UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER: 001-23407
SURREY, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2138564
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13110 Trails End Road
Leander, Texas 78641
(Address of principal executive offices)
(512) 267-7172
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes _X_ No ___
On May 14, 1999, the registrant had 2,472,727 outstanding shares of common
stock, no par value.
Transitional Small Business Disclosure Format (check one);
Yes ___ No _X_
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SURREY, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Operations for the Quarter and Three Months Ended
March 31, 1999 and March 31, 1998
Balance Sheet as of March 31, 1999 and December 31, 1998
Statements of Cash Flows for the Quarter and Three Months
Ended March 31, 1999 and March 31, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
SIGNATURES
EXHIBITS
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PART I: ITEM 1. FINANCIAL STATEMENTS
SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
------------------------
1999 1998
------- -------
Net sales $ 3,332 $ 1,902
Cost of sales $ 2,762 $ 1,365
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Gross profit $ 570 $ 537
Operating expenses:
Sales and marketing $ 284 $ 166
General and administrative $ 539 $ 378
------- -------
Total operating expenses $ 823 $ 544
Income (loss) from operations $ (253) $ (7)
Other:
Interest expense $ (112) $ (32)
Other income $ 0 $ 25
------- -------
Income (loss) before income taxes $ (365) $ (14)
Income tax (benefit) provision $ (111) $ (5)
------- -------
Net Income (loss) $ (254) $ (9)
------- -------
Basic and diluted earnings (loss) per share $ (0.10) $ 0.00
Shares used in computing earnings per share:
Basic 2,473 2,473
Diluted 2,473 2,473
SEE ACCOMPANYING NOTES
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SURREY, INC
BALANCE SHEET
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 0 $ 77
Accounts receivable $ 2,435 $ 1,713
Inventories, net $ 2,362 $ 2,232
Prepaid expenses and other current assets $ 229 $ 315
Deferred income taxes $ 146 $ 182
Income taxes receivable $ 232 $ 156
------- -------
Total current assets $ 5,404 $ 4,675
Property and equipment, net $ 4,110 $ 3,710
Deferred income taxes $ 250 $ 178
------- -------
Total assets $ 9,764 $ 8,563
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,630 $ 1,159
Accrued expenses $ 154 $ 204
Notes payable $ 0 $ 0
Current maturities of long-term debt $ 129 $ 134
Current maturities of capital lease obligations $ 210 $ 208
------- -------
Total current liabilities $ 2,123 $ 1,705
Long-term debt, less current maturities $ 4,274 $ 3,192
Capital lease obligations, less current maturities $ 331 $ 376
Deferred income taxes $ 0 $ 0
Commitments and contingencies
Shareholders' equity:
Common stock; no par value $ 4,099 $ 4,099
Common stock warrants $ 64 $ 64
Retained deficit $(1,127) $ (873)
------- -------
Total shareholders' equity $ 3,036 $ 3,290
------- -------
Total liabilities and shareholders' equity $ 9,764 $ 8,563
======= =======
SEE ACCOMPANYING NOTES.
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SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
1999 1998
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OPERATING ACTIVITIES
Net income (loss) $ (254) $ (9)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation $ 87 $ 61
Changes in operating assets and liabilities:
Accounts receivable $ (722) $ 264
Inventories $ (130) $ (256)
Prepaid expenses and other current assets $ 86 $ (238)
Trade accounts payable $ 471 $ 37
Accrued expenses $ (50) $ (202)
Income taxes receivable/payable $ (112) $ (5)
------- -------
Net cash provided by (used in) operating activities $ (624) $ (348)
INVESTING ACTIVITIES
Acquisition of property and equipment $ (487) $ (680)
------- -------
Net cash used in investing activities $ (487) $ (680)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ 800 $ 0
Payment of notes payable $ 0 $ (895)
Proceeds from issuance of long-term debt $ 311 $ 0
Payment of long-term debt $ (34) $ (28)
Proceeds from capital lease obligations $ 7 $ 0
Principal payments on capital lease obligations $ (50) $ (20)
Payment of deferred financing costs $ 0 $ (22)
------- -------
Net cash provided (used) by financing activities $ 1,034 $ (965)
Net increase (decrease) in cash $ (77) $(1,993)
Cash and cash equivalents, beginning of period $ 77 $ 3,066
------- -------
Cash and cash equivalents, end of period $ 0 $ 1,073
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 112 $ 35
Income taxes $ 0 $ 0
Acquisition of property and equipment
via issuance of capital leases $ 7 $ 22
SEE ACCOMPANYING NOTES
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SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month periods ended March 31,
1999 and 1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. For further information, refer to the
financial statements and footnotes thereto included in the Surrey, Inc. annual
report on Form 10-KSB for the year ended December 31, 1998.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
------- -------
<S> <C> <C>
Numerator:
Net income (loss) $ (254) $ (9)
Numerator for basic and diluted earnings (loss) per share -
income (loss) available to common stockholders $ (254) $ (9)
======= =======
Denominator:
Denominator for basic earnings (loss) per share - weighted -
average shares 2,473 2,473
------- -------
Denominator for diluted earnings (loss) per share - adjusted
weighted - average shares and assumed conversions 2,473 2,473
======= =======
Basic earnings (loss) per share $ (0.10) $ (0.00)
======= =======
Diluted earnings (loss) per share $ (0.10) $ (0.00)
</TABLE>
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Options to purchase 305,000 shares of common stock at $4.00 to $4.40 per share,
warrants to purchase 675,000 shares of common stock at $4.80 per share, and a
warrant to purchase 62,500 Units (consisting of two shares of common stock and
one redeemable common stock purchase warrant) at $9.75 per Unit were outstanding
during 1999 and 1998 but were not included in the computation of diluted
earnings per share because the exercise prices were greater than the average
market price of the common shares; therefor, the effect would be antidilutive.
3. CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.
4. LONG-TERM DEBT
As of March 31, 1999, the Company was not in compliance with a certain financial
covenant specified in their term loan and line of credit agreements. The Company
has received a waiver from the lender for such violation.
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PART I: ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should be
read with the financial statements appearing in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
NET SALES. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales increased to $3,332,000 for the three
months ended March 1999 from $1,902,000 for the three months ended March 1998,
an increase of 75.2%. This substantial increase is primarily attributable to the
opening order shipments (initial shipment of products to stock stores shelves)
for two major accounts, Bath and Body Works glycerine soap and Minnetonka Brands
"Star Wars" soap project for retail distribution. Now that the Company's
expansion is complete and all of the new manufacturing equipment is on-line and
fully operational, the Company's sales staff has been able to begin marketing
new product lines to take full advantage of the new manufacturing facilities.
Therefore, the Company expects increased sales during each quarter of 1999.
GROSS PROFIT. Gross profit increased for the three months ended
March 1999 to $570,000 from $537,000 for the comparable three month period in
1998. Gross profit margin for the same period decreased from 28.2% in 1998 to
17.1% in 1999. This decrease in gross profit margin is attributed to the build
up of materials and the hiring of additional production workers to fully staff
three production shifts required to enter into full production for the Bath and
Body Works and Minnetonka Brands soap projects. Full production was achieved in
March 1999. The Company expects that the new expansion and the installation of
more labor efficient production equipment, coupled with increased sales, will
allow the Company to reap the benefits of improved economy's of scale with the
gross profit margin showing continued improvement throughout 1999.
In addition, the Company also expects that profit margins will
improve in 1999 with increased sales of new higher margin product lines,
particularly the scented candle product line.
OPERATING EXPENSES. Operating expenses in the first three months of
1999 increased by 52.2%, but decreased as a percentage of net sales; $828,000
(or 24.9% of net sales) in 1999, as compared to $544,000 (or 28.6% of net sales)
for the comparable period in 1998. Operating expenses increased due to increased
sales efforts, but decreased as a percentage of net sales primarily because the
significant increase in net sales had a positive effect on the ratio of net
sales to fixed operating expenses. The Company expects this favorable trend in
the ratio between net sales and fixed operating expenses to continue throughout
1999.
The increase in sales and marketing expenses from $166,000 (or 8.7%
of net sales) in 1998 to $284,000 (or 8.6% of net sales) in 1999 was due mainly
to increased advertising and increased sales commissions, based on increased
sales.
General and administrative expenses increased from $378,000 (or
19.9% of net sales) in 1998 to $544,000 (or 16.3% of net sales) for 1999,
primarily due to increased salaries for sales and marketing personnel.
INTEREST EXPENSE. Interest expense of $112,000 (3.4% of net sales)
in March 1999 increased significantly as compared to $32,000 (1.7% of net sales)
in March 1998. This increase is due to the Company's increased borrowings in
connection with its expansion. Increased interest obligations resulted as the
Company increased its long-term debt to fund the new facility expansion,
incurred lease financing of $2,000,000 for new manufacturing equipment, and
increased its short-term borrowings for working
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capital purposes related to increased sales efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity, other than proceeds of
the Company's 1997 initial public offering ("IPO") which were fully expended in
1998, are cash flow from operations, bank borrowings, and lease financing.
In April 1998, the Company entered into a loan agreement with Chase
Bank of Texas, National Association ("Lender") to provide (a) a
construction/term loan in the principal amount of $2,300,000 ("Term Loan") with
a final maturity in April 2005, and (b) a revolving line of credit to be used
for working capital purposes in the amount of the lesser of 80% of eligible
accounts receivable or $1,000,000 ("Revolving Note") which would allow the
Company to borrow, repay, and reborrow until its final maturity in April 2000.
The entire Term Loan has been drawn.
On January 25, 1999, the Company and the Lender amended the Loan
Agreement to provide for an additional term loan of $400,000 with a maturity of
February 2004 ("Additional Term Loan"). Such amendment also provided for an
increase in the amount available under the Revolving Note to include the lesser
of 80% of eligible accounts receivable or $2,000,000. As of March 31, 1999, the
Company had no remaining excess borrowing capacity under the Revolving Note and
had fully drawn down the Additional Term Loan.
Effective March 31, 1999, the Company and the Lender again amended
the Loan Agreement to provide for reduced financial covenants, in particular the
debt to tangible net worth ratio and the debt service coverage ratio.
The interest on each of the Term Loan, the Additional Term Loan and
the Revolving Note will, at the Company's option, float at either the lender's
Prime Rate or the LIBOR Rate (London Interbank Offering Rate) plus the LIBOR
margin, which will range from 1.75% to 2.25% depending on the Company's debt to
tangible net worth ratio. Currently, the Company has elected to pay interest at
the LIBOR Rate plus LIBOR margin on the Term Loan, which interest rate was 7.25%
as of May 12, 1999. The Company elected to pay interest at the Prime Rate on the
Revolving Note and the Additional Term Loan, which interest rate was 7.75% as of
May 12, 1999. The Company and Lender have also entered into an interest rate
risk management program for the term loans, pursuant to which the Company and
Lender entered into an ISDA Agreement (International Swap Dealers Association)
intended to hedge the interest rate fluctuations on the Term Loan and Additional
Term Loan. Overdue amounts on the loans are payable at a past due rate of
interest. The loans are secured by a lien on the Company's plant, equipment,
inventory, and accounts receivable.
Interest on each of the Term Loan, the Additional Term Loan and the
Revolving Note is payable monthly. Under the amended Loan Agreement, the Company
is required to pay down the Revolving Note and maintain a zero balance for 30
consecutive days once during the period after April 9, 1999 and prior to
maturity in April 2000. Principal on the Term Loan is payable in monthly
installments which began on January 8, 1999 of approximately $9,500 per month,
increasing to approximately $12,700 per month after April 2001.
Among other requirements, the Loan Agreement, as amended, currently
contains the following covenants, which are tested quarterly: the Company must
maintain (a) a current ratio of not less than 1.50 to 1.00; (b) a debt to
tangible net worth ratio not greater than (i) 2.00 to 1.00 as of March 31, 1999,
and (ii) 1.75 to 1.00 as of the end of each calendar quarter thereafter; and (c)
a debt service coverage
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ratio of not less than (i) 1.00 to 1.00 for the quarter ending June 30, 1999,
based on the results of operations for the 1999 calendar year to date, (ii) 1.25
to 1.00, as of September 30, 1999, based on yearly operations to date, and (iii)
2.00 to 1.00, as of December 31, 1999 and each calendar quarter thereafter,
based on results of operations for the previous four calendar quarters. At March
31, 1999, the Company was in compliance with the covenant set forth in item (a)
above, but was not in compliance with item (b), its required debt to tangible
net worth ratio. The Lender has waived such non-compliance for first quarter of
1999. Item (c), the debt service coverage ratio, is not tested for first
quarter.
The Loan Agreement, as amended, also limits indebtedness by the
Company, restricts borrowing under certain equipment leases to $2,000,000,
restricts the Company from making or incurring capital expenditures exceeding
$2,000,000 in any 12 month period, restricts indebtedness in connection with
acquisition of equipment to $200,000 and limits sales of assets. The Loan
Agreement also restricts the Company from making any dividends or distributions
on its capital stock unless net income equals or exceeds $2,000,000,
repurchasing or redeeming any capital stock (other than pursuant to the terms of
the Company's Warrants, provided no default would occur under the bank loans),
paying any bonus or other non-salary compensation, replacing its President or
Chief Financial Officer, or entering into certain related party transactions
without prior written consent of Lender.
The Company used approximately $1,191,000 of the aggregate Term Loan
proceeds to repay loans to Norwest Bank of Texas, and the Company used
approximately $1,109,000 to finance the expansion of its plant and facility. The
Company used approximately $1,200,000 of the Revolving Note for working capital,
including payment of vendors and payroll expense. In addition, the Company used
approximately $300,000 for down payments on manufacturing and production
equipment and the balance for general working capital needs. The Company used
the proceeds of the Additional Term Loan to finance the 1999 facility expansion,
remodel approximately 5,000 square feet of existing space into a soap curing
area, and for reimbursement of expenses relating to the construction of a candle
room. All periodic payments on all such loans are to be paid out of future cash
flows generated by the Company.
The Company leases certain pieces of its manufacturing equipment
pursuant to capital leases. The capital leases currently in effect have maturity
dates ranging from dates during 1999 to 2002. Such leases, some of which are
personally guaranteed by the current and former Chief Executive Officers 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.
The Company has a lease line of credit (the "KCCI Lease Line of
Credit") with Key Corporate Capital, Inc. ("KCCI") which allows for a $1,562,000
leasing line of credit. The equipment currently leased under this agreement
includes two poured soap lines dedicated to manufacturing glycerin soap, four
high speed wrapping machines and one candle making line. The Company began
drawing on the KCCI Lease Line of Credit in August 1998 and had drawn the entire
amount by December 1998. The Chief Executive Officer of the Company has
personally guaranteed the KCCI Lease Line of Credit. Payments under this line
are approximately $288,400 per year or $24,000 per month.
The Company relied on a capital lease line of credit from Winthrop
Resources, Inc. (the "Winthrop January 1999 Lease Line of Credit") in the amount
of $477,000 to finance one traditional soap making line. The Company has fully
utilized this line of credit. Payments under the Winthrop January 1999 Lease
Line of Credit are approximately $180,000 per year or $15,000 per month.
The Company has recently purchased and installed four 10,000 gallon
storage containers to store the Company's key raw materials. To finance the
purchase of the bulk storage containers and
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<PAGE>
related construction, the Company drew on a Winthrop Resources, Inc. Capital
Lease Line of Credit in the amount of approximately $300,000 ("Winthrop March
1999 Lease Line of Credit"). Payments under the Winthrop March 1999 Lease Line
of Credit are approximately $10,000 per month for 36 months, beginning April
1999.
In March 1999, the Company entered into a lease line of credit with
Amembal Capital Corporation (the "Amembal Capital March 1999 Lease Line of
Credit") in the total amount of approximately $416,000 to finance three poured
soap lines dedicated to manufacturing glycerin soap and required to complete the
1999 expansion. Payments under the Amembal Capital March 1999 Lease Line of
Credit are approximately $70,900 per year or $5,900 per month.
The Company announced on November 23, 1998 that it received a major
letter of commitment from Bath & Body Works, a wholly owned subsidiary of The
Limited, Inc., to purchase Company products. In such letter, Bath & Body Works
notified the Company of its intention to purchase approximately 10,000,000 bars
of glycerin specialty soap products in the 12 month period beginning January 1,
1999. During the first quarter, the Company received and shipped orders for
approximately $1 million of product from Bath & Body Works. The Company shipped
the first delivery of ordered product on February 1, 1999, approximately two
weeks ahead of schedule.
As previously reported, to accommodate the current and expected
purchase orders from Bath & Body Works, the Company constructed additional
warehouse space and remodeled existing space into a soap curing area, at a cost
of approximately $380,000, and acquired additional equipment. To finance such
additional equipment, the Company drew approximately $560,000 on its lease line
of credit with KCCI and approximately $477,000 under its lease line of credit
with Winthrop.
The Company currently anticipates that it may be required to borrow
approximately $500,000 during second quarter in additional working capital to
finance anticipated sales. The Company has begun discussions with its lender to
acquire such capital.
The Company believes that cash expected to be provided by future
operations and its current and anticipated bank loans and financing leases will
be sufficient to meet its working capital and anticipated capital expenditure
requirements at least over the next 12 months. However, the Company may seek
additional working capital financing if net sales increase more than currently
anticipated.
FORWARD LOOKING INFORMATION
Statements contained in this report regarding the Company's future
operations, future performance and results, the Company's ability to meet its
working capital needs and the anticipated liquidity, increased sales, and the
reduction of labor costs as a percentage of net sales are forward-looking and
therefore are subject to certain risks and uncertainties.
Any forward-looking information regarding the operations of the
Company will be affected by the Company's ability to efficiently manage and
operate its facility as expanded (particularly its costs of operations), the
continued receipt of large orders from the Company's significant customers
including Bath & Body Works, the Company's ability to successfully and
efficiently manufacture and deliver product to Bath & Body Works in a timely
manner, the ability of the Company to secure additional working capital, and the
Company's general ability to successfully increase its marketing and sales
efforts in order to take advantage of its increased production facilities. Any
forward looking information regarding an increase of the Company's gross profit
margin also will be affected by the Company's ability to implement its strategy
of focusing on the sales of higher margin products as well
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as the Company's ability to efficiently utilize its expanded facilities. There
can be no assurance that the Company will be successful in efficiently managing
its growth in order to maximize potential production.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, involved in legal proceedings
arising in the normal course of its business. No such current proceeding is
expected to result in any material loss to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
[The Company's Annual Meeting is held in its second fiscal quarter.]
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.15 - Third Amendment of Loan Agreement, March 31,
1999, between the Company and Chase Bank of
Texas, National Association, as lender.
Exhibit 27 - Financial Data Schedule.
(b) The Company filed no Reports on Form 8-K during the reporting
period.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SURREY, INC.
(Registrant)
Date: May 13, 1999 By: /s/ MARTIN VAN DER HAGEN
-----------------------------------
Martin van der Hagen
President
By: /s/ MARK VAN DER HAGEN
-----------------------------------
Mark van der Hagen
Chief Financial Officer
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EXHIBIT 10.15
THIRD AMENDMENT OF LOAN AGREEMENT
THIS THIRD AMENDMENT OF LOAN AGREEMENT ("Agreement") is made and entered
into as of March 31, 1999, by and between SURREY, INC., ("Borrower"), a Texas
corporation, and CHASE BANK OF TEXAS, NATIONAL ASSOCIATION ("Lender"), a
national banking association.
RECITALS:
On or about April 8, 1998, Borrower and Lender entered into a Loan
Agreement providing for loans to be made to the Borrower for the purposes
provided for therein. Such Loan Agreement has previously been amended pursuant
to a First Amendment of Loan Agreement dated effective May 14, 1998 and by a
Second Amendment of Loan Agreement dated effective January 25, 1999. Such Loan
Agreement, as amended, is herein called the "Original Agreement".
The Borrower and the Lender now desire to further amend the Original
Agreement in certain respects as hereinafter provided to modify certain
provisions of the Original Agreement, all as more particularly set forth herein.
AGREEMENTS:
For and in consideration of the premises and the mutual agreements herein
contained, the parties hereto agree as follows:
(1) The following new definition is hereby added to Paragraph 1 of the
Original Agreement:
"Monthly Financial Statements shall mean the monthly financial
statements of a Person, including a balance sheet as of the end of such
month and an income statement for the fiscal year to date, subject to
normal year-end adjustments, prepared in accordance with GAAP and
certified as true and correct to the best knowledge of an appropriate
officer or other party acceptable to Lender on behalf of such Person. The
Monthly Financial Statements for Borrower shall be prepared on a
consolidated basis. In connection with each set of Monthly Financial
Statements, if Borrower ever acquires any Subsidiary or Subsidiaries in
accordance with the other provisions of this Agreement, monthly
consolidating statements shall also be prepared by Borrower for delivery
to Lender, and such consolidating statements will be prepared in
accordance with GAAP only to the extent normal and customary."
(2) The last sentence of the definition of "Applicable Margin" contained
in Paragraph 1 of the Original Agreement is hereby amended and restated in its
entirety to hereafter be and read as follows:
<PAGE>
"The Applicable Margin will be adjusted (if necessary) quarterly based on
the Debt to Tangible Net Worth Ratio as of the end of each quarter, as
reflected in the Monthly Financial Statements and Compliance Certificates
required to be provided Lender under Paragraphs 10(b)(2) and (3), with any
change in the Applicable Margin becoming effective ten (10) calendar days
after receipt by Lender of such Monthly Financial Statements and
Compliance Certificates."
(3) Paragraph 2(c) of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"(c) Borrower shall cause the outstanding principal balance of the
Revolving Note to be prepaid in full and reduced to a zero balance for
thirty (30) consecutive days at any time from April 9, 1999 until and
including the Maturity Date."
(4) Paragraph 10(b)(2) of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"(2) as soon as available and in any event within 30 days after the
end of each month (including the last month of each fiscal year), Monthly
Financial Statements of Borrower;"
(5) Paragraph 10(c)(2) of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"(2) a Debt to Tangible Net Worth Ratio not greater than (i) 2.00 to
1.00 as of the end of the calendar quarter ending March 31, 1999, and (ii)
1.75 to 1.00 as of the end of each calendar quarter after March 31, 1999."
(6) Paragraph 10(c)(3) of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"(3) a Debt Service Coverage Ratio of not less than (i) 1.00 to 1.00
for the calendar quarter ending June 30, 1999, based on the results of
operations for the 1999 calendar year to date, (ii) 1.25 to 1.00, tested
for compliance on September 30, 1999, based on the results of operations
for the 1999 calendar year to date, and (iii) thereafter 2.00 to 1.00,
tested for compliance on December 31, 1999 and as of the end of each
calendar quarter after December 31, 1999, on a Rolling Four Quarters
basis."
(7) Exhibits B and C to the Original Agreement are hereby amended and
restated in its entirety to hereafter be in the form of Exhibit A and Exhibit B,
respectively, attached hereto and incorporated herein for all purposes.
Notwithstanding that the amended Exhibit B to the Original Agreement (in the
form attached hereto as Exhibit A) contains a general listing of the components
of the Borrowing Base, the listing is not intended to be inclusive of all
components of the Borrowing Base nor is it intended to limit the Lender's right
to exclude Accounts from the definition of Current Accounts Receivable or
Eligible Accounts or to modify the components of the Borrowing Base in
accordance with the terms of the Original Agreement.
2
<PAGE>
(8) Borrower represents and warrants that the representations and
warranties contained in Paragraph 9 of the Original Agreement and in the other
Loan Documents are true and correct in all material respects on and as of the
date thereof as though made on and as of such date. The Borrower hereby
certifies that no event has occurred and is continuing which constitutes an
Event of Default under the Original Agreement or any of the other Loan Documents
or which upon the giving of notice of the lapse of time or both would constitute
such an Event of Default.
(9) The Borrower hereby ratifies and confirms that the Security
Agreement and the Deed of Trust executed by the Borrower are in full force and
effect, and since the Security Agreement and the Deed of Trust secure any and
all indebtedness of the Borrower to the Lender now or hereafter outstanding, it
secures all amounts outstanding under the Original Agreement, as amended hereby,
including without limitation, all amounts outstanding under the Revolving Loans
and under the Advance/Term Loans.
(10) Except as expressly amended hereby, the Original Agreement and the
other Loan Documents shall remain in full force and effect. The Original
Agreement, as hereby amended, and all rights and powers created thereby or
thereunder and under the other Loan Documents are in all respects ratified and
confirmed and remain in full force and effect.
(11) Terms used herein which are defined in the Original Agreement or in
the other Loan Documents shall have the meanings therein ascribed to them. The
term "Loan Agreement" or "Credit Agreement" as used in the Original Agreement,
the other Loan Documents or any other instrument, document or writing furnished
to the Lender by the Borrower, when referring to the Original Agreement, shall
mean the Original Agreement as hereby amended.
(12) This Agreement (a) shall be binding upon the Borrower and the Lender
and their respective successors and assigns (provided, however, that the
Borrower shall not assign his rights hereunder without the prior written consent
of the Lender); (b) may be modified or amended only by a writing signed by each
party; (C) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OR THE
STATE OF TEXAS AND THE UNITED STATES OF AMERICA; (d) may be executed in several
counterparts, and by the parties hereto on separate counterparts, constitute an
original agreement, and all such separate counterparts shall constitute but one
and the same agreement; and (e) embodies the entire agreement and understanding
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, consents and understandings relating to such subject matter
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS AGREEMENT, THE ORIGINAL AGREEMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED BY ANY OF THE PARTIES TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT
WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SURREY, INC.
a Texas corporation
By: /s/ Mark van der Hagen
------------------------------------
Name: Mark van der Hagen
----------------------------------
Title: Vice President / CFO
---------------------------------
"Borrower"
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION
By: /s/ Cindy Matula
------------------------------------
Name: Cindy Matula
----------------------------------
Title: Senior Vice President
---------------------------------
"Lender"
Attach:
Exhibit A - Amended Exhibit B to Original Agreement (Borrowing Base Certificate)
Exhibit B - Amended Exhibit C to Original Agreement (Compliance Certificate)
4
<PAGE>
BORROWING BASE CERTIFICATE
Borrowing Base Report for Period Beginning: ____________ and Ending ____________
("Current Period")
Loan Agreement (as amended, the "Agreement") dated as of April 8, 1998 by and
between Surrey, Inc. and Chase Bank of Texas, National Association
The undersigned hereby certifies that he or she is the ________________________
of Surrey, Inc., and that as such is authorized to execute this Borrowing Base
Certificate on behalf of Surrey, Inc. pursuant to the Agreement. On behalf of
the Borrower, the undersigned further certifies, represents and warrants that
the following components of the Borrowing Base and the calculation of the
Borrowing Base and amount available for borrowing, if any, are true and correct
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified herein):
Line 1. Total Accounts as of the end of the Current Period
(based on the lesser of each such Account as reflected in
Borrower's aging of Accounts and Borrower's general
ledger) $_________
Ineligible Accounts as of the end of the Current Period
2. (a) Accounts more than 90 days from invoice date: $_________
(b) Other Accounts which are not Current Accounts
Receivable $_________
(c) Foreign Accounts (unless insured or backed by
credit insurance or a letter of credit in form
and substance reasonably acceptable to Lender in
all respects): $_________
(d) Government Accounts $_________
(e) Accounts subject to a Lien, other than the Lien
of the Security Documents $_________
(f) Accounts owed by any Subsidiary, employee,
officer, agent, director, stockholder, partner,
trustee or other owner of equity rights of
Borrower or any Affiliate of any such Person $_________
(g) All of the Accounts of an account debtor(s) where
more than 20% of the total dollar amount of all
Accounts of the account debtor are unpaid more
than 90 days from invoice date $_________
(h) That portion of Accounts of an account debtor
(other than Wal-Mart Stores, Inc. and any of its
Affiliates or Bath & Body Works and any of its
Affiliates) in excess of 10% of the total dollar
amount of the total Accounts for the Current
Period (Line 1) $_________
(i) That portion of Accounts, in the aggregate, of
Wal-Mart Stores, Inc. and
EXHIBIT A
<PAGE>
its Affiliates in excess of 25% of the total
dollar amount of the total Accounts for the
Current Period (Line 1) $_________
(j) That portion of Accounts, in the aggregate, of
Bath & Body Works and its Affiliates in excess of
25% of the total dollar amount of the total
Accounts for the Current Period (Line 1) $_________
(k) Other ineligible Accounts under the Agreement $_________
3. Total ineligible Accounts for the Current Period (add
lines 2(a) through 2(k)) $_________
4. Total Eligible Accounts (line 1 minus line 3) $_________
5. Multiplied by current advance rate _________%
6. Equals total Borrowing Base as of the end of the Current
Period $_________
7. Revolving Commitment as of the date hereof $_________
8. Lesser of Borrowing Base (line 6) or Revolving Commitment
(line 7) $_________
9. Minus the aggregate outstanding amount of the Revolving
Loans as of the date hereof $_________
10. Minus the aggregate face amount of all outstanding
Letters of Credit as of the date hereof $_________
11. Equals the amount available for borrowing subject to the
Agreement, if positive, or amount to be repaid, if
negative $_________
To the extent of any conflict between the components of the Borrowing Base as
set forth on this exhibit and the provisions of the Agreement, the Agreement
shall control.
The undersigned hereby certifies that the above information and computations are
true and correct and not misleading as of the date hereof, that no Default or
Event of Default has occurred and is continuing under the Agreement and that the
Borrower is in compliance with all the financial covenants set out in the
Agreement.
Very truly yours,
Print Name:
------------------------------
of Surrey, Inc.
----------------
EXHIBIT A
<PAGE>
COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the __________________________
of Surrey, Inc. ("Borrower"), and that as such is authorized to execute this
certificate on behalf of Borrower pursuant to the Loan Agreement (as amended,
the "Loan Agreement") dated as of April 8, 1998 by and between Borrower and
Chase Bank of Texas, National Association; and that a review of Borrower has
been made under his supervision with a view to determining whether Borrower has
fulfilled all of its obligations under the Loan Agreement and the other Credit
Documents; and on behalf of Borrower further certifies, represents and warrants
as follows (each capitalized term used herein having the same meaning given to
it in the Loan Agreement unless otherwise specified):
(a) Each Obligor has fulfilled its respective obligations under the
Credit Documents.
(b) Except as described on the continuation pages attached hereto
(if any), the representations and warranties made in each Credit Document
are true and correct in all respects on and as of the time of delivery
hereof, with the same force and effect as if made on and as of the time of
delivery hereof.
(c) The financial statements delivered to Lender concurrently with
this Compliance Certificate have been prepared in accordance with GAAP
consistently followed throughout the period indicated and fairly present
the financial condition and results of operations of the applicable
Persons as at the end of, and for, the period indicated.
(d) No Default has occurred and is continuing. In this regard, the
compliance with the provisions of Paragraph 10(c) of the Loan Agreement is
as follows:
SECTION 10(c)(1) -- CURRENT RATIO
actual Current Ratio for Borrower as of the date hereof:
__.____ :1.00
required Current Ratio for Borrower as of the date hereof:
greater than or equal to 1.50:1.00
EXHIBIT B
<PAGE>
SECTION 10(c)(2) -- DEBT TO TANGIBLE NET WORTH RATIO
actual Debt to Tangible Net Worth Ratio for Borrower as of the date
hereof:
__.____ :1.00
required Debt to Tangible Net Worth Ratio for Borrower as of the
date hereof:
less than or equal to 2.00:1.00
[for quarter ending March 31, 1999]
less than or equal to 1.75:1.00
[for all other quarter ends]
SECTION 10(c)(3) -- DEBT SERVICE COVERAGE RATIO
actual Debt Service Coverage Ratio for Borrower as of the date
hereof:
__.____ :1.00
required Debt Service Coverage Ratio for Borrower as of the date
hereof:
None [for quarter ending March 31, 1999]
greater than or equal to 1.00:1.00
[for quarter ending June 30, 1999]
greater than or equal to 1.25:1.00
[for quarter ending September 30, 1999]
greater than or equal to 2.00:1.00
[for quarter ending December 31, 1999 and thereafter]
(e) Based on the actual Debt to Tangible Net Worth Ratio shown
above, the Applicable Margin to be effective after Lender's review of the
Monthly Financial Statements delivered with this Compliance Certificate is
_________%.
(f) There is no Default under Paragraph 11(i) of the Loan Agreement
and for purposes thereof the undersigned certifies as follows:
actual Capital Expenditures during the prior 12-month period:
$_____________
permitted Capital Expenditures during the prior 12-month period:
less than or equal to $2,000,000.00
(g) There has occurred no material adverse change in the assets,
liabilities, financial condition, business or affairs of any Obligor since
the date of the Loan Agreement.
EXHIBIT B
<PAGE>
DATED as of .
-------------
Very truly yours,
-----------------------------------------
Print Name:
------------------------------
of Surrey, Inc.
-------------------------
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