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 June 30, 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 August 12, 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 Three Months and Six Months
Ended June 30, 1999 and 1998
Balance Sheets as of June 30, 1999 and December 31, 1998
Statements of Cash Flows for the Six Months Ended June 30,
1999 and 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: FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 5,245 $ 1,917 $ 8,577 $ 3,819
Cost of sales $ 3,954 $ 1,399 $ 6,716 $ 2,764
------- ------- ------- -------
Gross profit $ 1,291 $ 518 $ 1,861 $ 1,055
Operating expenses:
Sales and marketing $ 367 $ 178 $ 651 $ 344
General and administrative $ 482 $ 519 $ 1,021 $ 897
------- ------- ------- -------
Total operating expenses $ 849 $ 697 $ 1,672 $ 1,241
Income (loss) from operations $ 442 ($ 179) $ 189 ($ 186)
Other:
Interest expense ($ 171) ($ 52) ($ 283) ($ 84)
Other income $ 0 $ 13 $ 0 $ 38
------- ------- ------- -------
Income (loss) before income taxes $ 271 ($ 218) ($ 94) ($ 232)
Income tax (benefit) provision $ 83 ($ 74) ($ 28) ($ 79)
------- ------- ------- -------
Net Income (loss) $ 188 ($ 144) ($ 66) ($ 153)
------- ------- ------- -------
Basic earnings per share $ 0.08 ($ 0.06) ($ 0.03) ($ 0.06)
Diluted earnings per share $ 0.07 ($ 0.06) ($ 0.02) ($ 0.06)
Shares used in computing earnings per share:
Basic 2,473 2,473 2,473 2,473
Diluted 2,823 2,473 2,823 2,473
</TABLE>
SEE ACCOMPANYING NOTES
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SURREY, INC
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 47 $ 77
Accounts receivable $ 3,467 $ 1,713
Inventories, net $ 2,526 $ 2,232
Prepaid expenses and other current assets $ 30 $ 315
Deferred income taxes $ 138 $ 182
Income taxes receivable $ 130 $ 156
-------- --------
Total current assets $ 6,338 $ 4,675
Property and equipment, net $ 4,143 $ 3,710
Deferred income taxes $ 219 $ 178
-------- --------
Total assets $ 10,700 $ 8,563
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,845 $ 1,159
Accrued expenses $ 208 $ 204
Notes payable $ 2,350 $ 0
Current maturities of long-term debt $ 125 $ 134
Current maturities of capital lease obligations $ 216 $ 208
-------- --------
Total current liabilities $ 4,744 $ 1,705
Long-term debt, less current maturities $ 2,444 $ 3,192
Capital lease obligations, less current maturities $ 288 $ 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 $ (939) ($ 873)
-------- --------
Total shareholders' equity $ 3,224 $ 3,290
-------- --------
Total liabilities and shareholders' equity $ 10,700 $ 8,563
======== ========
SEE ACCOMPANYING NOTES.
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SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 66) ($ 153)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation $ 184 $ 143
Changes in operating assets and liabilities:
Accounts receivable ($1,754) $ 356
Inventories ($ 294) ($ 677)
Prepaid expenses and other current assets $ 285 ($ 396)
Deferred income taxes $ 3 $ 0
Trade accounts payable $ 686 $ 106
Accrued expenses $ 4 ($ 236)
Income taxes receivable/payable $ 26 ($ 79)
------- -------
Net cash provided by (used in) operating activities ($ 926) ($ 936)
INVESTING ACTIVITIES
Acquisition of property and equipment ($ 617) ($1,230)
------- -------
Net cash used in investing activities ($ 617) ($1,230)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ 1,350 $ 0
Payment of notes payable $ 0 ($ 895)
Proceeds from issuance of long-term debt $ 311 $ 1,939
Payment of long-term debt ($ 68) ($1,225)
Proceeds from capital lease obligations $ 33 $ 0
Principle payments on capital lease obligations ($ 113) ($ 39)
Payment of deferred financing costs $ 0 ($ 22)
------- -------
Net cash provided (used) by financing activities $ 1,513 ($ 242)
Net increase (decrease) in cash ($ 30) ($2,408)
------- -------
Cash and cash equivalents, beginning of period $ 77 $ 3,066
Cash and cash equivalents, end of period $ 47 $ 658
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 283 $ 86
Income taxes $ 0 $ 0
Acquisition of property and equipment via issuance of
Capital leases $ 33 $ 30
</TABLE>
SEE ACCOMPANYING NOTES
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SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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
regulations 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 and six month periods ended June
30, 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 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 Six Months Ended
June 30 June 30
------------------- --------------------
1999 1998 1999 1998
------------------- --------------------
<S> <C> <C> <C> <C>
Numerator:
Net Income (loss) $ 188 $ (144) $ (66) $ (153)
Numerator for basic and diluted earnings (loss)
Per share - income (loss) available to common
Stockholders $ 188 $ (144) $ (66) $ (153)
------- ------- ------- -------
Denominator:
Denominator for basic earnings (loss) per share - weighted - average
shares 2,473 2,473 2,473 2,473
------- ------- ------- -------
Denominator for diluted earnings (loss) per share - adjusted weighted -
average shares and assumed conversions 2,823 2,473 2,823 2,473
Basic earnings (loss) per share $ 0.08 $ (0.06) $ (0.03) $ (0.06)
------- ------- ------- -------
Diluted earnings (loss) per share $ 0.07 $ (0.06) $ (0.02) $ (0.06)
</TABLE>
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Options to purchase 525,000 shares of common stock, at exercise prices ranging
between $1.82 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 are outstanding. Shares issuable upon exercise of the warrants
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 June 30, 1999, the Company was not in compliance with certain financial
covenants specified in its term loan and line of credit agreements. The Company
has received a waiver from the lender for such violations.
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PART I: FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition. This discussion should be read with the
financial statements appearing in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
NET SALES. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales increased to $5,245,000 for the three
months ended June 30, 1999 from $1,917,000 for the three months ended June 30,
1998, an increase of 175%. Net sales increased to $8,577,000 for the six months
ended June 30, 1999 from $3,819,000 for the six months ended June 30, 1998, an
increase of 125%. The substantial increase in net sales for both periods is
primarily attributable to shipments for three major accounts. During first
quarter 1999, the Company delivered opening order shipments (initial shipments
of products to stock store shelves) for two major accounts, Bath & Body Works
glycerin soap and Minnetonka Brands, for its "Star Wars" soap retail
distribution project. During second quarter 1999, the Company shipped large
follow-on orders to both Bath & Body Works and Minnetonka Brands, and a large
potpourri products order to Wal-Mart to be included in a special late summer
promotional program. With the completion of the Company's expansion and with all
new manufacturing equipment on-line and operational, the Company's sales staff
has been able to begin marketing new product lines to take full advantage of the
new manufacturing facilities.
GROSS PROFIT. Gross profit increased for the three months ended June 30,
1999 to $1,291,000 from $518,000 for the comparable three month period in 1998.
Gross profit margin for the three month period decreased from 27.1% in 1998 to
24.7% in 1999. Gross profit increased for the six months ended June 30, 1999 to
$1,861,000 from $1,055,000 for the comparable six month period in 1998. Gross
profit margin also decreased for the six month period from 27.7% in 1998 to
21.7% in 1999. The decrease in gross profit margin during both periods is
attributable 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 & Body Works and Minnetonka Brands soap projects.
While full production was achieved in March 1999, the Company is still working
on improving its gross profit margin. The Company has shown strong improvement
in gross profit margin when compared to the gross profit margin for the year end
1998 which was 15.0%. The Company continues to expect that the new expansion and
installation of more labor efficient production equipment, coupled with
continued sales increases, will allow the Company to further reap benefits of
improved economies of scale, resulting in continued improvement of the gross
profit margin for the second half of 1999.
OPERATING EXPENSES. Operating expenses increased for the three months ended
June 30, 1999 by 21.8% over the three months ended June 30, 1998, but decreased
as a percentage of net sales; $849,000 (or 16.2% of net sales) in 1999, as
compared to $697,000 (or 36.4% of net sales) in 1998. Operating expenses also
increased in the six months ended June 30, 1999 by 34.8% over the six months
ended June 30, 1998, but decreased as a percentage of net sales; $1,672,000 (or
19.5% of net sales) in 1999, as compared to $1,241,000 (or 32.5% of net sales)
in 1998.
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Operating expenses increased due to increased sales efforts, but decreased
as a percentage of 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.
Sales and marketing expenses increased for both the three months and six
months ended June 30, 1999 over the comparable periods in 1998, but decreased in
each case as a percentage of net sales. Such expenses for second quarter
increased from $178,000 (or 9.3% of net sales) in 1998 to $367,000 (or 7.0% of
net sales) in 1999, and for the six-month period, increased from $344,000 (or
9.0% of net sales) in 1998 to $651,000 (or 7.6% of net sales) in 1999. The
increases in each period were due mainly to increased advertising and increased
sales commissions, which are generally based on a percentage of sales.
General and administrative expenses decreased for the three months ended
June 30, 1999 as compared to the same period in 1998, and also decreased
significantly as a percentage of net sales, from $519,000 (or 27.1% of net
sales) in 1998 to $482,000 (or 9.2% of net sales) in 1999. This decrease was
primarily due to a decrease in legal and accounting fees during the period,
off-set by increased salaries for sales and marketing personnel. For the six
months ended June 30, 1999, general and administrative expenses increased over
the comparable period in 1998, but decreased significantly as a percentage of
net sales. Such expenses for the six-month period increased from $897,000 (or
23.5% of net sales) in 1998 to $1,021,000 (or 11.9% of net sales) in 1999. This
increase was primarily due to increased salaries for sales and marketing
personnel.
INTEREST EXPENSE. Interest expense increased substantially in both periods,
but each such decrease was only a slight increase as a percentage of net sales.
Interest expense was $171,000 (3.3% of net sales) in the three months ended June
30, 1999, as compared to $52,000 in the three months ended June 30, 1998 (2.8%
of net sales). Interest expense was $283,000 (3.3 % of net sales) for the six
months ended June 30, 1999, as compared to $86,000 (2.3% of net sales) for the
six months ended June 30, 1998. The increase was 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 $2,800,000 for new manufacturing and
storage equipment, and increased its short-term borrowings for working capital
purposes related to increased sales efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current primary sources of liquidity 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"). The Additional Term Loan was fully drawn in first
quarter of 1999.
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The January 1999 amendment to the Loan Agreement 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. On June 17, 1999, the Loan
Agreement was further amended to provide for amounts available under the
Revolving Note to include the lesser of (A) 80% of Eligible Accounts (as such
definition was revised in the June 1999 amendment) plus the lesser of (i) 100%
of the Eligible Purchase Orders (as such definition was revised in the June 1999
amendment) from Bath & Body Works and Minnetonka Brands and (ii) $500,000 or (B)
$2,500,000. Such percentages are subject to decrease by the Lender in certain
circumstances, as set forth in the June 1999 amendment. The Lender charged an
amendment fee of $10,000 for the June 1999 amendment. As of June 30, 1999, the
Company had $2,350,000 outstanding under the Revolving Note and $150,000
remaining excess borrowing capacity.
Effective March 31, 1999, the Company and the Lender first 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 Loan
Agreement, as amended, contains the following covenants, among other
requirements, 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 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 June 30, 1999, the Company was not in compliance with the covenants set
forth above and had received a waiver from the Lender for such non-compliance.
The Company and the Lender are currently negotiating a revision of the financial
covenants.
Effective with the June 1999 amendment, the interest on each of the Term
Loan, the Additional Term Loan and the Revolving Note was increased. Interest on
the Revolving Note floats at the Lender's Prime Rate plus 1%. Interest on the
term loans will, at the Company's option, float at either the Lender's Prime
Rate plus 1% or the LIBOR Rate (London Interbank Offering Rate) plus the LIBOR
margin, which is 3.65%. Currently, the Company has elected to pay interest at
the LIBOR Rate plus LIBOR margin on the Term Loan, which interest rate is
currently 7.3125%. The Company pays interest at the Prime Rate plus 1% on the
Revolving Note and the Additional Term Loan, which interest rate currently is
9%. 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.
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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,
to 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.
During the first six months of 1999, the Company purchased and installed
four 10,000 gallon storage containers to store key raw materials. To finance the
purchase of the bulk storage containers and 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
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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 believes that cash expected to be provided by future operations
and its current bank loans and financing leases will be sufficient to meet its
working capital and anticipated capital expenditure requirements during 1999.
However, the Company may need to seek additional working capital financing if
net sales increase more than currently anticipated.
The Company experiences seasonal fluctuations in operating results, with
sales and revenues generally higher during the third and fourth calendar
quarters, reflecting primarily orders for the holiday retail season. Orders
shipped in the third and fourth quarters generally account for approximately 60%
of the Company's total net sales for the year.
FORWARD LOOKING INFORMATION
Statements contained in this report regarding the Company's future
operations, 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 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 business. No current proceeding is expected to result in
any material loss to the Company.
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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
On March 19, 1999, proxy statements were mailed to the holders of record of
2,472,727 shares of common stock to solicit proxies in connection with the
Annual Meeting of Shareholders on April 13, 1999. Shareholders holding 2,449,072
shares were present, in person or by proxy. Two proposals were submitted to a
vote of shareholders.
Vote
--------------------------------
Matter For Withhold Authority
------ --- ------------------
1. Election of Directors: 2,428,932 20,140
John B. van der Hagen 2,428,932 20,140
Martin J. van der Hagen 2,428,932 20,140
Mary A. van der Hagen 2,427,592 21,470
Bruce Masucci 2,428,932 20,140
G. Thomas MacIntosh 2,428,932 20,140
2. Ratification and Appointment of Ernst & Young LLP as independent
auditors for fiscal year 1999.
----------------------------------------------------------
For Against
--- -------
2,446,072 3,000
ITEM 5 OTHER INFORMATION
On April 13, 1999, the Board of Directors approved amendments to the
Company's stock option plans, subject to approval by the shareholders, to
increase the number of shares authorized for grant under incentive stock options
by 500,000 and to grant an additional 10,000 options to each non-employee
director, effective April 13, 1999. In addition, the Board, acting as the
Compensation Committee, voted (i) to re-price certain outstanding employees
options to the fair market value on April 13, 1998, the date of such re-pricing,
which was $1.82 and (ii) to issue an additional 199,500 options to certain
employees.
As previous reported on Form 8-K, on August 2, 1999, Surrey, Inc. and Ernst
& Young LLP ("E&Y") ceased their current client-auditor relationship. E&Y served
as Surrey's independent certifying auditors for the fiscal years 1995, 1996,
1997 and 1998. No report of E&Y for any such period contained an adverse opinion
or disclaimer of opinion, or was qualified or
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modified in any way. The decision to change accountants was not recommended or
approved by the Audit Committee or the Board of Directors of Surrey.
There has been no disagreement between Surrey and E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. In April 1999, E&Y advised the Board of Directors of Surrey
that it saw a "material weakness" in Surrey's internal controls, namely the need
for updated inventory software and the need for Surrey to hire a controller and
additional accounting personnel. E&Y stated that such report did not effect its
report, dated February 9, 1999, on the financial statements of Surrey for the
two fiscal years ended December 31, 1998. The Board of Directors discussed the
recommendations at its April 1999 meeting and generally agreed with the
recommendations made by E&Y. The Board recommended to management that new
inventory software and controls should be implemented after the hiring of a
controller. Management is currently reviewing the related costs of implementing
the E&Y recommendations and the Board intends to further address these matters
at the next Board meeting.
Surrey is currently in the process of selecting a new firm of certifying
accountants.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.16 - Fourth Amendment of Loan Agreement, June 17, 1999,
between the Company and Chase Bank of Texas, National Association, as
lender..
Exhibit 27. - Financial Data Schedule
(b) The Company filed one Report on Form 8-K during the reporting period.
On August 4, 1999, the Company reported a change in its certifying
accountants, as discussed above.
-14-
<PAGE>
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: August 12, 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
-15-
EXHIBIT 10.16
FOURTH AMENDMENT OF LOAN AGREEMENT
THIS FOURTH AMENDMENT OF LOAN AGREEMENT ("Agreement") is made and
entered into as of June 17, 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, by a Second
Amendment of Loan Agreement dated effective January 25, 1999, and by a Third
Amendment of Loan Agreement dated effective March 31, 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 increase the revolving
line of credit loan under the Original Agreement and to modify certain other
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 of "Eligible Purchase Orders" is
hereby added to the definitions contained in Paragraph 1 of the Original
Agreement:
Eligible Purchase Orders shall mean, as at any date of
determination, written purchase orders for goods to be manufactured
or sold by the Borrower to Bath & Body Works or Minnetonka Brands in
the ordinary course of its business, which are and at all times
shall continue to be acceptable to Lender in all respects. Standards
of eligibility for Eligible Purchase Orders may be fixed and revised
from time to time solely by Lender in Lender's exclusive judgment.
In general, without limiting the foregoing, an Eligible Purchase
Order must comply with the following requirements: (a) the
applicable purchasing party is not a foreign country or any
subdivision or agency or department there of or located outside of
the fifty (50) states of the United States or Puerto Rico, unless
the purchaser's obligation under such purchase order is insured or
backed by credit insurance or a letter of credit in form and
substance reasonably acceptable to Lender in all respects; (b) the
applicable purchasing party is not the United States of America or
any of its agencies, department, commissions, boards or bureaus or
is not otherwise subject to the Federal Assignment of Claims Act;
(c) the obligation of the purchasing party under the purchase order
is subject to no Lien whatsoever, except for the Liens created
pursuant to the Security Documents; (d) the applicable
<PAGE>
purchasing party is not a Subsidiary, employee, officer, agent,
director, stockholder, partner, trustee or other owner or holder of
any indicia of equity rights (whether issued and outstanding capital
stock, partnership interests or otherwise) of Borrower or any
Affiliate of any such Person; (e) each of the representations and
warranties set forth in the Security Documents with respect to such
purchase order is true and correct in all material respects; and (f)
Lender has not deemed such purchase order ineligible because of
Lender's reasonable belief in the uncertainty about the
creditworthiness of the purchasing party or because Lender otherwise
reasonably considers the collateral value thereof to be impaired or
its ability to realize such value to be insecure; provided, however,
(a) if more than twenty percent (20%) of any purchasing party's
total Accounts with Borrower remain unpaid for more than 90 days
after the date of invoice, the total purchase orders owed to
Borrower by such purchasing party shall be excluded from Eligible
Purchasing Orders; (b) in the event that the sum of the total
purchase orders plus the aggregate Accounts owed to Borrower by
Minnetonka Brands exceeds ten percent (10%) of the total Accounts
owed to Borrower by all account debtors plus the total of all
outstanding unfilled purchase orders of all purchasing parties, the
purchase orders owed by Minnetonka Brands to Borrower in excess of
such ten percent (10%) amount shall be excluded from Eligible
Purchase Orders; (c) in the event that the sum of the total purchase
orders plus the aggregate Accounts owed to Borrower by Bath & Body
Works exceeds thirty-five percent (35%) of the total Accounts owed
to Borrower by all account debtors plus the total of all outstanding
unfilled purchase orders of all purchasing parties, the purchase
orders owed by Bath & Body Works to Borrower in excess of such
thirty-five percent (35%) amount shall be excluded from Eligible
Purchase Orders; and (d) no portion of a purchase order which
constitutes an Account of Borrower shall be included in Eligible
Purchase Orders. In the event of any dispute under the foregoing
criteria about whether a purchase order is or has ceased to be an
Eligible Purchase Order, the decision of Lender shall be conclusive
and binding. Nothing in this definition of "Eligible Purchase
Orders" shall be construed to limit or release any right of Lender
to any Collateral.
(2) The following definitions currently contained in Paragraph 1 of
the Original Agreement are hereby amended and restated to hereafter be and read
as follows:
Applicable Margin shall mean three and sixty-five one
hundredths of one percent (3.65%).
Base Rate shall mean for any day a rate per annum (rounded upwards
to the nearest 1/100 of 1%) equal to the lesser of (a) the Prime Rate (computed
on the basis of the actual number of days elapsed over a year of 360 days) in
effect on such day plus one percent (1%) per annum or (b) the Ceiling Rate. For
purposes of this Agreement any change in the Base Rate due to a change in the
Prime Rate shall be effective on the effective date of such change in the Prime
Rate.
Borrowing Base shall mean, as at any date, the amount of
the Borrowing Base shown on the Borrowing Base Certificate then most
recently delivered pursuant to Paragraph 10(b) hereof, determined by
the following calculation:
2
<PAGE>
80% of the Eligible Accounts of Borrower at said date
which are owed by account debtors plus the lesser of (i)
100% of the Eligible Purchase Orders from Bath & Body
Works and Minnetonka Brands and (ii) $500,000.00.
Notwithstanding anything to the contrary set forth in the
immediately preceding sentence, Lender reserves the right to adjust
downward to a level acceptable to Lender in its sole discretion the
eighty percent (80%) and one hundred percent (100%) advance rates
set forth above if Borrower's average dilution percentage for all
Accounts exceeds five percent (5%). In the absence of a current
Borrowing Base Certificate, Lender shall determine the Borrowing
Base from time to time in its discretion, taking into account all
information available to it, and the Borrowing Base from time to
time so determined shall be the Borrowing Base for all purposes of
this Agreement until a current Borrowing Base Certificate, in Proper
Form, is furnished to and accepted by Lender.
Eligible Accounts shall mean, as at any date of
determination thereof, Current Accounts Receivable created by
Borrower (but only to the extent that such Current Accounts
Receivable are Collateral hereunder and are subject to a first
priority perfected Lien in favor of Lender) in the ordinary course
of business arising out of the sale of goods or rendering of
serviced by Borrower, which are and at all times shall continue to
be acceptable to Lender in all respects. Standards of eligibility
for Eligible Accounts may be fixed and revised from time to time
solely by Lender in Lender's exclusive judgment. In general, without
limiting the foregoing, an Eligible Account must comply with the
following requirements: (a) the applicable account debtor is not a
foreign country or any subdivision or agency or department thereof
or located outside of the fifty (50) states of the United States or
Puerto Rico, unless the applicable Current Account Receivable is
insured or backed by credit insurance or a letter of credit in form
and substance reasonably acceptable to Lender in all respects; (b)
the applicable account debtor is not the United States of America or
any of its agencies, departments, commissions, boards or bureaus or
is not otherwise subject to the Federal Assignment of Claims Act;
(c) the Account is subject to no Lien whatsoever, except for the
Liens created pursuant to the Security Documents; (d) the Account
has not arisen out of transactions with a Subsidiary, employee,
officer, agent, director, stockholder, partner, trustee or other
owner or holder of any indicia of equity rights (whether issued and
outstanding capital stock, partnership interests or otherwise) of
Borrower or any Affiliate of any such Person; (e) each of the
representations and warranties set forth in the Security Documents
with respect to such Account is true and correct in all material
respects; (f) to the extent the total of the Eligible Accounts as
reflected in Borrower's aging of Accounts is different from the
total reflected in Borrower's general ledger, the lesser balance
will be used as the total of Eligible Accounts, and (g) Lender has
not deemed such Account ineligible because of Lender's reasonable
belief in the uncertainty about the creditworthiness of the account
debtor or because Lender otherwise reasonably considers the
collateral value thereof to be impaired or its ability to realize
such value to be insecure; provided, however, (a) if more than
twenty percent (20%) of any account debtor's total Accounts with
Borrower remain unpaid for more than 90 days after the date of
invoice, the total Accounts owed to Borrower by such account debtor
shall be excluded from Eligible Accounts; (b) in the event that the
aggregate Accounts owed to Borrower by any account debtor (other
than Wal-Mart Stores, Inc. and any of its Affiliates and Bath & Body
Works and any of its Affiliates) exceeds ten percent (10%)
3
<PAGE>
of the total Accounts owed to Borrower by all account debtors, the
Accounts owed by such account debtor to Borrower in excess of such
ten percent (10%) amount shall be excluded from Eligible Accounts;
(c) in the event that the aggregate Accounts owed by Borrower by
Wal-Mart Stores, Inc. and any of its Affiliates exceeds twenty-five
percent (25%) of the total Accounts owed to Borrower by all account
debtors, the Accounts owed by Wal-Mart Stores, Inc. and its
Affiliates in excess of such twenty-five percent (25%) amount shall
be excluded from Eligible Accounts; and (d) in the event that the
aggregate Accounts owed to Borrower by Bath & Body Works and any of
its Affiliates exceeds thirty-five (35%) of the total Accounts owed
to Borrower by all account debtors, the Accounts owed by Bath & Body
Works and its Affiliates in excess of such thirty-five percent (35%)
amount shall be excluded from Eligible Accounts. In the event of any
dispute under the foregoing criteria about whether an Account is or
has ceased to be an Eligible Account, the decision of Lender shall
be conclusive and binding. Nothing in this definition of "Eligible
Accounts" shall be construed to limit or release any right of Lender
to any Collateral.
Revolving Commitment shall mean the obligation of Lender
under this Agreement to make Revolving Loans and incur Letter of
Credit Liabilities in an aggregate principal amount at any on time
outstanding up to (but not exceeding) $2,500,000.00.
(3) The fifth (5th) sentence of Paragraph 2(a) of the Original
Agreement is hereby amended and restated in its entirety to hereafter be and
read as follows:
"The Revolving Loans shall be evidenced by the Revolving Note dated
June 17, 1999 executed by Borrower, payable to the order of Lender in the
original principal amount of $2,500,000.00."
(4) Exhibits A and B to the Original Agreement is 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.
(5) In consideration of Lender's agreement to enter into this
agreement and increase the Revolving Commitment, Borrower agrees to pay to
Lender concurrently herewith an amendment fee in the amount of $10,000.00, which
fee shall be deemed earned and accrued on the date hereof and due and payable on
demand thereafter. Any unpaid fee shall bear interest from its due date until
paid at the Past Due Rate.
(6) 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.
(7) 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
4
<PAGE>
outstanding, each secures all amounts outstanding under the Original Agreement,
as amended hereby, including without limitation, all amounts outstanding under
the Revolving Loan, as increased hereby, and under the Advance/Term Loan.
(8) 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.
(9) 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.
(10) 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.
(11) BORROWER HEREBY RELEASES, DISCHARGES AND ACQUITS FOREVER LENDER
AND ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND COUNSEL FROM ANY AND ALL
CLAIMS EXISTING AS OF THE DATE HEREOF. AS USED HEREIN, THE TERM "CLAIM" MEANS
ANY AND ALL LIABILITIES, CLAIMS, JUDGMENTS, DEFICIENCIES. INTEREST, LIENS, COSTS
OR EXPENSES (INCLUDING BUT NOT LIMITED TO COURT COSTS, PENALTIES, ATTORNEYS'
FEES AND DISBURSEMENTS, AND AMOUNTS PAID IN SETTLEMENT) OF ANY KIND AND
CHARACTER WHATSOEVER, INCLUDING BUT NOT LIMITED TO CLAIMS FOR USURY, BREACH OF
CONTRACT, AND NEGLIGENT MISREPRESENTATION, IN EACH CASE WHETHER NOW KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, ASSERTED OR UNASSERTED OR PRIMARY OR
CONTINGENT, AND WHETHER ARISING OUT OF WRITTEN DOCUMENTS, UNWRITTEN UNDERTAKINGS
OR COURSE OF CONDUCT.
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
5
<PAGE>
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
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 M. Matula
Title: President
"Lender"
Attach:
Exhibit A - Amended Exhibit A to Original Agreement (Request for Credit Form)
Exhibit B - Amended Exhibit B to Original Agreement (Borrowing Base Certificate)
6
<PAGE>
REQUEST FOR CREDIT
--------------
Chase Bank of Texas,
National Association
700 Lavaca
Austin, Texas 78701
Attn: Manager, Commercial Lending Division
Gentlemen:
The undersigned hereby certified that he is the __________________
of Surrey, Inc. ("Borrower"), and that as such is authorized to execute this
Request for Advance (the "Request") on behalf of Borrower pursuant to the Loan
Agreement (as it may be amended, supplemented or restated from time to time, the
"Loan Agreement") dated as of April 8, 1998 by and between Borrower and Chase
Bank of Texas, National Association. The (CHECK ONE) _____ Revolving Loan _____
Letter of Credit being requested hereby is to be in the amount set forth in (b)
below and is requested to be made or issued, as the case may be, on
__________________, which is a Business Day. On behalf of Borrower, the
undersigned 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 herein):
a. As of the date hereof:
(1) The current Borrowing Base is: $____________
(2) Aggregate outstanding amount of
Revolving Loans is: $____________
(3) Aggregate face amount of all
outstanding Letters of Credit is: $____________
(4) The available Revolving Commitment
[the amount by which the lesser of
(x) the amount in (a)(1) above or
(y) $2,500,000 exceeds the sum of
the amounts in (a)(2) or (a)(3)
above], if positive is: $____________
EXHIBIT A
<PAGE>
b. If and only if the available Revolving Commitment is positive,
Borrower hereby requests under this Request a (CHECK ONE) ______
Revolving Loan _____ Letter of Credit in the amount of
$____________ (which is no more than the available Revolving
Commitment).
c. 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.
d. No Default has occurred and is continuing or will occur as a
result of the requested Revolving Loan or Letter of Credit, as
the case may be.
e. If a Letter of Credit is being requested, attached hereto is all
pertinent information relating to the issuance of the requested
Letter of Credit, including the name of the beneficiary to be
designated, the proposed expiration date and any special
conditions to drawings to be included in the Letter of Credit.
(CHECK IF APPLICABLE) _____ The expiration date of the Letter of
Credit is after the Maturity Date; therefore, Cover must be
provided for such Letter of Credit prior to its issuance.
Thank you for your attention to this matter.
Very truly yours,
----------------------------------
Print Name: ----------------------
------------------ of Surrey, Inc.
EXHIBIT A
<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 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) $__________
2. Ineligible Accounts as of the end of the Current Period
(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 and Bath & Body Works and 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 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
35% 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) $__________
EXHIBIT B
<PAGE>
5. Multiplied by current advance rate ________%
6. Equals total Eligible Accounts component of Borrowing
Base as of the end of the Current Period $__________
7. Total purchase orders as of the end of the Current Period
from Bath & Body Works and Minnetonka Brands, excluding
any purchase orders or portions thereof which have become
Accounts $__________
8. Ineligible Purchase Orders as of the end of the Current
Period
(a) Foreign purchasers (unless insured or backed by
credit insurance or a letter of credit in form
and substance reasonably acceptable to Lender in
all respects) $__________
(b) Governmental purchasers $__________
(c) Obligations of purchasing party under purchase
orders which are subject to a Lien, other than
the Lien of the Security Documents $__________
(d) Purchase orders where the purchasing party is a
Subsidiary, employee, officer, agent, director,
stockholder, partner, trustee or other owner of
equity rights of Borrower or any Affiliate of any
such Person $__________
(e) All of the purchase orders of a purchasing party
where more than 20% of the total dollar amount of
all Accounts of such purchasing party are unpaid
more than 90 days from invoice date $__________
(f) That portion of the purchase orders of Minnetonka
Brands and any of its Affiliates which, when
added to the total Accounts of Minnetonka Brands
and its Affiliates exceeds 10% of the total
dollar amount of the total purchase orders then
outstanding and the total Accounts for the
Current Period $__________
(g) That portion of the purchase orders of Bath &
Body Works and any of its Affiliates which, when
added to the total Accounts of Bath & Body Works
and its Affiliates, exceeds 35% of the total
dollar amount of the total purchase orders and
Accounts for the Current Period $__________
(h) Other ineligible purchase orders under the
Agreement $__________
9. Total ineligible purchase orders for the Current Period
(add lines 8(a) through 8(h)) $__________
10. Total Eligible Purchase Orders for the Current Period
(line 7 minus line 9) $__________
11. Multiplied by current advance rate _________%
12. Equals, maximum Eligible Purchase Orders component of
Borrowing Base $__________
13. Lesser of (i) line 12 and (ii) $500,000, equals total
Eligible Purchase Orders component of Borrowing Base as
of the end of the Current Period $__________
14. Total Borrowing Base as of the end of the Current Period
(add lines 6 and 13) $__________
15. Revolving Commitment as of the date hereof $__________
16. Lesser of Borrowing Base (line 14) or Revolving
Commitment (line 15) $__________
EXHIBIT B
<PAGE>
17. Minus the aggregate outstanding amount of the Revolving
Loans as of the date hereof $__________
18. Minus the aggregate face amount of all outstanding
Letters of Credit as of the date hereof $__________
19. 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 B
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 47
<SECURITIES> 0
<RECEIVABLES> 3,449
<ALLOWANCES> (18)
<INVENTORY> 2,526
<CURRENT-ASSETS> 6,338
<PP&E> 6,054
<DEPRECIATION> 1,911
<TOTAL-ASSETS> 10,700
<CURRENT-LIABILITIES> 4,744
<BONDS> 2,732
0
0
<COMMON> 4,099
<OTHER-SE> (875)
<TOTAL-LIABILITY-AND-EQUITY> 10,700
<SALES> 5,245
<TOTAL-REVENUES> 5,245
<CGS> 3,954
<TOTAL-COSTS> 4,803
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<INTEREST-EXPENSE> 171
<INCOME-PRETAX> 271
<INCOME-TAX> (83)
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