SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File No. 001-23407
SURREY, INC.
(Name of Small Business Issuer 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 and zip code of principal executive offices)
512-267-7172
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE ("COMMON STOCK")
REDEEMABLE COMMON STOCK PURCHASE WARRANTS ("WARRANT")
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ___.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The Issuer's revenues for the year ended December 31, 1998: $9,247,000
Aggregate market value of Common Stock held by non-affiliates as of March 10,
1999: $2,864,500
Number of Shares of Common Stock outstanding as of the close of business on
March 1, 1999: 2,472,727
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for Annual Meeting
of Shareholders to be held April 13, 1999 ("Proxy Statement") are incorporated
by reference into Part III hereof.
Transitional Small Business Disclosure Format: Yes ___ No _X_.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Surrey, Inc. ("Surrey" or the "Company") specializes in the
development and manufacture of high quality transparent glycerin and specialty
soap products, as well as the production of certain personal care and home
fragrance products. The Company has built four successful retail brands and a
strong private label and contract manufacturing business for high-profile
customers. Surrey uses a proprietary process for manufacturing poured bar soaps
that allows the Company to produce unique and affordable original soap products
in large quantities with consistent quality. Surrey also maintains a library of
chemical formulations for producing purer, milder and harder glycerin soap bars
primarily through the use of synthetic moisturizing ingredients rather than the
use of tallow (i.e., animal fat). The Company also manufactures and sells home
fragrance products and a full line of potpourri products as part of its crafts
market product line. The Company recently began manufacturing a line of high-end
scented candles that compliments its line of home fragrance products. In
addition, the Company recently began manufacturing a small amount of traditional
bar soap. See also "Competition."
BACKGROUND
Surrey was incorporated in 1981 as a Texas corporation. The Company
was the successor to a venture begun in 1972 to market a brush, mug, and line of
shaving soap for men. Management began working to perfect techniques for
producing a milder bar soap for its shaving kits, and in 1979 began
manufacturing its own soap products and expanding a new library of soap
formulations. At that time, the Company discovered that specialty soaps were a
lucrative niche market which it believed was too small to attract significant
competition from the larger soap producers like Dial, Unilever,
Colgate-Palmolive and Procter & Gamble.
During the eighties, management began developing a new generation of
soap formulations and selling its products to drug store chains, supermarket
chains, and discount/mass merchandisers across the country. Surrey found that
the chemistry of most glycerin bar soaps made the soap soft and difficult to
process. Surrey's newly formulated glycerin soaps were firmer, lasted longer,
and could be used to create various unique shapes and formats, such as Surrey's
original "soap suspended in soap" products.
In the early nineties, Surrey entered the contract manufacturing
business and began producing specialty soap products for a variety of premier
brand consumer product companies and prestige accounts, including Elizabeth
Arden, Walt Disney Co., Avon, Ann Taylor, Wal-Mart, and Walgreen's. In 1990, the
Company acquired the assets of Simmer Scents, a line of potpourri home
fragrances and began moving into the major craft chains.
In March 1987, the Company moved its operations to its current site
in Leander, Texas, close to Austin, originally occupying an 18,000 square foot
manufacturing plant. The Company has expanded several times over the years, and
in 1998, the Company again expanded its facility by adding approximately 39,100
square feet, which brought the total size of its facilities to approximately
77,100 square feet. In January 1999, the Company obtained financing to complete
an
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additional expansion of approximately 14,000 square feet of warehouse space and
to remodel a 5,000 square foot existing space into a soap curing room in
response to the receipt of a large letter of commitment to purchase the
Company's products. In addition, the Company used a portion of such financing to
replenish working capital used in 1998 in relation to the construction of its
candle production room. See "Growth Strategy," "Bath & Body Works" and
"Significant Customers."
PRODUCTS AND DISTRIBUTION
Surrey's principal product line has traditionally been its high
quality glycerin bar soaps which it markets, both directly and through
manufacturers' representatives, to a large variety of retail establishments, and
which it manufactures, on a contract basis, for a variety of private-label
customers. In addition, the Company now manufactures and markets a full line of
potpourri products. The Company's total sales mix in 1998 was approximately
equally divided among: (a) contract manufacturing products, and (b) retail
products, including soaps, shaving products, potpourri, and craft products.
The Company has a wide variety of private label and contract
manufacturing clients for which it makes specialty glycerin soap bars and other
products. Many of the retail customers, such as Wal-Mart, Bath & Body Works,
K-Mart, Walgreen's and General Nutrition Centers, buy products designed, created
and manufactured exclusively by Surrey's personnel. Contract manufacturing
customers, such as Elizabeth Arden, Avon, Liz Claiborne and Walt Disney Co.,
work closely with the Company to create a product unique to that customer
through the use of specialty designs, fragrances, labeling, colors and shapes.
Surrey, through its proprietary processes, has been successful in creating
unique shapes and designs, including its "soap in a soap," tailored specifically
for certain customer requests.
Surrey currently contracts with approximately 60 brokers and
manufacturers' representatives who sell the Company's products on a commission
basis to a variety of retail customers. All such brokers and manufacturers'
representatives sell products for manufacturers other than the Company. Such
products include both the Company's own branded products and private-label
products manufactured for such retailers under their individual labels. The
Company also produces, on a direct marketing basis, specialty products for a
variety of contract manufacturing customers. Those products are sold through
direct marketing efforts by the Company. The Company does not offer any products
through a retail catalogue.
Surrey markets its products under its own four premium in-house
brand names:
* THE PURE PLEASURE(TM) Line * THE SIMMER SCENTS Line
* boxed sets of glycerin soap bars * potpourri bags
* antibacterial liquid glycerin soap * potpourri liquids
* oils
* sachets
* THE SURREY MEN'S LINE * THE ILLUMATHERAPE(TM) Line
* shaving mug, brush and soap set * various shaped and scented
candles
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In mid-1997 the Company introduced a full line of potpourri intended
to capitalize on the Company's experience in producing high quality fragrances.
The Company's potpourri line is being sold both through craft stores (such as
Michael's) and discount mass merchandisers (such as Wal-Mart and K-Mart). At the
end of 1998, the Company entered the candle market with a line of high-end
scented candles that compliments its line of home fragrance products. These
products have increased the Company's ability to market to craft stores. In
1999, the Company intends to reintroduce its soap making kits as a holiday
product.
As part of its 1998 expansion, the Company began manufacturing a
small amount of traditional bar soap. The Company does not expect to make
significant inroads into the traditional bar soap market; rather, the Company
intends to meet the existing demand of its customers for traditional bar soap.
The addition of a traditional line of bar soap allows the Company to offer a
more complete line of soap products including traditional soap products, liquid
soap, and glycerin bar soap. See "Competition."
GROWTH STRATEGY
Over the past several years, the Company has embarked on a growth
strategy designed to substantially increase revenue and profitability. The
Company intended to significantly expand its business by:
* doubling its manufacturing and production capabilities
* hiring additional professional sales personnel
* continuing to diversify its product mix by promoting sales of
its liquid soap, potpourri and craft products
* developing new products for its retail market, including the
development of a line of traditional soap, which will allow
the Company to manufacture and sell most types of soap, and a
line of high-end scented candles
* increasing its direct marketing and sales efforts to attract
new contract manufacturing customers
* continuing to shift its marketing emphasis to its higher
margin products
In 1996, the Company began a shift in its sales strategy away from
low-end volume discount accounts to concentrate on higher margin retail accounts
and products and on contract manufacturing.
The Company hired a Vice President of Sales as a national retail
sales director in July 1997. The Company has hired a second sales director to
concentrate on the retail market, where the Company's goal is to increase retail
sales in the near term. The Company promoted a third person to handle contract
manufacturing sales, which includes working with customers to create and
manufacture products according to that customer's design, fragrance, labeling,
color and shape specifications. The Company also hired a design professional to
assist in the marketing and design of products and packaging. The Company has
entered into an agreement with two additional salespersons to sell its contract
manufacturing products. In connection with its 1998 and 1999
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expansions, the Company has hired additional employees at the manufacturing
level and expects that it will ultimately require more manufacturing level
employees.
In 1998, the Company expanded its facility by adding approximately
39,100 square feet, which increased the total size of its facilities to
approximately 77,100 square feet. Approximately 18,100 square feet were added to
the Company's production and manufacturing facilities, approximately 14,900
square feet were added to its warehousing and storage space, and approximately
6,100 square feet were added to its corporate office space. The 1998 expansion
more than doubled the Company's manufacturing and production capabilities. In
1999, the Company intends to add approximately 14,000 square feet to its
warehouse space.
As part of its 1998 expansion, the Company added one soap making
line dedicated to producing traditional soap, two poured soap lines dedicated to
producing glycerin soaps, one high speed wrapping machine which doubled the
Company's wrapping capacity, and one candle making line. As part of its 1999
expansion, the Company added three poured soap lines dedicated to producing
glycerin soaps (bringing the total number to eight) and three high speed
wrapping machines (bringing the total number to four). The 1999 expansion was
necessary to meet the additional demand created by the Bath & Body Works
purchase orders expected by management. The 1999 expansion was complete and
operational at the end of February 1999. See also "Bath & Body Works,"
"Competition" and "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company has borne significant costs in relation to the
implementation of its growth strategy, which management expects will provide the
infrastructure for long-term growth. There can be no assurance that the Company
will not need to expand in the future or that the Company will efficiently
utilize its expanded facilities.
BATH & BODY WORKS
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. Management estimates the commitment
will result in additional revenues of approximately $6,000,000. In such letter
of commitment, 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.
The letter of commitment is a letter of intent, which indicates that
the parties are to work toward a more formal agreement. However, other than
periodic purchase orders, management does not expect that any more formal
agreement will be entered into between Bath & Body Works and the Company.
As of March 1, 1999, the Company had received purchase orders for
approximately $1,500,000 of the Company's products from Bath & Body Works. Bath
& Body Works required that the Company make the first delivery of ordered
product on or before February 19, 1999. The Company shipped such products to
Bath & Body Works on February 1, 1999, ahead of schedule.
To accommodate the current and expected purchase orders from Bath
and Body Works, the Company constructed an additional 14,000 square foot
warehouse space expansion and remodeled 5,000 square feet of existing space into
a soap curing area in 1999 at a cost of approximately
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$380,000. Such construction was financed with an additional term loan with Chase
Bank of Texas, N.A. and from working capital.
The Company required three additional poured soap lines dedicated to
producing glycerin soaps and three additional high speed wrapping machines to
meet the current and expected orders from Bath and Body Works. To finance such
additional equipment, the Company drew approximately $560,000 on its lease line
of credit with Keycorp Leasing, a division of Key Corporate Capital, Inc.
("KCCI"), the total amount of which is approximately $1,562,000 ("KCCI Lease
Line of Credit"). KCCI required a personal guarantee of the Chief Executive
Officer of the Company in order to draw such amount. At this time, no further
amounts may be drawn from the KCCI Lease Line of Credit. The Company also relied
on a capital lease line of credit in the amount of $477,000 from Winthrop
Resources, Inc. to finance one traditional soap making line ("Winthrop January
1999 Lease Line of Credit").
In addition, the Company has received a commitment to enter into a
lease line of credit from Amembal Capital Corporation in the total amount of
approximately $416,000 to finance the remaining pieces of equipment required to
complete the 1999 expansion. As of March 1, 1999, the Company had not negotiated
or signed any final agreements with Amembal Capital Corporation with respect to
such lease line of credit. See also "Item 6, Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
COMPETITION
While there is extensive competition in the bar soap manufacturing
industry, the Company believes that it currently competes directly with only a
small number of manufacturers in the specialty soap market, notably Neutrogena,
Beiersdorf (Basis), and Johnson & Johnson (Purpose). In addition, many other
companies manufacture and/or market a range of personal care products which
compete with Surrey's soap and other products. These companies include, among
others, Twincraft Soap Company, Original Bradford Soap Works and Stahl Soap. See
also "Proprietary Processes and Trademarks."
The Company recently began manufacturing a small amount of
traditional bar soap. Within the traditional soap market, the Company competes
directly with many larger manufacturers, such as Procter & Gamble,
Colgate-Palmolive, Unilever and Dial, which are much larger and have greater
financial resources than the Company. The Company does not expect to make
significant inroads into the traditional bar soap market; rather the Company
intends to meet the existing demand of its customers for traditional soap.
Currently, the Company contracts with a third party to fill its customers'
demand for traditional soap.
The Company currently believes that it will experience little
competition from the large manufacturers of traditional bar soap in its
specialty soap niche market due to the small relative size of the market and the
larger relative cost to mass produce a high quality glycerin bar soap product.
These larger manufacturers may, however, present more competition to the Company
for its liquid soap products.
In late 1998, the Company added a line of high-end scented candles
to compliment its potpourri and craft products. These additions are intended to
add variety to its product line. The candle industry is highly competitive and
dominated by larger manufacturers, most of which have greater financial
resources than the Company.
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The Company currently believes that it experiences the majority of
its competition based on the variety of its product line, and to a lesser extent
on price. The Company is broadening its product line and believes its current
and intended diversification into traditional bar soaps, liquid soaps,
potpourris, high-end scented candles and crafts will be advantageous in its
marketing, and instrumental in helping it maintain a competitive position in its
targeted markets. However, as the Company continues its diversification into
other product lines, it may experience competition from other sources, as well
as from foreign manufacturers.
SIGNIFICANT CUSTOMERS
In 1997 and 1998, Wal-Mart accounted for approximately 34% and 26%,
respectively, of the Company's net sales. Avon accounted for approximately 7%
and 4% of sales in 1997 and 1998, respectively, and K-Mart accounted for
approximately 5% and 2% of sales in 1997 and 1998, respectively. No other
customer accounted for more than 5% of sales in 1998. The Company anticipates
that Bath & Body Works will comprise more than 25% of the Company's net sales in
1999.
CUSTOMER CONTRACTS
The Company's large retail customers, such as Bath & Body Works,
Wal-Mart, K-Mart and Walgreen's generally establish their product order plans on
a 12 month cycle. Once such plan is in place it is often not reviewed for a
year; however, only the first order under any such plan is guaranteed. The
Company has no standing orders or long-term contracts with any of its retail
customers. Any such customer can re-order at any time or cancel or replace the
Company's product in its 12 month plan at any time with no notice to the
Company.
Most of the Company's contract manufacturing customers, such as
Elizabeth Arden, Avon and Walt Disney, order on a job-by-job basis only. Such
orders are generally cancelable by the customer if not shipped within two weeks
of the scheduled shipping date. Unless the Company is developing a new product
for a contract manufacturing customer (for which the development period can take
from months to years depending on the product and the customer), the Company
typically ships products within 60 to 90 days after receiving a purchase order.
Such period may be longer if special packaging or labeling is required by the
customer. Individual contract manufacturing clients generally supply the Company
with soap boxes and labeling; therefore, the Company is not required to carry
such inventory on its balance sheet. In addition, many of the Company's contract
manufacturing customers pay for the development and production of the die stock
and molds and, therefore, own such molds and the formulas for their individual
products.
Because the Company generally does not have any standing orders or
long-term contracts with its customers and orders are generally shipped within
60 to 90 days after receipt of purchase orders, the Company had no significant
backlog in 1998.
PROPRIETARY PROCESSES AND TRADEMARKS
The Company holds no patents on any of its equipment or processes
and relies substantially on certain formulas and processes that are not
patentable. In addition, much of the Company's proprietary information is the
experience and knowledge of its employees, contractors and business partners. To
protect these rights, the Company requires certain contractors, business
partners and distributors to enter into confidentiality agreements. There can be
no assurance that these agreements
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will provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information in the event of any unauthorized use or
disclosure; however, the Company intends to defend its trademark and proprietary
information as appropriate. Further, in the absence of patent protection, the
Company may be exposed to competitors who independently develop substantially
equivalent technology or otherwise gain access to the Company's trade secrets,
knowledge or proprietary information. The Company became aware in mid-1997 that
a company which signed such a confidentiality agreement appears to be using
certain trade secrets of the Company in violation of their agreement. No action
is currently contemplated in relation to such violation. Management believes
that such infringement is not material. Because the Company is in a niche
market, any significant volume from a competitor could reduce the Company's
sales and revenue.
The Company holds a registered trademark to use Floating Bath
Pals(R) and Hill Country Soap Company(R) and has applied for a trademark to use
Pure Pleasure(TM) and Illumatherape(TM). Although Surrey believes its trademarks
are important, it does not believe that its trademarks are material to its
business.
RESEARCH AND DEVELOPMENT
During fiscal years 1997 and 1998, the Company's principal research
and development activities have been experimentation in the Company's laboratory
by its own personnel and ideas brought to the Company by its customers. The
Company has historically spent significantly less than 5% of its net sales on
research and development. While research and development is important to the
Company's ongoing business and a significant portion of certain employees' time
is committed to this area, the costs of research and development in the
Company's product line is significantly less than for other types of
manufacturing companies. The Company originally intended to use a portion of the
proceeds of its recent public offering for research and development; however,
the Company actually applied only a small portion of such proceeds to research
and development.
SEASONALITY
The Company experiences seasonal fluctuations in operating results,
with sales and revenues generally higher during the third and fourth calendar
quarters. Orders shipped in the third and fourth quarters generally account for
approximately 60% of the Company's total net sales for the year, due primarily
to the holiday retail season. Generally, customers place holiday purchase orders
in early to mid summer for shipment around September and October. As a
consequence, the Company generally begins increasing its temporary staff in July
and August to accommodate such increased production volume. The Company operates
its production facilities using two shifts during the third and fourth quarters.
EMPLOYEES
As of March 1, 1999, Surrey employed 146 full-time employees and had
no part-time employees. The Company maintains two shifts of production
personnel. In addition, the Company hires temporary full-time employees during
its heaviest production periods, generally July through December, or upon the
receipt of a special order. The Company has five full-time employees in sales,
marketing and design, seven in administration and finance, two in research and
development, 12 in procurement, 110 in production manufacturing, seven in
Quality Control and three in shipping and handling. In connection with its
expansion, the Company expects that it will ultimately require additional
employees at the manufacturing level. The Company's employees are not
represented by
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any collective bargaining organization. The Company believes that its relations
with its employees are satisfactory.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Substantially all of the raw materials (predominantly glycerin and
other chemicals) used by the Company to manufacture its products are of a
generic nature and are available from several suppliers. To the best knowledge
of the Company, none of the raw materials for its products is in short supply,
and all are readily available from a variety of distributors. The Company has
recently purchased four 10,000 gallon containers to store key raw materials.
Management believes the Company will reduce the cost of such raw materials
slightly by buying in bulk. The Company does not anticipate any significant
difficulties in securing adequate supplies of raw materials of acceptable
quality and at acceptable prices in the foreseeable future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns the property and facilities that comprise its
production plant and corporate headquarters. The property consists of
approximately 12.50 acres in Travis County, Texas, approximately 22 miles
northwest of Austin. All of the Company's operations are currently centered in
one 77,100 square foot single story warehouse building which houses the offices,
production facilities and warehouse and storage. Currently, the Company's
corporate offices and research facility occupy approximately 9,100 square feet,
the production and manufacturing facilities occupy approximately 25,900 square
feet, and the remaining 42,100 square feet are dedicated to warehousing and
storage.
The Company is currently in the process of expanding its warehouse
space by adding approximately 14,000 square feet, which will bring the total
size of its warehouse space to approximately 56,100 square feet.
The Company entered into a construction contract with Van and Van
Austin of Austin, Texas to complete the 1999 facility expansion and the
remodeling of 5,000 square feet of existing space into a soap curing area at a
proposed cost of approximately $380,000. Such construction is being financed
with an additional term loan from Chase Bank of Texas, N.A. and from working
capital.
The Company's production and manufacturing equipment generally is
leased under certain capital and operating equipment leases. To finance the
equipment necessary to complete its 1998 and 1999 expansions, the Company relied
principally on the KCCI Lease Line of Credit, the Winthrop January 1999 Lease
Line of Credit, an additional lease line of credit with Winthrop Resources, Inc.
in the amount of approximately $300,000 ("Winthrop March 1999 Capital Lease Line
of Credit") and a lease line of credit with Amembal Capital Corporation. The
1998 expansion was completed and began operations at the end of 1998, and the
1999 expansion was completed and placed in service at the end of February 1999.
The principal manufacturing equipment currently in use consists of
eight poured bar soap production line units, two liquid fill lines, one
traditional manufacturing soap line production unit and filler, one candle
making line, four high speed wrapping machines and four low speed wrapping
machines.
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In addition, the Company has purchased and is in the process of
installing four 10,000 gallon storage containers to store the Company's key raw
materials. To finance the purchase of the bulk storage containers and related
construction, the Company has drawn on its Winthrop March 1999 Capital Lease
Line of Credit. See "Item 6, Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
The Company's existing and future plant and equipment are pledged to
secure its outstanding bank loans. Management believes that the Company's
properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company and its client Bath & Body Works were defendants in a
lawsuit filed in the Los Angeles Superior Court on April 2, 1997. The plaintiff,
Seretha F. Ebraham, claimed, among other things, that a liquid potpourri product
manufactured by the Company for Bath & Body Works failed to properly warn the
plaintiff of the potential dangers of the product and that she sustained burns
from the liquid potpourri as a result of such insufficient warning. The
Company's product liability insurer at the time of the occurrence defended the
claim. Such insurer settled the lawsuit for $200,000 in damages and $77,000 in
attorneys' fees. Management believes that the entire amount of the settlement
and costs will be covered by such insurer.
Other than the above lawsuit, the Company is involved in legal
proceedings arising in the normal course of its business, none of which is
expected to result in any material loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Surrey, Inc.'s Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbol "SOAP" and "SOAPW," respectively. The Company's
Units, which were comprised of two shares of Common Stock and one Warrant, began
trading on the Nasdaq SmallCap Market under the symbol "SOAPU" on December 4,
1997. On January 8, 1998, the Units were delisted, at the Company's request, and
the Units were separated into their component parts at such time.
As of March 1, 1999, there were 2,472,727 outstanding shares,
approximately 12 holders of record, approximately 650 beneficial holders of the
Common Stock, and 675,000 outstanding Warrants to purchase Common Stock. The
Warrants are exercisable on or before December 3, 2002 at an exercise price of
$4.80 per share. The Company may redeem the Warrants in whole at a price
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of $.01 per Warrant if the Company's price per share exceeds $5.00 per share for
20 consecutive trading days.
The following table sets forth the high and the low bid prices for
the Company's Common Stock, Warrants and Units for the fourth quarter 1997 and
1998 as reported on the Nasdaq system. Prior to such time, the Company's Common
Stock, Warrants or Units were not publicly traded on a national exchange or
automated quotation system.
Quarter Ended December 31, 1998 High Bid Low Bid
------------------------------- -------- -------
Common Stock $2.875 $1.3125
Warrant $.6875 $.25
Quarter Ended September 30, 1998 High Bid Low Bid
-------------------------------- -------- -------
Common Stock $2.9375 $1.25
Warrant $.625 $.4375
Quarter Ended June 30, 1998 High Bid Low Bid
Common Stock $3.4375 $2.6875
Warrant $.6875 $.4375
Quarter Ended March 31, 1998 High Bid Low Bid
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Common Stock $3.75 $3.25
Warrant $.75 $.625
Quarter Ended December 31, 1997(1) High Bid Low Bid
------------------------------- -------- -------
Unit $8.25 $8.00
Common Stock N/A N/A
Warrant N/A N/A
---------
(1) Period from December 4, 1997 (the first day of trading after the
effective date of Company's initial public offering) through
December 31, 1997. From December 4, 1997 through December 31,
1997, the Common Stock and the Warrants traded as part of the
Units but did not trade separately. The Common Stock and
Warrants began separate trading on January 8, 1998. At such
time, the Units were delisted at the request of the Company
The last sales price on March 10, 1999 was $2.125 per share for the
Common Stock and $.40625 per Warrant.
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DIVIDEND POLICY
The Company did not issue any dividends to stockholders during the
fiscal years 1997 or 1998. The Company currently intends to retain earnings for
use in the operation and expansion of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future. The Company's
bank loan restricts the payment of any dividends or purchase by the Company of
any shares of Common Stock without the prior written consent of the lender. See
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
items in the Company's Statements of Operations expressed as a percentage of net
sales for that period:
Year Ended
December 31,
--------------------
1998 1997
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Net Sales ............................ 100% 100%
Costs of Goods Sold .................. 85.0% 74.3%
Gross Profit ......................... 15.0% 25.7%
Operating Expenses
Sales and Marketing ............. 8.9% 5.3%
General & Administrative ........ 16.8% 13.3%
Interest Expense ................ 2.5% 3.0%
Net Income ........................... (9.2%) 2.5%
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales increased to $9,247,000 in 1998 from
$9,185,000 in 1997, an increase of 0.7%. This small increase in net sales is
attributed primarily to the fact that the Company's 1998 expansion was not fully
completed until the end of the fourth quarter of 1998, approximately six months
later than expected. This delay meant that the Company could not begin to use
its expanded production capabilities until first quarter of 1999. As a result,
the Company's sales efforts in 1998 were restricted by production capacity and
its inability to manufacture new product lines contemplated by the expansion.
GROSS PROFIT. Gross profit decreased in 1998 to $1,391,000 from
$2,392,000 in 1997, a decrease of 41.8%. Gross profit margin also decreased from
25.7% in 1997 to 15.0% in 1998. This decrease in gross profit and gross profit
margin is attributed to flat net sales growth coupled with an
-12-
<PAGE>
increase in cost of sales. The increase in cost of sales is attributed primarily
(i) to a disposal of inventory for no proceeds in the fourth quarter and
inventory shrinkage, valued in the aggregate at approximately $200,000, and (ii)
increased direct factory costs, primarily labor costs related to production
inefficiencies. Production inefficiencies resulted from a lack of sufficient
manufacturing and storage space pending the Company's expansion, which increased
in the fourth quarter due to higher holiday season production levels. Labor
costs also increased in the fourth quarter because the Company began to hire
additional workers in anticipation of production of the Bath & Body Works
purchase order.
The Company does not expect any significant disposal of inventory in
1999. The Company also expects that labor costs as a percentage of sales (23.8%
in 1998) will decline in 1999. As a result of the new expansion, an improvement
in labor efficiency is expected in 1999 due to new equipment and the possibility
for more efficient production scheduling. The Company also expects that product
margins will improve in 1999 with increased sales of new higher margin product
lines, particularly the scented candle product line.
OPERATING EXPENSES. Operating expenses increased in 1998 by 45.5%
and increased as percentage of net sales; $2,539,000 or 27.5% of net sales in
1998, as compared to $1,745,000 or 19.0% of net sales in 1997. Operating
expenses increased as a percentage of net sales primarily due to increased sales
and marketing expenses and to increased general and administrative expenses.
A major component of the increase in sales and marketing expenses
was salaries related to the five sales positions added in 1998. Sales and
marketing related salaries increased to $360,000, or 3.9% of net sales in 1998,
over $68,000 or .7% of net sales in 1997. Also, travel expenses due to the
increased sales and marketing efforts increased to $119,000 or 1.2% of net sales
in 1998 over $55,000 or .6% of net sales in 1997. The Company expects that these
additional investment costs will begin to be recovered in 1999 as revenue
increases due to the sales efforts begun in 1998.
General and administrative expenses increased to $1,552,000 in 1998
from $1,101,000 in 1997, and increased as a percentage of net sales to 16.8% in
1998 from 12.0% in 1997. This increase was due to higher legal and professional
expenses incurred by the Company in order to fulfill its expanded duties and
obligations as a public company and higher insurance costs due to larger
payrolls and expanded property and equipment coverage.
INTEREST EXPENSE. Interest expense decreased to $230,000 in 1998
from $278,000 in 1997, and decreased as a percentage of net sales to 2.5% of net
sales in 1998 from 3.0% in 1997. This decrease in interest expense is due to the
payoff of the Company's short-term working capital loan due to Norwest Bank
Texas, South Central prior to establishing a new banking relationship.
PROVISION (BENEFIT) FOR INCOME TAXES. As a result of the Company's
loss before income taxes in 1998, the Company recognized a benefit for income
taxes of $485,000 in 1998 compared to a provision for income taxes of $147,000
in 1997 and recorded a net deferred tax asset of $360,000 in 1998 compared to a
net deferred tax liability of $11,000 in 1997. The Company expects to utilize
approximately $138,000 of the 1998 deferred tax asset as a carry-back against
income taxes previously paid, and believes it is more likely than not that the
Company will generate sufficient taxable income in the future to realize the
remainder of the deferred tax asset, primarily because of the additional $6
million of revenues expected in 1998 from the Bath & Body Works letter of
commitment.
-13-
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased significantly to $9,185,000 in 1997
from $7,336,000 in 1996, an increase of 25.2%. Such an increase was attributed
primarily to the new marketing strategy begun in 1996 toward higher margin
products and the Company's introduction of its Soap Making Kits.
Substantial sales increases were recognized during 1997 as new accounts and
product lines were added.
GROSS PROFIT. Gross profit increased in 1997 to $2,362,000 from
$1,851,000 for 1996. This was a 27.6% increase in 1997 over 1996. Gross profit
margin also increased slightly from 25.2% in 1996 to 25.7% in 1997. The Company
attributed the increase in gross profit and gross profit margin to its
continuing strategy of changing its product mix toward higher margin products.
OPERATING EXPENSES. Operating expenses increased in 1997 by 13.4%,
but decreased as a percentage of net sales; $1,715,000 or 18.7% of net sales in
1997, as compared to $1,512,000 in 1996 or 20.6% of net sales in 1996. Operating
expenses decreased as a percentage of net sales primarily due to aggressive
Company cost controls. Sales and marketing expenses decreased slightly to
$490,000 in 1997 from $507,000 in 1996. The decrease was due to a more focused
and cost effective sales plan and the continuation of marketing plans begun in
1996 to achieve higher sales and profit margins at a lower cost per sales
dollar. Operating expenses increased overall because of higher professional fees
paid and an increase in compensation paid to officers and other employees.
General and administrative expenses increased to $1,225,000 in 1997
from $1,005,000 in 1996, but decreased slightly as a percentage of net sales to
13.3% in 1997 from 13.7% in 1996. This slight decrease was primarily due to the
increase in sales volume out pacing the increase in general and administrative
expenses.
INTEREST EXPENSES. Interest expense increased to $278,000 or 3.0 %
of net sales in 1997 from $226,000 or 3.1% of net sales in 1996. The increase in
interest expense was due primarily to the fact that substantial amounts remained
outstanding under the Company's revolving loans with Norwest Bank Texas, South
Central for most of 1997 to fund working capital. See Notes to Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity, other than proceeds of
the Company's 1997 initial public offering ("IPO"), are cash flow from
operations, bank borrowings, and lease financing.
In April 1998, the Company entered into a loan agreement ("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.
As of December 31, 1998, the entire Term Loan had 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
-14-
<PAGE>
to include the lesser of 80% of eligible accounts receivable or $2,000,000. As
of March 1, 1999, the Company had no remaining excess borrowing capacity under
the Revolving Note and had fully drawn down the Additional Term Loan. See "Item
1. Description of Business - Bath & Body Works Purchase Order."
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
9.0625% as of March 1, 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 March 1, 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. The Company is required to twice prepay the
Revolving Note and maintain a zero balance for 30 consecutive days during each
year the Revolving Note is outstanding, once before April 8, 1999 and once after
April 9, 1999 but prior to maturity. The Lender waived the Company's requirement
to prepay the Revolving Note and maintain a zero balance for 30 consecutive days
before April 8, 1999. 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 1.50 to 1.00; and (c) a debt service
coverage ratio of not less than 1.75 to 1.00. Prior to the January 25, 1999
amendment of the Loan Agreement, there was a requirement that the Company
maintain a fixed charge coverage ratio of not less than 1.20 to 1.00 rather than
the ratio required in (c) above. At December 31, 1998, the Company was not in
compliance with the debt to tangible net worth ratio or the prior fixed charge
coverage ratio, and the Company has received a waiver from the Lender through
December 31, 1998 for both of these events of non-compliance.
For both of these events of non-compliance, management believes that
based upon current financial projections the Company may not comply with certain
financial ratio covenants currently specified during the year ending December
31, 1999. Management is working with the Lender and anticipates resetting the
specified financial ratios defined in the Loan Agreement, as amended, in the
first quarter of fiscal 1999. Management has already received proposed covenant
changes from the Lender and is not aware of any events or circumstances that
would preclude the Company from successfully resetting the financial covenants
in fiscal 1999.
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
-15-
<PAGE>
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. The Company has 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. The Company currently anticipates
that it will make periodic payments on all such loans out of future cash flows
generated by the Company.
The Company leases certain pieces of its manufacturing equipment
pursuant to capital leases. Payments for 1998 aggregated $208,000 under short
term capital leases and $376,000 under long term capital leases. The leases
currently in effect have maturity dates ranging from 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 and KCCI entered into the KCCI Lease Line of Credit,
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 $1,562,000 by December 31, 1998. The Chief Executive
Officer of the Company has personally guaranteed the KCCI Lease Line of Credit.
Payments under the KCCI Lease Line of Credit are approximately $288,400 per year
or $24,000 per month.
The Company relied on 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 is in the process of
installing four 10,000 gallon storage containers to store the Company's 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 Lease
Line of Credit"). Annual and monthly payments under the Winthrop March 1999
Lease Line of Credit have not yet been fixed.
In addition, the Company has receive a commitment to enter into a
lease line of credit from Amembal Capital Corporation 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. As of
March 1, 1999, the Company had not negotiated or signed any final agreements
with Amembal
-16-
<PAGE>
Capital Corporation with respect to such lease line of credit. Under the current
commitment letter, the payments would be approximately $70,900 per year or
$5,900 per month.
The Company believes that its current cash balances, 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 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, growth strategy, future performance and results, and the Company's
ability to meet its working capital and capital expenditure needs and the
anticipated liquidity, the effect of the Company's 1998 and 1999 expansions, the
Bath & Body Works letter of commitment, utilization of the Company's deferred
tax asset, amendments to the financial ratio loan covenants, 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 successfully complete its expansion in a timely and cost effective
fashion, to efficiently manage and operate its facility as expanded, to manage
effectively its costs of operation, the Company's ability to successfully
increase its marketing and sales efforts in order to take advantage of its
increased production facilities, successfully and efficiently manufacturing and
delivering product under to Bath & Body Works, the continued receipt of large
orders from the Company's significant customers including Bath & Body Works, and
the ability of the Company and Lender to agree on amended financial covenants.
Any forward looking information regarding an increase of the Company's gross
profit margin 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 completing its proposed
expansion, or, if completed, that it will be successful in efficiently managing
its growth in order to maximize potential production.
-17-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are included on the pages
indicated:
INDEX TO FINANCIAL STATEMENTS PAGE
- ----------------------------- ----
Report of Independent Auditors............................................. F-1
Balance Sheets as of December 31, 1997 and 1998............................ F-2
Statements of Operations for the years
ended December 31, 1997 and 1998........................................... F-3
Statements of Shareholders' Equity for the
years ended December 31, 1997 and 1998..................................... F-4
Statements of Cash Flows for the years
ended December 31, 1997 and 1998........................................... F-5
Notes to Financial Statements.............................................. F-6
-18-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
N/A.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information regarding directors and executive officers of the
company is set forth under "Information concerning Directors, Nominees and
Executive Officers" and under "Section 16(a) Beneficial Ownership Reporting
Requirements" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be held April 13, 1998, and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under
"Executive Compensation" in the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders, to be held April 13, 1998, and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial
owners and management is set forth under "Beneficial Ownership of Common Stock"
in the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be held April 13, 1998, and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions
is set forth under "Information Concerning Directors, Nominees and Executive
Officers" in the Company's definitive Proxy Statement for 1998 Annual Meeting of
Shareholders to be held April 13, 1998, and is incorporated herein by reference.
-19-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Number Description
- ------ -----------
* 3.1 Articles of Incorporation, as amended to date
* 3.2 Amended and Restated By-laws
+ 4.2 Form of Warrant Agreement and Warrant Certificate
o*10.1 1997 Long-Term Incentive Plan
o*10.2 1997 Non-Employee Directors' Stock Option Plan
o*10.3 Employment Agreement, effective December 1997, between Surrey, Inc.
and John van der Hagen
o*10.4 Employment Agreement, effective December 1997, between Surrey, Inc.
and Martin van der Hagen
o*10.5 Form of Consulting Agreement between the Company and Stuart, Coleman
& Co., Inc.
**10.6 Loan Agreement, April 8, 1998, between Company and Chase Bank of
Texas, National Association ("Lender")
**10.7 Construction Loan Agreement, April 8, 1998, between Company and
Lender
**10.8 Security Agreement between Company and Lender securing all
obligations of the Company to Lender under the Loan Agreement.
**10.9 Promissory Note, in the face amount of $2,300,000.00, due to Lender
April 8, 2005
**10.10 Master Equipment Lease between the Company and Key Corporate
Capital, Inc.
10.11 Second Amended Loan Agreement, January 25, 1999, between Company and
Lender
10.12 Construction Loan Agreement, January 25, 1999, between Company and
Lender
10.13 Promissory Note, in the face amount of $400,000.00, due to Lender
February 8, 2004
10.14 Promissory Note, in the face amount of $2,000,000.00, due to Lender
April 8, 2000
27 Financial Data Schedule
- --------------------
* incorporated by reference to the Company's registration statement on
Form SB-2 dated September 16, 1997 (Reg. No. 333-35757).
+ incorporated by reference to the Company's Amendment No. 1 to the
registration statement on Form SB-2 dated November 12, 1997 (Reg. No.
333-35757).
** incorporated by reference to the Company's quarterly report on Form
10-QSB dated May 15, 1998
++ incorporated by reference to the Company's quarterly report on Form
10-QSB dated November 16, 1998
o Items that are management contracts or compensation plans or arrangement
required to be filed as an exhibit to the Form 10-KSB and incorporated
by reference to the Company's registration statement on Form SB-2 dated
September 16, 1997.
(b) REPORTS ON FORM 8-K
On November 25, 1998, the Company filed a Form 8-K disclosing that the
Company had received a major letter of commitment from Bath & Body
Works, a wholly owned subsidiary of The Limited, Inc., to purchase its
products. At that time, management estimated the commitment would result
in additional revenues of approximately $6,000,000. See "Item 1.
Description of Business--Bath & Body Works."
-20-
<PAGE>
SIGNATURES
In accordance with the requirements of Sections 13 or 15(d) of the
Securities Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SURREY, INC.
Date: March 18, 1999 By /s/ John B. van der Hagen
------------------------------------
John B. van der Hagen
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this 10-KSB has been signed
below by the following persons on behalf of the Issuer on March 18, 1999 in the
capacities indicated.
/s/ John B. van der Hagen Chairman of the Board of Directors and
- ------------------------------ Chief Executive Officer
John B. van der Hagen
/s/ Martin van der Hagen President and Director
- ------------------------------
Martin van der Hagen
/s/ Mary van der Hagen Secretary and Director
- ------------------------------
Mary van der Hagen
/s/ Bruce A. Masucci Director
- ------------------------------
Bruce A. Masucci
/s/ G. Thomas MacIntosh Director
- ------------------------------
G. Thomas MacIntosh
/s/ Mark J. van der Hagen Vice President - Finance and Treasurer
- ------------------------------
Mark J. van der Hagen
-21-
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Surrey, Inc.
We have audited the accompanying balance sheets of Surrey, Inc. as of December
31, 1997 and 1998, and the related statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surrey, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
February 9, 1999 except for
Notes 7 and 14, as to which
the date is March 15, 1999
F-1
<PAGE>
Surrey, Inc.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,066 $ 77
Accounts receivable, net of allowance for doubtful accounts
of $27 and $106 in 1997 and 1998, respectively 1,427 1,713
Inventories, net 1,252 2,232
Prepaid expenses and other current assets 39 315
Deferred income taxes 38 182
Income taxes receivable 42 156
-----------------------------
Total current assets 5,864 4,675
Property and equipment, net 1,510 3,710
Deferred income taxes -- 178
-----------------------------
Total assets $ 7,374 $ 8,563
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 630 $ 1,159
Accrued expenses 239 204
Notes payable 895 --
Current maturities of long-term debt 96 134
Current maturities of capital lease obligations 66 208
-----------------------------
Total current liabilities 1,926 1,705
Long-term debt, less current maturities 1,153 3,192
Capital lease obligations, less current maturities 85 376
Deferred income taxes 49 --
Commitments and contingencies
Shareholders' equity:
Common stock; no par value; 10,000,000 shares authorized;
2,472,727 shares issued and outstanding 4,120 4,099
Common stock warrants; 737,500 authorized; 675,000
issued and outstanding 65 64
Accumulated deficit (24) (873)
-----------------------------
Total shareholders' equity 4,161 3,290
-----------------------------
Total liabilities and shareholders' equity $ 7,374 $ 8,563
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
Surrey, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998
-----------------------------
<S> <C> <C>
Net sales $ 9,185 $ 9,247
Cost of sales 6,793 7,856
-----------------------------
Gross profit 2,392 1,391
Operating expenses:
Research and development 154 166
Sales and marketing 490 821
General and administrative 1,101 1,552
-----------------------------
Total operating expenses 1,745 2,539
-----------------------------
Income (loss) from operations 647 (1,148)
Other:
Interest expense (278) (230)
Other income 6 44
-----------------------------
Income (loss) before income taxes 375 (1,334)
Provision (benefit) for income taxes 147 (485)
-----------------------------
Net income (loss) $ 228 $ (849)
=============================
Basic and diluted earnings (loss) per share $ 0.12 $ (0.34)
=============================
Shares used in computing earnings (loss) per share:
Basic 1,921 2,473
=============================
Diluted 1,921 2,473
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
F-4
Surrey, Inc.
Statements of Shareholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK WARRANTS
---------------------------- -----------------------
RETAINED
EARNINGS TOTAL
SHARES WARRANTS (ACCUMULATED SHAREHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING AMOUNT DEFICIT) EQUITY
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,245,454 $ 393 -- $ -- $ 605 $ 998
Repurchase of common stock (1,122,727) (393) -- -- (857) (1,250)
Issuance of common stock and warrants
net of issuance costs of $1,300 1,350,000 4,120 675,000 65 -- 4,185
Net income -- -- -- -- 228 228
-----------------------------------------------------------------------------------
Balance at December 31, 1997 2,472,727 4,120 675,000 65 (24) 4,161
Payment of issuance costs -- (21) -- (1) -- (22)
Net loss -- -- -- -- (849) (849)
-----------------------------------------------------------------------------------
Balance at December 31, 1998 2,472,727 $ 4,099 675,000 $ 64 $ (873) $ 3,290
===================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Surrey, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 228 $ (849)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Gain on disposal of property and equipment -- (2)
Depreciation 236 279
Changes in operating assets and liabilities:
Accounts receivable (115) (286)
Inventories (80) (980)
Prepaid expenses and other current assets (8) (276)
Deferred income taxes 15 (371)
Trade accounts payable (30) 529
Accrued expenses 149 (35)
Income taxes receivable/payable (50) (114)
-----------------------------
Net cash provided by (used in) operating activities 345 (2,105)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment -- 10
Acquisition of property and equipment (181) (1,954)
-----------------------------
Net cash used in investing activities (181) (1,944)
FINANCING ACTIVITIES
Proceeds from issuance of notes payable 713 --
Payment of notes payable (1,797) (895)
Payment of notes payable to shareholders (182) --
Proceeds from issuance of long-term debt -- 3,300
Payment of long-term debt (77) (1,234)
Principal payments on capital lease obligations (99) (89)
Proceeds from issuance of Common Stock and Warrants, net 4,185 --
Payment of issuance costs -- (22)
-----------------------------
Net cash provided by financing activities 2,743 1,060
Net change in cash 2,907 (2,989)
Cash and cash equivalents, beginning of period 159 3,066
-----------------------------
Cash and cash equivalents, end of period $ 3,066 $ 77
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 278 $ 248
Income taxes $ 185 $ --
Acquisition of property and equipment via issuance of capital
leases $ 67 $ 522
Acquisition of property and equipment via issuance of long-term
debt $ -- $ 11
Repurchase of common stock via issuance of a note payable $ 1,250 $ --
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Surrey, Inc.
Notes to Financial Statements
December 31, 1998
1. THE COMPANY
Surrey, Inc. (the "Company") specializes in the development and manufacture of
high quality transparent glycerin and specialty soap products, as well as the
production of certain personal care and home fragrance products for major drug,
grocery and discount retailers and distributes its products on a nationwide
basis. The Company also manufactures and sells home fragrance products and a
full line of potpourri products as part of its crafts market product line. The
Company recently began manufacturing a line of high-end scented candles that
compliments its line of home fragrance products. In addition, the Company
recently began manufacturing a small amount of traditional bar soap. The Company
conducts its business within one industry segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECOGNITION OF REVENUE
Revenue is recognized at the date of shipment. Provision is made for estimated
product returns.
CASH AND CASH EQUIVALENTS
The Company considers all investments with maturities of ninety days or less
when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes expenditures for major
renewals and improvements and interest costs associated with significant capital
additions. For the year ended December 31, 1998, the Company capitalized
interest of approximately $23,000 and none in 1997. Equipment includes amounts
recorded under capital leases. Depreciation is recorded using the straight-line
method over estimated useful lives ranging from three to forty years.
F-6
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Assets recorded under capital leases are amortized using the straight-line
method over the lesser of the estimated useful lives of the assets or the term
of the related leases, and such amortization is included in depreciation
expense. Repairs and maintenance are charged to expense when incurred.
LONG-LIVED ASSETS
Impairment losses are recognized when indicators of impairment are present and
the estimated future undiscounted cash flows are not sufficient to recover the
assets' carrying value or estimated fair value, less costs to sell. At December
31, 1998 there were no events or circumstances which indicated that long-lived
assets of the Company might be impaired.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $59,000 and $106,000 for the years ended December 31, 1997 and
1998, respectively.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, EARNINGS PER SHARE. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented in accordance with, and where appropriate, restated to conform to the
Statement No. 128 requirements.
F-7
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options. As allowed by
Statement No. 123, the Company has elected to account for its employee
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25).
COMPREHENSIVE INCOME
In 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE INCOME which
establishes standards for reporting comprehensive income and its components in a
full set of financial statements. The adoption of SFAS No. 130 did not have a
significant effect on the current financial statement presentation income as the
Company has no items of comprehensive income.
SEGMENTS
In 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which establishes reporting standards for a
company's operating segments in annual financial statements and the reporting of
selected information about operating segments in financial statements. The
adoption of Statement No. 131 had no effect on the disclosure of segment
information as the Company continues to consider its business activities as a
single segment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, trade accounts payable and accrued expenses are
stated at cost which approximates fair value due to the short-term maturity of
these instruments. All significant debt instruments carry variable interest
rates and their carrying value is considered to approximate fair value.
F-8
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain prior year financial statement balances have been reclassified to
conform with the 1998 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement
of Position (SOP) 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES. The SOP
requires the costs of start-up activities and organization costs to be expensed
as incurred. The SOP is effective for fiscal years beginning after December 15,
1998. The Company's existing accounting policies are consistent with those of
the SOP, and as such, the Company does not expect the SOP to have a significant
impact on future operating results.
3. INVENTORIES
The Company's inventories consist of the following (in thousands):
DECEMBER 31
1997 1998
-------------------------------
Raw materials $ 863 $1,307
Work in progress 159 447
Finished goods 230 478
-------------------------------
$1,252 $2,232
===============================
F-9
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31
1997 1998
------------------------------
Equipment $ 1,892 $ 2,659
Building 899 2,325
Automobiles 94 93
Furniture and fixtures 34 96
Construction in process 23 --
------------------------------
2,942 5,173
Accumulated depreciation and amortization (1,499) (1,744)
------------------------------
1,443 3,429
Land 67 281
------------------------------
Property and equipment, net $ 1,510 $ 3,710
==============================
The Company is expanding its production facility. The construction project is
expected to be completed in the second quarter of 1999. Estimated cost to
complete the construction is approximately $500,000 as of December 31, 1998.
F-10
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
5. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------------------------------
<S> <C> <C>
Borrowings under a $800,000 revolving line of credit, bearing
interest at the bank's prime rate plus 1.5% (10% at December
31, 1997), with interest due monthly and all principal due in
April 1998. The line is collateralized by accounts receivable,
inventory and property and equipment, and is guaranteed by a
shareholder of the Company. $ 700 $ --
Notepayable to a bank, bearing interest at the bank's prime rate
plus 2% (10.5% at December 31, 1997), due in monthly
installments of $5,664 in principal and interest through May
1998, at which time all outstanding principal and interest are
due. The note is collateralized by accounts receivable,
inventory and property and equipment, and is guaranteed by a
shareholder of the Company. 195 --
--------------------------------
$ 895 $ --
================================
</TABLE>
6. NOTES PAYABLE TO SHAREHOLDERS
In March 1996, the Company issued notes payable totaling $200,000, bearing
interest at 12% per annum, to shareholders of the Company. During 1997, the
Company made interest payments of approximately $20,000 on such notes. The
outstanding balance of $182,000 was paid in December 1997.
F-11
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------------------------------
<S> <C> <C>
Notepayable to a bank, bearing interest at the bank's prime rate
plus 1.75% (10.25% at December 31, 1997), due in monthly
installments of approximately $16,000 in principal and
interest through November 2006, at which time all
outstanding principal and interest is due. The note is
collateralized by accounts receivable, inventory and property
and equipment. The note is guaranteed by a shareholder of the
Company and by the United States Small Business
Administration. This note was refinanced during 1998. $1,215 $ --
Borrowings under a $1,000,000 revolving line of credit (the
"Line"), bearing interest at the bank's prime rate (7.75% at
December 31, 1998), with interest due monthly and all
principal due in April 2000. The Line is collateralized by
accounts receivable, inventory and property and equipment.
Amounts available under the Line are subject to certain
borrowing base limitations. The Line was fully drawn as of
December 31, 1998. -- 1,000
</TABLE>
F-12
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------------------------------
<S> <C> <C>
Notes payable to a bank under a $2,300,000 construction
advance (the "Notes") converting to a single term note in
January 1999, approximately $1,939,000 bearing interest at
the London Interbank Offered Rate (LIBOR) plus 1.75%
(8.94% at December 31, 1998) and approximately $361,000
bearing interest at the bank's prime rate (7.75% at December
31, 1998), principal payments of approximately $10,000 due
monthly from January 2000 through April 2000, then
increasing to approximately $13,000 due monthly through
April 2005, the maturity date of the Notes. The Notes are
collateralized by accounts receivable, inventory and property
and equipment. -- 2,300
Notes payable to various banks for automobiles, bearing interest
at rates ranging from 7.75% to 8.75%, due in monthly
installments of principal and interest of approximately $1,000,
maturing at various dates through January 2003. The notes are
collateralized by the automobiles financed by the notes. 34 26
--------------------------------
1,249 3,326
Less current maturities (96) (134)
--------------------------------
Long-term debt, less current maturities $1,153 $3,192
================================
</TABLE>
The Line and the Notes contain restrictive covenants which require the Company
to maintain certain financial ratios. At December 31, 1998, the Company was in
violation of the debt to tangible net worth ratio and the fixed charge coverage
ratio. The Company has obtained a waiver from the lender for these violations.
F-13
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
7. LONG-TERM DEBT (CONTINUED)
Management believes that based upon current financial projections the Company
may not comply with certain financial ratio covenants currently specified during
the year ending December 31, 1999. Management is working with the pertinent
lender and anticipates resetting the specified financial ratios defined in the
agreement in the first quarter of fiscal 1999 whereby no violation will occur or
exist. Management has already received proposed covenant changes from its lender
and is not aware of any events or circumstances that would preclude the Company
from successfully resetting the financial covenants in fiscal 1999.
Maturities of long-term debt are as follows for the periods ending December 31
(in thousands):
1999 $ 134
2000 1,117
2001 143
2002 156
2003 153
Thereafter 1,623
----------
Total $3,326
==========
F-14
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
8. LEASES
The Company leases certain equipment under capital and operating leases.
Commitments for minimum rentals under non-cancelable leases as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
----------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 254 $ 166
2000 204 166
2001 172 166
2002 5 166
2003 -- 166
Thereafter -- 291
-----------------------------------
Total minimum lease payments 635 1,121
=============
Less amount representing interest (51)
--------------
Present value of minimum lease payments 584
Less current maturities (208)
--------------
$ 376
==============
</TABLE>
Rent expense was approximately $11,000 and $43,000 in 1997 and 1998,
respectively.
Property and equipment include the following amounts for capitalized leases at
December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------------------------------
<S> <C> <C>
Equipment $ 277 $ 748
Less accumulated amortization $ (111) (117)
-------------------------------
$ 166 $ 631
===============================
</TABLE>
F-15
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
DECEMBER 31
1997 1998
-----------------------------
Deferred tax liabilities:
Tax over book depreciation $(49) $(59)
-----------------------------
Total deferred tax liabilities (49) (59)
Deferred tax assets:
Net operating losses -- 237
Allowance for doubtful accounts 11 39
Reserves for inventory and other 27 143
-----------------------------
Total deferred tax assets 38 419
-----------------------------
Net deferred tax assets (liabilities) $(11) $360
=============================
The Company has net tax operating losses of approximately $640,000 which will
expire in 2018, if not utilized.
F-16
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
9. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows (in thousands):
YEAR ENDED DECEMBER 31
1997 1998
--------- ----------
Current:
Federal $119 $(105)
State 11 (9)
--------- ----------
Total current 130 (114)
Deferred:
Federal 15 (341)
State 2 (30)
--------- ----------
Total deferred 17 (371)
--------- ----------
$147 $(485)
========= ==========
The reconciliation of income tax at the U.S. federal statutory tax rate to
income tax expense is:
YEAR ENDED DECEMBER 31
1997 1998
--------- ----------
Tax at federal statutory rate 34% (34)%
State taxes (net of federal benefit) 3 (3)
Permanent items and other 2 1
--------- ----------
39% (36)%
========= ==========
F-17
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998
-----------------------------
<S> <C> <C>
Numerator:
Net income (loss) $ 228 $ (849)
-----------------------------
Numerator for basic and diluted earnings (loss) per share -
income (loss) available to common shareholders $ 228 $ (849)
=============================
Denominator:
Denominator for basic earnings (loss) per share - weighted-
average shares 1,921 2,473
Effect of dilutive securities:
Employee stock options -- --
Non-employee directors' stock options -- --
-----------------------------
Dilutive potential common shares -- --
-----------------------------
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares and assumed conversions 1,921 2,473
=============================
Basic and diluted earnings (loss) per share $ 0.12 $ (0.34)
=============================
</TABLE>
Options to purchase 305,500 shares of common stock at exercise prices ranging
from $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 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; therefore, the
effect would be antidilutive.
F-18
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
11. SHAREHOLDERS' EQUITY
STOCK REPURCHASE
On August 15, 1997, the Company entered into a Stock Purchase Agreement to
purchase 50% of the then outstanding capital stock of the Company (1,122,727
shares) for $1,250,000 from a shareholder. The purchase price was payable in the
form of a non-interest bearing promissory note. The promissory note was paid in
December 1997. The shares repurchased by the Company were canceled.
STOCK SPLIT
Effective September 3, 1997, the Shareholders and the Board of Directors
approved a 11.22727-for-1 stock split of the then outstanding common stock. All
share amounts presented in these financial statements have been restated to
retroactively reflect the stock split.
INITIAL PUBLIC OFFERING
On December 3, 1997, the Company completed its initial public offering of
625,000 Units. Net proceeds to the Company from the offering and a 50,000 Unit
over-allotment option exercised December 19, 1997 aggregated approximately
$4,185,000.
WARRANTS
As of December 31, 1998, the Company had outstanding 675,000 warrants to
purchase common stock. Each warrant entitles the holder thereof to purchase one
share of common stock at $4.80 per share. The warrants expire on December 9,
2002. The warrants have a call provision whereby the Company may call the
warrants at a price of $0.01 per warrant at any time that the market value of
the common stock exceeds $5.00 per share for a period of twenty consecutive
trading days. The warrants trade on the Nasdaq SmallCap Market.
Also outstanding as of December 31, 1998, were warrants with which the
Underwriter of the Company's initial public offering could purchase from the
Company an aggregate of 62,500 Units at $9.75 per Unit. The warrants expire on
December 2, 2002.
F-19
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
In September 1997, the Board of Directors adopted the Surrey, Inc. 1997
Long-Term Incentive Plan to provide for the grant of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance awards
or any combination thereof to employees, under which 350,000 shares of common
stock are reserved for issuance. The exercise price of each option shall equal
the fair market value of the Company's common stock on the date of grant (110%
of the fair market value in the case of options granted to a person possessing
10% or more of the combined voting power of the Company as of the date of
grant). The stock options generally vest over a four to five year period. The
term of each option shall not exceed 10 years from the date of grant (five years
in the case of options granted to a person possessing 10% or more of the
combined voting power of the Company as of the date of grant).
Stock appreciation rights may be granted by themselves or in tandem with a stock
option. Stock appreciation rights granted in tandem with an option shall become
nonexercisable upon the exercise of the option and an option granted in tandem
with stock appreciation rights shall become nonexercisable upon the exercise of
the rights. The term of stock appreciation rights shall not exceed 10 years from
the date of grant. No grants of stock appreciation rights had been made as of
December 31, 1998.
Restricted stock shall be subject to a restricted period as determined by the
Board of Directors. The Board of Directors may provide for the lapse of
restrictions in installments, upon the occurrence of certain events, or upon
other terms and conditions as the Board of Directors deems appropriate. No
grants of restricted stock had been made as of December 31, 1998.
Performance awards shall be awarded to individuals specified by the Board of
Directors based upon the achievement of long-term performance goals. The Board
of Directors shall define performance objectives with a performance period of
not less than five years, and establish a fixed or variable value for each
performance award (which may be expressed in terms of specified dollar amounts
or a specified number of shares) at the date of the award. Payments related to
performance awards may be made in lump sum or in installments, and shall be
subject to such vesting, deferral or other terms and conditions as the Board of
Directors may determine. No grants of performance awards had been made as of
December 31, 1998.
F-20
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
In September 1997, the Board of Directors adopted the Surrey, Inc. 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan") under which
100,000 shares of common stock are reserved for issuance. This Directors' Plan
allows for two types of stock option grants; an initial grant of 6,000 options
effective on the Company's public offering, with options vesting one third upon
the first anniversary of the grant date, and one third on each of the next two
anniversaries of the grant date; and an annual grant of 2,000 shares upon
reelection to the Board for a fourth or subsequent term, with options vesting
immediately. The exercise price of each option shall equal the fair market value
of the Company's common stock on the date of grant. All options expire ten years
from the date of grant. The Company began issuing options in 1997.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE RANGE OF
EXERCISE EXERCISE
SHARES PRICES PRICES
---------------------------------------------
<S> <C> <C> <C>
Options outstanding December 31, 1996 -- $ -- $ --
Granted 305,500 4.07 4.00 - 4.40
Exercised -- -- --
Canceled -- -- --
---------------------------------------------
Options outstanding December 31, 1997 305,500 4.07 4.00 - 4.40
Granted 30,000 4.00 --
Exercised -- -- --
Canceled (30,000) 4.00 --
---------------------------------------------
Options outstanding December 31, 1998 305,500 $ 4.07 $4.00 - 4.40
=============================================
</TABLE>
F-21
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The following is additional information relating to options outstanding at
December 31, 1998:
Exercisable 64,000
Weighted-average exercise prices of options exercisable $4.08
Weighted-average remaining contractual life of options
outstanding at December 31, 1998 8.12 years
The Company has elected to account for its employee stock options under APB 25.
As a result, pro forma information regarding net income and income per share is
required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which
requires that the information be determined as if the Company had accounted for
its employee stock options under the fair value method prescribed by SFAS No.
123. The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
1997 1998
-----------------------------
Risk-free interest rate 6% 6%
Dividend yield 0% 0%
Expected life 5 years 5 years
Volatility factor 0.215 0.260
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-22
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
11. SHAREHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
DECEMBER 31
1997 1998
-----------------------
Pro forma net income (loss) (in thousands) $ 219 $ (971)
Pro forma basic and diluted earnings (loss) per share $0.11 $(0.39)
The exercise price of some options differed from the market price of the stock
on the grant date. The following is a summary of the weighted-average fair
values and exercise prices for such options:
DECEMBER 31
1997 1998
------------------------------------------
FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE
------------------------------------------
Stock price equal to exercise price $2.45 $4.00 $ -- $ --
Stock price less than exercise price $2.37 $4.40 $ 0.77 $4.00
SHARES RESERVED
Common stock reserved at December 31, 1998 consists of the following:
For exercise of stock options 450,000
For exercise of common stock warrants 675,000
For exercise of Unit warrants 187,500
-------------
1,312,500
=============
F-23
<PAGE>
Surrey, Inc.
Notes to Financial Statements (continued)
12. CONCENTRATIONS OF CREDIT RISK AND SALES TO MAJOR CUSTOMERS
The Company is engaged in the manufacturing and distribution of personal and
home care products within the United States. Consequently, the Company's ability
to collect the amounts due from customers may be affected by economic
fluctuations within the United States and the major drug, grocery and discount
retailer industry. Credit losses relating to such economic fluctuations have
been within management's expectations.
For the years ended December 31, 1997 and 1998, sales to one customer amounted
to approximately $3,158,000 and $2,443,000, respectively, representing 34% and
26% of net sales, respectively.
13. 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.
14. SUBSEQUENT EVENTS
In January 1999, the Company amended its existing line of credit and
construction advance loan agreements to increase borrowing capacity under such
agreements by $1,000,000 and $400,000, respectively. Additional credit available
under the line of credit will be used for working capital purposes.
Additional credit available under the construction advance loan will be used for
plant expansion.
In addition, between January 1, 1999 and March 15, 1999, the Company entered
into capital leases for equipment in the amount of $777,000 and entered into
operating leases for additional equipment valued at $981,000.
F-24
EXHIBIT 10.11
SECOND AMENDMENT OF LOAN AGREEMENT
THIS SECOND AMENDMENT OF LOAN AGREEMENT ("Agreement") is made and
entered into as of January 25, 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. 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, to provide for an additional
$400,000.00 advance/term loan 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 definitions are hereby added to Paragraph 1 of
the Original Agreement:
"Debt Service Coverage Ratio shall mean as of any day that the
Debt Service Coverage Ratio is being calculated, the ratio of EBITDA
less cash taxes to the sum of (a) scheduled principal payments of
Funded Indebtedness, (b) interest expense, and (c) dividends paid. All
components of the Debt Service Coverage Ratio shall be computed for the
Rolling Four Quarters as of such day and determined on a consolidated
basis in accordance with GAAP, consistently applied.
"Phase I Construction Loan Agreement shall mean the
Construction Loan Agreement dated April 8, 1998 between Borrower and
Lender, which governs advances under the $2,300,000.00 Advance/Term
Note.
Phase II Construction Loan Agreement shall mean the
Construction Loan Agreement dated January 25, 1999 between Borrower and
Lender, which governs advances under the $400,000.00 Advance/Term
Note."
<PAGE>
(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:
"Advance/Term Note shall mean, collectively, the promissory
notes of Borrower described in Paragraph 3 hereof, and any and all
renewals, extensions, modifications, rearrangements and replacements
thereof and any and all substitutions therefor.
Construction Loan Agreement shall mean, collectively, the
Phase I Construction Loan Agreement and the Phase II Construction Loan
Agreement, as the same may be amended, supplemented or restated.
Deed of Trust shall mean, collectively, (a) the Deed of Trust,
Absolute Assignment of Rents, Security Agreement and Financing
Statement dated on or about April 8, 1998 executed by Borrower, in
favor of David L. Mendez, Trustee for the benefit of Lender, and (b)
the Deed of Trust, Absolute Assignment of Rents, Security Agreement and
Financing Statement dated on or about January 25, 1999 executed by
Borrower, in favor of David L. Mendez, Trustee for the benefit of
Lender, as the same may be amended, restated or supplemented from time
to time.
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 services 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
2
<PAGE>
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 or Bath & Body Works and any of
its Affiliates) exceeds ten percent (10%) 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 to 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 twenty-five percent (25%) 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
twenty-five percent (25%) 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.
Interest Payment Dates shall mean (a) for Base Rate
Borrowings, the eighth (8th) day of each calendar month and, if any
Base Rate Borrowing is converted to a LIBOR Rate Borrowing, the first
day of the Interest Period applicable to such borrowing, and (b) for
LIBOR Rate Borrowings, the eighth (8th) day of each calendar month, and
at the end of each Interest Period in the event that any LIBOR Rate
Borrowings are not rolled over to a successive Interest Period as a
LIBOR Rate Borrowing.
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 one time
outstanding up to (but not exceeding) $2,000,000.00."
(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 January 25, 1999 executed by Borrower, payable to the order of
Lender in the original principal amount of $2,000,000.00.
(4) The first (1st) sentence of Paragraph 2(b) of the Original
Agreement is hereby amended and restated in its entirety to hereafter be and
read as follows:
"Subject to the terms and conditions of this Agreement, and on
the condition that the aggregate Letter of Credit Liabilities shall
never exceed $750,000.00 at any one time outstanding, Borrower shall
have the right to, in addition to the Revolving Loans, utilize the
Revolving Commitment from time to time prior to the Maturity Date by
obtaining the issuance of letters of credit for the account of Borrower
and on behalf of Borrower (such
3
<PAGE>
letters of credit, as any of them may be amended, supplemented,
extended or confirmed from time to time, being herein collectively
called the "Letters of Credit").
(5) Paragraph 3 of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"3. Advance/Term Loans. Prior to the effective date of the
Second Amendment of Loan Agreement which amends this Agreement, Lender
has made advances under the Advance/Term Note dated April 8, 1998 in
the face principal amount of $2,300,000.00, executed by the Borrower,
payable to the order of the Lender (the "$2,300,000.00 Advance/Term
Note"). No amounts remain to be advanced under the $2,300,000.00
Advance/Term Note. The Lender agrees, subject to all of the terms and
conditions of this Agreement (including Paragraph 8 hereof), to make
additional Advance/Term Loans to Borrower at any time prior to July 25,
1999, in an aggregate principal amount of no more than $400,000.00 for
the purposes, upon the terms and conditions and subject to the
limitations set forth in the Phase II Construction Loan Agreement. The
additional $400,000.00 Advance/Term Loan shall be evidenced by the
promissory note dated January 25, 1999 in the face principal amount of
$400,000.00, executed by the Borrower, payable to the order of the
Lender (the "$400,000.00 Advance/Term Note"). The $2,300,000.00
Advance/Term Note and the $400,000.00 Advance/Term Note are herein
collectively called the "Advance/Term Note". Both parties hereto agree
that, except to the extent overridden by the applicable Construction
Loan Agreement, the terms and conditions of this Agreement shall govern
the Advance/Term Loans until payment in full of the amounts outstanding
thereunder."
(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 1.75 to
1.00, to be tested for compliance as of the end of each calendar
quarter on a Rolling Four Quarters basis."
(7) Paragraph 11(a)(4) of the Original Agreement is hereby amended and
restated in its entirety to hereafter be and read as follows:
"(4) currently contemplated non-revolving Indebtedness of
Borrower to Key Corporate Capital, Inc., or its affiliates or assignees
or other equipment lessors, under equipment leases, in the aggregate
amount of no more than $2,000,000.00, and all renewals and extensions
(but not increases) thereof;"
(8) There is hereby added a new Paragraph 11(j) of the Original
Agreement which shall read as follows:
"(j) Borrower will not make or incur Capital Expenditures
exceeding $2,000,000.00, in the aggregate, in any 12-calendar month
period."
4
<PAGE>
(9) Exhibits A and C 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.
(10) 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.
(11) 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 Loan,
as increased hereby, and under the Advance/Term Loan, as increased hereby.
(12) 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.
(13) 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.
(14) 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.
5
<PAGE>
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.
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 Finance/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 A to Original Agreement (Request for Credit Form)
Exhibit B - Amended Exhibit C to Original Agreement (Compliance Certificate)
EXHIBIT 10.12
CONSTRUCTION LOAN AGREEMENT
January 25, 1999
Surrey, Inc.
13110 Trails End Road
Leander, Texas 78641
Attn: Mark van der Hagen
Re: Chase Bank of Texas, National Association $400,000.00 Advance/Term
Loan to Surrey, Inc.
Dear Mr. van der Hagen:
RECITALS
Reference is hereby made to that certain promissory note of even date
herewith (the "Advance/Term Note") executed by Surrey, Inc. (the "Borrower"),
payable to the order of Chase Bank of Texas, National Association (the
"Lender"), a national banking association, in the original principal sum of
$400,000.00. The Advance Term Note has been issued pursuant to the terms of the
Loan Agreement (as amended, the "Loan Agreement") between Borrower and Lender
dated on or about April 8, 1998 and is the $400,000.00 Advance/Term Note
described in the Loan Agreement. This Agreement is the Phase II Construction
Loan Agreement referenced in the Loan Agreement. The Advance/Term Note shall be
governed by the terms of the Loan Agreement, although the provisions of this
Agreement shall control with respect to advances under the Advance/Term Note.
Capitalized terms used herein which are not otherwise defined shall have the
same meaning here as in the Loan Agreement.
The Advance/Term Note shall be secured, among other security, by the
security provided for in the Loan Agreement, including without limitation the
Deed of Trust and the Security Agreement. The Deed of Trust covers and affects,
among other property, certain real property (the "Property") in Travis County,
Texas, more particularly described in Exhibit A attached hereto, together with
all improvements now or hereafter located on the Property.
The proceeds to be advanced under and evidenced by the Advance/Term
Note shall be used solely to (a) reimburse the Borrower for up to $80,449.94 of
the costs incurred by the Borrower in the construction of the "candle room"
located on the Property, (b) to pay up to eighty percent (80%) of the costs and
expenses of construction of the approximately 14,000 square feet of additional
office/warehouse space, renovation of existing office/warehouse space and other
related
<PAGE>
Surrey, Inc.
Page 2
improvements to the new and existing space (collectively the "Improvements") to
be constructed to the Borrower's existing manufacturing facilities located on
the Property and (c) to pay up to eighty percent (80%) of the Lender-approved
closing costs incurred by the Borrower in connection with these transactions.
All of such proceeds shall be applied in accordance with a schedule to be
approved in writing by the Borrower and the Lender (the "Approved Budget"). Such
schedule shall contain a sufficiently detailed listing of the reimbursement
costs to the Borrower for the candle room and all such construction expenses and
costs for each item of work or material required to construct the Improvements
in accordance with the approved plans and specifications therefor, together with
all other professional fees and expenses for governmental permits.
The Improvements shall be constructed by Bruce Van Waes d/b/a Van & Van
Austin, as contractor (the "Contractor"), and are contemplated in the
construction contract (the "Construction Contract") executed or to be executed
by and between the Contractor and the Borrower. The Improvements shall be
constructed in accordance with the plans and specifications (the "Plans and
Specifications") for such Improvements prepared by the Contractor, a copy of
which has been or will be furnished to and approved by the Lender. The Lender
may, at its option, retain a person or entity acceptable to the Lender (the
"Inspector"), at the Borrower' expense, for the purpose of approving the
Construction Contract and the Plans and Specifications; verifying the Approved
Budget; performing inspections as construction progresses to verify that the
Improvements are being constructed to completion in a manner satisfactory to the
Lender and in accordance with the approved Plans and Specifications; certifying
that the amount of each advance included in a Construction Request for Advance
(as defined below) does not exceed the value of the work completed less prior
advances and required retainage; certifying that the undisbursed Advance/Term
Note proceeds (together with other designated and escrowed sources of funds) are
sufficient to complete all of the Improvements; and performing such other
consulting tasks as the Lender shall direct from time to time.
This Agreement evidences certain agreements among the parties regarding
the loans to be evidenced by the Advance/Term Note, including without
limitation, advances of funds to be made by the Lender against the Advance/Term
Note.
ADVANCE PROCEDURE UNDER ADVANCE/TERM NOTE
Subject to the provisions of this Agreement, from time to time before
the date six (6) months from the date hereof, the Lender will advance funds
under the Advance/Term Note directly to the Borrower. The funds to be so
advanced will aggregate up to $400,000.00, shall be used solely to (a) reimburse
the Borrower for up to $80,449.94 of the costs incurred by the Borrower in the
construction of the "candle room" located on the Property, (b) pay up to eighty
percent (80%) of the costs to construct the Improvements, and (c) pay up to
eighty percent (80%) of the Lender-approved closing costs incurred by the
Borrower in connection with these transactions and shall constitute loan
proceeds evidenced by the Advance/Term Note, with interest on the Advance/Term
Note being
<PAGE>
Surrey, Inc.
Page 3
computed with respect to each advance from the date of the advance.
Notwithstanding any contrary provision contained in this Agreement or in any
other Credit Documents, in no event whatsoever will the amount of funds to be
advanced under the Advance/Term Note for the construction of the Improvements
and the payment of the Borrower's closing costs be allowed to exceed (as
determined by the Lender) the lesser of (a) eighty percent (80%) of the cost to
construct the Improvements plus eighty percent (80%) of the Lender-approved
closing costs, or (b) $319,550.06.
The aggregate amount to be advanced under the Advance/Term Note for
construction of the Improvements constitutes only a portion of the total
projected costs to construct the Improvements thereon. As of today's date, an
additional sum of $76,012.61 , in addition to amounts available under the
Advance/Term Note, will be required to be paid directly by the Borrower. Such
additional amounts must be funded and paid out-of-pocket directly by the
Borrower prior to Lender having any obligation to advance any proceeds of the
Advance/Term Note for the construction of the Improvements. As a condition to
receiving any advances of funds under the Advance/Term Note, the Borrower will
be required to furnish the Lender with paid invoices and other satisfactory
evidence to confirm that such equity funds have been paid by the Borrower and to
confirm which Approved Budget items have been paid by the Borrower with such
equity funds.
Each request for an advance under the Advance/Term Note ("Construction
Request for Advance") to pay for construction of the Improvements, shall be
submitted to the Lender in writing substantially in the form of the Construction
Request for Advance attached to this Agreement as Exhibit B and hereby made a
part hereof. Each Construction Request for Advance shall be accompanied by
vouchers and invoices satisfactory to the Lender for all labor and materials for
which payment is requested and by such other supporting evidence as the Lender
may require. The Lender reserves the right to delay the time of advancing any
funds requested under a Construction Request for Advance if it determines that
such delay is necessary or prudent to protect its rights, interests or security.
In those instances where a Construction Request for Advance covers amounts to be
paid to Contractor, it shall also be accompanied by an Application and
Certificate for Payment in the form of Exhibit C attached to this Agreement and
hereby made a part hereof, reflecting that, as to all such Applications and
Certificates for Payment other than for final payment of retainage after
completion of the Improvements, retainage of at least 10% of the amount of the
"total completed and stored to date" has been deducted in calculating the
"current payment due", duly sworn to and executed by the Contractor and duly
executed and certified by the Inspector (if required by the Lender) and the
Borrower. In addition, Lender absolutely reserves the right to retain such
additional funds as Lender is required to retain by law or which Lender
determines in its sole discretion are necessary to satisfy itself that there
will be no unpaid claims for labor or materials. Lender reserves the right to
retain such funds for such length of time as Lender may deem necessary to
satisfy itself that there will be no unpaid claims for labor or materials. (It
is understood that Lender shall have no duty to Borrower or to anyone else to
delay the time of advancing any funds or to retain any funds for any period, and
that Lender shall have no duty or obligation to Contractor to pay Contractor,
make any other payments or advances to Borrower, Contractor or anyone else or
<PAGE>
Surrey, Inc.
Page 4
in any other way to pay or protect Contractor, and all such acts by Lender shall
be solely for its own benefit and satisfaction.)
Within five (5) business days after receipt of a proper Construction
Request for Advance and approval thereof by the Inspector (if required by the
Lender) and the Lender, the Lender agrees with the Borrower that the Lender will
advance the amount requested (net of retainage), provided that all terms of this
Agreement are complied with and all conditions to that advance have been
satisfied. In any event, the Lender shall not be required to make more than one
(1) advance under the Advance/Term Note per calendar month.
CONDITIONS TO ADVANCES
The Lender shall have no obligation to make any advance under the
Advance/Term Note unless simultaneously with or before the advance:
1. The Lender has received and approved, in its discretion, all
written evidence required by the Lender confirming (a) the
absence of any hazardous materials on or under the Property
and (b) that the current status of the Property does not
violate any applicable laws relating to health or the
environment.
2. The Lender has received and approved of the Approved Budget
for construction of the Improvements.
3. For any advance other than the advance to reimburse the
Borrower for a portion of the costs associated with the
construction of the candle room, the Lender has received a
Construction Request for Advance for a advance under the
Advance/Term Note, in the form, signed and with supporting
materials, as required above.
4. For any advance to reimburse the Borrower for a portion of the
costs associated with the construction of the candle room, the
Lender has received and approved (a) an Affidavit of Bills
Paid (in form and substance satisfactory to the Lender) from
the general contractor for construction of the candle room and
any subcontractors from whom the Lender requests such an
affidavit in order to satisfy the Lender that the construction
of the candle room has been completed lien-free and that the
costs of all materials furnished and labor performed in
connection therewith have been paid in full, and (b) an
executed Certificate of Acceptance from the Borrower (in form
and substance satisfactory to the Lender) whereby the Borrower
accepts the candle room as substantially completed in
accordance with the plans and specifications therefor and
acknowledges that it has received no notice of any claim for
unpaid construction costs with respect to the candle room.
<PAGE>
Surrey, Inc.
Page 5
5. The Lender has received and approved: (i) a copy of the Plans
and Specifications, satisfactory in all respects to the Lender
and the Inspector (if required by the Lender), for complete
construction of the Improvements, initialed by the Borrower
and the Contractor to evidence their approval, (ii) a
Contractor/Lender Agreement (the "Contractor/Lender
Agreement") executed by the Contractor in the form required by
the Lender and (iii) a Design Professional/Lender Agreement
(the "Design Professional/Lender Agreement") executed by any
architect, engineer or design professional (other than
Contractor) engaged by the Borrower in connection with the
construction of the Improvements in the form required by the
Lender. (The Lender's review and approval of all such
materials referred to in items (3), (4) and (5) above and this
paragraph shall be solely for its own benefit.)
6. The Lender is satisfied that all subcontractors and all bills
incurred for labor and materials in connection with the
construction of the Improvements are being currently paid the
entire amount then due (less only any applicable retainage).
7. Except for work for which the Lender has been provided lien
waivers in the form required by the Lender, the Borrower
hereby warrants to the Lender that no materials have been or
will be furnished nor labor performed for the construction of
the Improvements before the signing, notary, acknowledgment,
delivery and recording of the Deed of Trust.
8. The Lender is satisfied that the unadvanced proceeds under the
Advance/Term Note available to be advanced to pay for the
construction of the Improvements, together with the requisite
equity funds to be paid directly by the Borrower, will be
sufficient to pay for the completion of all of the
Improvements in accordance with the Plans and Specifications
therefor, the Approved Budget and all legal requirements which
apply to the Property; or if such proceeds and equity funds
are not adequate, additional funds are deposited by the
Borrower with the Lender in order to provide sufficient funds
to complete the Improvements in accordance with the Plans and
Specifications and all legal requirements which apply to the
Property.
9. The Lender is satisfied, in its reasonable determination, that
the Improvements are being constructed on schedule to be
completed no later than July 1, 1999 and in accordance with
the Plans and Specifications and applicable law. (It is
understood, however, that the Lender shall have no duty to the
Borrower or anyone else to make any inspection or
determination regarding construction, and all such
inspections, if any, shall be solely for the Lender's own
benefit and satisfaction).
10. After the location of any foundation for the Improvements has
been established and staked on the ground and before any such
foundation is poured, the Lender shall have been provided with
a current survey of the Property by a state-licensed surveyor
who is acceptable to the Lender. Such survey shall contain a
surveyor's certificate
<PAGE>
Surrey, Inc.
Page 6
satisfactory to the Lender and shall reflect that the location
of the Improvements and all other improvements on the Property
will be entirely within the boundary lines of the Property and
will not encroach upon any flood plain or special flood hazard
area, set-back line, easement, right-of-way or adjoining
property or breach or violate any covenant, condition or
restriction affecting the Property or any legal requirement,
and that no adjoining structure encroaches upon the Property.
Upon completion of the Improvements, if requested by the
Lender, the Borrower shall provide the Lender with an updated
"as-built" survey of the Property which meets the requirements
set forth in this paragraph.
11. The Lender is satisfied that each advance against the
Advance/Term Note will be secured by a lien against the
Property, all Improvements and all other personalty described
in the Deed of Trust and the Security Agreement.
12. The Lender is furnished a Mortgagee Title Insurance Policy
(the "Title Policy") in Texas Standard Form in the full amount
of the Advance/Term Note, issued by Heritage Title Company of
Austin, Inc. to the Lender insuring that good and indefeasible
fee simple absolute title to the Property is vested in the
Borrower, insuring that the lien evidenced by the Deed of
Trust is a valid lien, and containing only (a) the normal
"pending disbursement" and "completion of improvements"
exceptions and (b) such other exceptions as shall be
previously approved by the Lender in writing. The form and
substance of the Title Policy shall in all respects be
satisfactory to the Lender. The Lender shall also have been
furnished with legible copies of all instruments reflecting
exceptions in the Title Policy.
13. The Lender is furnished with such insurance coverage and
policies or certificates as it requires from time to time,
issued by companies acceptable to the Lender, including
(without limitation) an original policy or certificate of fire
and extended coverage insurance of the Improvements at least
equal in amount to the replacement cost of the Improvements,
with an endorsement naming the Lender as mortgagee insured and
prohibiting policy cancellation or modification without 30
days' prior written notice to the Lender. (Builder's risk
insurance will satisfy this requirement during actual
construction only, provided that the Lender is named as
mortgagee insured and the policy is in all respects
satisfactory to the Lender.)
14. If requested or required by the Lender, the Borrower shall
have provided the Lender with satisfactory evidence, including
without limitation, all certificates, licenses, zoning
variances, permits and no action letters, that the Property,
the Plans and Specifications for the Improvements and the
actual construction of the Improvements have met and are
meeting the approval of the appropriate architectural control
committees (if any) and comply with any other law, ordinance,
order, rule,
<PAGE>
Surrey, Inc.
Page 7
regulation, restriction, zoning ordinance or other legal
requirements which apply to the Property.
15. The Lender has received the following items, all properly
executed, notarized, recorded (if necessary or required by the
Lender) and otherwise completed to the satisfaction of the
Lender:
a. The Advance/Term Note;
b. The Deed of Trust;
c. This Agreement;
d. The Appraisal;
e. The Approved Budget;
f. The applicable Construction Request for Advance;
g. The Title Policy;
h. The insurance certificates or policies required by
the Credit Documents;
i. The survey(s) of the Property at the time required by
this Agreement;
j. The Construction Contract;
k. The final Plans and Specifications (acceptable to the
Lender in all respects);
l. The approvals of the Plans and Specifications from
all architectural control committees (if any) and all
other persons and entities having the right to
approve of such Plans and Specifications;
m. All applicable governmental building and site
permits;
n. All other information required under the provisions
of this Agreement or the other Credit Documents;
o. Any other papers which the Lender may reasonably
require at any time.
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Surrey, Inc.
Page 8
16. The Lender is satisfied that no Event of Default or Default
has occurred.
17. The Lender has received and approved of Affidavit and Lien
Waiver/Subordination Agreements from each contractor and
subcontractor who will be retained in connection with the
construction of the Improvements, in form and substance
satisfactory to the Lender.
18. Prior to the final advance of retainage under the Advance/Term
Note, the Lender shall have received the following, on or
before the date of such advance, in form and substance
satisfactory to the Lender:
a. If available, certificates of Occupancy issued by all
appropriate governmental authorities for all portions
of the Improvements;
b. If required by the Lender, an "as-built" current
survey showing the location of the Improvements and
complying with all other survey requirements stated
above;
c. If available, a complete set of "as-built" plans and
specifications for the Improvements certified as
accurate by the Contractor;
d. An Affidavit of Bills Paid (in form and substance
satisfactory to the Lender) from the Contractor and
any subcontractors from whom the Lender requests such
an affidavit in order to satisfy the Lender that the
construction of the Improvements has been completed
lien-free and that the costs of all materials
furnished and labor performed in connection therewith
have been paid in full; and
e. An executed Certificate of Acceptance from the
Borrower (in form and substance satisfactory to the
Lender) whereby the Borrower accept the Improvements
as substantially completed in accordance with the
approved plans and specifications therefor and
acknowledges that it has received no notice of any
claim for unpaid construction costs with respect to
the Improvements.
EVENTS OF DEFAULT
The occurrence of any of the following, if not cured within any
applicable notice and/or cure period provided for in the Loan Agreement, shall
be an Event of Default hereunder:
<PAGE>
Surrey, Inc.
Page 9
1. Failure of the Borrower to perform, observe or comply with any
of the terms, covenants, conditions or provisions of the
Construction Contract.
2. A survey of the Property shall show that any improvements
located thereon are not entirely within the boundary lines of
the Property or encroach upon any flood plain or special flood
hazard area, set-back line, easement, right-of-way, street or
adjoining property or that any legal requirement has been
breached or that any adjoining structure encroaches upon the
Property.
3. The Inspector or an architectural firm of recognized standing
shall at any time certify to the Lender in writing that the
Improvements are not at the date of such certificate being
constructed with reasonable diligence and/or in accordance
with the Plans and Specifications and the Construction
Contract.
4. Failure of the Borrower to complete the construction of the
Improvements in accordance with the Plans and Specifications
and receive a Certificate of Occupancy (if available) therefor
from the appropriate governmental authorities on or before
July 1, 1999.
5. Failure of Borrower to pay for and deliver to Lender within a
reasonable time after completion of the Improvements, an
endorsement to the Policy deleting all exceptions under such
policy relating to (a) liens arising by reason of unpaid bills
or claims for work performed or materials furnished in
connection with the Improvements, and (b) the standard
"pending disbursements" limitations to the Policy.
6. An Event of Default shall have occurred under the Loan
Agreement.
RIGHTS SUBSEQUENT TO AN EVENT OF DEFAULT
At any time after an Event of Default which has not been waived by the
Lender in writing or cured to the Lender's satisfaction, the Lender shall have
the right, at its option, to exercise all rights and remedies available to the
Lender under the Loan Agreement, the other Credit Documents and applicable law.
In addition to these rights and remedies, upon the occurrence of (a) any Event
of Default or (b) any Default, the commitment of the Lender (if then
outstanding) to make advances against the Advance/Term Note shall cease until
the Lender declares that all such Events of Default and Defaults have been cured
to the Lender's satisfaction, or until the Lender shall have agreed in writing
to fund despite the default or waived the default. The Lender may, at its
option, continue or at any time recommence making one or more advances and in
any case all advances by the Lender shall be deemed to have been made pursuant
to a commitment (as such term is used and defined in the Uniform Commercial Code
as enacted and in force in the State of Texas) and pursuant to this Agreement.
<PAGE>
Surrey, Inc.
Page 10
OTHER AGREEMENTS AND REPRESENTATIONS
1. The Borrower shall allow the Lender to place a sign on the
Property indicating that the Lender is the lending institution
with respect to the construction of the Improvements.
2. The Borrower shall permit the Lender and its duly authorized
agents free access to the Property and shall make available
for audit and inspection by the Lender, at any time during
regular business hours, all property, equipment, books or
other records relating to the Property or construction of the
Improvements.
3. If the Lender determines at any time that the unadvanced
proceeds under the Advance/Term Note (together with the
initial requisite equity funds from the Borrower) will be
insufficient to pay for the completion of the Improvements in
accordance with the Plans and Specifications therefor and all
legal requirements which apply to the Property, the Borrower
shall deposit additional funds with the Lender in an amount
satisfactory to the Lender to provide sufficient funds to
complete the Improvements in accordance with the Plans and
Specifications therefor and all legal requirements which apply
to the Property. Upon such an event, the Lender shall not be
obligated to make any further advances of funds under the
Advance/Term Note until the Borrower shall have made such
satisfactory arrangements to the Lender to provide such
additional, sufficient funds.
4. If the amount budgeted for any particular category of costs
set forth in the Approved Budget is or will be insufficient to
pay the actual or projected cost of such category, the
Borrower shall make arrangements satisfactory to the Lender
(which with the written permission of the Lender may include
either reallocation of savings manifestly realized on
completed portions of the Improvements to other Approved
Budget categories or use of funds available under any
contingency item of the Approved Budget) to provide sufficient
funds to pay the difference between such actual or projected
costs and the amount budgeted for such category in the
Approved Budget. Until the Borrower has made satisfactory
arrangements to the Lender to provide coverage for any such
difference between actual or projected costs and the budgeted
amount for any Approved Budget category, the Lender shall not
be obligated to make any additional advances of funds under
the Advance/Term Note.
5. The Borrower shall not have the right to utilize any funds
available under any contingency item of the Approved Budget or
reallocate savings manifestly realized on completed portions
of the Improvements to other Approved Budget categories
without the prior written consent of the Lender.
<PAGE>
Surrey, Inc.
Page 11
6. No material change will be made in the Plans and
Specifications without the prior written consent of the
Lender. For purposes of this paragraph, a change shall not be
considered a material change unless it alone or together with
any other prior change (a) such change alone increases or
decreases the contract price for, or other costs in respect of
construction of the Improvements, by more than $5,000.00, (b)
such change, together with all other changes, increases or
decreases the contract price for, or other costs in respect of
construction of the Improvements by more than $20,000.00, (c)
extends or is likely to extend (in the reasonable judgment of
the Lender) the completion date of the Improvements past July
1, 1999 or (d) requires the prior approval of any applicable
subdivision planning committee, architectural control
committee or any other person or entity according to the terms
of any restrictive covenants, zoning ordinances or other legal
requirements which apply to the Property.
7. The Borrower will prosecute the construction of the
Improvements in accordance with the plans and specifications
therefor, all applicable legal requirements and the Credit
Documents, and with diligence and dispatch and without
unreasonable cessation of work thereon, and will complete such
construction before July 1,1999.
8. The Borrower has obtained (or will obtain prior to receiving
any funds under the Advance/Term Note) all necessary approvals
of the Plans and Specifications from all subdivision planning
committees or architectural control committees, if any, having
jurisdiction over the Property and any other person or entity
whose approval of the Plans and Specifications is required
under any restrictions, zoning ordinances or other legal
requirements applicable to the Property. All of the Plans and
Specifications comply with all restrictions, zoning ordinances
and other legal requirements applicable to the Property.
9. As of the date hereof, the Borrower is in compliance with all
terms, covenants and provisions of this Agreement and all
other Credit Documents and no Default or Event of Default
exists.
10. By February 9, 1999, the Borrower shall have delivered to the
Lender a written non-binding estimate of the time required to
vacate the existing public utility easement over which a
building on the Property is located. The Borrower will
diligently prosecute the vacation of such easement and will
use its best efforts to cause such vacation to be accomplished
as soon as reasonably possible. Monthly during the prosecution
of the vacation of the easement, and more often if requested
by the Lender, the Borrower will provide a written status
report to the Lender with reference to the vacation of the
easement, and will notify the Lender of any changes to the
estimated time required to accomplish the vacation.
<PAGE>
Surrey, Inc.
Page 12
MISCELLANEOUS AGREEMENTS
The Lender shall not be obligated to the Borrower to determine that any
subcontractor has not breached any of its agreements with the Borrower, nor will
the Lender for any reason assume (or be construed to have assumed) any of the
obligations of the Borrower to any subcontractor or of any subcontractor to the
Borrower.
This Agreement constitutes the entire agreement of the parties,
supersedes and cancels any prior understandings or written or oral agreements
between the parties concerning the matters covered herein, including without
limitation, advances hereunder, and can be modified or varied only by a written
instrument subscribed to by all of the parties hereto; provided, however, that
all written or oral representations made by the Borrower to the Lender with
respect to the subject matter hereof shall survive the execution of this
Agreement. The Lender has no commitment to lend sums to the Borrower other than
as specifically set forth herein and in the other Credit Documents.
If there are any conflicts or inconsistencies between this Agreement
and any of the other Credit Documents, this Agreement shall prevail and control.
This Agreement shall bind and benefit the parties hereto and their
respective heirs, legal representatives, successors and assigns. However, any
attempted assignment of any rights of the Borrower hereunder without the prior
written consent of the Lender shall be void.
Any notice, request or other communication required or permitted to be
given hereunder shall be given in accordance with the terms of the Loan
Agreement.
If this letter correctly states your understanding of our agreements
concerning the matters referred to herein, please indicate your acceptance
hereof and agreement hereto by executing copies of this letter in the space
provided below.
[Remainder of page intentionally left blank]
<PAGE>
Surrey, Inc.
Page 13
THIS CONSTRUCTION LOAN AGREEMENT, TOGETHER WITH ALL OTHER CREDIT
DOCUMENTS, CONSTITUTES A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES TO IT 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.
Very truly yours,
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION
By: /s/ Cindy Matula
------------------------------------
Name: Cindy Matula
----------------------------------
Title: Senior Vice President
---------------------------------
"Lender"
AGREED TO AND ACCEPTED BY BORROWER:
SURREY, INC.
a Texas corporation
By: /s/ Mark van der Hagen
---------------------------------
Name: Mark van der Hagen
-------------------------------
Title: Vice President Finance/CFO
------------------------------
"Borrower"
ATTACH:
Exhibit A - The Property
Exhibit B - Construction Request for Advance
Exhibit C - Application and Certificate for Payment
EXHIBIT 10.13
NOTE
Austin, Texas
$400,000.00 January 25, 1999
FOR VALUE RECEIVED, SURREY, INC., a Texas corporation, promises to pay
to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking
association, at its banking house in the City of Austin, Travis County, Texas
(or such other place as the holder hereof may hereafter designate in writing),
in immediately available funds and in lawful money of the United States of
America, the principal sum of FOUR HUNDRED THOUSAND DOLLARS ($400,000.00) (or
the unpaid balance of all principal advanced against this note, if that amount
is less), together with interest as follows: (a) interest on the unpaid
principal balance of this note from time to time outstanding at the Stated Rate
and interest on all past due amounts, both principal and accrued interest, from
the respective due dates thereof until paid at the Past Due Rate and (b) the
Additional Interest; provided, that for the full term of this note the interest
rate produced by the aggregate of all sums paid or agreed to be paid to the
holder of this note for the use, forbearance or detention of the debt evidenced
hereby (including, but not limited to, all interest on this note at the Stated
Rate and the Past Due Rate plus the Additional Interest) shall not exceed the
Ceiling Rate.
1. Definitions. Unless otherwise defined herein, capitalized terms used
in this note shall have the same meaning in this note as in the Loan Agreement
(hereafter defined). As used in this note, the following terms shall have the
respective meanings indicated:
(a) "Additional Interest" means the aggregate of (i) all amounts
paid by Maker to the holder of this note pursuant to the provisions of
Subparagraph (c) of numbered Paragraph 4 hereof and (ii) all other amounts
accrued or paid pursuant to this note or any of the other Credit Documents
(other than interest on this note at the Stated Rate) which, under applicable
laws, are or may be deemed to constitute interest on the indebtedness evidenced
by this note.
(b) "Construction Loan Agreement" means the Construction Loan
Agreement dated concurrently herewith between Maker and Payee, as the same may
have been or may be amended, supplemented, restated or replaced from time to
time.
(c) "Loan Agreement" means the Loan Agreement dated April 8, 1998
between Maker and Payee, as the same may have been or may be amended,
supplemented, restated or replaced from time to time.
(d) "Maker" means Surrey, Inc., a Texas corporation.
INITIALLED FOR
IDENTIFICATION:______
Page 1 of 7 Pages
<PAGE>
(e) "Maturity Date" means the maturity of this note, February 8,
2004, as the same may hereafter be accelerated pursuant to the provisions of
this note or any of the other Credit Documents.
(f) "Payee" means Chase Bank of Texas, National Association, a
national banking association, and any other holder or holders of this note from
time to time and, upon acquisition of this note by any holder or holders other
than the named payee, effective as of the time of such acquisition, the term
"Payee" shall mean all of the then holders of this note, to the exclusion of all
prior holders not then retaining or reserving an interest in this note, to the
end that all the rights, powers, remedies, liens, benefits and privileges
accruing and to accrue hereunder to Payee, as such term is used herein, shall
inure to the benefit of and be owned and held by the holder or holders of this
note from time to time, whether such holder acquires this note through
succession to or assignment from a prior Payee.
(g) "Stated Rate" means, for any day, a rate per annum equal to
the applicable Base Rate for that day for each Base Rate Borrowing made under
this note in accordance with the terms of the Loan Agreement and the applicable
LIBOR Rate for each LIBOR Rate Borrowing made under this note in accordance with
the terms of the Loan Agreement; provided, that if on any day the Stated Rate
for that day would exceed the Ceiling Rate for that day, the Stated Rate shall
be fixed at the Ceiling Rate on that day and on each day thereafter until the
total amount of interest accrued at the Stated Rate (as so fixed) on the unpaid
principal balance of this note plus the Additional Interest equals the total
amount of interest which would have accrued if there had been no Ceiling Rate.
If this note matures (or is prepaid) before such equality is achieved, then, in
addition to the unpaid principal and accrued interest then owing pursuant to the
other provisions of this note, Maker promises to pay on demand to the order of
the holder of this note interest in an amount equal to the excess (if any) of
(a) the lesser of (i) the total interest which would have accrued on this note
if the Stated Rate had been defined as equal to the Ceiling Rate from time to
time in effect and (ii) the total interest which would have accrued on this note
if the Stated Rate were not so prohibited from exceeding the Ceiling Rate, over
(b) the total interest actually accrued hereon to such maturity (or prepayment)
date. Without notice to Maker or any other person or entity, the Stated Rate
shall automatically fluctuate upward and downward in accordance with the
provisions of this Subparagraph and the Loan Agreement.
2. Loan Agreement; Advances; Security. This note has been issued
pursuant to the terms of the Loan Agreement, and is an Advance/Term Note
referred to in the Loan Agreement. Advances against this note by Payee or other
holder hereof shall be governed by the terms and provisions of the Loan
Agreement and the Construction Loan Agreement. Reference is hereby made to the
Loan Agreement and the Construction Loan Agreement for all purposes. Payee is
entitled to the benefits of and security provided for in the Loan Agreement and
the Construction Loan Agreement. Such security includes, among other security,
the Deed of Trust covering and affecting
INITIALLED FOR
IDENTIFICATION:______
Page 2 of 7 Pages
<PAGE>
certain property situated in Travis, Texas, more fully described therein, and
the Security Agreements. The unpaid principal balance of this note at any time
shall be the total of all amounts lent or advanced against this note less the
amount of all payments or permitted prepayments made on this note and by or for
the account of Maker. All loans and advances and all payments and permitted
prepayments made hereon may be endorsed by the holder of this note on a schedule
which may be attached hereto (and thereby made a part hereof for all purposes)
or otherwise recorded in the holder's records; provided, that any failure to
make notation of (a) any advance shall not cancel, limit or otherwise affect
Maker's obligations or any holder's rights with respect to that advance, or (b)
any payment or permitted prepayment of principal shall not cancel, limit or
otherwise affect Maker's entitlement to credit for that payment as of the date
received by the holder. Amounts paid or prepaid under this note may not be
reborrowed.
3. Computation of Interest. Interest on the amount of each advance
against this note shall be computed on the amount of that advance and from the
date it is made. Interest at the Stated Rate shall be computed for the actual
number of days elapsed in a year consisting of 360 days, unless the Ceiiling
Rate would thereby be exceeded, in which event, to the extent necessary to avoid
exceeding the Ceiling Rate, interest at the Stated Rate shall be computed on the
basis of the actual number of days elapsed in the applicable calendar year in
which accrued.
4. Mandatory Payments of Principal and Interest.
(a) Accrued and unpaid interest on the unpaid principal balance of
this note shall be due and payable (i) on the Interest Payment Dates and (ii) on
the Maturity Date.
(b) The principal of this note shall be due and payable in monthly
installments in the amounts described below. The first such installment shall be
due and payable on September 8, 1999 and a like installment shall be due and
payable on the same day of each succeeding calendar month thereafter until this
note shall have been fully paid and satisfied; provided, that on the Maturity
Date, the entire unpaid principal balance of this note shall be finally due and
payable. The amount of the required monthly principal installment shall be
determined by Payee on July 25, 1999 and will be equal to the outstanding
balance of this note on such date divided by fifty-four (54).
(c) Additional Interest consisting of One Thousand Dollars
($1,000.00) shall be deemed earned and accrued on the date of this note and
shall be due and payable on demand.
(d) All payments hereon made pursuant to this Paragraph shall be
applied first to accrued interest, the balance to principal.
(e) If any payment provided for in this note shall become due on a
day other than a Business Day, such payment may be made on the next succeeding
Business Day (unless the result of such extension of time would be to extend the
date for such payment into another calendar month
INITIALLED FOR
IDENTIFICATION:______
Page 3 of 7 Pages
<PAGE>
or beyond the Maturity Date, and in either such event such payment shall be made
on the Business Day immediately preceding the day on which such payment would
otherwise have been due), and such extension of time shall in such case be
included in the computation of interest on this note.
5. No Usury Intended; Spreading. Notwithstanding any provision to the
contrary contained in this note or any of the other Credit Documents, it is
expressly provided that in no case or event shall the aggregate of (i) all
interest on the unpaid balance of this note, accrued or paid from the date
hereof and (ii) the aggregate of any other amounts accrued or paid pursuant to
this note or any of the other Credit Documents, which under applicable laws are
or may be deemed to constitute interest upon the indebtedness evidenced by this
note from the date hereof, ever exceed the Ceiling Rate. In this connection,
Maker and Payee stipulate and agree that it is their common and overriding
intent to contract in strict compliance with applicable usury laws. In
furtherance thereof, none of the terms of this note or any of the other Credit
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the Ceiling Rate. Maker or other parties now or hereafter becoming liable for
payment of the indebtedness evidenced by this note shall never be liable for
interest in excess of the Ceiling Rate. If, for any reason whatever, the
interest paid or received on this note during its full term produces a rate
which exceeds the Ceiling Rate, the holder of this note shall credit against the
principal of this note (or, if such indebtedness shall have been paid in full,
shall refund to the payor of such interest) such portion of said interest as
shall be necessary to cause the interest paid on this note to produce a rate
equal to the Ceiling Rate. All sums paid or agreed to be paid to the holder of
this note for the use, forbearance or detention of the indebtedness evidenced
hereby shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread in equal parts throughout the full term of this note, so
that the interest rate is uniform throughout the full term of this note. The
provisions of this Paragraph shall control all agreements, whether now or
hereafter existing and whether written or oral, between Maker and Payee.
6. Default. If any default, event of default or similar event (however
denominated) occurs under any Credit Document, then that shall automatically
constitute default under this note, and unless Payee declares the default fully
cured to Payee's satisfaction with any applicable grace period (if any) agreed
to in writing by Payee, then the obligation (if any) of Payee to make further
advances against this note shall cease and terminate and the owner or holder
hereof may, at its, his or her option, exercise any or all rights, powers and
remedies afforded under any Credit Document and by law, including the right to
declare the unpaid balance of principal and accrued interest on this note at
once mature and payable.
7. No Waiver by Payee. No delay or omission of Payee or any other
holder hereof to exercise any power, right or remedy accruing to Payee or any
other holder hereof shall impair any such power, right or remedy or shall be
construed to be a waiver of the right to exercise any such power, right or
remedy. Payee's right to accelerate this note for any late payment or Maker's
failure to timely fulfill its other obligations hereunder or under the other
Credit Documents shall not be
INITIALLED FOR
IDENTIFICATION:______
Page 4 of 7 Pages
<PAGE>
waived or deemed waived by Payee by Payee's having accepted a late payment or
late payments in the past or Payee otherwise not accelerating this note or
exercising other remedies for Maker's failure to timely perform its obligations
hereunder or under the other Credit Documents. Payee shall not be obligated or
be deemed obligated to notify Maker that it is requiring Maker to strictly
comply with the terms and provisions of this note and the other Credit Documents
before accelerating this note and exercising its other remedies hereunder or
under the other Credit Documents because of Maker's failure to timely perform
its obligations under this note and the other Credit Documents.
8. Costs and Attorneys' Fees. If any holder of this note retains an
attorney in connection with any default or to collect, enforce or defend this
note or any of the Credit Documents in any lawsuit or in any probate,
reorganization, bankruptcy or other proceeding, or if Maker sues any holder in
connection with this note or any of the Credit Documents and does not prevail,
then Maker agrees to pay to each such holder, in addition to principal and
interest, all reasonable costs and expenses incurred by such holder in trying to
collect this note or in any such suit or proceeding, including reasonable
attorneys' fees. Any amount to be paid under this Paragraph by Maker to Payee
shall be a demand obligation owing by Maker to Payee and shall bear interest
from the date of demand until paid at the Past Due Rate.
9. Waivers by Maker and Others. Except to the extent, if any, that
notice of default is expressly required herein or in any of the other Credit
Documents, Maker and any and all co-makers, endorsers, guarantors and sureties
severally waive notice (including, but not limited to, notice of intent to
accelerate and notice of acceleration, notice of protest and notice of
dishonor), demand, presentment for payment, protest, diligence in collecting and
the filing of suit for the purpose of fixing liability and consent that the time
of payment hereof may be extended and re-extended from time to time without
notice to any of them. Each such person agrees that his, her or its liability on
or with respect to this note shall not be affected by any release of or change
in any guaranty or security at any time existing or by any failure to perfect or
to maintain perfection of any lien against or security interest in any such
security or the partial or complete unenforceability of any guaranty or other
surety obligation, in each case in whole or in part, with or without notice and
before or after maturity.
10. Paragraph Headings. Paragraph headings appearing in this note are
for convenient reference only and shall not be used to interpret or limit the
meaning of any provision of this note.
11. Venue; Choice of Law. This note is performable in Travis County,
Texas, which shall be a proper place of venue for suit on or in respect of this
note. Maker hereby irrevocably agrees that any legal proceeding in respect of
this note shall be brought in the district courts of Travis County, Texas, or in
the United States District Court for the Western District of Texas, Austin
Division (collectively, the "Specified Courts"). Maker hereby irrevocably
submits to the nonexclusive jurisdiction of the state and federal courts of the
State of Texas. Maker hereby irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or
INITIALLED FOR
IDENTIFICATION:______
Page 5 of 7 Pages
<PAGE>
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this note or any of the Credit Documents brought in any
Specified Court, and hereby further irrevocably waives any claims that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. Maker further irrevocably consents to the service of process
out of any of the Specified Courts in any such suit, action or proceeding by the
mailing of copies thereof by certified mail, return receipt requested, postage
prepaid, to Maker. Nothing herein shall affect the right of Payee to commence
legal proceedings or otherwise proceed against Maker in any jurisdiction or to
serve process in any manner permitted by applicable law. Maker agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE APPLICABLE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM
TIME TO TIME IN EFFECT.
12. Successors and Assigns. This note and all the covenants and
agreements contained herein shall be binding upon, and shall inure to the
benefit of, the respective legal representatives, heirs, successors and assigns
of Maker and Payee.
13. Records of Payments. The records of Payee shall be prima facie
evidence of the amounts owing on this note.
14. Severability. If any provision of this note is held to be illegal,
invalid or unenforceable under present or future laws, the legality, validity
and enforceability of the remaining provisions of this note shall not be
affected thereby, and this note shall be liberally construed so as to carry out
the intent of the parties to it. Each waiver in this note is subject to the
overriding and controlling rule that it shall be effective only if and to the
extent that (a) it is not prohibited by applicable law and (b) applicable law
neither provides for nor allows any material sanctions to be imposed against
Payee for having bargained for and obtained it.
15. Sale and Assignment. Payee reserves the right, exercisable in its
sole discretion and without notice to Maker or any other person, to sell
participations or assign its interest, or both, in all or any part of this note
or any loan evidenced by this note.
16. Prepayment. Except as provided in the Loan Agreement, Maker may
prepay this note, in whole or in part, at any time without penalty or fee. All
prepayments hereon shall be applied first to any applicable prepayment charge,
if any, next to accrued interest and the balance to principal.
17. Business Loans. Maker warrants and represents to Payee and all
other holders of this note that all loans evidenced by this note are and will be
for business, commercial, investment or
INITIALLED FOR
IDENTIFICATION:______
Page 6 of 7 Pages
<PAGE>
other similar purpose and not primarily for personal, family, household or
agricultural use, as such terms are used in Chapter 1D of Title 79, Texas
Revised Civil Statutes 1925, as amended.
18. Entire Agreement. This note and the other Credit Documents embody
the entire agreement and understanding between Payee and Maker and other parties
with respect to their subject matter and supersede all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter. Maker acknowledges and agrees that there is no oral agreement between
Maker and Payee which has not been incorporated in this note and the other
Credit Documents.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS NOTE AND ALL OTHER CREDIT DOCUMENTS EXECUTED BY ANY OF THE PARTIES
SUBSTANTIALLY CONCURRENTLY HEREWITH 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.
SURREY, INC., a Texas corporation
By: /s/ Mark van der Hagen
------------------------------------
Name: Mark van der Hagen
----------------------------------
Title: Vice President Finance/CFO
---------------------------------
EXHIBIT 10.14
NOTE
Austin, Texas
$2,000,000.00 January 25, 1999
FOR VALUE RECEIVED, SURREY, INC., a Texas corporation, promises to pay
to the order of CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, a national banking
association, at its banking house in the City of Austin, Travis County, Texas
(or such other place as the holder hereof may hereafter designate in writing),
in immediately available funds and in lawful money of the United States of
America, the principal sum of TWO MILLION DOLLARS ($2,000,000.00) (or the unpaid
balance of all principal advanced against this note, if that amount is less),
together with interest on the unpaid principal balance of this note from time to
time outstanding at the Stated Rate and interest on all past due amounts, both
principal and accrued interest, from the respective due dates thereof until paid
at the Past Due Rate; provided, that for the full term of this note the interest
rate produced by the aggregate of all sums paid or agreed to be paid to the
holder of this note for the use, forbearance or detention of the debt evidenced
hereby (including, but not limited to, all interest on this note at the Stated
Rate and the Past Due Rate) shall not exceed the Ceiling Rate.
1. Definitions. Unless otherwise defined herein, capitalized terms used
in this note shall have the same meaning in this note as in the Loan Agreement
(hereafter defined). As used in this note, the following terms shall have the
respective meanings indicated:
(a) "Loan Agreement" means the Loan Agreement dated April 8, 1998
between Maker and Payee, as the same may have been or may be amended,
supplemented, restated or replaced from time to time.
(b) "Maker" means Surrey, Inc., a Texas corporation.
(c) "Maturity Date" means the maturity of this note, April 8,
2000, as the same may hereafter be accelerated pursuant to the provisions of
this note or any of the other Credit Documents.
(d) "Payee" means Chase Bank of Texas, National Association, a
national banking association, and any other holder or holders of this note from
time to time and, upon acquisition of this note by any holder or holders other
than the named payee, effective as of the time of such acquisition, the term
"Payee" shall mean all of the then holders of this note, to the exclusion of all
prior holders not then retaining or reserving an interest in this note, to the
end that all the rights, powers, remedies, liens, benefits and privileges
accruing and to accrue hereunder to Payee,
INITIALLED FOR
IDENTIFICATION:______
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as such term is used herein, shall inure to the benefit of and be owned and held
by the holder or holders of this note from time to time, whether such holder
acquires this note through succession to or assignment from a prior Payee.
(e) "Stated Rate" means, for any day, a rate per annum equal to
the applicable Base Rate for that day for each Base Rate Borrowing made under
this note in accordance with the terms of the Loan Agreement and the applicable
LIBOR Rate for each LIBOR Rate Borrowing made under this note in accordance with
the terms of the Loan Agreement; provided, that if on any day the Stated Rate
for that day would exceed the Ceiling Rate for that day, the Stated Rate shall
be fixed at the Ceiling Rate on that day and on each day thereafter until the
total amount of interest accrued at the Stated Rate (as so fixed) on the unpaid
principal balance of this note equals the total amount of interest which would
have accrued if there had been no Ceiling Rate. If this note matures (or is
prepaid) before such equality is achieved, then, in addition to the unpaid
principal and accrued interest then owing pursuant to the other provisions of
this note, Maker promises to pay on demand to the order of the holder of this
note interest in an amount equal to the excess (if any) of (a) the lesser of (i)
the total interest which would have accrued on this note if the Stated Rate had
been defined as equal to the Ceiling Rate from time to time in effect and (ii)
the total interest which would have accrued on this note if the Stated Rate were
not so prohibited from exceeding the Ceiling Rate, over (b) the total interest
actually accrued hereon to such maturity (or prepayment) date. Without notice to
Maker or any other person or entity, the Stated Rate shall automatically
fluctuate upward and downward in accordance with the provisions of this
Subparagraph and the Loan Agreement.
2. Loan Agreement; Advances; Security. This note has been issued
pursuant to the terms of the Loan Agreement, and is the Revolving Note referred
to in the Loan Agreement. Advances against this note by Payee or other holder
hereof shall be governed by the terms and provisions of the Loan Agreement.
Reference is hereby made to the Loan Agreement for all purposes. Payee is
entitled to the benefits of and security provided for in the Loan Agreement.
Such security includes, among other security, the Deed of Trust covering and
affecting certain property situated in Travis County, Texas, more fully
described therein, and the Security Agreements. The unpaid principal balance of
this note at any time shall be the total of all amounts lent or advanced against
this note less the amount of all payments or permitted prepayments made on this
note and by or for the account of Maker. All loans and advances and all payments
and permitted prepayments made hereon may be endorsed by the holder of this note
on a schedule which may be attached hereto (and thereby made a part hereof for
all purposes) or otherwise recorded in the holder's records; provided, that any
failure to make notation of (a) any advance shall not cancel, limit or otherwise
affect Maker's obligations or any holder's rights with respect to that advance,
or (b) any payment or permitted prepayment of principal shall not cancel, limit
or otherwise affect Maker's entitlement to credit for that payment as of the
date received by the holder.
3. Computation of Interest. Interest on the amount of each advance
against this note shall be computed on the amount of that advance and from the
date it is made. Interest at the Stated
INITIALLED FOR
IDENTIFICATION:______
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Rate shall be computed for the actual number of days elapsed in a year
consisting of 360 days, unless the Ceiling Rate would thereby be exceeded, in
which event, to the extent necessary to avoid exceeding the Ceiling Rate,
interest at the Stated Rate shall be computed on the basis of the actual number
of days elapsed in the applicable calendar year in which accrued.
4. Mandatory Payments of Principal and Interest.
(a) Accrued and unpaid interest on the unpaid principal balance of
this note shall be due and payable (i) on the Interest Payment Dates and (ii) on
the Maturity Date.
(b) The principal of this note shall be due and payable on the
Maturity Date.
(c) All payments hereon made pursuant to this Paragraph shall be
applied first to accrued interest, the balance to principal.
(d) If any payment provided for in this note shall become due on a
day other than a Business Day, such payment may be made on the next succeeding
Business Day (unless the result of such extension of time would be to extend the
date for such payment into another calendar month or beyond the Maturity Date,
and in either such event such payment shall be made on the Business Day
immediately preceding the day on which such payment would otherwise have been
due), and such extension of time shall in such case be included in the
computation of interest on this note.
5. No Usury Intended; Spreading. Notwithstanding any provision to the
contrary contained in this note or any of the other Credit Documents, it is
expressly provided that in no case or event shall the aggregate of (i) all
interest on the unpaid balance of this note, accrued or paid from the date
hereof and (ii) the aggregate of any other amounts accrued or paid pursuant to
this note or any of the other Credit Documents, which under applicable laws are
or may be deemed to constitute interest upon the indebtedness evidenced by this
note from the date hereof, ever exceed the Ceiling Rate. In this connection,
Maker and Payee stipulate and agree that it is their common and overriding
intent to contract in strict compliance with applicable usury laws. In
furtherance thereof, none of the terms of this note or any of the other Credit
Documents shall ever be construed to create a contract to pay, as consideration
for the use, forbearance or detention of money, interest at a rate in excess of
the Ceiling Rate. Maker or other parties now or hereafter becoming liable for
payment of the indebtedness evidenced by this note shall never be liable for
interest in excess of the Ceiling Rate. If, for any reason whatever, the
interest paid or received on this note during its full term produces a rate
which exceeds the Ceiling Rate, the holder of this note shall credit against the
principal of this note (or, if such indebtedness shall have been paid in full,
shall refund to the payor of such interest) such portion of said interest as
shall be necessary to cause the interest paid on this note to produce a rate
equal to the Ceiling Rate. All sums paid or agreed to be paid to the holder of
this note for the use, forbearance or detention of the indebtedness evidenced
hereby shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread in equal parts
INITIALLED FOR
IDENTIFICATION:______
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throughout the full term of this note, so that the interest rate is uniform
throughout the full term of this note. The provisions of this Paragraph shall
control all agreements, whether now or hereafter existing and whether written or
oral, between Maker and Payee.
6. Default. If any default, event of default or similar event (however
denominated) occurs under any Credit Document, then that shall automatically
constitute default under this note, and unless Payee declares the default fully
cured to Payee's satisfaction with any applicable grace period (if any) agreed
to in writing by Payee, then the obligation (if any) of Payee to make further
advances against this note shall cease and terminate and the owner or holder
hereof may, at its, his or her option, exercise any or all rights, powers and
remedies afforded under any Credit Document and by law, including the right to
declare the unpaid balance of principal and accrued interest on this note at
once mature and payable.
7. No Waiver by Payee. No delay or omission of Payee or any other
holder hereof to exercise any power, right or remedy accruing to Payee or any
other holder hereof shall impair any such power, right or remedy or shall be
construed to be a waiver of the right to exercise any such power, right or
remedy. Payee's right to accelerate this note for any late payment or Maker's
failure to timely fulfill its other obligations hereunder or under the other
Credit Documents shall not be waived or deemed waived by Payee by Payee's having
accepted a late payment or late payments in the past or Payee otherwise not
accelerating this note or exercising other remedies for Maker's failure to
timely perform its obligations hereunder or under the other Credit Documents.
Payee shall not be obligated or be deemed obligated to notify Maker that it is
requiring Maker to strictly comply with the terms and provisions of this note
and the other Credit Documents before accelerating this note and exercising its
other remedies hereunder or under the other Credit Documents because of Maker's
failure to timely perform its obligations under this note and the other Credit
Documents.
8. Costs and Attorneys' Fees. If any holder of this note retains an
attorney in connection with any default or to collect, enforce or defend this
note or any of the Credit Documents in any lawsuit or in any probate,
reorganization, bankruptcy or other proceeding, or if Maker sues any holder in
connection with this note or any of the Credit Documents and does not prevail,
then Maker agrees to pay to each such holder, in addition to principal and
interest, all reasonable costs and expenses incurred by such holder in trying to
collect this note or in any such suit or proceeding, including reasonable
attorneys' fees. Any amount to be paid under this Paragraph by Maker to Payee
shall be a demand obligation owing by Maker to Payee and shall bear interest
from the date of demand until paid at the Past Due Rate.
9. Waivers by Maker and Others. Except to the extent, if any, that
notice of default is expressly required herein or in any of the other Credit
Documents, Maker and any and all co-makers, endorsers, guarantors and sureties
severally waive notice (including, but not limited to, notice of intent to
accelerate and notice of acceleration, notice of protest and notice of
dishonor), demand, presentment for payment, protest, diligence in collecting and
the filing of suit for the purpose of
INITIALLED FOR
IDENTIFICATION:______
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fixing liability and consent that the time of payment hereof may be extended and
re-extended from time to time without notice to any of them. Each such person
agrees that his, her or its liability on or with respect to this note shall not
be affected by any release of or change in any guaranty or security at any time
existing or by any failure to perfect or to maintain perfection of any lien
against or security interest in any such security or the partial or complete
unenforceability of any guaranty or other surety obligation, in each case in
whole or in part, with or without notice and before or after maturity.
10. Paragraph Headings. Paragraph headings appearing in this note are
for convenient reference only and shall not be used to interpret or limit the
meaning of any provision of this note.
11. Venue; Choice of Law. This note is performable in Travis County,
Texas, which shall be a proper place of venue for suit on or in respect of this
note. Maker hereby irrevocably agrees that any legal proceeding in respect of
this note shall be brought in the district courts of Travis County, Texas, or in
the United States District Court for the Western District of Texas, Austin
Division (collectively, the "Specified Courts"). Maker hereby irrevocably
submits to the nonexclusive jurisdiction of the state and federal courts of the
State of Texas. Maker hereby irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this note or any
of the Credit Documents brought in any Specified Court, and hereby further
irrevocably waives any claims that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum. Maker further
irrevocably consents to the service of process out of any of the Specified
Courts in any such suit, action or proceeding by the mailing of copies thereof
by certified mail, return receipt requested, postage prepaid, to Maker. Nothing
herein shall affect the right of Payee to commence legal proceedings or
otherwise proceed against Maker in any jurisdiction or to serve process in any
manner permitted by applicable law. Maker agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE APPLICABLE
LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN
EFFECT.
12. Successors and Assigns. This note and all the covenants and
agreements contained herein shall be binding upon, and shall inure to the
benefit of, the respective legal representatives, heirs, successors and assigns
of Maker and Payee.
13. Records of Payments. The records of Payee shall be prima facie
evidence of the amounts owing on this note.
14. Severability. If any provision of this note is held to be illegal,
invalid or unenforceable under present or future laws, the legality, validity
and enforceability of the remaining provisions of this note shall not be
affected thereby, and this note shall be liberally construed so as
INITIALLED FOR
IDENTIFICATION:______
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to carry out the intent of the parties to it. Each waiver in this note is
subject to the overriding and controlling rule that it shall be effective only
if and to the extent that (a) it is not prohibited by applicable law and (b)
applicable law neither provides for nor allows any material sanctions to be
imposed against Payee for having bargained for and obtained it.
15. Sale and Assignment. Payee reserves the right, exercisable in its
sole discretion and without notice to Maker or any other person, to sell
participations or assign its interest, or both, in all or any part of this note
or any loan evidenced by this note.
16. Prepayment. Except as provided in the Loan Agreement, Maker may
prepay this note, in whole or in part, at any time without penalty or fee. All
prepayments hereon shall be applied first to any applicable prepayment charge,
if any, next to accrued interest and the balance to principal.
17. Revolving Loan. Subject to the terms and provisions of the Loan
Agreement, Maker may use all or any part of the credit provided to be evidenced
by this note at any time before the Maturity Date. Maker may borrow, repay and
reborrow hereunder, and except as set forth in the Loan Agreement, there is no
limitation on the number of advances made hereunder so long as the total unpaid
principal amount at any time outstanding hereunder does not exceed the lesser of
(a) the Borrowing Base or (b) the Revolving Commitment. Pursuant to Section
346.003 of the Texas Finance Code, as amended, Maker and Payee expressly agree
that Chapter 346 of the Texas Finance Code shall not apply to this note or to
any loan evidenced by this note and that neither this note nor any such loan
shall be governed by or subject to the provisions of Chapter 346 in any manner
whatsoever.
18. Business Loans. Maker warrants and represents to Payee and all
other holders of this note that all loans evidenced by this note are and will be
for business, commercial, investment or other similar purpose and not primarily
for personal, family, household or agricultural use, as such terms are used in
Chapter 1D of Title 79, Texas Revised Civil Statutes 1925, as amended.
19. Entire Agreement. This note and the other Credit Documents embody
the entire agreement and understanding between Payee and Maker and other parties
with respect to their subject matter and supersede all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter. Maker acknowledges and agrees that there is no oral agreement between
Maker and Payee which has not been incorporated in this note and the other
Credit Documents.
20. Renewal. To the extent of the unpaid principal balance thereof,
this note is given, in part, in renewal, extension and rearrangement, and not in
extinguishment, of the unpaid principal balance of that certain promissory note
April 8, 1998, in the original principal amount of One Million Dollars
($1,000,000.00) executed by Maker payable to the order of Payee. All liens,
INITIALLED FOR
IDENTIFICATION:______
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assignments and security interests securing the payment of said promissory note
(including without limitation the Deed of Trust and the Security Agreement) are
hereby ratified, confirmed, brought forward, renewed, extended and rearranged,
as security for the payment of this note, in addition to and cumulative of all
other security for this note.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS NOTE AND ALL OTHER CREDIT DOCUMENTS EXECUTED BY ANY OF THE PARTIES
SUBSTANTIALLY CONCURRENTLY HEREWITH 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.
SURREY, INC., a Texas corporation
By: /s/ Mark van der Hagen
------------------------------------
Name: Mark van der Hagen
----------------------------------
Title: Vice President Finance/CFO
---------------------------------
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 1,819
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<BONDS> 0
0
0
<COMMON> 4,099
<OTHER-SE> (809)
<TOTAL-LIABILITY-AND-EQUITY> 8,563
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<CGS> 7,856
<TOTAL-COSTS> 8,677
<OTHER-EXPENSES> (44)
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<INTEREST-EXPENSE> 230
<INCOME-PRETAX> (1,334)
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