1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SURREY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 2844 74-2138564
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
13110 TRAILS END ROAD
LEANDER, TEXAS 78641
(512) 267-7172
(Address, including zip code, and telephone number including
area code, of registrant's principal executive offices)
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JOHN VAN DER HAGEN, CEO
SURREY, INC.
13110 TRAILS END ROAD
LEANDER, TEXAS 78641
(512) 267-7172
(Name address, including zip code, and telephone number
including area code, of agent for service)
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Copies to:
ELIZABETH H. COBB, ESQ. HELENE K. NETTER, ESQ.
MACKALL, CROUNSE & MOORE, PLC STUART, COLEMAN & CO., INC.
1400 AT&T TOWER 11 WEST 42ND STREET
901 MARQUETTE AVENUE 15TH FLOOR
MINNEAPOLIS, MN 55402 NEW YORK, NY 10036
(612) 305-1400 (212) 789-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY(2) PRICE(2) REGISTRATION
- ---------------------------------------------------------------------------------------------------------------------------
Units....................................... 718,750
Each Unit consisting of:
Two Shares of Common Stock, no par
value.................................. 1,437,500 $4.00 $5,750,000 $1,742.42
One Warrant to purchase a share of Common
Stock, no par value.................... 718,750 $0.10 71,875 21.78
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Common Stock, no par value, issuable upon
exercise of Warrants...................... 718,750 $4.80 $3,450,000 $1,045.45
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Total....................................... $2,809.65
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(1) Including 93,750 Units which the Underwriter may purchase to cover
over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SURREY, INC.
FORM SB-2
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CROSS-REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY PART I OF
FORM SB-2
FORM SB-2 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
--------------------------------- ---------------------
1. Front of Registration Statement and Outside Outside Front Cover Page
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Purpose of the Offering; Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Positions on Underwriting
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Dividend Policy; Principal Shareholders;
Stockholder Matters Underwriting
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Not Applicable
Accountants on Accounting and Financial
Disclosure
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
PROSPECTUS
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SURREY LOGO
625,000 UNITS
SURREY, INC.
1,250,000 SHARES OF COMMON STOCK AND
625,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Surrey, Inc. ("Surrey" or the "Company") hereby offers 625,000 Units, each
Unit consisting of two shares of common stock, no par value ("Common Stock"),
and one redeemable Common Stock Purchase Warrant ("Warrant") to purchase one
share of Common Stock. The Warrants will be detachable and separately
transferable from the Common Stock commencing 60 days from the date of this
Prospectus or earlier at the sole discretion of Stuart, Coleman & Co., Inc., as
representative (the "Representative") of the several underwriters (the
"Underwriters"). Each Warrant entitles the registered holder to purchase one
share of Common Stock at an exercise price of $4.80, subject to adjustment in
certain circumstances, at any time prior to the fifth anniversary of the date of
the Prospectus. The Warrants are redeemable by Surrey commencing one year after
the date of the Prospectus on at least 30 days' prior written notice, at a price
of $.01 per Warrant, at any time that the market value of the Common Stock
exceeds $5.00 per share for a period of 20 consecutive trading days. See
"Description of the Securities." Prior to this offering, there has been no
public market for the securities of the Company and there can be no assurance
that such a market will develop, or if developed, that it will be sustained. The
Company has applied for quotation of its securities on the Nasdaq SmallCap
Market(SM) upon official notice of issuance under the symbols "SOAPU," "SOAPC"
and "SOAPW." It is currently estimated that the initial public offering price
will be $8.10 per Unit. For information regarding factors used to determine the
initial offering price, see "Underwriting."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
DISCUSSION UNDER THE CAPTIONS "RISK FACTORS" AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION, NOR ANY STATE SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Unit...................................... $ $ $
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Total(3)...................................... $ $ $
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(1) The Company (a) has agreed to pay to the Representative a nonaccountable
expense allowance equal to 3% of the gross proceeds of the offering of
Units, or $151,875 (or $174,656 if the over-allotment option is exercised in
full), of which $50,000 has been paid to date; (b) has agreed to sell to the
Representative, at a price of $.0005 per warrant, warrants to purchase from
the Company up to 71,875 Units at a price per Unit equal to 120% of the per
Unit offering price (the "Representative's Warrant"); (c) has agreed to
enter into a two-year financial consulting agreement with the Representative
commencing on the closing date, providing for compensation in the amount of
$12,500 per year, all payable in advance at the closing; and (d) has agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at approximately
$340,000 (approximately $363,000 if the Underwriters' over-allotment option
is exercised in full) including the Representative's nonaccountable expense
allowance referenced in note 1 above.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
93,750 additional Units solely to cover over-allotments. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ , $ and $
respectively. See "Underwriting."
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The Units are being offered on a "firm commitment" basis, subject to prior
sale, when, as and if delivered to and accepted by the Representative, subject
to certain other conditions, including the right to reject any order in whole or
in part. It is expected that delivery of the Units will be made against payment
therefor on or about , 1997 in New York, New York.
Stuart Coleman Logo
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The date of this Prospectus is , 1997
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[INSIDE FRONT COVER PAGE]
Home and Bath Products
[Contains photographs of selected soap products manufactured by Surrey, Inc.]
sensibly indulgent
SURREY
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK OR WARRANTS INCLUDING STABILIZING BIDS OR SYNDICATE COVERING TRANSACTIONS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. All information concerning the Company's authorized, issued
and outstanding Common Stock and all financial information presented on a per
share basis reflects the repurchase by the Company in August 1997 of fifty
percent of the outstanding shares of Common Stock and the subsequent
11.22727-for-one stock split in September 1997. Unless otherwise indicated,
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised.
THE COMPANY
Surrey, Inc. ("Surrey" or the "Company") specializes in the development and
manufacture of high quality transparent glycerin and specialty soap products, as
well as the production of certain personal care and home fragrance products. The
Company has built four successful retail brands and a strong private label and
contract manufacturing business for high-profile customers. Surrey uses a
proprietary process for manufacturing poured bar soaps that allows the Company
to produce unique and affordable original soap products in large quantities with
consistent quality. Surrey also maintains a library of chemical formulations for
producing purer, milder and harder glycerin soap bars. The Company is also
entering the crafts market, with its new soap making kits, and is expanding its
home fragrance products with the introduction of a full line of potpourri
products.
Surrey was incorporated in Texas in 1981, as the successor to a business
begun in 1972. The Company's executive offices are located at 13110 Trails End
Road, Leander, Texas 78641, and its telephone number is (512) 267-7172.
THE OFFERING
Units(1).................................. 625,000 Units, each consisting of two shares of Common
Stock and one redeemable Warrant. See "Description of
Securities."
Common Stock Outstanding
Before Offering......................... 1,122,727
After Offering(2)....................... 2,372,727
Warrants:
The Offering............................ 625,000 Warrants offered as part of the Units. The
Warrants will be detachable and separately transferable
for the Common Stock commencing 60 days from the date of
this Prospectus or earlier at the discretion of the
Representative.
Exercise Terms.......................... Exercisable to purchase one share of Common Stock, at
$4.80 per share, subject to adjustment in certain
circumstances. See "Description of Securities."
Expiration Date......................... , 2002
Redemption.............................. Redeemable by the Company commencing one year after the
date of this Prospectus upon at least 30 days' notice,
at a price of $.01 per Warrant at any time the market
value of the Common Stock value exceeds $5.00 per share
for twenty consecutive trading days.
- -------------------------
(1) Does not include up to 93,750 Units issuable to the Underwriters'
over-allotment option or 71,875 Units which may be purchased upon exercise
of the Representative's Warrant. See "Underwriting."
(2) Does not include (i) 187,500 shares included in the Underwriters'
over-allotment option, (ii) 450,000 shares reserved for issuance under the
Company's stock option plans, (iii) 718,750 shares reserved for issuance
under the Warrants being offered hereby or (iv) 215,625 shares of Common
Stock which may be purchased upon exercise of the Representative's Warrant.
See "Description of Securities," "Management" and "Underwriting."
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Use of Proceeds........................... Purchase of equipment and other capital expenditures,
expansion of sales and marketing efforts, repayment of
certain indebtedness as described herein, and working
capital and other general corporate needs. See "Use of
Proceeds."
Risk Factors.............................. The securities offered hereby involve a high degree of
risk and immediate and substantial dilution. See "Risk
Factors" and "Dilution."
SUMMARY FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE INCOME DATA)
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $7,479 $7,882 $7,336 $3,148 $3,724
Cost of goods sold................................ 5,692 6,071 5,485 2,455 2,820
Gross profit...................................... 1,787 1,811 1,851 693 904
Total operating expenses.......................... 1,635 1,589 1,512 716 696
Interest expense.................................. 138 222 226 106 102
Other............................................. -- 3 -- -- --
Provision for income taxes........................ 6 1 47 (54) 42
Net income (loss)................................. 8 2 66 (75) 64
Net income (loss) per share(1).................... $ .01 $ -- $ .06 $ (.07) $ .06
Weighted average shares outstanding(1)............ 1,123 1,123 1,123 1,123 1,123
JUNE 30, 1997
DECEMBER 31, ------------------------
1996 ACTUAL AS ADJUSTED(2)
------------ ------ --------------
BALANCE SHEET DATA:
Working capital.......................................... $1,002 $ 800 $3,766
Total assets............................................. 4,228 4,546 7,422
Current liabilities...................................... 1,718 2,190 2,100
Long-term debt, less current portion..................... 1,470 1,256 1,256
Stockholder's equity..................................... 998 1,062 4,028
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(1) In August 1997, the Company repurchased fifty percent of the outstanding
shares of Common Stock for $1,250,000 and subsequently authorized a
11.22727-for-one stock split in September 1997. The per share and shares
outstanding data is presented as if the stock split and repurchase occurred
prior to January 1, 1994.
(2) Adjusted to reflect the sale of 1,250,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $4.00 per share and
application of the estimated net proceeds therefrom; does not reflect shares
issuable upon exercise of the Warrants offered hereby.
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RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the risk factors set forth below as well as the other
information set forth in this Prospectus before purchasing the Common Stock
offered hereby.
GROWTH STRATEGY
The Company intends to use most of the net proceeds from the offering to
significantly expand its business. The Company's current strategy includes (1)
doubling its current manufacturing and warehouse facilities, (2) continuing to
diversify its product mix by the development or introduction of new products or
product lines, (3) hiring professional marketing personnel and significantly
increasing its direct marketing efforts in order to support the anticipated new
production capacity, (4) continuing its shift toward higher margin products, and
(5) reducing its reliance on bank borrowings to support product development and
growth. There can be no assurance that the Company's proposed increased
marketing, sales and development efforts will be successful. In such event,
there can be no assurance that full use of the Company's expanded manufacturing
and production facilities will occur, or will occur in the time frame currently
anticipated by the Company. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business -- Growth
Strategy," "Business -- Properties and Equipment" and "Management."
MANAGEMENT OF GROWTH
Growth of the Company's business will result in increased costs for
personnel and systems. There can be no assurance that the Company will be able
to secure and maintain the additional management, employees and staffing, or
other resources required to support the intended growth of its business. See
"Use of Proceeds" and "Business -- Growth Strategy."
CONSTRUCTION RISK
The Company currently intends to use approximately $400,000 of the net
proceeds of this offering to cover part of the cost to enlarge its current
manufacturing facility and anticipates securing a new or extended line of bank
financing for the balance of such cost. It is currently estimating that such
construction would require approximately twelve months. Based on a preliminary
estimate the Company anticipates that the cost of such construction will be
approximately $800,000; however, the Company has not entered into any agreements
with any contractors or architects in connection with such expansion, and has
not received any firm bids for constructions cost. There can be no assurance
that the Company will be able to construct its intended expansion within its
currently estimated project costs and any increased costs could be material. In
addition, the Company has entered into discussions with its current bank lender
to secure financing to cover the balance of the cost of construction not being
paid with proceeds of this offering and has obtained from such lender a letter
of intent to finance, on a secured basis, such balance, subject to review and
approval at the time of such loan by such lender's credit committee of the fair
market narrative appraisal, title commitment and survey analysis of construction
budget and plans, and underwriting of proposed building contractor, and subject
to compliance by the Company with the terms of its currently outstanding loans.
There can be no assurance, however, that such conditions can be satisfied by the
Company and that sufficient bank financing will be available to cover the cost
of such construction, or that the proposed expansion can be completed within
management's assumed timeframe. Inability to secure additional bank financing or
increases in the construction costs could require the Company to complete a
smaller structure, reduce its ability to use net proceeds of the offering for
other corporate purposes, or seek additional means of financing, any of which
could have a material adverse effect on the Company and its plans for expansion.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Business -- Growth Strategy" and "Business -- Properties and Equipment."
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DEPENDENCE ON CUSTOMERS
During fiscal years 1996 and 1995, Wal-Mart was the Company's single
largest customer and accounted for approximately 21% and 13%, respectively, of
the Company's net sales. Avon was the Company's second largest customer in 1996,
accounting for approximately 6%. In 1995, Dollar General was the second largest,
accounting for approximately 11% and Walgreens was the third largest, accounting
for approximately 10%. Based on net sales from the first six months of 1997, and
anticipated sales for the entire year, management currently anticipates that
Wal-Mart will be the Company's single largest customer, and will account for
relatively the same percentage of net sales as 1996, and that Avon and Walgreens
will be the second and third largest customers, respectively, each accounting
for less than 10% of net sales. The Company has no long term contracts or
standing orders with any of its customers. The loss of any of the Company's
major accounts, especially Wal-Mart, or a decrease in orders from any such
customers, could have a material adverse effect on the Company and its business.
There can be no assurance that sales to any of these customers will continue at
historic levels, if at all. See "Business -- Customer Contracts" and "Business
- -- Significant Customers."
COMPETITION
Although there is extensive competition in the bar soap manufacturing
industry generally, the Company believes that it currently competes directly
with only a small number of manufacturers in the specialty soap market. The
Company also competes generally for market share with many larger manufacturers
and distributors of soap and personal care products, such as Dial,
Colgate-Palmolive, Procter & Gamble and Unilever, companies which have
significantly more resources than the Company. However, the Company currently
believes that the specialty soaps market niche is too small to attract
significant competition from these larger soap producers. In addition, the
Company is aware of several smaller manufacturers of personal care items with
which it must compete for market share. As the Company continues its
diversification into other product lines, it may experience competition from
other sources as well as from foreign manufacturers. See "Business --
Competition," "Business -- Customer Contracts" and "Business -- Proprietary
Processes and Trademarks."
CONTROL BY PRINCIPAL SHAREHOLDER
Following the completion of this offering, John van der Hagen, CEO and
Chairman of the Board, will own approximately 47% of the outstanding Common
Stock. As a result, management may have the ability to elect the Company's
entire board of directors and control all affairs of the Company, including all
fundamental corporate transactions such as mergers, consolidations and the sale
of substantially all of the Company's assets. See "Management" and "Principal
Shareholders."
DEPENDENCE ON KEY PERSONNEL
The Company's success is highly dependent on the efforts of its key
management personnel. The loss of the services of any such personnel could have
a material adverse effect on the Company. The Company currently has employment
agreements with its CEO and President. The Company does not maintain life
insurance policies payable to the Company on any key management personnel, but
has secured a policy, for the benefit of its bank lender, on its former CEO who
has guaranteed the Company's current bank loan. The Company will continue to be
dependent on its ability to attract and retain qualified personnel in the
future. See "Business -- Growth Strategy" and "Management."
RELIANCE ON PROPRIETARY RIGHTS
The Company's success and ability to compete depend in large part on the
protection of its proprietary processes and formulas. The Company seeks to
protect such processes through confidentiality agreements with certain
contractors, business partners, and distributors. However, there can be no
assurance that such agreements will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of unauthorized use or disclosure. Any such unauthorized disclosure or use could
have a material adverse effect on the Company. The Company has recently become
aware that a company
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which signed such a confidentiality agreement appears to be using certain trade
secrets of the Company in violation of their agreement. The Company does not own
any patents on any of its technology. The Company believes that the trademarks
it owns on certain product names have significant value and are important to the
marketing of its products, but does not consider any individual mark to be
material to its operation. There can be no assurance, however, that the
Company's marks are, in fact, of value, that such marks do not or will not
violate the proprietary rights of others, that the Company's proprietary rights
in the marks would be upheld if challenged, or that the Company would not be
prevented from using its marks, any of which could have an adverse effect on the
Company. The Company has been unable to register the name Surrey as a trademark
due to a prior registration; however, such prior registrant manufactures plastic
combs, not soaps. While the Company believes that its current use of the name is
not infringing on the rights of others, there can be no assurance that its use
will not ever be challenged. See "Business -- Proprietary Processes and
Trademarks."
USE OF PROCEEDS
The Company currently anticipates that it will use approximately 31.8% of
the net proceeds of this offering to repay outstanding indebtedness owed to a
former officer and director of the Company and the balance is intended to be
used by the Company in accomplishing its growth strategy. Approximately 39.8% of
the net proceeds are being allocated to current working capital and general
corporate purposes to allow the Company to have sufficient cash assets to take
immediate advantage of any opportunities presented to it to develop and market
new product lines, or to take advantage of acquisitions of, or investments in,
business, products or technologies that are complementary to the current product
lines. Other than continuation and diversification of current product lines, the
Company has no current new product lines targeted. In addition, no acquisition
transactions are planned or being negotiated as of this date. Management of the
Company has great discretion in how the net proceeds of this offering will be
used. See "Use of Proceeds."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY; NO CASH DIVIDENDS
Prior to this offering, there has been no public market for the Units,
Common Stock or Warrants. The initial public offering price has been determined
by negotiation between the Company and the Representative with reference to the
general status of the securities market and other relevant factors. Such
offering price may not be indicative of the market price for the Common Stock
after this offering, which may be highly volatile depending upon various
factors, including the general economy, stock market conditions, announcements
by the Company, its vendors or competitors and fluctuation in the Company's
operating results. The Company currently intends to retain earnings for use in
operations and expansion of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy" and
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Following the completion of this offering, the current shareholder of the
Company will own a total of 1,122,727 shares of Common Stock. The holder has
agreed to refrain from selling his shares of Common Stock, except to members of
his immediate family, without the prior written consent of the Representative
for 20 months after the date of this Prospectus. Sales of a substantial number
of shares of Common Stock in the public market subsequent to this offering, or
the perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock. See "Shares Eligible for Future Sale."
DILUTION
There will be an immediate and substantial dilution to the public investors
who purchase shares in this offering in that the net tangible book value per
share of the Common Stock after the offering will be substantially less than the
Price to Public of the shares offered hereby. The dilution to new investors
after this offering will be approximately $2.30 per share. See "Dilution."
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USE OF PROCEEDS
The net proceeds from the sale of the 625,000 Units offered hereby, at an
assumed offering price of $8.10 per Unit, are estimated (after deducting the
Underwriting discount and estimated offering expenses payable by the Company) to
be approximately $4,216,250 (approximately $4,876,906 if the Underwriters' over-
allotment option is exercised in full). The Company intends to use the net
proceeds as follows:
APPROXIMATE
AMOUNT OF
NET PERCENTAGE OF
ANTICIPATED APPLICATION PROCEEDS NET PROCEEDS
----------------------- ----------- -------------
Building expansion(1)....................................... $ 400,000 9.5%
New product development, sales and marketing(2)............. 800,000 18.9
Repayment of indebtedness(3)................................ 1,340,000 31.8
Working capital and general corporate purposes(4)........... 1,676,250 39.8
---------- ------
Total.................................................. 4,216,250 100.0
========== ======
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(1) Represents portion of the cost of expanding the current facility not
expected to be financed with bank debt. The Company has entered into
discussions with its current bank lender to secure financing for the balance
of such costs. See "Business -- Growth Strategy" and "Business -- Properties
and Equipment."
(2) Represents funds allocated to the development of new products and increased
marketing and sales efforts, including salaries and commission for new sales
and marketing personnel. See "Business -- Growth Strategy."
(3) Represents repayment to a former officer, director and shareholder of (a)
$1,250,000 principal amount promissory note issued in connection with the
repurchase of shares by the Company and (b) approximately $90,000 principal
amount promissory note for borrowed money. See "Certain Transactions."
(4) Represents funds to be used for working capital and general corporate
purposes. See discussion below and also "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Business --
Growth Strategy."
The Company currently anticipates that such working capital will allow it
to develop new products and, together with cash generated from sales, pay
monthly expenses for the leasing of capital equipment to be acquired over the
next three to five years. Such equipment includes additional bulk storage tanks
for raw materials, additional stock soap die shapes and molds, two additional
bar soap line production units and fillers, a high speed wrapping machine, and
packing carton set-up machine. The total leasing costs of such equipment over
the next five years are currently estimated by the Company at approximately
$900,000, which is expected to be paid monthly out of operating revenues;
however, there can be no assurance that the Company will generate sufficient
revenue to cover all such costs. In such event, a portion of the net proceeds of
this offering, if available at the time, may be used to pay such expenses. In
addition, if the Company is not able to meet the conditions required by its
lender to secure adequate bank financing at the time to complete the planned
expansion of its facilities, the Company may be required to fund the entire
construction costs from working capital, including the proceeds of this
offering. See also "Risk Factors," "Business -- Growth Strategy," "Business --
Properties and Equipment."
The Company intends, from time to time, to evaluate possible acquisitions
of or investments in businesses, products or technologies that are complementary
to the current product lines of the Company. The portion of the net proceeds of
the offering which are added to the Company's working capital and general
corporate funds, as well as funds dedicated to new product development, together
with other internally generated funds, may, if appropriate, be used for such
purpose. No such transactions are planned or being negotiated as of the date
hereof.
The purposes of the offering are also to increase the Company's financial
resources, provide a public market for the Company's Common Stock, and
facilitating access to public equity markets for future
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financing. Pending the use of the net proceeds from the offering, the Company
intends to invest the net proceeds in short-term securities.
The amounts actually expended for new product development, capital
expenditures and plant expansion may vary significantly depending upon a variety
of factors, including: the actual costs of construction of the proposed
expansion, the timing of such expenditures, the ability of the Company to hire
additional qualified marketing personnel and the resources needed to attract and
retain such personnel, new product opportunities that might become available,
and the continued availability of the Company's working capital line of credit.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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DILUTION
The net tangible book value of the Company's Common Stock at June 30, 1997
was $1,062,000 or $0.47 per share. After giving effect to the 1997 stock split,
and repurchase of shares (as illustrated below), the pro forma net tangible book
value of the Company's Common Stock at June 30, 1997 was $(188,000) or $(0.17)
per share. "Net tangible book value" per share represents the total tangible
assets less total liabilities of the Company, divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in the
Company's net tangible book value after June 30, 1997, other than to give effect
to the sale of the shares of Common Stock included in the Units offered hereby
at the assumed offering price, the net tangible book value of the Company at
June 30, 1997 would have been $4,028,000 or $1.70 per share. This represents an
immediate increase in net tangible book value to the existing shareholders of
$1.87 per share and an immediate dilution of $2.30 per share to the investors
purchasing the shares offered hereby at the price to the public. The following
table illustrates this per share dilution in pro forma net tangible book value
to new investors.
Assumed initial public offering price..................... $4.00
Net tangible book value as of June 30, 1997............. $ 0.47
Pro forma effect of the 1997 repurchase of shares....... $(0.64)
------
Pro forma net tangible book value prior to offering..... $(0.17)
------
Increase attributable to new investors.................. $ 1.87
------
Pro forma net tangible book value adjusted for this
offering................................................ $1.70
-----
Dilution to new investors in this offering................ $2.30
=====
The above chart does not give effect to the exercise of the Warrants
included in the Units offered hereby, the Representative's Warrants or any other
warrants or options of the Company.
DIVIDEND POLICY
The Company currently intends to retain earnings for use in the operation
and expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. Cash dividends, if any, that may be paid in
the future to holders of Common Stock will be payable when, as and if declared
by the Board of Directors of the Company, based upon the Board's assessment of
the financial condition of the Company, its earnings, need for funds, capital
requirements and other factors. In addition, the Company's bank loan restricts
the payment of any dividends or the purchase of shares of Common Stock without
the prior written consent of the lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and as adjusted to reflect the sale by the Company of 625,000 Units, at
an assumed offering price of $8.10 per Unit, the events set forth in the
footnotes below, and the application of the net proceeds therefrom.
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
------ --------
(IN THOUSANDS)
DEBT (INCLUDING CURRENT MATURITIES):
Notes payable to shareholder............................. $ 175 $ 85
Long-term debt........................................... 1,295 1,295
Capital lease obligations................................ 142 142
------ ------
Total debt................................................. 1,612 1,522
SHAREHOLDERS' EQUITY:
Common stock, no par value; 10,000,000 authorized;
2,245,464 (actual) and 2,372,727 (as adjusted) issued
and outstanding(1).................................... 393 4,216
Retained earnings (deficit)................................ 669 (188)
------ ------
Total shareholders' equity................................. 1,062 4,028
------ ------
Total capitalization....................................... $2,674 $5,550
====== ======
- -------------------------
(1) Reflects stock repurchase and stock split undertaken by the Company in
August and September 1997. Does not include (i) 187,500 shares included in
the Underwriters' over-allotment option, (ii) 450,000 shares reserved for
issuance under the Company's stock option plans, (iii) 718,750 shares
reserved for issuance under the Warrants being offered hereby, or (iv)
215,625 shares of Common Stock which may be purchased upon exercise of the
Representative's Warrant. See "Description of Securities," "Management" and
"Underwriting."
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SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INCOME DATA)
The statement of operations data for the years ended December 31, 1995 and
1996, and the balance sheet data at December 31, 1996 are derived from audited
financial statements of the Company, which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this Prospectus. The
statement of operations data for the year ended December 31, 1994 are derived
from audited financial statements not included herein. The six month financial
data have not been audited, but, in the opinion of management, include all
adjustments, consisting of normal, recurring adjustments and accruals, which the
Company considers necessary for fair presentation of the Company's financial
position and the results of operations for the periods indicated. The following
selected historical financial data should be read in conjunction with and are
qualified in their entirety by the historical Financial Statements and the Notes
thereto included elsewhere in this Prospectus. See also "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $7,479 $7,882 $7,336 $3,148 $3,724
Cost of goods sold................................ 5,692 6,071 5,485 2,455 2,820
Gross profit...................................... 1,787 1,811 1,851 693 904
Total operating expenses.......................... 1,635 1,589 1,512 716 696
Interest expense.................................. 138 222 226 106 102
Other............................................. -- 3 -- -- --
Provision for income taxes........................ 6 1 47 (54) 42
Net income (loss)................................. 8 2 66 (75) 64
------ ------ ------ ------ ------
Net income (loss) per share(1).................... $ .01 $ -- $ .06 $ (.07) $ .06
Weighted average shares outstanding(1)............ 1,123 1,123 1,123 1,123 1,123
JUNE 30, 1997
DECEMBER 31, ------------------------
1996 ACTUAL AS ADJUSTED(2)
------------ ------ --------------
BALANCE SHEET DATA:
Working capital.......................................... $1,002 $ 800 $3,766
Total assets............................................. 4,228 4,546 7,422
Current liabilities...................................... 1,718 2,190 2,100
Long-term debt, less current portion..................... 1,470 1,256 1,256
Stockholder's equity..................................... 998 1,062 4,028
- -------------------------
(1) In August 1997, the Company repurchased fifty percent of the outstanding
shares of Common Stock for $1,250,000 and subsequently authorized a
11.22727-for-one stock split in September 1997. The per share and shares
outstanding data is presented as if the stock split and repurchase occurred
prior to January 1, 1994.
(2) Adjusted to reflect the sale of 1,250,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $4.00 per share and
the application of estimated net proceeds therefrom; does not reflect shares
issuable upon exercise of the Warrants offered hereby.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items in
the Company's Statements of Operations expressed as a percentage of net sales
for that period:
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
Net Sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of Goods Sold.................................. 74.8 77.0 76.1 75.7 78.0
Gross Profit......................................... 25.2 23.0 23.9 24.3 22.0
Operating Expenses
Marketing.......................................... 6.9 6.5 9.7 4.2 7.5
General & Administrative........................... 13.7 13.7 12.1 14.5 15.3
Interest Expense (Net)............................. 3.1 2.8 1.9 2.7 3.4
Net Income (Loss).................................... .9 -- .1 1.7 (2.4)
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales for the year ended December 31, 1996
were $7,336,000, as compared to $7,882,000 for the year ended December 31, 1995,
a decrease of approximately 6.9%. This decrease in net sales was primarily due
to a shift in the Company's sales strategy to move away from low-end volume
discount accounts to concentrate on higher margin retail accounts and products
and on contract manufacturing. This strategy involved repositioning certain
segments of the Company's retail product line. Consequently, sales volume
dropped temporarily as the Company's marketing focus shifted to more profitable
product lines and accounts.
Gross Profit. Gross profit increased in 1996 to $1,851,000 compared with
$1,811,000 for 1995. Gross profit margin increased to 25.2% in 1996 from 23.0%
in 1995. This increase was primarily due to the beginning of a shift in sales to
higher margin product lines as a result of the Company beginning its new
marketing strategy.
Operating Expenses. Total operating expenses decreased slightly to
$1,512,000 in 1996 from $1,589,000, a decrease of 4.8%, but increased as a
percentage of net sales to 20.6% from 20.2%. This increase was due primarily to
lower sales volume for 1996 as the Company refocused its marketing strategy in
order to pursue more lucrative markets in 1996 and on into 1997. Marketing
expenses were essentially flat in 1996 at $507,000 (6.9% of net sales), compared
to $513,000 (6.5% of net sales) in 1995 with the Company investing these
marketing expenses in support of its new marketing strategy. The marketing of
new products required relatively higher expenses. General and administrative
expenses also decreased 6.6%, to $1,005,000 in 1996 from $1,076,000 in 1995.
Company management was able to hold general and administrative expenses in 1996
to a level comparable to 1995.
Interest Expense. Net interest expense for 1996 was $226,000 (3.1% of net
sales) and remained fairly constant compared to $222,000 (2.8% of net sales) for
1995. The Company's outstanding debt increased by $386,000 in 1996 for
additional working capital purposes.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales. Net sales for 1995 increased to $7,882,000 from $7,479,000 in
1994, or an increase of approximately 5.4% due to the introduction by the
Company of its Hill Country specialty soap line and the
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initial shipments of Hill Country products in the fourth quarter of 1994. In
addition, the Company continued the expansion of its liquid potpourri product
line.
Gross Profit. Gross profit increased slightly to $1,811,000 in 1995 from
$1,787,000 in 1994. Gross profit margin decreased to 23.0% in 1995 from 23.9% in
1994 due to a heavy increase in sales focused on high volume and low margin
retail accounts and products. These products were primarily liquid glycerin soap
which has a small profit margin. The higher sales volume offset the decrease in
profit margin resulting in slightly higher gross profit for 1995 as compared to
1994.
Operating Expenses. Operating expenses decreased in 1995 by 2.8% to
$1,589,000 (or 20.2% of net sales) from $1,635,000 in 1994 (or 21.9% of net
sales). Marketing expenses decreased to $513,000 (6.5% of net sales) in 1995
from $726,000 (9.7% of net sales) in 1994. Company advertising and promotion
declined to $141,000 in 1995 from $261,000 in 1994. This decrease was due to
de-emphasized sales programs for the Company's high volume/low margin product
lines. Sales commissions dropped to 4.0% of sales in 1995 from 4.9% of sales in
1994 due primarily to the higher percentage of sales generated by the Company's
direct sales force. Travel and entertainment expenses decreased to $57,000 in
1995 from $76,000 in 1994 due to better cost controls. General and
administrative expenses increased to $1,076,000 (13.7% of net sales) in 1995
from $908,000 (12.1% of net sales) in 1994. This increase was due to a number of
factors. First, payroll tax expense and medical insurance expense increased
$40,000 in 1995 due to the addition of a full-time second shift of plant
employees. Second, general insurance expense increased $41,000 in 1995 due to
increased inventory, equipment, new building addition and increased product
liability insurance due to increased sales volume. Third, officer salaries
increased $54,000 in 1995 due to bonus compensation paid to executive officers.
Fourth, product development increased $38,000 in 1995 due to the additional
costs involved in a major new product line launch, Hill Country specialty soaps.
Interest Expense. Net interest expense increased to $222,000 in 1995 (2.8%
of net sales) from $138,000 (1.8% of net sales) in 1994. The increase was due
primarily to an increase of $341,000 in debt outstanding during 1995 in order to
provide the Company with additional working capital.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Sales. Net sales increased significantly to $3,724,000 in June 1997
from $3,148,000 in June 1996, an increase of 18.3%. Such increase is attributed
primarily to the new marketing strategy begun in 1996 toward higher margin
products and the Company's introduction of its Soap Making Kits. Substantial
sales increases were recognized during the first half of 1997 as new accounts
and product lines were added. Based on current orders to be shipped during the
second six months of 1997, the Company currently anticipates that net sales for
fiscal 1997 will be approximately $9,000,000; however, such forecasted number is
based on anticipated orders which might not be received, which can be canceled
by customers on 30 days' notice, and which might actually be shipped in first
quarter 1998, all events which are outside the control of the Company.
Gross Profit. Gross profit increased for the six months ended June 1997 to
$904,000, from $693,000 for the comparable six-month period in 1996. Gross
profit margin for the same period increased from 24.3% in 1996 to 22.0% in 1997.
This increase was primarily due to the Company's focus on higher product margin
products and accounts, as well as factory efficiencies gained by continued
aggressive cost controls and the successful launch of the new product line.
Operating Expenses. Operating expenses decreased slightly in the first six
months of 1997 by 2.8% to $696,000 (or 18.7% of net sales), as compared to
$716,000 in 1996 (or 22.8% of net sales). Operating expenses remained fairly
flat, even as sales volume increased, due primarily to aggressive Company cost
controls. Marketing expenses decreased to $156,000 in June 1997 from $235,000
for the same period in 1996. The decrease was due to a more focused and cost
effective sales plan and the continuation of marketing plans begun in 1996 to
achieve higher sales and profit margins at a lower cost per sales dollar.
General and administrative expenses increased to $540,000 in June 1997 from
$481,000 in June 1996, but decreased as a percentage of net sales to 14.5% in
1997 from 15.3% in 1996. Such decrease is primarily due to the increase in sales
volume while fixed general and administrative expenses have remained constant.
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Interest Expense. Net interest expense remained constant at $102,000 (2.7%
of net sales) in June 1997 as compared to $106,000 in June 1996 (3.4% of net
sales.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have historically been cash flow
from operations, bank borrowings, loans from related parties, and capital lease
financing. In November of 1994, the Company entered into a loan agreement with
Liberty National Bank of Austin, Texas (which was acquired by Norwest Bank
Texas, South Central ("Norwest"), in the initial principal amount of $1,400,000,
with an interest rate per annum equal to 1.75% over the prime lending rate for
commercial banks, which interest rate is adjusted quarterly each January 1,
April 1, July 1 and October 1. The loan amortizes over a twelve year period and
is due November 2006. The outstanding balance of this loan as of June 30, 1997
was approximately $1,245,000, at an interest rate of 10.25%. The loan is
partially guaranteed by the Small Business Association (the "SBA"). In addition,
the loan is guaranteed by each of the current and former Chief Executive
Officers of the Company (the "CEOs"). The loan is secured by a lien on the
Company's plant, equipment and inventory, as well as accounts receivable, and
the shares owned by John van der Hagen (currently representing all of the stock
of the Company) are pledged to secure his guaranty. Among other requirements,
the loan currently contains the following covenants, which are tested quarterly:
the Company must maintain (a) a debt to net worth ratio of less than 3.5:1; (b)
a current ratio greater than 1.25:1; (c) a net worth of $1,000,000; and (d) a
minimum debt service coverage ratio of 1.25:1 on a traditional cash flow basis.
The loan also limits the salaries of officers to $250,000 annually and the
payment of certain bonuses without consent of the bank. As of June 30, 1997, the
Company was not in compliance with all such restrictions; however, Norwest has
waived such defaults under the loan. The loan prohibits the Company from (a)
making any dividends or distributions on its capital stock, or repurchasing or
issuing any capital stock, without prior written consent and (b) from purchasing
any fixed asset valued in excess of $50,000 without prior written consent.
Norwest, as lender, has consented to the transactions contemplated hereby;
however, the SBA will not consent to this reduction of the stock collateral
pledged to secure the loan. The Company has received a letter from Norwest
stating that the failure of the SBA to consent to the transactions will not be a
default under the loan.
In addition, in connection with its construction plans, the Company has
entered into discussions with Norwest to secure the balance of such financing
that is not being provided by proceeds of this offering and has obtained from
Norwest a letter of intent to finance, on a secured basis, such balance, subject
to review and approval at the time of such loan by such lender's credit
committee of the fair market narrative appraisal, title commitment and survey,
analysis of construction budget and plans, and underwriting of proposed building
contractor, and the compliance by the Company with the terms of its current
loans.
The Company also has outstanding two working capital loans with Norwest.
One such loan, in the principal amount of $500,000, is due March 31, 1998, and
bears interest at a rate per annum equal to 1.5% over Norwest's Index Rate (as
defined), which loan interest rate is currently 10.0%. The second such loan, in
the principal amount of approximately $221,000, is due May 31, 1998 and bears
interest at a rate per annum equal to 2% over the Index Rate, which loan
interest rate is currently 10.5%. Both notes are secured by all accounts
receivable, inventory, furniture, fixtures and equipment, and are guaranteed by
both the current and former CEOs of the Company.
Based on its increased sales activity during the first six-months of 1997,
as well as the volume of orders in July and August, the Company currently
anticipates that it will be required to increase its current working capital
line prior to the closing of this offering in order to finance such production.
The Company is currently discussing with Norwest such extension. Such extension
would be subject to certain conditions including review by Norwest of the
Company's borrowing base of eligible receivables and SBA concurrence if the SBA
is required to subordinate any lien on receivables. While, based on anticipated
receivables, the Company expects such loan will be extended, there can be no
assurance. Any failure to extend such line could have a material adverse effect
on the Company.
The Company leases its manufacturing equipment pursuant to capital leases.
Total minimum payments under such leases aggregated $174,000 at June 30, 1997,
and $204,000 at December 31, 1996, with maturity
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dates ranging from 1997 to 2002. Such leases, which are personally guaranteed by
the current and former CEOs of the Company, 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. See also Notes to Financial
Statements.
FORWARD LOOKING INFORMATION
Information contained in this Prospectus which is not of a historical
nature, including, without limitation, statements above and statements under
"Risk Factors," "Business -- Growth Strategy" and "Business -- Properties and
Equipment," is forward looking and is therefore inherently unreliable and
subject to numerous risks and uncertainties, many of which are described herein
and which may be outside the control of the Company.
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BUSINESS
GENERAL
Surrey, Inc. ("Surrey" or the "Company") specializes in the development and
manufacture of high quality transparent glycerin and specialty soap products, as
well as the production of certain personal care and home fragrance products. The
Company has built four successful retail brands and a strong private label and
contract manufacturing business for high-profile customers. Surrey uses a
proprietary process for manufacturing poured bar soaps that allows the Company
to produce unique and affordable original soap products in large quantities with
consistent quality. Surrey also maintains a library of chemical formulations for
producing purer, milder and harder glycerin soap bars. The Company is also
entering the crafts market, with its new soap-making kits, and is expanding its
home fragrance products with the introduction of a full line of potpourri
products.
BACKGROUND
Surrey was incorporated in 1981, as a Texas corporation, by its two
founders. The Company was the successor to a venture begun in 1972 by the
current CEO and co-founder, John van der Hagen, to market a brush, mug, and line
of shaving soap for men. Management began working to perfect techniques for
producing a milder bar soap for its shaving kits. In 1979, Surrey began
manufacturing its own soap products and began expanding a new library of soap
formulations. At this time, the Company discovered that specialty soaps was a
lucrative niche market which it believed was too small to attract significant
competition from the larger soap producers, like Dial, Unilever,
Colgate-Palmolive and Procter & Gamble.
During the eighties, management began developing a new generation of soap
formulations and selling its products to drug store chains, supermarket chains,
and discount/mass merchandisers across the country. Surrey found that the
chemistry of most glycerin bar soaps made the soap soft and difficult to
process. Surrey's newly formulated glycerin soaps were firmer, lasted longer,
and could be used to create various unique shapes and formats, such as Surrey's
original "soap suspended in soap" products.
In March 1987, the Company moved its operations to its current site close
to Austin, Texas, occupying an 18,000 square foot manufacturing plant. In 1992
the Company expanded its facilities by 10,000 square feet to meet the demand for
its products. In October 1994 the Company again added 10,000 square feet,
bringing the plant to its current size of 38,000 square feet.
In the early nineties, Surrey entered the contract manufacturing business
and began producing specialty soap products for a variety of premier brand
consumer product companies and prestige accounts, including Elizabeth Arden,
Walt Disney Co., Avon, Ann Taylor, Wal-Mart, and Walgreens. In 1990, the Company
acquired the assets of Simmer Scents, a line of potpourri home fragrances and
began moving into the major craft chains.
Surrey is currently in the process of developing new product lines,
including home fragrances and potpourris, and expanding its current liquid soap
lines. In addition, the Company intends, with a portion of the net proceeds of
this offering and in connection with its proposed additional production
capacity, to increase its sales and marketing activities both in the United
States and abroad, principally Asia. See "Use of Proceeds."
PRODUCTS AND DISTRIBUTION
Surrey's principal product line is its high quality glycerin bar soaps,
which it markets, both directly and through manufacturers' representatives, to a
large variety of retail establishments, and which it manufactures, on a contract
basis, for a variety of private-label customers. In addition, the Company
manufactures and markets a full line of potpourri products and Soap Making Kits
and accessories. The Company estimates its total sales mix for 1997 to be
equally divided among: (a) contract manufacturing products, (b) potpourri and
craft products and (c) retail soaps and shaving products.
The Company has a wide variety of private label and contract manufacturing
clients for which it makes specialty glycerin soap bars and other products. Many
of the retail customers, such as Wal-Mart, Walgreens
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and Target, buy products designed, created and manufactured exclusively by
Surrey's personnel. Contract manufacturing customers, such as Elizabeth Arden,
Avon, Liz Claiborne and Walt Disney Co., work closely with the Company to create
a product unique to that customer through the use of specialty designs,
fragrances, labeling, colors and shapes. Surrey, through its proprietary
processes, has been successful in creating unique shapes and designs, including
its "soap in a soap," tailored specifically for certain customer requests.
Surrey currently contracts with approximately 60 brokers and manufacturers'
representatives who sell the Company's products on a commission basis to a
variety of retail customers. Such products include both the Company's own
branded products and private-label products manufactured for such retailers
under their individual labels. The Company also produces, on a direct marketing
basis, specialty products for a variety of contract manufacturing customers.
Surrey's retail and contract manufacturing account customers include:
- -- ANN TAYLOR -- LIZ CLAIBORNE
- -- AVON -- NEIMAN MARCUS
- -- BIG B -- OSCO
- -- CHANEL -- REVLON
- -- CONNIE STEVENS -- STOP AND SHOP
- -- CVS -- TARGET
- -- ELIZABETH ARDEN -- ULTA3
- -- GENOVESE -- WAL-MART
- -- HEWITT SOAP CO. -- WALGREENS
- -- K-MART -- WALT DISNEY
- -- LADY PRIMROSE
Surrey markets its products under its own four premium in-house brand
names:
- - THE HILL COUNTRY SOAP COMPANY(TM) line
- glycerin specialty soap
- glycerin bars incorporating loofah, oil beads, oatmeal and buffs
- cream soap bars
- specialty shape bars: cameos, hearts, roses, seashells
- shower gel, hand and body lotion
- - THE SURREY MEN'S LINE
- shaving mug, brush and soap set
- - THE PURE PLEASURE(R) line
- Soap Making Kits
- boxed sets of glycerin soap bars
- antibacterial liquid glycerin soap
- - THE SIMMER SCENTS LINE
- potpourri bags
- potpourri liquids
- oils
- sachets
The Company has recently been expanding its product line, with the
introduction in 1997 of its Soap Making Kits. Initial orders for the kits,
aggregating approximately $1,400,000, were shipped in the first two quarters of
1997, with orders aggregating approximately $500,000 received for shipment in
the third and fourth quarters. Currently, the Company expects to receive
additional orders for shipment in the fourth quarter as well as re-stock orders
aggregating approximately $50,000 to $100,000 per month. Such kits are being
sold both through craft stores (such as Michael's) and discount mass
merchandisers (such as Wal-Mart and K-Mart). This product is expected to
increase the Company's ability to market to craft stores, a market in which its
simmer scents liquid potpourri line has already been introduced.
In mid-1997 the Company also introduced a full line of potpourris intended
to capitalize on the Company's experience with producing high quality fragrances
and its line of liquid soaps.
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GROWTH STRATEGY
The Company currently anticipates that most of the net proceeds from the
offering will be used to significantly expand its business. Surrey currently
intends to:
- double its manufacturing and production capabilities
- hire additional professional marketing personnel
- continue to diversify its product mix by promoting sales of its liquid
soap, potpourri and craft products
- develop new products for its retail market and increase its direct
marketing and sales efforts to attract new contract manufacturing
customers
- continue to shift its marketing emphasis to its higher margin products
In 1996, the Company began a shift in its sales strategy away from low-end
volume discount accounts to concentrate on higher margin retail accounts and
products and on contract manufacturing. The Company began to see the results of
this strategy in the first half of 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's current goal is to double its production over the next three
to five years through a combination of expanded manufacturing and production
capacity, use of additional professional full-time marketing personnel, and
continued growth in promotion of its higher margin products. There can be no
assurance, however, that the Company will be able to achieve this goal in such
time frame, if at all. See "Risk Factors," "Use of Proceeds," and "Business --
Properties and Equipment."
As part of its growth strategy, the Company hired a new national retail
sales director in July 1997. Upon the closing of this offering, the Company
currently intends to hire a second sales director to concentrate on the craft
and potpourri markets, where the Company's goal is to increase sales in the near
term. In addition, the Company intends to add, by promotion or outside hires,
additional direct sales marketing personnel. See "Management."
PROPERTIES AND EQUIPMENT
The Company owns the property and facilities that comprise its production
plant and corporate headquarters. The property consists of approximately 7.73
acres in Travis County, Texas, approximately twenty-two miles northwest of
Austin. All of the Company's operations are currently centered in one 38,000
square foot single store warehouse building which houses the offices, production
facilities and warehouse and storage. Currently, the Company's corporate offices
and research occupy approximately 3,000 square feet, the production and
manufacturing facilities occupy approximately 7,760 square feet, and the
remaining 27,240 square feet are dedicated to warehousing and storage. The
Company's plant and equipment is pledged to secure its outstanding bank loans.
The Company's production and manufacturing equipment is leased under certain
capital and equipment leases. The principal manufacturing equipment currently in
use consists of three poured bar soap production line units, two liquid fill
lines, and dedicated packaging equipment.
The Company's business is seasonal with its highest volume of orders being
received in late third and early fourth quarters. During such periods, the
Company's production facilities are operated at full capacity, using two shifts.
While the plant does not run at full capacity during the entire year, due to the
seasonal nature of the business, the Company must increase its production
capacity during its high season in order to implement its growth strategy. As
part of this current strategy, the Company intends to construct a 30,000 square
foot addition to its current plant, approximately one-third of which will be
additional corporate offices, approximately one-third will be additional
manufacturing and production space, and approximately one-third will be
additional warehouse facilities. This will more than double its production and
manufacturing space.
Based on a preliminary estimate, the Company currently anticipates that
such construction will cost approximately $800,000 and can be constructed in
approximately twelve months. The Company has not yet received any firm bids or
entered into any agreements with any contractors or architects in connection
with such construction; consequently, actual costs could differ materially.
Currently, the Company's goal is to use
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approximately $400,000 of the proceeds of this offering for such expansion and
to refinance and increase its currently outstanding bank loan (or enter into an
additional loan) to cover the balance of the anticipated construction costs. The
Company has entered into discussions with its current bank lender to secure such
financing and has obtained from such lender a letter of intent to finance, on a
secured basis, such cost, subject to review and approval at the time of such
loan by such lender's credit committee of the fair market narrative appraisal,
title commitment and survey, analysis of construction budget and plans, and
underwriting of proposed building contractor, and the compliance by the Company
with the terms of its current loans.
In addition, as part of the expanded facilities, the Company intends to
acquire, pursuant to capital and equipment leases, additional equipment,
including additional bulk storage tanks for raw materials, additional stock soap
die shapes and molds, two additional bar soap line production units and fillers,
a high speed wrapping machine, and packing carton set-up machine. Management
currently estimates, based on manufacturer's price lists previously received,
that such required equipment can be leased for monthly payments over three to
five years totalling approximately $900,000. Such expenses are anticipated to be
made monthly out of current revenues. There can be no assurance, however, that
such amounts will be available from operations. In such event, the Company
currently intends to use proceeds of this offering, to the extent still
available, to pay such capital lease payments. See "Risk Factors" and "Use of
Proceeds."
In order to have cash available for expanded product development and
marketing efforts, the Company currently intends to finance the construction of
its new facilities and equipment as described in this section; however, there
can be no assurance such financing, on terms acceptable to the Company, actually
will be available at the time needed by the Company. In such event, the Company
may use its working capital, including proceeds of the offering, to complete
such construction and purchase. See "Risk Factors" and "Use of Proceeds."
The Company currently anticipates that, with the proposed additional
production equipment and the proposed additional manufacturing and warehouse
facilities intended to be built, it will be in a position, once all such new
facilities are completely on line and operational, to increase its average
production by approximately 100% over the next three to five years. This
estimate is, of course, subject to many additional factors, such as the timing
of orders for its product, the success of its marketing efforts, the continued
availability of employees, and other factors, many of which may be outside the
control of the Company.
COMPETITION
While there is extensive competition in the bar soap manufacturing
industry, the Company believes that it currently competes directly with only a
small number of manufacturers in the specialty soap market, notably Neutrogena,
Beiersdorf (Basis), and Johnson & Johnson (Purpose). In addition, many other
companies manufacture and/or market a range of personal care products which
compete with Surrey's soap and other products. These companies include, among
others, Bath & Body Works, Twincraft Soap Company, Original Bradford Soap Works
and Stahl Soap. See "Proprietary Processes and Trademarks."
The larger manufacturers, such as Procter & Gamble, Colgate-Palmolive,
Unilever and Dial, primarily produce a more traditional bar soap, not a glycerin
bar soap. These companies are much larger, have greater market share, and
greater financial resources than the Company. The Company currently believes,
however, that it will experience little competition from these manufacturers in
its niche market due to the small relative size of the market and the larger
relative cost to mass produce a high quality glycerin bar soap product. These
larger manufacturers may, however, present more competition to the Company for
its liquid soap products.
The Company believes its current and intended diversification into bar and
liquid soaps, potpourris and crafts will be advantageous in its marketing and
instrumental in helping it maintain a competitive position in its targeted
markets. However, as the Company continues its diversification into other
product lines, it may experience competition from other sources, as well as from
foreign manufacturers.
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SIGNIFICANT CUSTOMERS
In 1996 and 1995, Wal-Mart accounted for approximately 21% and 13%,
respectively, of the Company's net sales. Wal-Mart is expected to account for
approximately the same percentage of net sales in 1997 as it did in 1996. Avon,
which was the Company's second largest single customer, accounted for
approximately 6% of sales in 1996 and is currently expected to be the second
largest customer for 1997, with less than 10% of net sales. No other customer is
currently expected to account for more than 10% of sales in 1997.
BUSINESS -- CUSTOMER CONTRACTS
The Company's large retail customers, such as Wal-Mart and Walgreens,
generally establish their product order plan-a-grams on a twelve-month cycle.
Once such plan is in place it is often not reviewed for a year; however, only
the first order under any such plan is guaranteed. The Company has no standing
orders or long-term contracts with any of its retail customers. Any such
customer can re-order at any time or cancel or replace the Company's product in
its twelve-month plan at any time with no notice to the Company. Most of the
Company's contract manufacturing customers, such as Elizabeth Arden and Avon,
order on a job-by-job basis only. Unless the Company is developing a new product
for a contract manufacturing customer (which development period can take from
months to years depending on the product and the customer), the Company
typically ships products within 60 to 90 days after receiving a purchase order.
Such period may be longer if special packaging or labeling is required by the
customer. Individual contract manufacturing clients generally supply the Company
with soap boxes and labeling; therefore, the Company is not required to carry
such inventory on its balance sheet. In addition, many of the Company's contract
manufacturing customers pay for the development and production of the die stock
and molds and, therefore, own such molds and the formulas for their individual
products.
Because the Company generally does not have any standing orders or
long-term contracts with its customers and orders are generally shipped within
60 to 90 days after receipt of purchase orders, the Company had no significant
backlog as of June 30, 1997 or 1996.
PROPRIETARY PROCESSES AND TRADEMARKS
The Company holds no patents on any of its equipment or processes and
relies substantially on certain formulas and processes that are not patentable.
In addition, much of the Company's proprietary information is the experience and
knowledge of its employees, contractors and business partners. To protect these
rights, the Company requires certain contractors, business partners and
distributors to enter into confidentiality agreements. There can be no assurance
that these agreements will provide meaningful protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure; however, the Company intends to defend its
trademark and proprietary information as appropriate. Further, in the absence of
patent protection, the Company may be exposed to competitors who independently
develop substantially equivalent technology or otherwise gain access to the
Company's trade secrets, knowledge or proprietary information. The Company has
recently become aware that a company which signed such a confidentiality
agreement appears to be using certain trade secrets of the Company in violation
of their agreement.
The Company holds a registered trademark to use Floating Bath Pals(R) and
has applied for a trademark on Hill Country Soap Company(TM). Although Surrey
believes its trademarks are important, it does not believe that its marks are
material to its business.
SEASONALITY
The Company's business is seasonal, with the bulk of its orders being
received for shipment in the fall. Orders shipped in the third and fourth
quarters generally account for approximately 60% of the Company's total net
sales for the year, due primarily to the holiday retail season. Generally,
customers place holiday purchase orders in early to mid summer for shipment
around September and October. As a consequence, the Company generally begins
increasing its temporary staff in July and August to accommodate such increased
production volume. See also "Properties and Equipment" above.
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EMPLOYEES
Surrey currently employs 72 full-time employees and has no part-time
employees. The Company maintains two shifts of production personnel. In
addition, the Company hires temporary full-time employees during its heaviest
production periods. The Company has 3 full-time employees in sales and
marketing, 6 in administration and finance, 1 in research and development, 60 in
production manufacturing, and 2 in shipping and handling. The Company's
employees are not represented by any collective bargaining organization. The
Company believes that its relations with its employees are satisfactory. See
also "Management."
SOURCES AND AVAILABILITY OF RAW MATERIALS
Substantially all of the raw materials (predominantly glycerin and other
chemicals) used by the Company to manufacture its products are of a generic
nature and are available from several suppliers. To the best knowledge of the
Company, none of the raw materials for its products is in short supply, and all
are readily available from a variety of distributors. The Company does not
anticipate any significant difficulties in securing adequate supplies of raw
materials of acceptable quality and at acceptable prices in the foreseeable
future.
LEGAL PROCEEDINGS
The Company is from time to time involved in legal proceedings incidental
to its business. The Company is currently not a party to any litigation which
the Company believes will have a material adverse effect on its business. See
also "Proprietary Processes and Trademarks" above.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company:
NAME AGE POSITION
---- --- --------
John B. van der Hagen..................... 65 Chairman of the Board and CEO
Martin J. van der Hagen................... 35 President and Director
Mary van der Hagen........................ 58 Secretary and Director
Bruce A. Masucci.......................... 37 Director
G. Thomas MacIntosh....................... 59 Director
Mark J. van der Hagen..................... 41 Vice President-Finance and Treasurer
JOHN B. VAN DER HAGEN is a co-founder of Surrey and has served as a
Director since 1981. He served as President of the Company from 1988 until being
named Chairman of the Board in September 1997 and CEO in August 1997. From 1981
to 1988 he served as Vice-President of the Company. As Chief Executive Officer,
he is responsible for overall Company operations. He has been actively involved
in and has had primary responsibility for, marketing and product development
since becoming President of the Company in 1988. Prior to joining Surrey, John
van der Hagen was President of the Company and founder of Alpine Oil Company. He
attended St. Thomas University in St. Paul, Minnesota. John van der Hagen is the
father of Martin van der Hagen and Mark van der Hagen, and Mary van der Hagen is
his wife.
MARTIN J. VAN DER HAGEN was elected as a Director and President of Surrey
in September 1997. Prior to that time he served as Executive Vice President of
the Company. He has been responsible for manufacturing operations, marketing and
product development since becoming Vice President in 1988. He joined the Company
in 1985 after attending the University of Texas and receiving a Bachelor of Arts
degree in finance. Martin van der Hagen is the son of John and Mary van der
Hagen.
MARY VAN DER HAGEN was elected to the Board of Directors of Surrey in 1981.
She has served as Secretary of the Company from 1981 to the present. From 1981
to April 1997, Ms. van der Hagen was employed on a part-time basis by the
Company. She resigned from such employment with the Company in April 1997, but
continues to serve as a Director and as Secretary. Mary van der Hagen is the
wife of John van der Hagen and mother of Martin and Mark van der Hagen.
MARK J. VAN DER HAGEN was elected Vice President of Finance and Treasurer
in September 1997. Prior to that time he served as Vice President. His primary
responsibility is overseeing Company finances. He also has held positions in
retail sales and marketing since joining the Company in 1991. Prior to joining
Surrey, he was a Manager of Account Services for First Bank Systems in St. Paul,
Minnesota from 1988 to 1991, and a Senior Financial Analyst for The Federal
Reserve Bank in Minneapolis from 1980 to 1988. Mark van der Hagen attended the
Carlson School of Management at the University of Minnesota and received a
Bachelor of Science in Business. Mark van der Hagen is the son of John and Mary
van der Hagen.
BRUCE A. MASUCCI was elected to the Board of Directors of Surrey in
September 1997. Mr. Masucci is currently President of Golden Mile Sales
Association, Inc. in Framingham, Massachusetts, a position he has held since
1982. Golden Mile is a manufacturers representative, concentrating in the New
England states, which currently represents Surrey in that geographic area.
Golden Mile has represented the Company for approximately nine years, and
receives compensation from Surrey in the form of sales-based commissions in an
amount customarily received by other manufacturers representatives who do
business with the Company.
G. THOMAS MACINTOSH was elected to the Board of Directors of Surrey in
September 1997. Mr. MacIntosh is a member and serves on the Board of Governors
of the Minneapolis law firm of Mackall, Crounse & Moore, PLC ("MCM"). He
practices in general corporate and business law with an emphasis in franchising
and distribution law. Prior to joining MCM in October 1993, Mr. MacIntosh was a
partner in the Minneapolis law firm of O'Connor & Hannan. He is a graduate of
the University of Minnesota law school.
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Directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been duly elected and qualified.
Directors currently do not receive any cash compensation for their services as
such, but nonemployee Directors are entitled to reimbursement for transportation
to and from meetings of the Board of Directors. The Company may pay cash
compensation to nonemployee directors in the future. All Directors are eligible
to participate in the Company's stock option plans described below. Nonemployee
Directors receive an automatic initial grant of options to purchase 6,000
shares, which vest over a three-year period, and thereafter, an annual automatic
grant of options to purchase 2,000 shares. Executive officers are appointed by
and serve at the discretion of the Board of Directors.
The Board of Directors has an Audit Committee comprised of Mr. Masucci, Mr.
MacIntosh and Mr. Martin van der Hagen. The Board currently has no other
standing committees.
KEY EMPLOYEES
Joseph L. Busick, 50, joined Surrey in July 1997. As Sales and Marketing
Director, his primary responsibilities are to oversee and direct sales and
marketing to the Company's retail customers. Before joining Surrey, Mr. Busick
held the position of Vice President -- Director of Sales and Marketing at CBI
Laboratories, Inc., a $30 million personal care manufacturer, from June 1994 to
June 1997. Prior to CBI, he was co-owner /President of J. Busick & Col/Cashe'
International Inc., an apparel importer and marketing company selling to the
mass-chain retail stores. Mr. Busick received a B.S. degree in marketing from
the University of North Texas and graduate hours towards an M.B.A. in marketing
from Case Western University.
David L. Wills, 40, has been Plant Manager for the Company since 1985. His
primary responsibility is plant operations, including production, processing and
purchasing. He served as a production assistant prior to being promoted to Plant
Manager. Mr. Wills supervised production for a midwestern agricultural
processing plant before joining Surrey, Inc. in 1981. Mr. Wills attended Western
Washington University.
Jon M. Hysick, 38, has been Operations Manager for the Company since 1993.
His primary responsibilities are scheduling purchasing of raw materials,
scheduling production and cost control. He served as purchasing supervisor prior
to his promotion to Operations Manager. He was assistant manager of loans and
collections for Commercial Credit Corporation in Austin, Texas from 1988 until
he joined Surrey in 1992. Mr. Hysick attended the University of Texas.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
for the fiscal year ended December 31, 1996 and the prior two years earned by or
paid to the current Chief Executive Officer and the only other executive officer
who was serving at the end of the most fiscal year whose annual salary and bonus
exceeded $100,000 (together with the CEO, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------
FISCAL OTHER ANNUAL
NAME YEAR SALARY BONUS COMPENSATION(1)
---- ------ ------ ----- ---------------
John B. van der Hagen........................ 1996 $125,000 -- $17,040
Chairman, CEO(2) 1995 $125,000 $10,000 $17,220
1994 $125,000 -- $16,920
James K. Olson(3)............................ 1996 $125,000 -- $12,780
1995 $125,000 $10,000 $16,800
1994 $125,000 -- $16,500
- -------------------------
(1) Represents automobile allowance for such years.
(2) Elected CEO in August 1997; served as President of the Company from 1981 to
August 1997.
(3) Resigned as CEO and director in August 1997 and entered into a consulting
agreement with the Company. See "Certain Transactions."
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EMPLOYMENT AGREEMENTS WITH CEO AND PRESIDENT.
The Company will enter into an employment agreement with each of John van
der Hagen, CEO and major shareholder, and Martin van der Hagen, President, upon
the closing of the offering. Each such agreement provides for an increase in
such officer's minimum annual base salary, as follows: (a) for 1998, such base
salary will be increased to $150,000, provided the Company's gross sales for
such year are at least $12 million; and (b) for 1999, such base salary will be
increased to $175,000, provided the Company's gross sales for such year are at
least $15 million. In addition, each such officer is entitled to an annual
automobile allowance, to participate in the Company's stock option and other
benefit plans, and to a bonus in accordance with Company policy in effect from
time to time, if any.
1997 LONG-TERM INCENTIVE PLAN
In September 1997, the Board of Directors and shareholder of the Company
adopted the 1997 Long-Term Incentive Plan (the "Plan") to provide for the
granting of stock options and other incentive awards to key employees and
employee directors of the Company. The Company has reserved 350,000 shares of
its Common Stock for issuance under the Plan.
The Plan may be administered by a committee of the Board of Directors which
consists of a majority of "nonemployee directors," as defined under applicable
securities laws, or the full Board acting as a committee (collectively,
"Committee"). The Plan is currently administered by the entire Board acting as
the Committee. Employees of the Company, including directors who are current
employees, are eligible to receive awards of options to purchase Common Stock
("Options"), stock appreciation rights ("Stock Appreciation Rights" or
"Rights"), restricted stock of the Company ("Restricted Stock"), or performance
awards ("Performance Awards"), or any combination thereof, pursuant to the Plan.
The Committee has the discretion to select eligible employees to whom awards
will be granted and establish the type, price, amount, size and terms of awards,
subject in all cases to the provisions of the Plan and the applicable provisions
of the Internal Revenue Code of 1986, as amended (the "Code"). Options, Rights,
Restricted Stock and Performance Awards are hereinafter referred to as "Awards."
Options may be incentive stock options qualified under Section 422 of the
Code ("Incentive Stock Options"), options not so qualified ("Nonqualified Stock
Options") or a combination of both. The exercise price of an Incentive Stock
Option cannot be less than 100% of the fair market value of the Common Stock on
the date the option is granted; provided, however, that if the optionee owns 10%
or more of the voting rights of all of the Company's stock, the exercise price
of an Incentive Stock Option cannot be less than 110% of the fair market value
of the Common Stock on the date the option is granted and the term cannot exceed
five years.
Stock options for the purchase of 287,500 shares of Common Stock were
granted to 17 employees effective as of the date of this Prospectus (the "Grant
Date"). Except as described below, the exercise price of these options is the
assumed initial public offering price of one share of Common Stock, based on the
offering price of a Unit as set forth on the outside front cover of this
Prospectus, and each of these Options becomes exercisable in five equal
installments commencing on the first anniversary of the Grant Date. Options
granted to John van der Hagen, as a holder of greater than 10% of the voting
shares, have an exercise price of 110% of such price, vest over a four year
period, and expire at the end of five years. Each of these Options generally
provides for forfeiture of any nonvested portion upon termination of employment
and expiration of any nonexercised options three months after termination of
employment (or one year after the employee's death or disability), and expires
on the tenth anniversary of the Grant Date. See also "Principal Shareholders."
1997 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1997, the Board of Directors and shareholder of the Company
adopted the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") to provide for the granting of stock options to directors of the Company
who are not employees. These Options do not qualify as incentive stock options
under Section 422 of the Code. The Company has reserved 100,000 shares of its
Common Stock for issuance under the Directors' Plan.
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The Directors' Plan is administered by the Company's Board of Directors as
a whole. Non-employee directors receive automatic, nondiscretionary awards upon
initial election to the Board of 6,000 options to purchase Common Stock
("Options") pursuant to the Directors' Plan, vesting over a three year period.
In addition, upon election to a fourth and each subsequent term, each
non-employee director receives an automatic annual grant thereafter of options
to purchase 2,000 shares, which are immediately exercisable. Each Option
specifies the expiration date, which may not exceed ten years from the date the
Option is granted. The exercise price of an Option cannot be less than 100% of
the fair market value of the Common Stock on the date the option is granted.
Stock options for the purchase of 6,000 shares of Common Stock were granted
to each of three non-employee directors effective as of the date of this
Prospectus (the "Grant Date"), and vest over a three-year period. The exercise
price of the initial options is the assumed initial public offering price of one
share of Common Stock, based on the offering price of a Unit as set forth on the
outside front cover of this Prospectus. Each of the Options generally provides
for forfeiture of any nonvested portion if such holder ceases to be a director
and expiration of any nonexercised option three months after an optionee ceases
to be a director (or one year after the director's death), and expires on the
tenth anniversary of the Grant Date. See also "Principal Shareholders."
LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Articles of Incorporation of the Company, as amended, limit the
liability of directors in their capacity as directors to the Company or its
shareholders to the full extent permitted by Texas law. They provide that a
director shall not be liable to the Company or its shareholders for monetary
damages for an act or omission in the director's capacity as a director, except
(i) for any breach of the director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions not in good faith that constitute a
breach of duty of the director to the Company or that involve intentional
misconduct or a knowing violation of the law, (iii) for any transaction from
which the director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, or (iv)
for any act or omission for which the liability of a director is expressly
provided by an applicable statute. These provisions do not affect the
availability of equitable remedies, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty, although, as a practical
matter, equitable relief may not be available. The above provisions also do not
limit liability of the directors for violations of, or relieve them from the
necessity of complying with, the federal securities law.
The Bylaws of the Company provide that the Company shall indemnify, to the
extent permitted by Article 2.02-1 of the Texas Business Corporation Act,
directors, officers and controlling persons of a company pursuant to the
foregoing provisions, or otherwise. The Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
STOCK PURCHASE AGREEMENT AND CONSULTING AGREEMENT WITH JAMES K. OLSON
In August 1997, the Company entered into a stock purchase agreement with
one of its founders, and former chief executive officer and director, James K.
Olson, pursuant to which the Company repurchased all of Mr. Olson's shares of
Common Stock, representing fifty percent of the outstanding shares, for
$1,250,000. The purchase price for such shares was paid by the Company with a
non-interest bearing promissory note ("Purchase Note"), payable on the earlier
of (i) the closing of this offering, (ii) December 31, 1997, or (iii) such other
date as the parties may agree. The principal of the Purchase Note will be paid
out of the net proceeds of this offering. See "Use of Proceeds."
In connection with the purchase of Mr. Olson's shares, both Mr. Olson and
his wife resigned as directors of the Company; Mr. Olson resigned as chief
executive officer; the Company agreed to repay a note ("Promissory Note") due to
Mr. Olson, in the outstanding principal amount of approximately $90,000 plus
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interest at 12%, at the time of payment of the Purchase Note; the Company and
John van der Hagen, current CEO of the Company, agreed to indemnify Mr. Olson
and his wife against certain liabilities, including any such liabilities
incurred by Mr. and Mrs. Olson in connection with certain indebtedness and
leases of the Company Mr. Olson has personally guaranteed. In addition, Mr.
Olson and Mr. John van der Hagen entered into a voting trust agreement whereby
Mr. Olson will be reinstated as a fifty percent shareholder, officer and
director of the Company if the Purchase Note is not paid when due as stated
above.
In addition, Mr. Olson, who had served as chief executive officer and chief
financial officer of the Company since 1981, entered into a consulting agreement
with the Company, pursuant to which Mr. Olson has continued to provide, on an as
needed basis during regular business hours, advice with respect to financial and
administrative affairs of the Company. For such services, the Company pays Mr.
Olson, during the term of the agreement, an annual fee of $125,000 payable
bi-weekly, as well as certain out-of-pocket expenses. In addition, Mr. Olson is
entitled to participate in health insurance, automobile allowance, and other
benefits provided by the Company to its officers. The consulting agreement
terminates upon the payment in full of the Purchase Note and the Promissory
Note. In the event that this offering does not close, the Company and Mr. Olson
have agreed to rescind all of the above transactions. In addition, Mr. Olson and
Mr. van der Hagen entered into a voting trust agreement whereby Mr. Olson will
be reinstated as a fifty percent shareholder, officer and director if the
Purchase Note is not paid when due as stated above.
LOAN FROM OFFICERS
Each of the current and former CEOs of the Company hold promissory notes,
each in the current principal amount outstanding of approximately $90,000. Such
notes were issued in March 1996, bear interest at 12% per annum on the unpaid
principal, and require payments of $2,000 per month. The promissory note held by
a former CEO and director is being repaid with a portion of the proceeds of this
offering, as described above.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date hereof, and as adjusted
to reflect the sale of the shares offered hereby (assuming no exercise of the
Underwriters' over-allotment option and no exercise of the Warrants offered
hereby) (i) by each person who is known by the Company to beneficially own more
than five percent (5%) of the outstanding Common Stock, and (ii) by each of the
Company's Named Executive Officers and Directors. Unless otherwise noted, each
person or group identified has sole voting and investment power with respect to
the shares shown.
PERCENT PERCENT
SHARES BEFORE AFTER
NAME AND ADDRESS(1)(2) OWNED(3) OFFERING(4) OFFERING(4)
- ---------------------- -------- ----------- -----------
John B. van der Hagen(5).................................... 1,122,727 100% 47%
Martin J. van der Hagen..................................... -0- -0- -0-
Mary van der Hagen.......................................... -0- -0- -0-
Bruce A. Masucci............................................ -0- -0- -0-
Golden Mile Sales
Associates, Inc.
225 Worcester Road
Framingham, MA 01701
G. Thomas MacIntosh......................................... -0- -0- -0-
Mackall, Crounse & Moore, PLC
1400 AT&T Tower
901 Marquette Avenue
Minneapolis, MN 55402
All directors and officers as a group (6 persons)........... 1,122,727 100% 47%
- -------------------------
(1) Unless otherwise noted, the business address of each person listed above is
at the Company, 13110 Trails End, Leander, Texas 78641.
(2) One of the Named Executive Officers, James Olson, currently owns no shares
of Common Stock and resigned as an officer and director in August 1997. See
"Certain Transactions."
(3) Options to purchase shares under the Company's stock option plans have been
granted as follows, effective as of the date of this Prospectus: John van
der Hagen, 50,000 options; Martin van der Hagen, 75,000 options; Mary van
der Hagen, 6,000 options; Mr. Masucci, 6,000 options; Mr. MacIntosh 6,000
options; and all officers and directors as a group, 193,000 options. No such
options will be exercisable prior to one year from the effective date of
grant. See "Management."
(4) Assumes no exercise of the Representative's Warrant, no exercise of the
Warrants offered as part of the Units and no exercise of other options.
(5) John van der Hagen's stock is subject to a Voting Trust Agreement with James
K. Olson, a former director, officer and shareholder. See "Certain
Transactions."
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DESCRIPTION OF SECURITIES
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, no par value.
UNITS
Each Unit being offered by the Company consists of two shares of the
Company's Common Stock, described below, and one redeemable Warrant, having the
terms and conditions described below. The Warrants will be detachable and
separately transferable from the Common Stock commencing 60 days from the date
of this Prospectus or earlier at the sole discretion of the Representative.
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, no
par value, of which 1,122,727 are currently outstanding and held by one
individual prior to this offering. All outstanding shares of Common Stock are,
and the shares offered by the Company hereby will be, duly authorized, validly
issued, fully paid and nonassessable. Holders of Common Stock are entitled to
receive dividends, when and if declared by the Board of Directors, out of funds
legally available therefor and to share ratably in the net assets of the Company
upon liquidation. Holders of Common Stock do not have preemptive or other rights
to subscribe for additional shares, nor are there any redemption or sinking fund
provisions associated with the Common Stock.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. Since the Common Stock does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of Common Stock voting for the election of
directors can elect all of the directors whose terms expire that year, if they
choose to do so. The officers and directors of the Company will continue to
control a majority of the votes following completion of this offering and,
accordingly, they will be able to elect all of the members of the Company's
Board of Directors.
WARRANTS
The Warrants (herein the "Warrant" or the "Warrants") will be issued in
registered form under, and subject to the terms of, a warrant agreement dated as
of the closing of this offering (the "Warrant Agreement") between the Company
and Norwest Bank Minnesota, N.A., as warrant agent (the "Warrant Agent"). The
following statements are brief summaries of certain provisions of the Warrant
Agreement and are subject to the detailed provisions thereof, to which reference
is made for a complete statement of such provisions. Copies of the Warrant
Agreement may be obtained from the Company or the Warrant Agent and have been
filed with the Securities and Exchange Commission (the "Commission") as an
Exhibit to the Registration Statement of which this Prospectus is a part.
The Company has authorized the issuance of 790,625 Warrants including:
625,000 Warrants being issued as part of the Units, 93,750 Warrants comprising
part of the Units representing the Underwriters' over-allotment option, and
71,875 comprising part of the Units issuable pursuant to the Representative's
Warrant. As of the date of the Prospectus, no Warrants are issued and
outstanding. The Representative's Warrant will be issued pursuant to a separate
warrant agreement between the Company and the Representative rather than under
the above-described Warrant Agreement. The Representative's Warrants is not
identical to the Warrants in that they will be exercisable during a four-year
period commencing one year from the effective date. The Company has reserved an
equivalent number of shares of Common Stock for issuance upon exercise of the
Warrants issued hereby and the Representative's Warrant.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at a price of $4.80 per share, subject to adjustment under
certain circumstances, at any time after the closing of this offering and until
the close of business on the fifth anniversary of the date of this Prospectus.
The Warrants will be detachable and separately transferable from the Common
Stock commencing 60 days from the date of this Prospectus or earlier at the sole
discretion of the Representative.
29
32
The Company may call the Warrants for redemption in whole, commencing one
year after the date of the Prospectus, at a price of $.01 per Warrant at any
time that the market value of the Common Stock exceeds $5.00 per share for a
period of twenty consecutive trading days, provided that notice of not less than
30 days is given to the Warrantholders. Upon such notice, Warrantholders shall
have the rights to exercise the Warrants until the close of business on the date
fixed for redemption.
The Warrants contain provisions that protect the holders thereof against
dilution. The exercise price and the number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including stock dividends, splits, reclassification,
recapitalization, reorganizations, mergers or consolidations of the Company.
However, the Warrants are not subject to adjustment for issuances of shares of
Common Stock at a price below the exercise price of the Warrants, including the
issuance of shares pursuant to the Company's stock option plans or otherwise.
Warrants are generally more speculative than Common Stock which is
purchasable upon the exercise thereof. Historically, the percentage increase or
decrease in the market price of a warrant has tended to be greater than the
percentage increase or decrease in the market price of the underlying common
shares. A Warrant may become valueless, or of reduced value, if the market price
of the Common Stock decreases, or increases only modestly, over the term of the
Warrant.
The Warrants may be exercised during the five year period commencing on the
date of this Prospectus (subject to redemption as described above) upon
surrender of the Warrant certificate on or prior to the expiration date at the
offices of the Warrant Agent, with the exercise form on the reverse side of the
Warrant certificate completed and executed as indicated, accompanied by full
payment of the exercise price (by check payable to the Company) for the number
of Warrants being exercised. The Warrantholders do not have the right or
privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise there is a
current registration statement under the Securities Act covering the issuance of
the shares underlying the Warrants. The Company has undertaken to use its best
efforts to maintain a current registration statement relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement. The
Company may suspend exercise of the Warrants during such period as is necessary
to obtain or keep effective any registration, qualification or other
governmental approval required in connection with the issuance of Common Stock
upon exercise of the Warrants.
No fractional shares will be issuable upon exercise of the Warrants.
However, if a Warrantholder exercises all Warrants then owned of record by him,
the Company will pay to such Warrantholder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the Common Shares on the last trading day prior to the exercise
date.
REPRESENTATIVE'S WARRANT
The Company has agreed to sell to the Representative, pursuant to a
separate warrant agreement, warrants to purchase from the Company an aggregate
of 71,875 Units at a price equal to 120% of the public offering price of the
Units offered hereby. See "Underwriting."
TRANSFER AGENT AND WARRANT AGENT
The transfer agent and registrar with respect to the Company's Units and
Common Stock and the warrant agent with respect to the Warrants is Norwest Bank
Minnesota, N.A.
TEXAS BUSINESS CORPORATION LAWS
The Texas Business Combination Law (Part 13 of the Texas Business
Corporation Act) provides for a three-year moratorium on certain mergers,
exchanges, sales of assets, shares issuances or reclassifications of securities
(collectively, a "business combination") between an issuing public corporation
and a shareholder who acquires beneficial ownership of 20% or more of such
corporation's voting securities, unless (1) the business combination or the
acquisition of shares by such affiliated holder is approved by the board of
directors
30
33
of the corporation prior to the affiliated holder's share acquisition date or
(2) such business combination is approved by the affirmative vote of the holders
of two-thirds of the outstanding voting shares of the corporation not owned by
such affiliated holder at a meeting of shareholders not less than six months
after the affiliated holder's share acquisition date.
As provided in such Law, the Board of Directors of Surrey amended the
Bylaws of the Corporation to provide that the Business Combination Law will not
apply to the Company. Therefore, such business combinations may be entered into
without such prior shareholder approval.
The Texas Business Corporation Act provides for a shareholder vote for
certain sale, lease, exchange or other disposition of corporate assets or
certain mergers. In addition, the Act provides shareholders the right to dissent
from certain of such corporate actions and, upon compliance with the required
procedures, to request payment of the fair value of their shares.
UNDERWRITING
The Company has entered into an Underwriting Agreement (the "Underwriting
Agreement") with Stuart, Coleman & Co., Inc., and the firms (the "Underwriters")
listed below with respect to this offering. The Underwriters named below,
represented by Stuart, Coleman & Co., Inc. (the "Representative"), have
severally agreed on a "firm commitment" basis to purchase from the Company the
respective number of Units set forth opposite their names below:
UNDERWRITER NUMBER OF UNITS
----------- ---------------
Stuart, Coleman & Co., Inc. ................................
-------
Total.................................................. 625,000
=======
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Units is subject to certain conditions
precedent and that the Underwriters will be obligated to purchase all of the
Units to be purchased by them pursuant to such Underwriting Agreement if any
Units are purchased.
The Underwriters will purchase the Units (including any Units purchased
upon exercise of the over-allotment option) from the Company at a price per Unit
representing a discount of 10% from the initial public offering price set forth
on the cover of this prospectus.
There has been no previous market for any of the Company's securities. The
major factors considered by the Company and the Representative in determining
the public offering price of the Units, in addition to prevailing market
conditions, were the Company's earnings history, estimates of the business
potential and earnings prospects of the Company, the present state of the
Company's development and an assessment of the Company's management, as well as
consideration of the above factors in relation to market valuations of
comparable companies.
The Underwriters propose initially to offer the Units to the public at the
Price to Public set forth on the cover page of this Prospectus and to selected
dealers at such price less a concession not in excess of $0.486 per Unit. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $0.10 per Unit to certain other brokers and dealers. After the initial public
offering, the offering price, concessions and
31
34
discounts to dealers may be changed by the Underwriters. The Representative has
informed the Company that it does not intend to confirm sales to any account
over which it has discretionary authority.
The Company has granted the Underwriters an option exercisable within 30
days after the date of this Prospectus to purchase up to an additional 93,750
Units at the Price to Public, less the underwriting discount shown on the cover
page of this Prospectus. The Underwriters may exercise such option only for the
purpose of covering any over-allotments in the sale of the Units offered hereby.
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to 3% of the aggregate offering price of the Units or $151,875
($174,656 if the Underwriters' over-allotment option is exercised in full),
$50,000 of which has been paid to date.
The Underwriting Agreement also provides that the Representative shall have
a right of first refusal to act as the Company's underwriter or agent for all
future financings, whether private placements, secondary public financings or
other financial transactions of any kind, for a period of five years from the
closing date of this offering.
In addition, the Company has agreed to enter into a two-year financial
consulting agreement with the Representative upon the closing of the offering.
The terms of this consulting agreement provide compensation to the
Representative of $12,500 per year or an aggregate of $25,000, all of which is
prepayable at the closing of the offering. The Representative has agreed to
provide, on an as needed basis, advice to the Company with respect to financial
matters.
In connection with this offering, the Company has agreed to sell to the
Representative, for a price of $.0005 per warrant, a warrant to purchase up to
71,875 Units (the "Representative's Warrant"). The Representative's Warrant may
be exercised in whole or in part commencing twelve months after the date of this
Prospectus and for a period of four years thereafter, at an exercise price equal
to 120% of the Price to Public. During the first year, the Representative's
Warrant may not be transferred, sold, assigned or hypothecated except to persons
who are officers, shareholders or principals of the Representative and to other
selling group members or their respective officers and partners, if any. The
Representative's Warrant contains anti-dilution provisions that make appropriate
adjustments upon the occurrence of certain events.
Subject to certain limitations and exclusions, the Company has agreed, at
the request of the holders of a majority of the Representative's Warrant and at
the Company's expense, during the four-year period commencing one year from the
date of this Prospectus, to register the Units, Common Stock and Warrants
underlying the Representative's Warrant under the Securities Act on one occasion
and to also include such underlying securities in any appropriate registration
statement which is filed by the Company during the four-year period commencing
one year after the date of this Prospectus.
Although it has no legal obligation to do so, the Representative has
indicated that from time to time it may become a market maker and otherwise
effect transactions in the Company's securities. The Company has made
application to have the Units, Common Stock and Warrants listed on the Nasdaq
SmallCap Market(SM) upon official notice of issuance.
In connection with the offering, the Representative and certain selling
group members may engage in certain transactions that stabilize, maintain or
otherwise affect the market price of the Units, the Common Stock and the
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase the Units, the Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Representative may also create a short position in the Units by selling more
Units in connection with the offering than it is committed to purchase from the
Company, and in such case the Representative may reduce all or a portion of that
short position by purchasing the Units, the Common Stock and the Warrants in the
open market. The Representative also may elect to reduce any short position by
exercising all or any portion of the over-allotment option described herein. In
addition, the Representative may impose "penalty bids" whereby selling
commissions allowed to selling group members or other broker-dealers in respect
of the Units sold in the offering for their account may be reclaimed by the
Representative if the securities comprising the Units are repurchased by the
Representative or any selling group member in stabilizing or covering
32
35
transactions. Any of the transactions described in this paragraph may stabilize
or maintain the market price of the Units, the Common Stock and the Warrants at
a level above that which might otherwise prevail in the open market.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Underwriters and their controlling persons against civil
liabilities in connection with the offering, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Each of the current executive officers and directors of the Company and
holders of more than 10% of the Common Stock, who will beneficially own in the
aggregate 1,227,727 shares of Common Stock after the offering, and the Company
have agreed that they will not, without the prior consent of the Representative,
offer, sell or grant any option to sell any securities of the Company in the
open market (other than pursuant to the over-allotment option) or otherwise for
a period of 20 months from the effective date of this Prospectus.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement, the Representative's Warrant and the financial consulting agreement
and does not purport to be a complete statement of their respective terms and
conditions. The Underwriting Agreement, the Representative's Warrant and the
financial consulting agreement each have been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 2,372,727 shares of
Common Stock outstanding. In addition, the Company will have 625,000 shares of
Common Stock reserved for issuance under the Warrants, 450,000 reserved for
issuance under the Company's stock option plans (305,500 of which options have
been granted effective as of the date of this Prospectus) and up to 215,625
shares reserved for issuance upon exercise of the Representative's Warrant. Of
the 2,372,727 shares to be outstanding after the offering, the 1,250,000 shares
of Common Stock sold to the public in this offering, and the 625,000 issuable
upon exercise of the Warrants, will be freely tradeable without restriction or
registration under the Securities Act, except that any shares purchased by an
"affiliate" of the Company (as defined in the rules and regulations promulgated
under the Act) will be subject to the resale limitations of Rule 144 under the
Securities Act.
The remaining 1,122,727 shares of Common Stock held by the existing
shareholder upon completion of this offering are "restricted securities" as that
term is defined under Rule 144, all of which are currently eligible for sale
pursuant to Rule 144. All such outstanding restricted shares are currently owned
by the Chief Executive Officer of the Company who has agreed that he will not,
without the prior consent of the Representative, offer, sell or grant any option
to sell any securities of the Company in the open market or otherwise for a
period of 20 months from the closing of this offering other than to members of
his immediate family who will also agree to the terms of such "lock-up." See
"Management." In addition, the Representative has received certain registration
rights under the Securities Act with respect to the securities issuable upon
exercise of the Representative's Warrants. See "Underwriting."
In general, under Rule 144, as currently in effect, a person (or persons
whose sales are aggregated) who has beneficially owned restricted shares for at
least a year is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock or the average weekly trading volume in the Company's
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. A person who has not been an affiliate of the Company at any time
during the three months preceding a sale, and who has beneficially owned such
restricted shares for at least two years, is entitled to sell all such shares
under Rule 144 without regard to the requirements described above.
33
36
As of the date of this Prospectus, there has been no public market for the
Company's Common Stock. No assurance can be given that any such market will
develop, or if developed, will be maintained. The Company cannot predict the
effect, if any, that sales of restricted securities or the availability of such
securities for sale could have on the market price, if any, prevailing from time
to time. Nevertheless, sales of substantial amounts of the Company's Common
Stock could adversely affect prevailing market prices of the Company's Common
Stock and the Company's ability to raise additional capital by occurring at a
time when it would be beneficial for the Company to sell securities.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Mackall, Crounse & Moore, PLC, Minneapolis,
Minnesota. G. Thomas MacIntosh, a director of the Company, is a partner with the
law firm of Mackall, Crounse, which has represented the Company in the past and
anticipates representing the Company in the future. Certain legal matters will
be passed upon for the Underwriter by Helene K. Netter, Esq., Managing Director,
Corporate Finance, Stuart, Coleman & Co., Inc., New York, NY.
EXPERTS
The financial statements of Surrey, Inc. at December 31, 1996 and for each
of the years ended December 31, 1995 and 1996, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 ("Registration Statement"),
together with exhibits thereto, relating to the Units offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and
exhibits thereto. For further information with respect to the Company and the
Units, the Common Stock, and the Warrants, reference is made to such
Registration Statement and exhibits. Statements made in this Prospectus as to
the contents of any contract, agreement or other documents referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved. The
Registration Statement and exhibits may be inspected without charge and copied
at the principal public reference facilities maintained by the Commission at 450
Fifth Street N.W., Washington, D.C. and at the Commission's regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and 7 World Trade Center, 13th Floor New York, New York 10048. Copies of such
material may be obtained at prescribed rates from the Commission's Public
Reference Section at 450 Fifth Street N.W., Washington, D.C. 20549. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
The Company has not, to date, filed reports with the Securities and
Exchange Commission, but will be required to do so upon completion of this
offering. The Company intends to furnish annual reports to shareholders
containing financial statements which have been audited and reported upon by
independent certified public accountants and such other periodic reports as it
may determine to be appropriate or as may be required by law. The Company will
also provide without charge to each person who receives this Prospectus, upon
written or oral request, a copy of any of the information that is incorporated
by reference (not including exhibits to the information that is incorporated by
reference unless the exhibits themselves are specifically incorporated by
reference). Such request should be directed to John B. van der Hagen, 13110
Trails End, Leander, Texas 78641, (512) 267-7172.
34
37
SURREY, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young, LLP, Independent Auditors.......... F-2
Balance Sheets as of December 31, 1996 and June 30, 1997
(unaudited)............................................... F-3
Statements of Operations for the years ended December 31,
1995 and 1996 and for the six months ended June 30, 1996
(unaudited) and 1997 (unaudited).......................... F-4
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1996 and for the six months ended
June 30, 1997 (unaudited)................................. F-5
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and for the six months ended June 30, 1996
(unaudited) and 1997 (unaudited).......................... F-6
Notes to Financial Statements............................... F-7
F-1
38
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Surrey, Inc.
We have audited the accompanying balance sheet of Surrey, Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1996. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Surrey, Inc. at December 31,
1996, and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Austin, Texas
September 4, 1997
F-2
39
SURREY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(UNAUDITED)
ASSETS
Current assets:
Cash........................................................ $ 159 $ 79
Accounts receivable, net of allowance for doubtful accounts
of $30 at December 31, 1996 and $23 at June 30, 1997...... 1,312 1,416
Inventories, net............................................ 1,172 1,430
Prepaid expenses and other current assets................... 31 30
Deferred income taxes....................................... 46 35
------ ------
Total current assets........................................ 2,720 2,990
Property and equipment, net................................. 1,508 1,531
Deferred financing costs.................................... -- 25
------ ------
Total assets................................................ $4,228 $4,546
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 660 $1,090
Accrued expenses.......................................... 90 93
Notes payable............................................. 729 608
Notes payable to shareholders, current portion............ 28 175
Current maturities of long-term debt...................... 97 102
Current maturities of capital lease obligations........... 106 79
Income taxes payable...................................... 8 43
------ ------
Total current liabilities................................... 1,718 2,190
Notes payable to shareholders, less current maturities...... 154 --
Long-term debt, less current maturities..................... 1,239 1,193
Capital lease obligations, less current maturities.......... 77 63
Deferred income taxes....................................... 42 38
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized,
2,245,454 shares issued and outstanding at December 31,
1996 and at June 30, 1997.............................. 393 393
Retained earnings......................................... 605 669
------ ------
Total shareholders' equity.................................. 998 1,062
------ ------
Total liabilities and shareholders' equity.................. $4,228 $4,546
====== ======
See accompanying notes.
F-3
40
SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
Net sales......................................... $ 7,882 $ 7,336 $ 3,148 $ 3,724
Cost of sales..................................... 6,071 5,485 2,455 2,820
--------- --------- --------- ---------
Gross profit...................................... 1,811 1,851 693 904
Operating expenses:
Sales and marketing............................. 513 507 235 156
General and administrative...................... 1,076 1,005 481 540
--------- --------- --------- ---------
Total operating expenses.......................... 1,589 1,512 716 696
Income (loss) from operations..................... 222 339 (23) 208
Other:
Interest expense, net........................... 222 226 106 102
Other income.................................... 3 -- -- --
--------- --------- --------- ---------
Income (loss) before income taxes................. 3 113 (129) 106
Provision for income taxes........................ 1 47 (54) 42
--------- --------- --------- ---------
Net income (loss)................................. $ 2 $ 66 $ (75) $ 64
========= ========= ========= =========
Net income (loss) per common share................ $ -- $ 0.03 $ (0.03) $ 0.03
========= ========= ========= =========
Weighted average shares outstanding............... 2,245,454 2,245,454 2,245,454 2,245,454
========= ========= ========= =========
See accompanying notes.
F-4
41
SURREY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------- TOTAL
SHARES RETAINED SHAREHOLDERS'
OUTSTANDING AMOUNT EARNINGS EQUITY
----------- ------ -------- -------------
Balance at January 1, 1995........................... 2,245,454 $393 $537 $ 930
Net income......................................... -- -- 2 2
--------- ---- ---- ------
Balance at December 31, 1995......................... 2,245,454 393 539 932
Net income......................................... -- -- 66 66
--------- ---- ---- ------
Balance at December 31, 1996......................... 2,245,454 393 605 998
Net income (unaudited)............................. -- -- 64 64
--------- ---- ---- ------
Balance at June 30, 1997 (unaudited)................. 2,245,454 $393 $669 $1,062
========= ==== ==== ======
See accompanying notes.
F-5
42
SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)........................................... $ 2 $ 66 $ (75) $ 64
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 205 210 106 118
Gain on sale of asset..................................... (3) -- -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... 120 (184) 491 (104)
Inventories............................................ (353) 183 307 (258)
Prepaid expenses and other current assets.............. 10 (19) (4) 1
Deferred income taxes.................................. (15) (3) (54) 7
Trade accounts payable................................. (65) (328) (549) 430
Accrued expenses....................................... 31 (38) (60) 3
Income taxes payable................................... (3) 6 (45) 35
----- ----- ----- -----
Net cash provided by (used in) operating activities......... (71) (107) 117 296
INVESTING ACTIVITIES
Acquisition of property and equipment....................... (159) (105) (54) (110)
Proceeds from sale of property and equipment................ 15 -- -- --
----- ----- ----- -----
Net cash used in investing activities....................... (144) (105) (54) (110)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable..................... 650 500 -- --
Payment of notes payable.................................... (275) (246) (225) (121)
Proceeds from issuance of notes payable to shareholders..... -- 200 200 --
Payment of notes payable to shareholders.................... -- (19) (6) (7)
Proceeds from issuance of long-term debt.................... 21 33 -- --
Payment of long-term debt................................... (55) (82) (38) (41)
Principal payments on capital lease obligations............. (145) (144) (77) (72)
Deferred financing costs.................................... -- -- -- (25)
----- ----- ----- -----
Net cash provided by (used in) financing activities......... 196 242 (146) (266)
Net increase (decrease) in cash............................. $ (19) $ 30 $ (83) $ (80)
Cash, beginning of period................................... 148 129 129 159
----- ----- ----- -----
Cash, end of period......................................... $ 129 $ 159 $ 46 $ 79
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid........................................... $ 8 $ 45 $ 45 $ 5
Acquisition of property and equipment via issuance of
capital leases............................................ $ 138 $ 22 $ 7 $ 31
Interest paid during the years ended December 31, 1995 and 1996 and the six
months ended June 30, 1996 and 1997 approximates the interest expense for those
periods.
See accompanying notes.
F-6
43
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. NATURE OF BUSINESS
Surrey, Inc. manufactures personal and home care products for major drug,
grocery and discount retailers and distributes its products on a nationwide
basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and notes
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 six months ended June 30, 1997 may not be
indicative of the results for the year ended December 31, 1997.
RECOGNITION OF REVENUE
Revenue is recognized at the date of shipment. Provision is made for
estimated product returns.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment includes amounts
recorded under capital leases. Depreciation is provided using the straight-line
method over estimated useful lives ranging from three to forty years. Assets
recorded under capital leases are amortized using the straight-line method over
the lesser of the estimated useful lives of the assets or the term of the
related leases and such amortization is included in depreciation and
amortization of property and equipment.
Expenditures for major renewals and improvements are capitalized, while
repairs and maintenance are charged to expense when incurred.
LONG-LIVED ASSETS
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Impairment losses
are recognized when indicators of impairment are present and the estimated
future undiscounted cash flows are not sufficient to recover the assets'
carrying value or estimated fair value, less costs to sell. The effect of
adopting this Statement was not material to the financial statements. At
December 31, 1996 there were no events or circumstances which indicated that
long-lived assets of the Company might be impaired.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement prescribes the use of the liability
method whereby deferred tax asset and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
F-7
44
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
ADVERTISING
The production cost of advertising is expensed as incurred. Advertising
expense was $141,000, $89,000, $38,000 and $17,000 for the years ended December
31, 1995 and 1996, and for the six month periods ended June 30, 1996 and 1997,
respectively.
NET INCOME (LOSS) PER COMMON SHARE
Net income per common share is based on the weighted average number of
common shares outstanding during the period. There are no common stock
equivalents.
In August 1997, the Company repurchased fifty percent (1,122,727 shares) of
the outstanding common stock. Supplemental income (loss) per share for the year
ended December 31, 1995 and 1996, and for the six months ended June 30, 1996 and
1997 are $0.002, $0.06, $(0.07) and $0.06, respectively. Supplemental earnings
per share is presented as if the repurchase occurred prior to January 1, 1995.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified for comparative purposes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements, the
presentation of primary earnings per share is replaced with basic earnings per
share, the calculation of which excludes the dilutive effect of common stock
equivalents. The Company believes that the Statement will not materially impact
previously reported earnings per share.
3. INVENTORIES
The Company's inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(UNAUDITED)
Raw materials......................................... $ 976 $ 999
Finished goods........................................ 196 431
------ ------
$1,172 $1,430
====== ======
F-8
45
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(UNAUDITED)
Equipment............................................. $1,702 $1,827
Building.............................................. 886 899
Automobiles........................................... 120 122
Furniture and fixtures................................ 33 34
------ ------
2,741 2,882
Accumulated depreciation and amortization............. (1,301) (1,419)
------ ------
1,440 1,463
Land.................................................. 68 68
------ ------
Property and equipment, net........................... $1,508 $1,531
====== ======
Assets under capital leases totaling $574,000 at December 31, 1996 and
$605,000 at June 30, 1997 are included in equipment.
5. 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.
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(UNAUDITED)
Borrowings under a $500,000 revolving line of credit,
bearing interest at the bank's prime rate plus 1.5% (9.75%
at December 31, 1996 and 10% at June 30, 1997), with
interest due monthly and all principal due in March 1998.
The line is collateralized by accounts receivable, inventory
and property and equipment, and is guaranteed by the
Company's shareholders. .................................... $500 $400
Note payable to a bank, bearing interest at the bank's prime
rate plus 2% (10.25% at December 31, 1996 and 10.5% at June
30, 1997), due in monthly installments of $6,000 in
principal and interest through May 1998, at which time all
outstanding principal and interest are due. The note is
collateralized by accounts receivable, inventory, and
property and equipment, and is guaranteed by the Company's
shareholders. .............................................. 229 208
---- ----
$729 $608
==== ====
F-9
46
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(UNAUDITED)
Note payable to a bank, bearing interest at the bank's prime
rate plus 1.75% (10% at December 31, 1996 and 10.25% June
30, 1997), due in monthly installments of $16,000 in
principal and interest, through November 2006, at which
time all outstanding principal and interest are due. The
note is collateralized by accounts receivable, inventory,
and property and equipment. The note is guaranteed by the
Company's shareholders and by the United States Small
Business Administration. ................................. $1,278 $1,245
Notes payable to various banks for automobiles, bearing
interest at rates ranging from 6.9% to 8.75%, due in
monthly installments of principal and interest of
approximately $1,000, maturing at various dates through
November 1999. The notes are collateralized by the
automobiles financed by the notes. ....................... 58 50
------ ------
1,336 1,295
Less current maturities..................................... (97) (102)
------ ------
Long-term debt, less current maturities..................... $1,239 $1,193
====== ======
The note which is guaranteed by the United States Small Business
Association ("the SBA Loan") contains restrictive covenants which limit the
Company's capital expenditures and require the Company to maintain certain
financial ratios. At December 31, 1996 and June 30, 1997, the Company was in
violation of certain covenants; however, the Company was able to obtain a waiver
of this violation from the lender.
Maturities of long-term debt are as follows for the period ending December
31 (in thousands):
1997........................................................ $ 97
1998........................................................ 96
1999........................................................ 104
2000........................................................ 96
2001........................................................ 106
2002........................................................ 117
Thereafter.................................................. 720
------
Total..................................................... $1,336
======
8. NOTES PAYABLE TO SHAREHOLDERS
In March 1996, the Company issued notes payable to shareholders of the
Company totaling $200,000. The notes bear interest at 12% per annum, and are due
in monthly installments of $2,000 in principal and interest through January
2002. The notes are subordinate to the SBA loan. The Company has not made
payment on the notes since March 1997, and thus the noteholders may declare the
notes to be immediately due. Accordingly, the notes are classified as current at
June 30, 1997.
F-10
47
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
Deferred tax liabilities:
Tax over book depreciation.............................. $(42) $(38)
---- ----
Total deferred tax liabilities............................ (42) (38)
Deferred tax assets:
Allowance for doubtful accounts......................... 10 9
Inventory............................................... 36 26
---- ----
Total deferred tax assets................................. 46 35
Valuation allowance for deferred tax assets............... -- --
---- ----
Net deferred tax assets................................... 46 35
---- ----
Net deferred tax assets (liabilities)..................... $ 4 $ (3)
==== ====
Significant components of the provision for income taxes attributable to
continuing operations for the years-ended are as follows (in thousands):
DECEMBER 31, JUNE 30,
------------ ------------
1995 1996 1996 1997
---- ---- ---- ----
Current:
Federal........................................ $ 4 $47 $ -- $31
State.......................................... 1 4 -- 3
--- --- ---- ---
Total current.................................... 5 51 -- 34
Deferred:
Federal........................................ (3) (3) (50) 7
State.......................................... (1) (1) (4) 1
--- --- ---- ---
Total deferred................................... (4) (4) (54) 8
--- --- ---- ---
$ 1 $47 $(54) $42
=== === ==== ===
The reconciliation of income tax attributable to continuing operations at
the U.S. federal statutory tax rates to income tax expense is:
DECEMBER 31, JUNE 30,
-------------- --------------
1995 1996 1996 1997
---- ---- ---- ----
Tax at federal statutory rate............................... 34% 34% (34)% 34%
State taxes (net of federal deficit)........................ 4 4 (3) 3
Permanent items and other................................... 4 4 (5) 3
-- -- --- --
42% 42% (42) 40%
== == === ==
F-11
48
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under capital leases. A summary of
minimum lease commitments that have initial or remaining lease terms in excess
of one year is as follows (in thousands):
CAPITAL LEASES
---------------------
PERIOD ENDING
DECEMBER 31 JUNE 30
----------- -------
1997...................................................... $ 121 $ 63
1998...................................................... 53 60
1999...................................................... 30 40
2000...................................................... -- 6
2001...................................................... -- 4
2002...................................................... -- 1
----- ----
Total minimum lease payments.............................. 204 174
Less amounts representing interest........................ (21) (32)
----- ----
Present value of net minimum lease payments............... 183 142
Less current maturities................................... (106) (79)
----- ----
$ 77 $ 63
===== ====
11. SALES TO MAJOR CUSTOMERS
For the year ended December 31, 1995, sales to three customers amounted to
approximately $2,660,000 representing 34% of net sales. For the year ended
December 31, 1996, sales to one customer amounted to approximately $1,615,000
representing 21% of net sales.
DECEMBER 31,
------------
1995 1996
---- ----
Customer A.................................................. 13% 21%
Customer B.................................................. 11% --
Customer C.................................................. 10% --
--- ---
34% 21%
=== ===
12. CONCENTRATION OF CREDIT RISK
The Company is principally engaged in the manufacturing and distribution of
personal and home care products within the United States. Consequently, the
Company's ability to collect the amounts due from customers may be affected by
economic fluctuations within the United States and the major drug, grocery and
discount retailer industry. Credit losses relating to such economic fluctuations
have been within management's expectations.
13. SUBSEQUENT EVENTS
On August 15, 1997, the Company (Purchaser) and a shareholder (Seller)
entered into a Stock Purchase Agreement (Purchase Agreement), to purchase 50% of
the outstanding capital stock of the Company (1,122,727 shares) for $1,250,000.
The purchase price is payable in the form of a promissory note. The note is due
at the earlier of the closing of the Purchaser's initial public offering,
December 31, 1997 or such other date as the parties may mutually agree.
Effective August 15, 1997, the 1,122,727 shares purchased by the Company were
retired.
F-12
49
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
On September 3, 1997 the Shareholders and the Board of Directors adopted
the Surrey, Inc. 1997 Long-Term Incentive Plan (the Incentive Plan) and the
Surrey, Inc. 1997 Non-Employee Directors' Stock Option Plan (the Directors'
Plan). The Incentive Plan provides for the granting of stock options and other
incentive awards to key employees and employee directors of the Company. The
exercise price of incentive stock options may not be less than fair market value
of the common stock on the date of grant (110% of fair market value in the case
of options granted to a person possessing more than 10% of the combined voting
power of the Company). Nonqualified stock options may also be granted under the
Incentive Plan. The Company has reserved 350,000 shares of its common stock for
issuance under the Incentive Plan.
The Director's Plan provides for the granting of automatic,
nondiscretionary awards of stock options to directors of the Company who are not
employees. The Company has reserved 100,000 shares of its common stock for
issuance under the Directors' Plan.
The Company intends to proceed with an initial public offering of its
common stock. Although the success of such a proposed offering cannot be
certain, management is proceeding with activities relating to the process.
Effective September 3, 1997 the Shareholders and the Board of Directors
approved a 11.22727-for-1 stock split of the outstanding common stock. All share
amounts presented in these financial statements have been restated to
retroactively reflect the stock split.
F-13
50
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE REPRESENTATIVE. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR SINCE THE DATE AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................... 3
Risk Factors........................... 5
Use Of Proceeds........................ 8
Dilution............................... 10
Dividend Policy........................ 10
Capitalization......................... 11
Selected Financial Data................ 12
Management's Discussion and Analysis of
Financial Condition and Results
of Operations........................ 13
Business............................... 17
Management............................. 23
Certain Transactions................... 26
Principal Shareholders................. 28
Description of Securities.............. 29
Underwriting........................... 31
Shares Eligible For Future Sale........ 33
Legal Matters.......................... 34
Experts................................ 34
Additional Information................. 34
Index to Financial Statements.......... F-1
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
625,000 UNITS
CONSISTING OF
1,250,000 SHARES OF COMMON STOCK
AND
625,000 COMMON STOCK PURCHASE WARRANTS
LOGO
SURREY, INC.
------------------
PROSPECTUS
------------------
LOGO
, 1997
======================================================
51
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides that the
Company may indemnify a person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a director
or officer only if it is determined in accordance with such article that the
person: (1) conducted himself in good faith; (2) reasonably believed: (a) in the
case of conduct in his official capacity, that his conduct was in the
corporation's best interests; and (b) in all other cases, that his conduct was
at least not opposed to the corporation's best interests; and (3) in the case of
any criminal proceeding, has no reasonable cause to believe his conduct was
unlawful.
Except to the extent permitted by such article, a director or officer may
not be indemnified under this article in respect of a proceeding: (1) in which
the person is found liable on the basis that personal benefit was improperly
received by him, whether or not the benefit resulted from an action taken in the
person's official capacity; or (2) in which the person is found liable to the
corporation.
A person may be indemnified under such article against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by the person in connection with the proceeding; but
if the person is found liable to the corporation or is found liable on the basis
that personal benefit was improperly received by the person, the indemnification
(1) is limited to reasonable expenses actually incurred by the person in
connection with the proceeding and (2) shall not be made in respect of any
proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A determination of indemnification under such article must be made: (1) by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding; (2) if such a quorum
cannot be obtained, by a majority vote of a committee of the board of directors,
designated to act in the matter by a majority vote of all directors, consisting
solely of two or more directors who at the time of the vote are not named
defendants or respondents in the proceeding; (3) by special legal counsel
selected by the board of directors or a committee of the board by vote as set
forth above in (1) or (2) or, if such a quorum cannot be obtained and such a
committee cannot be established, by a majority vote of all directors; or (4) by
the shareholders in a vote that excludes the shares held by directors who are
named defendants or respondents in the proceeding.
Authorization of indemnification and determination as to reasonableness of
expenses must be made in the same manner as the determination that
indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses must be
made in the manner specified by Subsection (3) above for the selection of
special legal counsel. A provision contained in the articles of incorporation,
the bylaws, a resolution of shareholders or directors, or an agreement that
makes mandatory the indemnification permitted under this article shall be deemed
to constitute authorization of indemnification in the manner required by this
section even though such provision may not have been adopted or authorized in
the same manner as the determination that indemnification is permissible.
A corporation shall indemnify a director or officer against reasonable
expenses incurred by him in connection with a proceeding in which he is a named
defendant or respondent because he is or was a director or officer if he has
been wholly successful, on the merits or otherwise, in the defense of the
proceeding.
A corporation may purchase and maintain insurance or another arrangement on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation or who is or was serving at the request of the corporation as a
director, officer, partner, venturer, proprietor, trustee, employee, agent, or
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan, or other
enterprise, against any liability asserted against him and incurred by him in
such a capacity or arising out of his status as such a person, whether or not
the corporation would have the power to
II-1
52
indemnify him against that liability under this article. Without limiting the
power of the corporation to procure or maintain any kind of insurance or other
arrangement, a corporation may, for the benefit of persons indemnified by the
corporation, (1) create a trust fund; (2) establish any form of self-insurance;
(3) secure its indemnity obligation by grant of a security interest or other
lien on the assets of the corporation; or (4) establish a letter of credit,
guaranty, or surety arrangement. The insurance or other arrangement may be
procured, maintained, or established within the corporation or with any insurer
or other person deemed appropriate by the board of directors regardless of
whether all or part of the stock or other securities of the insurer or other
person are owned in whole or part by the corporation. In the absence of fraud,
the judgment of the board of directors as to the terms and conditions of the
insurance or other arrangement and the identity of the insurer or other persons
participating in an arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the directors approving
the insurance or arrangement to liability, on any ground, regardless of whether
directors participating in the approval are beneficiaries of the insurance or
arrangement.
The articles of incorporation of a corporation may restrict the
circumstances under which the corporation is required or permitted to indemnify
a person under such article.
Provisions regarding indemnification of officers and directors of the
Company are contained in Article XI of the Company's Articles of Incorporation,
as amended (Exhibit 3.1 to this Registration Statement), and Article VIII of the
Company's Amended and Restated Bylaws (Exhibit 3.2 to this Registration
Statement), each of which are incorporated herein by reference.
Under Section 7 of the Underwriting Agreement, filed as Exhibit 1.1 hereto,
the Underwriters agree to indemnify, under certain conditions, the Company, its
directors, certain of its officers and persons who control the Company within
the meaning of the Securities Act of 1933, as amended, against certain
liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC Registration Fee, Nasdaq listing fee, and NASD filing fee,
are estimated.
SEC Registration Fee........................................ $ 2,809
Nasdaq Small Cap Listing Fee................................ 8,600
NASD Filing Fee............................................. 1,200
Transfer Agent's fees....................................... 2,500
Legal Fees and Expenses..................................... 65,000
Representative's Nonaccountable Expenses.................... 152,000
Accountants' Fees and Expenses.............................. 45,000
Printing Expenses........................................... 40,000
Blue Sky Fees and Expenses.................................. 16,500
Miscellaneous............................................... 6,391
--------
Total.................................................. $340,000
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the following
securities pursuant to exemptions from registration under the Securities Act of
1933, as amended (the "Act") pursuant to Section 4(2):
In September 1997, the Registrant effected a 11.22727-for-one stock split
with respect to its common stock.
The holder of the securities described above acquired them for his own
account and not with a view to any distribution thereof to the public in
violation of the securities laws. The certificate evidencing the securities
bears a legend stating that such shares may not be offered, sold or transferred
other than pursuant to
II-2
53
an effective registration statement under the Act, or an exemption from such
registration requirements. The Registrant has placed stop transfer instructions
with the transfer agent with respect to all such securities. No underwriting
commissions or discounts were paid with respect to the sales of unregistered
securities described above.
ITEM 27. EXHIBITS.
NUMBER DESCRIPTION
- ------ -----------
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement
1.3 Form of Representative's Warrant
1.4 Form of Lock-Up Agreement
3.1 Articles of Incorporation, as amended to date
3.2 Amended and Restated By-laws
*4.1 Specimen of Common Stock
4.2 Form of Warrant Agreement and Warrant Certificate
5 Opinion of Mackall, Crounse & Moore, PLC
10.1 1997 Long-Term Incentive Plan
10.2 1997 Non-Employee Directors' Stock Option Plan
10.3(a) SBA Authorization and Loan Agreement
10.3(b) Loan Agreement and Deed of Trust
10.3(c) SBA Note
10.3(d) Guaranty of James K. Olson
*10.3(e) Guaranty of John van der Hagen
*10.3(f) Security Agreement of Company
10.4(a) Promissory Note of the Company to Norwest Bank Texas, South
Central ("Norwest") in the principal amount of $500,000, due
March 1998
10.4(b) Commercial Guaranty of John van der Hagen
10.4(c) Commercial Guaranty of James K. Olson
10.4(d) Commercial Security Agreement of Company
10.4(e) Line of Credit Loan Agreement (Amendment to Loan)
10.5(a) Promissory Note of the Company to Norwest in the principal
amount of $221,234.39, due May 1998
10.5(b) Commercial Guaranty of John van der Hagen
10.5(c) Commercial Guaranty of James Olson
10.5(d) Security Agreement
10.6 Promissory Note payable to John B. van der Hagen, dated
March 11, 1996
10.7 Promissory Note payable to James K. Olson, dated March 11,
1996
10.8 Purchase Note payable to James K. Olson, dated August 15,
1997
*10.9 Employment Agreement, effective 1997, between Surrey,
Inc. and John van der Hagen
*10.10 Employment Agreement, effective 1997, between Surrey,
Inc. and Martin van der Hagen
10.11 Consulting Agreement between the Company and James K. Olson,
dated August 15, 1997, Indemnity Agreement, Noncompetition
and Confidentiality Agreement
10.12 Form of Consulting Agreement between the Company and Stuart,
Coleman & Co., Inc.
II-3
54
NUMBER DESCRIPTION
------ -----------
23.1 Consent of Mackall, Crounse & Moore, PLC (included in Exhibit 5)
23.2 Consent of Ernst & Young LLP, independent auditors (included at page II-6)
24 Powers of Attorney (included on Signature Page)
27 Financial Data Schedule
- -------------------------
* Documents to be filed by Amendment
ITEM 28. UNDERTAKINGS.
The Registrant will provide to the underwriters at the closing specified in
the Underwriting Agreement certificates required by the Underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
pending) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant further undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
55
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Leander, State of Texas, on September 15, 1997.
SURREY, INC.
By /s/ JOHN B. VAN DER HAGEN
------------------------------------
John B. van der Hagen
Chairman of the Board and CEO
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints John B. van
der Hagen and Martin J. van der Hagen, and each of them, as his or her true and
lawful attorney-in-fact and agent, with full power of substitution, to sign on
his or her behalf individually and in the capacity stated below and to perform
any acts necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement, and any and all instruments or
documents filed as part of or in connection with this Registration Statement or
the amendments thereto, and each of the undersigned does hereby ratify and
confirm all that said attorney-in-fact and agent, or his or her substitutes,
shall do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ JOHN B. VAN DER HAGEN Chairman of the Board and CEO September 15, 1997
- ------------------------------------------ (Principal Executive Officer)
John B. van der Hagen
/s/ MARTIN J. VAN DER HAGEN President and Director September 15, 1997
- ------------------------------------------
Martin J. van der Hagen
/s/ MARY VAN DER HAGEN Director September 15, 1997
- ------------------------------------------
Mary van der Hagen
/s/ BRUCE A. MASUCCI Director September 15, 1997
- ------------------------------------------
Bruce A. Masucci
/s/ G. THOMAS MACINTOSH Director September 15, 1997
- ------------------------------------------
G. Thomas MacIntosh
/s/ MARK J. VAN DER HAGEN Vice President -- Finance and September 15, 1997
- ------------------------------------------ Treasurer (Principal Accounting
Mark J. van der Hagen Officer)
II-5
56
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Selected
Financial Data" and "Experts" and to the use of our report dated September 4,
1997, in the Registration Statement (Form SB-2) and related Prospectus of
Surrey, Inc. for the registration of 625,000 units (each unit consisting of two
shares of common stock and one redeemable common stock purchase warrant to
purchase one share of common stock).
/s/ Ernst & Young LLP
Austin, Texas
September 16, 1997
II-6
57
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SURREY, INC.
EXHIBIT TO FORM SB-2
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealer Agreement
1.3 Form of Representative's Warrant
1.4 Form of Lock-Up Agreement
3.1 Articles of Incorporation, as amended to date
3.2 Amended and Restated By-laws
*4.1 Specimen of Common Stock
4.2 Form of Warrant Agreement and Warrant Certificate
5 Opinion of Mackall, Crounse & Moore, PLC
10.1 1997 Long-Term Incentive Plan
10.2 1997 Non-Employee Directors' Stock Option Plan
10.3(a) SBA Authorization and Loan Agreement
10.3(b) Loan Agreement and Deed of Trust
10.3(c) SBA Note
10.3(d) Guaranty of James K. Olson
*10.3(e) Guaranty of John van der Hagen
*10.3(f) Security Agreement of Company
10.4(a) Promissory Note of the Company to Norwest Bank Texas, South
Central ("Norwest") in the principal amount of $500,000, due
March 1998
10.4(b) Commercial Guaranty of John van der Hagen
10.4(c) Commercial Guaranty of James K. Olson
10.4(d) Commercial Security Agreement of Company
10.4(e) Line of Credit Loan Agreement (Amendment to Loan)
10.5(a) Promissory Note of the Company to Norwest in the principal
amount of $221,234.39, due May 1998
10.5(b) Commercial Guaranty of John van der Hagen
10.5(c) Commercial Guaranty of James Olson
10.5(d) Security Agreement
10.6 Promissory Note payable to John B. van der Hagen, dated
March 11, 1996
10.7 Promissory Note payable to James K. Olson, dated March 11,
1996
10.8 Purchase Note payable to James K. Olson, dated August 15,
1997
*10.9 Employment Agreement, effective 1997, between
Surrey, Inc. and John van der Hagen
*10.10 Employment Agreement, effective 1997, between
Surrey, Inc. and Martin van der Hagen
10.11 Consulting Agreement between the Company and James K. Olson,
dated August 15, 1997, Indemnity Agreement, Noncompetition
and Confidentiality Agreement
10.12 Form of Consulting Agreement between the Company and Stuart,
Coleman & Co., Inc.
23.1 Consent of Mackall, Crounse & Moore, PLC (included in
Exhibit 5)
23.2 Consent of Ernst & Young LLP, independent auditors (included
at page II-6)
24 Powers of Attorney (included on Signature Page)
27 Financial Data Schedule
- -------------------------
*Documents to be filed by Amendment