SURREY INC, 424B1, 1997-12-04

SURREY INC
424B1, 1997-12-04
SOAP, DETERGENTS, CLEANG PREPARATIONS, PERFUMES, COSMETICS

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<PAGE> 1

PROSPECTUS
- ---------------------

SURREY LOGO
SURREY, INC.

625,000 UNITS CONSISTING OF
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 components of the Units will be separately
transferable commencing January 3, 1998 or earlier at the discretion of Stuart,
Coleman & Co., Inc., (the "Underwriter"). The Underwriter may decide to delist
the Units after the thirty day minimum inclusion period. Each Warrant entitles
the registered holder to purchase one share of Common Stock, at any time prior
to December 9, 2002, at an exercise price of $4.80, subject to adjustment in
certain circumstances. The exercise price will not be adjusted by less than
$.05; however, there is no maximum limitation on such adjustment. No fractional
shares will be issued upon exercise. See "Description of Securities -- Warrants"
for a determination of cash consideration in lieu of fractional shares and
restrictions on, and circumstances permitting, adjustment to the exercise price.
The Warrants are redeemable by Surrey commencing December 9, 1998, 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." A former officer
and director will receive approximately 32% of the net proceeds of the offering
(or 27% if the overallotment option is exercised). See "Risk Factors -- Use of
Proceeds." 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 "SOAP", "SOAPU" and "SOAPW." The initial
public offering price is $8.125 per Unit. For information regarding factors used
to determine the initial offering price, see "Underwriting."
------------------------
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" BEGINNING ON PAGE 5, AND
"DILUTION."
------------------------
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.

<TABLE>
<CAPTION>
===================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit...................................... $8.125 $.8125 $7.3125
- -------------------------------------------------------------------------------------------------------------------
Total(3)...................................... $5,078,125 $507,812.50 $4,570,312.50
===================================================================================================================
</TABLE>

(1) The Company (a) has agreed to pay to the Underwriter a nonaccountable
expense allowance equal to 3% of the gross proceeds of the offering of
Units, or $152,344 (or $175,195 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
Underwriter, at a price of $.0005 per warrant, warrants to purchase from the
Company up to 62,500 Units at a price per Unit equal to 120% of the per Unit
offering price (the "Underwriter's Warrant"); (c) has agreed to enter into a
two-year financial consulting agreement with the Underwriter 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 Underwriter 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 $362,851 if the Underwriter's over-allotment option
is exercised in full) including the Underwriter's nonaccountable expense
allowance referenced in note 1 above.

(3) The Company has granted the Underwriter 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 $5,839,843.75, $583,989.38 and $5,255,859.37
respectively. See "Underwriting."
------------------------

The Units are being offered on a "firm commitment" basis, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, 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 December 9, 1997 in New York, New York.

Stuart Coleman Logo
------------------------

The date of this Prospectus is December 3, 1997
<PAGE> 2

[INSIDE FRONT COVER PAGE]

SURREY Home and Bath Products

[Contains photographs of the following products manufactured by Surrey: Chanel
soap for men; soap making kit; Pure Pleasure Glycerine Cleansing Bar; Milk &
Honey Cleansing Bar; Barbie soap; Avon Naturals; shaving soap; various clear
glycerine bars containing flowers and cube soaps; Elizabeth Arden soaps; Ann
Taylor soap; selected Disney soaps (Mickey Mouse, Minnie Mouse, Snow White,
Ariel); Liz Sport soap; Alfred Sung soap, and Hill Country Cameo soap.]

sensibly indulgent

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."
<PAGE> 3

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 Underwriter's 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

<TABLE>
<S> <C>
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
from the Common Stock commencing 30 days from the date
of this Prospectus or earlier at the discretion of the
Underwriter.
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......................... December 9, 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.
</TABLE>

- -------------------------
(1) Does not include up to 93,750 Units issuable to the Underwriter's
over-allotment option or 62,500 Units which may be purchased upon exercise
of the Underwriter's Warrant. See "Underwriting."

(2) Does not include (i) 187,500 shares included in the Underwriter's
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 (including the over-allotment
option) or (iv) 187,500 shares of Common Stock which may be purchased upon
exercise of the Underwriter's Warrant. See "Description of Securities,"
"Management" and "Underwriting."
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<PAGE> 4

<TABLE>
<S> <C>
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. Potential
risks include, among others: the Company's growth
strategy and management of growth, costs of
construction, dependence on significant customers,
competition, reliance on proprietary rights, possible
price violation of the shares, and no payments of
dividends. See "Risk Factors" and "Dilution."
</TABLE>

SUMMARY FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $7,479 $7,882 $7,336 $4,878 $6,363
Cost of goods sold................................ 5,692 6,071 5,485 3,562 4,702
Gross profit...................................... 1,787 1,811 1,851 1,316 1,661
Total operating expenses.......................... 1,635 1,589 1,512 1,095 1,158
Interest expense.................................. 138 222 226 162 159
Other income...................................... -- 3 -- -- 4
Provision for income taxes........................ 6 1 47 25 135
Net income........................................ 8 2 66 34 213
PRO FORMA DATA:
Pro Forma net income per share(1)................. $ .06 $ .19
Weighted average shares outstanding(1)............ 1,123 1,123
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ---------------------------
1996 ACTUAL(2) AS ADJUSTED(3)
------------ --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $1,002 $ (472) $3,758
Total assets........................................... 4,228 5,210 8,100
Current liabilities.................................... 1,718 3,974 2,634
Long-term debt, less current portion................... 1,470 1,237 1,237
Stockholders' equity (deficit)......................... 998 (39) 4,191
</TABLE>

- -------------------------
(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
on January 1, 1996.

(2) The balance sheet data as of September 30, 1997 reflects, among other
things, an increase in current liabilities and a decrease in stockholders'
equity of $1.25 million related to the repurchase of shares in August 1997.
See "Certain Transactions" and Financial Statements.

(3) Adjusted to reflect the sale of 625,000 Units offered hereby at an assumed
initial public offering price of $8.125 per Unit and application of the
estimated net proceeds therefrom; does not reflect shares issuable upon
exercise of the Warrants offered hereby.
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<PAGE> 5

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 approximately $2,500,000 (or 59%) of the net
proceeds from the offering to significantly expand its facilities, equipment,
and sales and marketing staff. 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. In such event, the Company would not be able to
significantly increase, if at all, production and sales over its current volume,
which would restrict the Company's ability to increase sales and revenue and
which could have a material adverse effect on the Company's future operations
and financial condition. 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. In such
event, the Company might not be able to increase production to a volume, or on a
schedule, that might otherwise be achieved, or the Company's costs and expenses
might be increased. In either such case, the Company's ability to increase sales
and revenue could be restricted. Such results could have a material adverse
effect on the Company's future results of operations and financial condition. In
addition, in the event marketing growth and personnel are not properly managed
with production growth, the Company could sell more product than it can timely
produce, potentially resulting in lost sales or lost customers. See "Use of
Proceeds" and "Business -- Growth Strategy."

COSTS OF CONSTRUCTION

The Company currently intends to use approximately $800,000 of the net
proceeds of this offering to enlarge its current manufacturing facility. The
Company has entered into discussion with its current bank lender and may secure
a new or extended line of bank financing for a portion of such cost. Management
believes 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. The Company's ability to receive secured
financing for any portion of the construction costs will be subject to any
conditions which might be imposed by such lender, including a review and
approval of all construction plans and an appraisal of the facility. There can
be no assurance, however, that such conditions can be satisfied by the Company
or that the proposed expansion can be completed within management's assumed time
frame. 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,"

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<PAGE> 6

"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Growth Strategy"
and "Business -- Properties and Equipment."

DEPENDENCE ON SIGNIFICANT CUSTOMERS/LACK OF CONTRACTS

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 nine 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 K-Mart
will be the second and third largest customers, respectively, each accounting
for less than 10% of net sales. Customers generally order on a job-by-job basis
through the use of purchase orders as needed. Such orders are generally
cancelable by the customer if not shipped after two weeks. 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."

USE OF PROCEEDS

The Company currently anticipates that it will use approximately 32% 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 and for working capital.
Approximately 8% of the net proceeds are being allocated to current working
capital and general corporate purposes. Such funds, together with proceeds
allocated to sales, marketing, and new product development, are expected 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. Any such acquisition would not
require the vote of shareholders. Management of the Company has great discretion
in how the net proceeds of this offering will be used. See "Use of Proceeds" and
"Certain Transactions."

PAYMENT OF PROCEEDS TO AFFILIATED PARTIES

A former officer and director of the Company will receive approximately 32%
of the net proceeds of this offering (or 27% if the overallotment option is
exercised). Such proceeds are being used to repay certain indebtedness owned to
such affiliated party. See "Use of Proceeds" and "Certain Transactions."

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SEASONALITY

The Company experiences seasonal fluctuations in operating results, with
sales and revenues generally higher during the third and fourth calendar
quarters, reflecting primarily orders for the holiday retail season. Orders
shipped in the third and fourth quarters generally account for approximately 60%
of the Company's total net sales for the year. See "Business -- Seasonality."

CONTROL BY PRINCIPAL SHAREHOLDER/RELATIONSHIP OF OFFICERS AND DIRECTORS

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. In addition, all of the principal
officers and a majority of the directors of the Company are family members. The
Company has only one standing committee of its Board of Directors, which is
composed of a majority, but not all, independent directors. 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/LACK OF PATENTS

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 which signed such a confidentiality agreement appears to be
using certain trade secrets of the Company in violation of their agreement. The
Company is not currently aware of the volume or quality of product, if any,
which may be produced by such company. Because the Company is in a niche market,
any significant volume from a competitor could reduce the Company's sales and
net revenue, which could have a material adverse effect on the Company's future
results of operations and financial condition. 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."

CURRENT PROSPECTUS AND STATE "BLUE SKY" REGISTRATION REQUIRED TO EXERCISE THE
WARRANTS

Holders of the Warrants offered hereby will have the right to exercise them
to purchase shares of the Company's Common Stock only if a current prospectus
relating to such shares is then in effect and only if the

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<PAGE> 8

shares are qualified for sale or exempt from qualification under the securities
laws of the states in which the holder of the Warrant resides. Although the
Company has undertaken to use its best efforts to maintain a current prospectus
under the Securities Act which will permit the purchase and sale of the Common
Stock underlying such Warrants during the warrant exercise term, there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify the shares of Common Stock underlying the Warrants for sale
in the states in which the original holders may reside, no assurance can be
given that qualification will occur or will remain in effect at such time as the
Warrants may be exercised. The Warrants may be deprived of any value if a
current prospectus covering the shares issuable upon exercise thereof is not
kept effective or if such underlying shares are not, or cannot be, qualified in
the applicable states. See "Description of Securities."

EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET(SM)

If the Company fails to maintain the qualification for its Units, Common
Stock and Warrants to trade on the Nasdaq SmallCap Market(SM), its securities
could be delisted from Nasdaq. In such event, trading, if any, in such
securities would thereafter be conducted in the over-the-counter markets in the
so-called "pink sheets" or the National Association of Securities Dealer's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities would likely be impaired, not only in the number of shares which
could be bought and sold, but also through delays in the timing of the
transactions, reduction in security analysts' and the news media's coverage, if
any, of the Company, and lower prices for the Company's securities than might
otherwise prevail.

PENNY STOCK REGULATION

In the event that the Company's securities are delisted from the Nasdaq
SmallCap Market(SM), as above described, the Company's securities could become
subject to the rules and regulations under the Securities Exchange Act of 1934
relating to "penny stocks" (the "Penny Stock Rule"), which impose additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and certain institutional investors.
"Penny stocks" generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges or
authorized for quotient on the Nasdaq system, provided that current price and
volume information with respect to transactions in that security is provided by
the exchange or system). For transactions covered by the Penny Stock Rule, a
broker-dealer must, among other things, make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. Consequently, the Penny Stock Rule may reduce the
level of trading activity in the secondary market for the Company's securities,
may adversely effect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of purchasers in this offering
to sell any of the securities acquired hereby in the secondary market.

NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

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 Underwriter 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. See "Underwriting."

NO CASH DIVIDENDS

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. In addition, the Company's current bank
loan restricts the payment of dividends. See "Dividend Policy."

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<PAGE> 9

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 with the Underwriter to refrain from selling his shares of Common Stock,
except to members of his immediate family (who would be required to make a
similar representation), without the prior written consent of the Underwriter
for 20 months after the date of this Prospectus and has entered into a two-year
lock-up agreement, as required by certain state securities laws, pursuant to
which such shareholder would be restricted from transfer or sale of his shares.
The form of state lock-up agreement was filed as an exhibit to the Registration
Statement. In addition, the current shareholder has pledged his shares to secure
his guarantee of the Company's bank loan and is restricted from transferring
such shares without consent of the lender. 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."

RESTRICTIONS AND COVENANTS IN COMPANY LOAN AGREEMENT

The Company's current $1.4 million term loan contains various financial
covenants, as more fully described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." As of September 30, 1997, the Company was in violation of the debt
to net worth ratio, current ratio, debt service coverage ratio, minimum net
worth and capital expenditures limitation; however, the lender has waived all
such defaults through October 1, 1998. In addition, such loan contains
restrictions on the Company's ability to pay dividends, issue shares and
repurchase shares. See also Notes to Financial Statements.

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 $2.23 per share (or 56%). See
"Dilution."

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<PAGE> 10

USE OF PROCEEDS

The net proceeds from the sale of the 625,000 Units offered hereby, at an
assumed offering price of $8.125 per Unit, are estimated (after deducting the
Underwriting discount and estimated offering expenses payable by the Company) to
be approximately $4,230,000 (approximately $4,914,000 if the Underwriter's
over-allotment option is exercised in full). The Company intends to use the net
proceeds as follows:

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF
NET PERCENTAGE OF
ANTICIPATED APPLICATION PROCEEDS NET PROCEEDS
- ----------------------- ----------- -------------
<S> <C> <C>
Building expansion(1)....................................... $ 800,000 18.9%
Capital equipment leasing(2)................................ 900,000 21.3
Sales, marketing, and new product development(3)............ 800,000 18.9
Repayment of indebtedness(4)................................ 1,340,000 31.7
Land purchase(5)............................................ 62,500 1.5
Working capital and general corporate purposes(6)........... 327,800 7.7
---------- -----
Total:.................................................... $4,230,300 100.0%
========== =====
</TABLE>

- -------------------------
(1) Represents the currently estimated cost of expanding the Company's facility.
The Company has entered into discussions with its current bank lender to
secure financing for a portion of such costs. In the event that bank
financing is available, a portion of such construction funds may be
available to the Company as working capital. See "Business -- Growth
Strategy" and "Business -- Properties and Equipment."

(2) The Company currently anticipates that such proceeds will allow it to 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.

(3) Represents funds allocated to increased marketing and sales efforts,
including salaries and commission for new sales and marketing personnel, and
also for the development of new products. See "Business -- Growth Strategy."

(4) Represents payment to a former officer, director and shareholder of (a)
$1,250,000 note ("Purchase Note") issued in connection with the repurchase
of shares by the Company and (b) approximately $90,000 note ("Promissory
Note") for borrowed money. In August 1997, the Company repurchased all
shares of the Company owned by such officer and issued the Purchase Note as
payment therefore. The Promissory Note represents repayment of a loan made
by the officer to the Company for working capital purposes in 1996. See
"Certain Transactions."

(5) The Company has committed to purchase approximately two acres of land
located next to its corporate headquarters for a purchase price of $62,500.
The purchase is expected to close in January 1998. This parcel of land will
be used primarily for drainage in connection with the planned expansion.

(6) 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 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.

10
<PAGE> 11

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
facilitate access to public equity markets for future 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."

DILUTION

The net tangible book value of the Company's Common Stock at September 30,
1997 was $(39,000) or $(0.03) 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 September 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 September 30, 1997 would have been
$4,191,000 or $1.77 per share. This represents an immediate increase in net
tangible book value to the existing shareholders of $1.80 per share and an
immediate dilution of $2.23 per share (or 56%) to the investors purchasing the
shares offered hereby at the price to the public. The following table
illustrates this per share dilution in net tangible book value to new investors.

<TABLE>
<S> <C> <C>
Assumed initial public offering price..................... $4.00
Net tangible book value as of September 30, 1997........ $(0.03)
------
Increase attributable to new investors.................. $ 1.80
------
Net tangible book value adjusted for this offering........ $1.77
-----
Dilution to new investors in this offering................ $2.23
=====
</TABLE>

The above chart does not give effect to the exercise of the Warrants
included in the Units offered hereby, the Underwriter'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."

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the sale by the Company of 625,000
Units, at an assumed offering price of $8.125 per Unit and the application of
the net proceeds therefrom.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
AS
ACTUAL ADJUSTED
------ --------
(IN THOUSANDS)
<S> <C> <C>
DEBT (INCLUDING CURRENT MATURITIES):
Note payable to former shareholder........................ $1,250 $ --
Notes payable to shareholder.............................. 175 85
Notes payable and long-term debt.......................... 1,961 1,961
Capital lease obligations................................. 132 132
------ ------
Total debt.................................................. 3,518 2,178
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; 10,000,000 authorized;
1,122,727 (actual) and 2,372,727 (as adjusted) issued
and outstanding(1)..................................... -- 4,230
Retained earnings (deficit)................................. (39) (39)
------ ------
Total shareholders' equity (deficit)........................ (39) 4,191
------ ------
Total capitalization........................................ $3,479 $6,369
====== ======
</TABLE>

- -------------------------
(1) Does not include (i) 187,500 shares included in the Underwriter's
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) 187,500 shares of Common
Stock which may be purchased upon exercise of the Underwriter's Warrant. See
"Description of Securities," "Management" and "Underwriting."

12
<PAGE> 13

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 nine 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."

<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $7,479 $7,882 $7,336 $4,878 $6,363
Cost of goods sold............................. 5,692 6,071 5,485 3,562 4,702
Gross profit................................... 1,787 1,811 1,851 1,316 1,661
Total operating expenses....................... 1,635 1,589 1,512 1,095 1,158
Interest expense............................... 138 222 226 162 159
Other income................................... -- 3 -- -- 4
Provision for income taxes..................... 6 1 47 25 135
Net income..................................... 8 2 66 34 213
------ ------ ------ ------ ------
PRO FORMA DATA:
Pro forma net income per share(1).............. $ .06 $ -- $ .19
Weighted average shares outstanding(1)......... 1,123 -- 1,123
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ---------------------------
1996 ACTUAL(2) AS ADJUSTED(3)
------------ --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $1,002 $ (472) $3,758
Total assets........................................... 4,228 5,210 8,100
Current liabilities.................................... 1,718 3,974 2,634
Long-term debt, less current portion................... 1,470 1,237 1,237
Stockholder's equity (deficit)......................... 998 (39) 4,191
</TABLE>

(3) Adjusted to reflect the sale of 625,000 Units offered hereby at an assumed
initial public offering price of $8.125 per Unit and the application of
estimated net proceeds therefrom; does not reflect shares issuable upon
exercise of the Warrants offered hereby.

13
<PAGE> 14

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:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1996 1995 1994 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of Goods Sold............................... 74.8 77.0 76.1 73.9 73.0
Gross Profit...................................... 25.2 23.0 23.9 26.1 27.0
Operating Expenses:
Marketing....................................... 6.9 6.5 9.7 4.5 7.5
General & Administrative........................ 13.7 13.7 12.1 13.7 14.9
Interest Expense (Net)............................ 3.1 2.8 1.8 2.5 3.3
Net Income........................................ .9 -- .1 3.3 .7
</TABLE>

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

14
<PAGE> 15

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.

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

Net Sales. Net sales increased significantly to $6,363,000 for September
1997 from $4,878,000 for September 1996, an increase of 30.4%. 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. The increase in sales from 1996 to 1997
is primarily attributable to an increase in volume of sales during such period.
Based on third quarter results of operations, orders actually shipped in October
1997, and current orders to be shipped during the last two 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 nine months ended September
1997 to $1,661,000 from $1,316,000 for the comparable nine-month period in 1996.
Gross profit margin for the same period decreased slightly from 27.0% in 1996 to
26.1% in 1997.

Operating Expenses. Operating expenses increased slightly in the first nine
months of 1997 by 5.8%, but decreased as a percentage of net sales; $1,158,000
(or 18.2% of net sales) in 1997, as compared to $1,095,000 in 1996 (or 22.4% of
net sales) in 1996. Operating expenses decreased as a percentage of net sales
due primarily to aggressive Company cost controls. Marketing expenses decreased
to $288,000 in September 1997 from $366,000 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 $870,000 in September 1997 from $729,000 in 1996, but decreased as
a percentage of net sales to 13.7% in 1997 from 14.9% in 1996. Such decrease is
primarily due to the increase in sales volume while fixed general and
administrative expenses have

15
<PAGE> 16

remained constant. In settlement of a disputed claim with a prior advisor, the
Company agreed to pay such prior advisor $60,000 on or before December 15, 1997.
This liability has been accrued at September 30, 1997.

Interest Expense. Net interest expense remained fairly constant at $159,000
(2.5% of net sales) in September 1997 as compared to $162,000 in September 1996
(3.3% of net sales.)

RESEARCH AND DEVELOPMENT

During fiscal years 1995, 1996 and the nine months ended September 30,
1997, the Company's principal research and development activities have been
experimentation in the Company's laboratory by its own personnel and ideas
brought to the Company by its customers. The Company has historically spent
significantly less than 5% of its net sales on research and development. While
research and development is important to the Company's ongoing business, and a
significant portion of certain employees' time is committed to this area, the
costs of research and development in the Company's product line is significantly
less costly than for other types of manufacturing companies. While a portion of
the proceeds of this offering will be used for new product development, sales
and marketing, the Company currently anticipates that the bulk of that amount
will be spent on marketing and sales and a smaller portion on research and
development.

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 September 30,
1997 was approximately $1,227,000, 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. Such security interest is
subordinate to the security interest underlying the Company's two additional
working capital loans described below. 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 limits the salaries of officers to $250,000 annually and the payment of
certain bonuses without consent of the bank. The loan also limits annual capital
expenditures to $100,000 without written approval of the lender. As of September
30, 1997, the Company was in violation of the debt to net worth ratio, current
ratio, debt service coverage ratio, minimum net worth and capital expenditures
limitation; however, the lender has waived such defaults under the loan through
October 1, 1998. 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 and the SBA
have consented to the transactions contemplated hereby. See also Notes to
Financial Statements.

The Company intends to use up to $862,500 of the proceeds of the offering
to purchase additional land and expand its manufacturing facilities. Based on
preliminary estimates, the Company currently anticipates a total construction
cost of $800,000 for the new facility; however, the Company has not yet received
any firm bids and such costs could differ materially. In addition, in connection
with such construction plans, the Company has entered into discussions with
Norwest to provide a portion of such construction costs, if required, 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.

16
<PAGE> 17

The Company also has outstanding two working capital loans with Norwest.
One such loan, in the principal amount of $800,000, is due April 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, equally and on a
senior basis to the Company's term loan, by all accounts receivable, inventory,
furniture, fixtures and equipment, and are guaranteed by both the current and
former CEOs of the Company.

The Company leases its manufacturing equipment pursuant to capital leases.
Total minimum payments under such leases aggregated $156,000 at September 30,
1997, and $204,000 at December 31, 1996, with maturity 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.

In connection with its planned expansion, described below under
"Business -- Properties and Equipment," the Company intends to purchase
additional land, to expand its facilities and to acquire additional production
equipment pursuant to capital and equipment leases. Management currently
estimates that such construction will cost approximately $800,000, that such
equipment can be leased for payments of approximately $900,000, and has a land
purchase contract for $62,500, all of which are expected to be paid with
proceeds from this offering. Except for such anticipated expansion, the Company
has no material commitments for capital over the next twelve months.

The Company believes that its current capital resources, including the
proceeds of this offering, will be sufficient to meet its capital requirements
and obligations over the next twelve months. See also "Use of Proceeds" and
"Business -- Properties and Equipment."

The Company does not anticipate that it will incur any material costs in
addressing the Year 2000 issue.

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.

17
<PAGE> 18

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 primarily through the use
of synthetic moisturizing ingredients rather than the use of tallow (i.e.,
animal fat). 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 were 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. Other than Wal-Mart, Avon and K-Mart,
none of the Company's retail or contract manufacturing customers, including the
list of customers below under "Products and Distribution," is expected to
account for more than 5% of sales for 1997. See also "Business -- Significant
Customers."

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 has traditionally been 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 now manufactures and markets a full line of potpourri
products and Soap Making Kits and accessories. The

18
<PAGE> 19

Company estimates its total sales and revenue 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 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. All such brokers and manufacturers' representatives
sell products for manufacturers other than the Company. 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
specialty products for a variety of contract manufacturing customers. Those
products are sold through direct marketing efforts by the Company. The Company
does not offer any products through a retail catalog.

Surrey's retail and contract manufacturing account customers include:

<TABLE>
<S> <C>
- -- 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
</TABLE>

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 three quarters
of 1997, with orders aggregating approximately $500,000 received for shipment in
the fourth quarter. 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

19
<PAGE> 20

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.

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 continuing into the third quarter. 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,

20
<PAGE> 21

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. In
addition, in connection with such construction plans, the Company has entered
into discussions with its current bank lender to provide a portion of such
construction costs, if required, 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. The
Company's glycerin products are generally more expensive to produce than
traditional bar soaps; therefore, the Company generally does not expect to
experience direct competition from these manufacturers. These larger
manufacturers may, however, present more competition to the Company for its
liquid soap products.

21
<PAGE> 22

The Company believes that currently it experiences the majority of its
competition based on the variety of its product line, and to a lesser extent on
price. The Company believes broadening its product line and 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.

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 September 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.

22
<PAGE> 23

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.

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. On October 16, 1997, the Company entered into a settlement and
release agreement with a prior advisor to settle a dispute under an arrangement
negotiated in mid-1996 in connection with a proposed restructuring of the
Company. In settlement of disputed claims, the Company agreed to pay $60,000 on
or before December 15, 1997 and such advisor agreed to release the Company from
any and all claims it might have against the Company and its officers and
directors. 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.

23
<PAGE> 24

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information concerning the directors and
executive officers of the Company:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
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
</TABLE>

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.

24
<PAGE> 25

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 only one standing committee, an Audit Committee
comprised of Mr. Masucci, Mr. MacIntosh and Mr. Martin van der Hagen. Only Mr.
Masucci and Mr. MacIntosh are independent directors. The Board currently has no
compensation or other standing committees and no current plans to establish
additional 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 recent fiscal year whose annual salary
and bonus exceeded $100,000 (together with the CEO, the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
FISCAL OTHER ANNUAL
NAME YEAR SALARY BONUS COMPENSATION(1)
---- ------ ------ ----- ---------------
<S> <C> <C> <C> <C>
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
</TABLE>

- -------------------------
(1) Represents automobile allowance for such years.

(2) Elected CEO in August 1997; served as President of the Company from 1981 to
August 1997.

25
<PAGE> 26

(3) Resigned as CEO and director in August 1997 and entered into a consulting
agreement with the Company. See "Certain Transactions."

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. The Company does not have employment agreements with any
of its other key personnel. However, as part of its effort to expand its
marketing and sales force, the Company may enter into employment agreements with
employees hired in the future.

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. The Company will not issue any option or warrant with an exercise
price of less than eighty-five percent (85%) of the fair market value of the
underlying Common Stock on the date of grant.

The Company intends to grant stock options for the purchase of 287,500
shares of Common Stock 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."

26
<PAGE> 27

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.

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 ("SEC") such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. The Company did not request or receive an opinion from the SEC
with respect to indemnification.

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<PAGE> 28

CERTAIN TRANSACTIONS

STOCK PURCHASE AGREEMENT AND CONSULTING AGREEMENT WITH JAMES K. OLSON

On August 15, 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 1,122,727 shares of Common
Stock from Mr. Olson, representing fifty percent of the outstanding shares, for
$1,250,000 (representing $1.11 per share). The purchase price for such shares,
which was determined by negotiation between the Company and Mr. Olson and was
not based on cash flow or earnings per share, 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. All shares purchased from Mr. Olson
were canceled by the Company, becoming authorized and unissued shares. 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
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 guaranteeing approximately
$1.6 million of the Company's bank loans and approximately $150,000 of the
capital lease obligations of the Company. In addition, Mr. John van der Hagen
entered into a voting trust agreement pursuant to which Mr. van der Hagen
granted the right to vote his shares during the term of such agreement to a
trustee. The agreement provides that in the event that the Company's public
offering is not closed on or before December 31, 1997, the trustee shall vote
all of Mr. van der Hagen's shares to reinstate Mr. Olson as a fifty percent
shareholder, officer and director of the Company. The voting trust agreement
terminates on the earlier of the payment to Mr. Olson of the Purchase Note and
the Promissory Note or the reinstatement of Mr. Olson as a fifty percent
shareholder.

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 for business entertaining
and travel, car insurance and maintenance, and dues and subscriptions to
business publications. 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.

At the time the stock purchase and related transactions were entered into,
the Company had no disinterested independent directors to ratify these
transactions. The Company believes that the terms of the transactions described
above were on terms at least as favorable to the Company as could have been
received from disinterested third parties.

LOAN FROM OFFICERS

Each of John van der Hagen and James Olson, the current and former CEOs of
the Company, holds a promissory note of the Company. Mr. Van der Hagen holds a
note, in the current principal amount outstanding of approximately $90,000,
which bears interest at 12% per annum on the unpaid principal, and requires
payments of $2,000 per month. Mr. Olson holds a note, in the current principal
amount outstanding of approximately $90,000, which bears interest at 12% per
annum on the unpaid principal, and requires payments of $2,000 per month. The
promissory note held by Mr. Olson is being repaid with a portion of the proceeds
of this offering, as described above. Both promissory notes were issued in March
1996, each in the original

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<PAGE> 29

principal amount of $100,000. At the time these loans were made to the Company,
the Company had no disinterested independent directors to ratify this
transaction.

The Company believes that the terms of these loans were on terms at least
as favorable to the Company as could have been received from disinterested third
parties. The Company has not made, and does not currently intend to make, loans
to its officers, directors or controlling persons.

All future material affiliated transactions and loans will be made or
entered into on terms that are no less favorable to the Company than those that
can be obtained from unaffiliated third parties. All future material affiliated
transactions and loans, and any forgiveness of loans, must be approved by a
majority of the Company's independent directors who do not have an interest in
the transactions and who had access, at the Company's expense, to the Company's
or independent legal counsel.

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<PAGE> 30

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
Underwriter's 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.

<TABLE>
<CAPTION>
PERCENT PERCENT
SHARES BEFORE AFTER
NAME AND ADDRESS(1)(2) OWNED(3) OFFERING(4) OFFERING(4)
- ---------------------- -------- ----------- -----------
<S> <C> <C> <C>
John B. van der Hagen(5).................................... 1,122,727 100% 47%
Martin J. van der Hagen..................................... -0- -0- -0-
Mary van der Hagen(6)....................................... 1,122,727 100% 47%
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%
</TABLE>

- -------------------------
(1) Unless otherwise noted, the business address of each person listed above is
at the Company, 13110 Trails End Road, 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 Underwriter'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 a
trustee for the benefit of James K. Olson, a former director, officer and
shareholder. See "Certain Transactions."

(6) Includes shares owned by John van der Hagen, spouse of Ms. van der Hagen, as
to which Ms. van der Hagen disclaims current beneficial ownership.

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<PAGE> 31

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 components of the Units will be
separately transferable commencing January 3, 1998 or earlier at the discretion
of the Underwriter. The Underwriter may decide to delist the Units after the
thirty day minimum inclusion period.

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 781,250 Warrants including:
625,000 Warrants being issued as part of the Units, 93,750 Warrants comprising
part of the Units representing the Underwriter's over-allotment option, and
62,500 Warrants comprising part of the Units issuable pursuant to the
Underwriter's Warrant. As of the date of the Prospectus, no Warrants are issued
and outstanding. The Underwriter's Warrant will be issued pursuant to a separate
warrant agreement between the Company and the Underwriter rather than under the
above-described Warrant Agreement. The Underwriter's Warrant 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 Underwriter'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 December 9, 2002. The components of the Units will be
separately

31
<PAGE> 32

transferable commencing January 3, 1998 or earlier at the discretion of the
Underwriter. The Underwriter may decide to delist the Units after the thirty day
minimum inclusion period.

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. No
adjustment in the exercise price shall be required unless such adjustment would
require an increase or decrease of at least $.05; however, there is no maximum
limitation on such adjustment.

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.

UNDERWRITER'S WARRANT

The Company has agreed to sell to the Underwriter, pursuant to a separate
warrant agreement, warrants to purchase from the Company an aggregate of 62,500
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.

32
<PAGE> 33

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 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. (the "Underwriter") with respect to
this offering. The Underwriter has agreed on a "firm commitment" basis to
purchase from the Company 625,000 Units.

The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Units is subject to certain conditions
precedent and that the Underwriter will be obligated to purchase all of the
Units to be purchased pursuant to such Underwriting Agreement if any Units are
purchased.

The Underwriter 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 Underwriter 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 Underwriter proposes 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 discounts to dealers may be
changed by the Underwriter. The Underwriter 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 Underwriter 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 Underwriter may exercise such option only for the
purpose of covering any over-allotments in the sale of the Units offered hereby.

33
<PAGE> 34

The Company has agreed to pay the Underwriter a nonaccountable expense
allowance equal to 3% of the aggregate offering price of the Units or $152,344
($175,195 if the Underwriter's over-allotment option is exercised in full),
$50,000 of which has been paid to date.

In addition, the Company has agreed to enter into a two-year financial
consulting agreement with the Underwriter upon the closing of the offering. The
terms of this consulting agreement provide compensation to the Underwriter of
$12,500 per year or an aggregate of $25,000, all of which is prepayable at the
closing of the offering. The Underwriter 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
Underwriter, for a price of $.0005 per warrant, a warrant to purchase up to
62,500 Units (the "Underwriter's Warrant"). The Underwriter'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 Underwriter's Warrant
may not be transferred, sold, assigned or hypothecated except to persons who are
officers of the Underwriter or by operation of law in the death of any such
officer. The Underwriter'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 Underwriter (or if transferred, by a majority of the holders
of the Underwriter'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 Underwriter'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 Underwriter 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 Underwriter 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 Underwriter 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 Underwriter 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 Underwriter
also may elect to reduce any short position by exercising all or any portion of
the over-allotment option described herein. In addition, the Underwriter 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 Underwriter if the securities comprising
the Units are repurchased by the Underwriter or any selling group member in
stabilizing or covering 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 Underwriter 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

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<PAGE> 35

offering, and the Company have agreed that they will not, without the prior
consent of the Underwriter, 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 Underwriter'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 Underwriter'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.

On December 2, 1996, the Underwriter offered a settlement in administrative
proceeding 3-8781 which was accepted by the Securities and Exchange Commission
("Commission"). The Commission issued an order making findings and imposing
remedial sanctions. The findings alleged improper supervision of a branch office
for not detecting a hidden scheme to "sell away" limited partnerships. The
Underwriter neither admitted nor denied the allegations, agreed to pay a $25,000
fine and received a censure. In addition, the Underwriter undertook measures to
tighten compliance with regard to "selling away" by retaining an outside
consultant to prepare a procedure for tighter branch supervision and supervisory
education. All aspects of the order have been complied with and the Commission
advised.

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 187,500
shares reserved for issuance upon exercise of the Underwriter'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 Underwriter, 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." In
addition, Mr. van der Hagen has entered into a two year lock-up agreement, as
required by certain state securities laws, pursuant to which he would be
restricted from transfer or sale of his shares. The form of state lock-up
agreement was filed as an exhibit to the Registration Statement. See
"Management." In addition, the Underwriter has received certain registration
rights under the Securities Act with respect to the securities issuable upon
exercise of the Underwriter'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.

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<PAGE> 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.

CHANGES IN COMPANY'S CERTIFYING ACCOUNTANT

On December 2, 1996, the Company's Board of Directors approved the
engagement of the independent certified public accounting firm of Ernst & Young
LLP to audit the financial statements of the Company. Accordingly, the
engagement of James M. Betty, Certified Public Accountants as the Company's
independent auditors was discontinued.

The report of James M. Betty, Certified Public Accountants on the Company's
financial statements for the year ended December 31, 1995 did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. The report is not included
in the Registration Statement as Ernst & Young LLP was engaged to re-audit that
period in connection with this offering.

There were no disagreements between the Company and James M. Betty,
Certified Public Accountants on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of James M. Betty, Certified Public
Accountants, would have caused James M. Betty, Certified Public Accountants to
make reference to the matter in their report.

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

36
<PAGE> 37

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 Road, Leander, Texas 78641, (512) 267-7172.

37
<PAGE> 38

SURREY, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors.......... F-2
Balance Sheets as of December 31, 1996 and September 30,
1997 (unaudited).......................................... F-3
Statements of Operations for the years ended December 31,
1995 and 1996 and for the nine months ended September 30,
1996 (unaudited) and 1997 (unaudited)..................... F-4
Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997 (unaudited)...................... F-5
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and for the nine months ended September 30,
1996 (unaudited) and 1997 (unaudited)..................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 39

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
<PAGE> 40

SURREY, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 159 $ 69
Accounts receivable, net of allowance for doubtful accounts
of $30 at December 31, 1996 and $45 at September 30,
1997...................................................... 1,312 1,977
Inventories, net............................................ 1,172 1,375
Prepaid expenses and other current assets................... 31 28
Deferred income taxes....................................... 46 53
------ ------
Total current assets........................................ 2,720 3,502
Property and equipment, net................................. 1,508 1,512
Deferred financing costs.................................... -- 196
------ ------
Total assets................................................ $4,228 $5,210
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.................................... $ 660 $1,308
Accrued expenses.......................................... 90 232
Notes payable............................................. 729 688
Note payable to former shareholder........................ -- 1,250
Notes payable to shareholders, current portion............ 28 175
Current maturities of long-term debt...................... 97 98
Current maturities of capital lease obligations........... 106 70
Income taxes payable...................................... 8 153
------ ------
Total current liabilities................................... 1,718 3,974
Notes payable to shareholders, less current maturities...... 154 --
Long-term debt, less current maturities..................... 1,239 1,175
Capital lease obligations, less current maturities.......... 77 62
Deferred income taxes....................................... 42 38
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized,
2,245,454 and 1,122,727 shares issued and outstanding
at December 31, 1996 and September 30, 1997,
respectively........................................... 393 --
Retained earnings (deficit)............................... 605 (39)
------ ------
Total shareholders' equity (deficit)........................ 998 (39)
------ ------
Total liabilities and shareholders' equity (deficit)........ $4,228 $5,210
====== ======
</TABLE>

See accompanying notes.

F-3
<PAGE> 41

SURREY, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ----------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................................... $7,882 $ 7,336 $4,878 $ 6,363
Cost of sales...................................... 6,071 5,485 3,562 4,702
------ ---------- ------ ----------
Gross profit....................................... 1,811 1,851 1,316 1,661
Operating expenses:
Sales and marketing.............................. 513 507 366 288
General and administrative....................... 1,076 1,005 729 870
------ ---------- ------ ----------
Total operating expenses........................... 1,589 1,512 1,095 1,158
Income from operations............................. 222 339 221 503
Other:
Interest expense, net............................ 222 226 162 159
Other income..................................... 3 -- -- 4
------ ---------- ------ ----------
Income before income taxes......................... 3 113 59 348
Provision for income taxes......................... 1 47 25 135
------ ---------- ------ ----------
Net income......................................... $ 2 $ 66 $ 34 $ 213
====== ========== ====== ==========
Pro forma net income per common share.............. $ 0.06 $ 0.19
========== ==========
Weighted average shares outstanding................ 1,122,727 1,122,727
========== ==========
</TABLE>

See accompanying notes.

F-4
<PAGE> 42

SURREY, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- RETAINED SHAREHOLDERS'
SHARES EARNINGS EQUITY
OUTSTANDING AMOUNT (DEFICIT) (DEFICIT)
----------- ------ --------- -------------
<S> <C> <C> <C> <C>
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
Repurchase of common stock......................... (1,122,727) (393) (857) (1,250)
Net income (unaudited)............................. -- -- 213 213
---------- ----- ----- -------
Balance at September 30, 1997 (unaudited)............ 1,122,727 $ -- $ (39) $ (39)
========== ===== ===== =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 43

SURREY, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 2 $ 66 $ 34 $ 213
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 205 210 158 172
Gain on sale of asset..................................... (3) -- -- --
Changes in operating assets and liabilities:
Accounts receivable.................................... 120 (184) 56 (665)
Inventories............................................ (353) 183 (110) (203)
Prepaid expenses and other current assets.............. 10 (19) (17) 3
Deferred income taxes.................................. (15) (3) 25 (11)
Trade accounts payable................................. (65) (328) (38) 648
Accrued expenses....................................... 31 (38) 8 142
Income taxes payable................................... (3) 6 (45) 145
----- ----- ----- -----
Net cash provided by (used in) operating activities......... (71) (107) 71 444
INVESTING ACTIVITIES
Acquisition of property and equipment....................... (159) (105) (48) (122)
Proceeds from sale of property and equipment................ 15 -- -- --
----- ----- ----- -----
Net cash used in investing activities....................... (144) (105) (48) (122)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable..................... 650 500 200 513
Payment of notes payable.................................... (275) (246) (231) (554)
Proceeds from issuance of notes payable to shareholders..... -- 200 200 --
Payment of notes payable to shareholders.................... -- (19) (12) (7)
Proceeds from issuance of long-term debt.................... 21 33 -- --
Payment of long-term debt................................... (55) (82) (58) (63)
Principal payments on capital lease obligations............. (145) (144) (132) (105)
Deferred financing costs.................................... -- -- -- (196)
----- ----- ----- -----
Net cash provided by (used in) financing activities......... 196 242 (33) (412)

Net increase (decrease) in cash............................. $ (19) $ 30 $ (10) $ (90)
Cash, beginning of period................................... 148 129 129 159
----- ----- ----- -----
Cash, end of period......................................... $ 129 $ 159 $ 119 $ 69
===== ===== ===== =====
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 $ 22 $ 54

</TABLE>
Interest paid during the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1996 and 1997 approximates the interest expense
for those periods.

See accompanying notes.

F-6
<PAGE> 44

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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
<PAGE> 45

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, $56,000 and $47,000 for the years ended December
31, 1995 and 1996, and for the nine month periods ended September 30, 1996 and
1997, respectively.

PRO FORMA NET INCOME PER COMMON SHARE

Pro forma net income per common share is based on the weighted average
number of common shares outstanding during the period. In August 1997, the
Company repurchased fifty percent (1,122,727 shares) of the outstanding common
stock. The pro forma earnings per share is presented as if the repurchase
occurred on January 1, 1996. There are no common stock equivalents.

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):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Raw materials........................................ $ 976 $ 931
Finished goods....................................... 196 444
------ ------
$1,172 $1,375
====== ======
</TABLE>

F-8
<PAGE> 46

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Equipment............................................ $1,702 $1,862
Building............................................. 886 899
Automobiles.......................................... 120 122
Furniture and fixtures............................... 33 34
------ ------
2,741 2,917
Accumulated depreciation and amortization............ (1,301) (1,473)
------ ------
1,440 1,444
Land................................................. 68 68
------ ------
Property and equipment, net.......................... $1,508 $1,512
====== ======
</TABLE>

Assets under capital leases totaling $574,000 at December 31, 1996 and
$628,000 at September 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):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Borrowings under a revolving line of credit ($500,000 at
December 31, 1996 and $800,000 at September 30, 1997),
bearing interest at the bank's prime rate plus 1.5% (9.75%
at December 31, 1996 and 10% at September 30, 1997), with
interest due monthly and all principal due in April 1998.
The line is collateralized by accounts receivable, inventory
and property and equipment, and is guaranteed by the
Company's shareholders. .................................... $500 $500
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
September 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. .............................................. 229 188
---- ----
$729 $688
==== ====
</TABLE>

F-9
<PAGE> 47

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to a bank, bearing interest at the bank's prime
rate plus 1.75% (10% at December 31, 1996 and 10.25%
September 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 $1,227
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 46
------ ------
1,336 1,273
Less current maturities..................................... (97) (98)
------ ------
Long-term debt, less current maturities..................... $1,239 $1,175
====== ======
</TABLE>

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, the Company was in violation of the debt
service coverage ratio, minimum net worth and the capital expenditures
limitation. The Company has obtained a waiver of these violations as of December
31, 1996 from the lender. At September 30, 1997, the Company was in violation of
the debt to net worth ratio, current ratio, debt service coverage ratio, minimum
net worth and capital expenditures limitation. The Company has obtained a waiver
from the lender for these violations through October 1, 1998.

Maturities of long-term debt are as follows for the period ending December
31 (in thousands):

<TABLE>
<S> <C>
1997........................................................ $ 97
1998........................................................ 96
1999........................................................ 104
2000........................................................ 96
2001........................................................ 106
2002........................................................ 117
Thereafter.................................................. 720
------
Total..................................................... $1,336
======
</TABLE>

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
September 30, 1997.

F-10
<PAGE> 48

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. SHAREHOLDERS' EQUITY

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 non-interest bearing 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. The shares repurchased by the Company have been canceled.

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.

10. 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):

<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1996 1997
------------ ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................. $(42) $(38)
---- ----
Total deferred tax liabilities............................ (42) (38)
Deferred tax assets:
Allowance for doubtful accounts......................... 10 17
Inventory and other resources........................... 36 36
---- ----
Total deferred tax assets................................. 46 53
Valuation allowance for deferred tax assets............... -- --
---- ----
Net deferred tax assets................................... 46 53
---- ----
Net deferred tax assets (liabilities)..................... $ 4 $ 15
==== ====
</TABLE>

Significant components of the provision for income taxes attributable to
continuing operations for the years-ended are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal....................................... $ 4 $47 $ 18 $132
State......................................... 1 4 2 14
--- --- ---- ----
Total current................................... 5 51 20 146
Deferred:
Federal....................................... (3) (3) 4 (9)
State......................................... (1) (1) 1 (2)
--- --- ---- ----
Total deferred.................................. (4) (4) 5 (11)
--- --- ---- ----
$ 1 $47 $ 25 $135
=== === ==== ====
</TABLE>

F-11
<PAGE> 49

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES (CONTINUED)
The reconciliation of income tax attributable to continuing operations at
the U.S. federal statutory tax rates to income tax expense is:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax at federal statutory rate............................... 34% 34% 34% 34%
State taxes (net of federal effect)......................... 4 4 4 3
Nondeductible items and other............................... 4 4 4 2
-- -- --- --
42% 42% 42% 39%
== == === ==
</TABLE>

11. 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):

<TABLE>
<CAPTION>
CAPITAL LEASES
--------------------------
PERIOD ENDING
DECEMBER 31 SEPTEMBER 30
----------- ------------
<S> <C> <C>
1997.................................................. $ 121 $ 26
1998.................................................. 53 65
1999.................................................. 30 45
2000.................................................. -- 10
2001.................................................. -- 8
2002.................................................. -- 2
----- ----
Total minimum lease payments.......................... 204 156
Less amounts representing interest.................... (21) (24)
----- ----
Present value of net minimum lease payments........... 183 132
Less current maturities............................... (106) (70)
----- ----
$ 77 $ 62
===== ====
</TABLE>

12. 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.

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Customer A.................................................. 13% 21%
Customer B.................................................. 11 --
Customer C.................................................. 10 --
--- ---
34% 21%
=== ===
</TABLE>

13. 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

F-12
<PAGE> 50

SURREY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13. CONCENTRATION OF CREDIT RISK (CONTINUED)
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.

14. LONG-TERM INCENTIVE PLAN

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.

15. COMMITMENTS AND CONTINGENCIES

In August 1997, the Company entered into a Consultant Agreement with a
former shareholder. The Company shall pay the former shareholder $125,000 per
year plus reimbursement of certain out-of-pocket expenses, payable on a
bi-weekly basis. The agreement will terminate on the earlier of the closing of
the Company's initial public offering, December 31, 1997 or such other date as
the parties may mutually agree.

The Company has a commitment to purchase land located next to its corporate
headquarters. The total purchase price is $62,500 and the purchase is expected
to close in January 1998. At September 30, 1997, the Company has put a deposit
of $5,000 on the land.

On October 16, 1997, the Company entered into a settlement and release
agreement with a prior advisor to settle a dispute under an arrangement
negotiated in mid-1996 in connection with a proposed restructuring of the
Company. In settlement of the disputed claims, the Company has agreed to pay the
prior advisor $60,000 on or before December 15, 1997. This liability has been
accrued at September 30, 1997.

16. SUBSEQUENT EVENTS

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.

F-13
<PAGE> 51

======================================================

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 UNDERWRITER. 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.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use Of Proceeds........................ 10
Dilution............................... 11
Dividend Policy........................ 11
Capitalization......................... 12
Selected Financial Data................ 13
Management's Discussion and Analysis of
Financial Condition and Results
of Operations........................ 14
Business............................... 18
Management............................. 24
Certain Transactions................... 28
Principal Shareholders................. 30
Description of Securities.............. 31
Underwriting........................... 33
Shares Eligible For Future Sale........ 35
Legal Matters.......................... 36
Experts................................ 36
Changes in Company's Certifying
Accountant........................... 36
Additional Information................. 36
Index to Financial Statements.......... F-1
</TABLE>

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UNTIL DECEMBER 28, 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
DECEMBER 3, 1997
======================================================