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 September 30, 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 November 10, 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
---- ----
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SURREY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 2000 and December 31, 1999
Statements of Operations for the Quarter and Nine Months Ended
September 30, 2000 and September 30, 1999
Statements of Cash Flows for the Nine Months Ended September
30, 2000 and September 30, 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: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SURREY, INC.
BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 0 $ 0
Accounts receivable 3,002 4,091
Inventories, net 3,773 2,838
Prepaid expenses and other current assets 16 23
Deferred income taxes 143 143
Income taxes receivable 32 40
-------- --------
Total current assets 6,966 7,135
Property and equipment, net 4,243 4,237
Deferred income taxes 253 113
-------- --------
Total assets $ 11,462 $ 11,485
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdrafts $ 265 $ 450
Trade accounts payable 1,426 1,724
Accrued expenses 293 312
Notes payable 2,400 0
Current maturities of long-term debt 136 418
Current maturities of capital lease obligations 42 204
-------- --------
Total current liabilities 4,562 3,108
Long-term debt, less current maturities 3,577 4,732
Capital lease obligations, less current maturities 135 196
Commitments and contingencies 0 0
Shareholders' equity:
Common stock; no par value 4,099 4,099
Common stock warrants 64 64
Retained deficit (975) (714)
-------- --------
Total shareholders' equity 3,188 3,449
Total liabilities and shareholders' equity $ 11,462 $ 11,485
======== ========
SEE ACCOMPANYING NOTES.
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SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2000 1999 2000 1999
------- ------- -------- --------
Net sales $ 5,034 $ 5,014 $ 12,294 $ 13,591
Cost of sales 3,640 4,092 9,327 10,808
------- ------- -------- --------
Gross profit 1,394 922 2,967 2,783
Operating expenses:
Sales and marketing 271 115 689 766
General and administrative 690 530 2,242 1,551
------- ------- -------- --------
Total operating expenses 961 645 2,931 2,317
Income (loss) from operations 433 277 36 466
Other:
Interest expense (164) (162) (426) (445)
------- ------- -------- --------
Income (loss) before income taxes 269 115 (390) 21
Income tax (benefit) provision 63 26 (129) 0
------- ------- -------- --------
Net Income (loss) $ 206 $ 89 ($ 261) $ 21
======= ======= ======== ========
Income (loss) per share
Basic $ 0.08 $ 0.04 ($ 0.11) $ 0.01
Diluted $ 0.08 $ 0.04 ($ 0.11) $ 0.01
======= ======= ======== ========
Shares used in computing earnings per share:
Basic 2,473 2,473 2,473 2,473
Diluted 2,473 2,473 2,473 2,473
======= ======= ======== ========
SEE ACCOMPANYING NOTE.S
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SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
------- -------
OPERATING ACTIVITIES
Net income (loss) $ (261) $ 21
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 302 284
Changes in operating assets and liabilities:
Accounts receivable 1,089 (2,155)
Inventories (935) (733)
Prepaid expenses and other current assets (7) 309
Deferred income taxes 0 (92)
Trade accounts payable (33) 1,203
Accrued expenses (19) 36
Income taxes receivable/payable 8 205
------- -------
Net cash provided by (used in) operating activities 144 (922)
INVESTING ACTIVITIES
Acquisition of property and equipment (79) (688)
------- -------
Net cash used in investing activities (79) (688)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable 450 1,500
Proceeds from issuance of long-term debt 0 311
Payment of long-term debt (150) (108)
Principal payments on capital lease obligations (180) (130)
Increase in bank overdraft (185) 0
------- -------
Net cash provided by (used in) financing activities (65) 1,573
Net increase (decrease) in cash 0 (37)
Cash and cash equivalents, beginning of period 0 77
------- -------
Cash and cash equivalents, end of period $ 0 $ 40
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 426 $ 445
Income taxes 0 0
Acquisition of property and equipment with
capital leases $ 25 $ 37
SEE ACCOMPANYING NOTES.
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SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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. 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 and nine month periods ended September 30, 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. INCOME (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 Nine months ended
September 30 September 30
-------------------- ----------------------
2000 1999 2000 1999
------ ------ ------- ------
Numerator:
Net Income (loss) $ 206 $ 89 ($ 261) $ 21
Numerator for basic and dilated (loss) per share - income
(loss) available to common stockholders 206 89 (261) 21
------ ------ ------- ------
Denominator:
Denominator for basic earnings (loss) per share - weighted
- average shares 2,473 2,473 2,473 2,473
Dilutive effect of stock options 0 0 0 0
------ ------ ------- ------
Denominator for basic earnings (loss) per share - adjusted
weighted - average shares and assumed conversions 2,473 2,473 2,473 2,473
Basic earnings (loss) per share $ 0.08 $ 0.04 ($ 0.11) $ 0.01
------ ------ ------- ------
Diluted earnings (loss) per share $ 0.08 $ 0.04 ($ 0.11) $ 0.01
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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.
4. LONG-TERM DEBT
As of September 30, 2000, 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 are currently negotiating a waiver of such
violations.
-7-
PART I: FINANCIAL INFORMATION
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 $5,034,000 for the three
months ended September 30, 2000 from $5,014,000 for the three months ended
September 30, 1999, an increase of 0.4%. Net sales decreased to $12,294,000 for
the nine months ended September 30, 2000 from $13,591,000 for the nine months
ended September 30, 1999, a decrease of 10.5%. The substantial decrease in net
sales for the first half of 2000, which significantly effects the results for
the first nine months of 2000, is primarily attributable to the same two basic
factors: (1) during first quarter 1999 the Company delivered opening order
shipments (initial shipments of products to stock store shelves) for two major
accounts, Bath & Body Works glycerin soap and Minnetonka Brands, for its "Star
Wars" soap retail distribution project and (2) during second quarter 1999 the
Company shipped large follow-on orders to both Bath & Body Works and Minnetonka
Brands. These initial orders were not repeated in 2000. Net sales were up but
substantially unchanged for the third quarter of 2000, as compared to the
comparable period in 1999, reflecting a substantially unchanged customer base.
The Company currently expects sales volume for the fourth quarter of
2000 to be comparable to sales for the third quarter of 2000. In addition, the
Company currently expects sales for year 2001 to increase over 2000, largely due
to new programs recently announced with CVS stores and Target stores and a new
line of products from Bath & Body Works expected in early 2001.
GROSS PROFIT. Gross profit and gross profit margin in each period
increased primarily due to substantially lower production labor costs included
in the cost of sales numbers. These cost savings are being driven by the
Company's use of lower cost seasonal full-time employees instead of higher cost
temporary agency workers. However, the use of such seasonal full time employees
(I.E., temporary but full time during the time of employment) also contributes
to higher general and administrative costs, as described below under "OPERATING
EXPENSES." Gross profit increased for the three months ended September 30, 2000
to $1,394,000 from $922,000 for the comparable three month period in 1999. Gross
profit margin for the three month period increased from 18.4% in 1999 to 27.7%
in 2000. Gross profit increased for the nine months ended September 30, 2000 to
$2,967,000 from $2,783,000 for the comparable nine month period in 1999. Gross
profit margin for the nine-month period ended September 30, 2000 increased to
24.1% from 20.5% for the comparable nine month period in 1999.
OPERATING EXPENSES. Operating expenses increased for the three months
ended September 30, 2000 by 49.0% over the three months ended September 30,
1999, and increased
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as a percentage of net sales; $961,000 (or 19.1% of net sales) in 2000, as
compared to $645,000 (or 12.9% of net sales) in 1999. Operating expenses also
increased in the nine months ended September 30, 2000 by 26.5% over the nine
months ended September 30, 1999, and increased as a percentage of net sales;
$2,931,000 (or 23.8% of net sales) in 2000, as compared to $2,317,000 (or 17.1%
of net sales) in 1999.
During 2000, the Company began implementing a program to use sales
commissions as employee incentives and rewards. As part of this initiative, a
larger part of the compensation payable to sales personnel is being shifted from
salary (which numbers appear in the general and administrative expenses) to
commissions (which numbers appear in the selling and marketing expenses). This
initiative begin in first quarter 2000 and has had a cumulative effect, with the
biggest effects being seen in the third quarter sales and marketing expenses due
to increased sales in third quarter (resulting in significantly higher sales
commissions). In addition, new full-time hires and increased salaries during
2000 have increased general and administrative expenses during 2000. 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 in 2001.
Sales and marketing expenses increased for the three months, and
decreased for the nine months, ended September 30, 2000 over the comparable
periods in 1999, and as a percentage of net sales. Such expenses for third
quarter increased from $115,000 (or 2.3% of net sales) in 1999 to $271,000 (or
5.4% of net sales) in 2000, and for the nine-month period, decreased from
$766,000 (or 5.7% of net sales) in 1999 to $689,000(or 5.6% of net sales) in
2000. The significant increase for the three month period was due primarily to
the increase in sales commissions, as described above. The slight decrease for
the nine month period was primarily due to lower sales commissions due to lower
sales volume.
General and administrative expenses significantly increased for the
three months ended September 30, 2000 as compared to the same period in 1999,
and also increased as a percentage of net sales, from $324,000 (or 11.3% of net
sales) in 1999 to $690,000 (or 13.7% of net sales) in 2000. For the nine months
ended September 30, 2000, general and administrative expenses also increased
over the comparable period in 1999 and as a percentage of net sales. Such
expenses for the nine-month period increased from $1,551,000 (or 11.5% of net
sales) in 1999 to $2,242,000 (or 18.2% of net sales) in 2000. This significant
increase was primarily due to increased salaries being paid during the entire
year, higher costs for the company medical plan due to more full-time employees,
including seasonal full-time employees, and higher product development costs,
particularly in third quarter, due to a higher level of new product launches
expected for 2001.
INTEREST EXPENSE. Interest expense as a percentage of sales increased
slightly for both periods as a result of higher bank borrowings and rate
increases. Interest expense was $164,000 (3.3% of net sales) in the three months
ended September 30, 2000, as compared to $162,000 in the three months ended
September 30, 1999 (3.3% of net sales). Interest expense was $426,000 (3.5 % of
net sales) for the nine months ended September 30, 2000, as compared to $445,000
(3.3% of net sales) for the nine months ended September 30, 1999. The increase
was primarily due to the Company's increased borrowings in the first six months
of 2000 in connection with its increased inventory needs and the replacement and
entire upgrade of its computer system.
-9-
Increased interest obligations resulted as the Company increased its revolving
line of credit to fund working capital, increased its long-term debt by moving
an outstanding working capital line to term debt, and incurred new lease
financing of approximately $450,000 for new a computer system and for candle
making equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations, bank and lease financing.
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
("Original Term Loan") with a final maturity in April 2005; (b) a term loan, in
the original principal amount of $400,000 ("Second Term Loan") with a maturity
of February 2004; and (c) a term loan, in the original principal amount of
$1,000,000 ("Third Term Loan") with a maturity of April, 2003. An aggregate of
approximately $3,700,000 was outstanding at September 30, 2000 under all three
term loans.
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 50% of current inventory balance
and (x) $1.2 million, or (B) $3,000,000. As of November 1, 2000, the Company had
$2,369,000 outstanding under the Revolving Note and $131,000 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 Original 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.
-10-
At September 30, 2000, the Company was not in compliance with either
the debt service coverage ratio or the debt to tangible net worth covenant set
forth above. The Company and the Lender are currently negotiating a waiver of
such non-compliance.
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 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., 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 $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 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.
-11-
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.
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 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, CVS and Target, the
Company's ability to effectively manage its costs of operation, its ability 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 business. No current proceeding is expected to
result in any material loss to the Company.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 27. - Financial Data Schedule
(b) The Company filed one Report on Form 8-K during the
reporting period. As discussed above, on October 20,
2000 the Company reported that its shares had been
delisted from the Nasdaq SmallCap Market and now
trade on the Nasdaq Over the Counter Bulletin Board
(SOAP.OB).
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: November 13, 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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