UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER: 001-23407
SURREY, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2138564
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13110 Trails End Road
Leander, Texas 78641
(Address of principal executive offices)
(512) 267-7172
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes _X_ No ___
On August 11, 2000, the registrant had 2,472,727 outstanding shares of
common stock, no par value.
Transitional Small Business Disclosure Format (check one);
Yes ___ No _X_
<PAGE>
SURREY, INC.
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets as of June 30, 2000 and December 31, 1999
Statements of Operations for the Quarter and Six Months
Ended June 30, 2000 and June 30, 1999
Statements of Cash Flows for the Six Months
Ended June 30, 2000 and June 30, 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operations
PART II - OTHER INFORMATION
---------------------------
SIGNATURES
----------
EXHIBITS
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<PAGE>
SURREY, INC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 86 $ 0
Accounts receivable, net 2,385 4,091
Inventories 3,140 2,838
Prepaid expenses and other current assets 9 23
Deferred income taxes 143 143
Income taxes receivable 32 40
-------- --------
Total current assets 5,795 7,135
Property and equipment, net 4,192 4,237
Deferred income taxes 318 113
-------- --------
Total assets $ 10,305 $ 11,485
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts $ 0 $ 450
Trade accounts payable 1,148 1,724
Accrued expenses 284 312
Notes payable 916 0
Current maturities of long-term debt 528 418
Current maturities of capital lease obligations 122 204
-------- --------
Total current liabilities 2,998 3,108
Long-term debt, less current maturities 4,184 4,732
Capital lease obligations, less current maturities 135 196
Commitments and contingencies 0 0
Shareholders' equity:
Common stock; no par value: 10,000 shares
authorized, 2,473 shares issued and outstanding 4,099 4,099
Common stock warrants: 737 authorized, 675
issued and outstanding 64 64
Retained deficit $ (1,175) $ (714)
-------- --------
Total shareholders' equity 2,988 3,449
-------- --------
Total liabilities and shareholders' equity $ 10,305 $ 11,485
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
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<PAGE>
SURREY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 3,910 $ 5,245 $ 7,260 $ 8,577
Cost of sales 2,970 3,954 5,686 6,716
------- ------- ------- -------
Gross profit 940 1,291 1,574 1,861
Operating expenses:
Sales and marketing 203 367 418 651
General and administrative 779 482 1,552 1,021
------- ------- ------- -------
Total operating expenses 982 849 1,970 1,672
Income (loss) from operations (42) 442 (396) 189
Other income (expense):
Interest expense (144) (171) (263) (283)
------- ------- ------- -------
Income (loss) before income taxes (186) 271 (659) (94)
Income tax (benefit) provision (60) 83 (192) (28)
------- ------- ------- -------
Net income (loss) $ (126) $ 188 $ (467) $ (66)
======= ======= ======= =======
Income (loss) per share:
Basic $ (0.05) $ 0.08 $ (0.19) $ (0.03)
Diluted $ (0.05) $ 0.07 $ (0.19) $ (0.03)
======= ======= ======= =======
Weighted average shares outstanding:
Basic 2,473 2,473 2,473 2,473
Diluted 2,473 2,823 2,473 2,473
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
SURREY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (467) $ (66)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 199 184
Changes in operating assets and liabilities:
Accounts receivable 1,761 (1,754)
Inventories (312) (294)
Prepaid expenses and other current assets 14 285
Deferred income taxes 206 3
Trade accounts payable (575) 686
Accrued expenses 42 4
Income taxes receivable/payable 0 26
------- -------
Net cash provided by (used in) operating
activities 858 (926)
INVESTING ACTIVITIES
Acquisition of property and equipment (113) (617)
FINANCING ACTIVITIES
Proceeds from notes payable 0 1,350
Proceeds from debt and capital lease obligations 0 344
Payment of long-term debt and capital lease obligations (209) (181)
------- -------
Net cash provided by (used in) financing
activities $ (209) $ 1,513
------- -------
Net increase (decrease) in cash and cash
equivalents 536 (30)
Cash and cash equivalents, beginning of period (450) 77
------- -------
Cash and cash equivalents, end of period $ 86 $ 47
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 143 $ 283
Income taxes 0 0
Acquisition of property and equipment
under capital leases $ 0 $ 33
</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
SURREY, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six- month periods ended June
30, 2000 and 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the financial statements and footnotes thereto included in the Surrey, Inc.
annual report on Form 10-KSB for the year ended December 31, 1999.
2. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------- -----------------------
1999 2000 1999 2000
---------------------- -----------------------
<S> <C> <C> <C> <C>
Numerator:
Net Income (loss) $ 188 $ (126) $ (66) $ (467)
Numerator for basic and diluted income (loss)
per share - income (loss) available to common
stockholders $ 188 $ (126) $ (66) $ (467)
-------- -------- -------- --------
Denominator:
Denominator for basic income (loss) per share -
weighted - average shares 2,473 2,473 2,473 2,473
Dilutive effect of stock options 350 0 0 0
-------- -------- -------- --------
Denominator for diluted income (loss) per share -
adjusted weighted - average shares and assumed
conversions 2,823 2,473 2,473 2,473
Basic income (loss) per share $ 0.08 $ (0.5) $ (0.03) $ (0.19)
-------- -------- -------- --------
Diluted income (loss) per share $ 0.07 $ (0.5) $ (0.03) $ (0.19)
</TABLE>
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<PAGE>
Options to purchase 415,000 shares of common stock at $1.53 to $1.68 were issued
in April 2000. Options to purchase 317,500 shares of common stock at $4.00 to
$4.40 per share; warrants to purchase 675,000 shares of common stock at $4.80
per share; and a warrant to purchase 62,500 Units (consisting of two shares of
common stock and one redeemable common stock purchase warrant) at $9.75 per Unit
were outstanding during 2000 and 1999 but were not included in the computation
of diluted earnings per share because the exercise prices were greater than the
average market price of the common shares; therefor, the effect would be
antidilutive.
3. CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.
4. LONG-TERM DEBT
As of June 30, 2000, the Company was not in compliance with certain financial
covenants specified in its term loan and line of credit agreements. The Company
has received a waiver from the lender for such violations.
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<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of the
Company's level of operation and financial condition. This discussion should be
read with the financial statements appearing in Part I, Item 1 of this report.
RESULTS OF OPERATIONS
NET SALES. Net sales for the Company reflect total sales less cash
discounts and estimated returns. Net sales decreased to $3,910,000 for the three
months ended June 30, 2000 from $5,245,000 for the three months ended June 30,
1999, a decrease of 25.5%. Net sales decreased to $7,260,000 for the six months
ended June 30, 2000 from $8,577,000 for the six months ended June 30, 1999, a
decrease of 15.4%. The substantial decrease in net sales for both periods is
primarily attributable to the fact that (1) during first quarter 1999, the
Company delivered opening order shipments (initial shipments of products to
stock store shelves) for two major accounts, Bath & Body Works glycerin soap and
Minnetonka Brands, for its "Star Wars" soap retail distribution project and (2)
during second quarter 1999, the Company shipped large follow-on orders to both
Bath & Body Works and Minnetonka Brands. The Company currently expects sales
volume during the second half of 2000 to be comparable to sales for the second
half of 1999.
GROSS PROFIT. Gross profit decreased for the three months ended June
30, 2000 to $940,000 from $1,291,000 for the comparable three month period in
1999. Gross profit margin for the three month period decreased slightly from
24.6% in 1999 to 24.0% in 2000. Gross profit decreased for the six months ended
June 30, 2000 to $1,574,000 from $1,861,000 for the comparable six month period
in 1999. Gross profit margin for the six-month period remained the same at
21.7%. The decrease in gross profit during both periods is attributable to lower
sales during the periods, coupled with an increase in salaries and bonuses and
the addition of new hires, partially offset by inventory adjustments taken in
May 2000. Gross profit margin remained the same even with lower sales primarily
due to substantially lower production labor costs. These cost savings are being
driven by the Company's use of lower cost seasonal full-time employees instead
of higher cost temporary agency workers.
OPERATING EXPENSES. Operating expenses increased for the three
months ended June 30, 2000 by 13.5% over the three months ended June 30, 1999,
and increased as a percentage of net sales; $982,000 (or 25.1% of net sales) in
2000, as compared to $849,000 (or 16.2% of net sales) in 1999. Operating
expenses also increased in the six months ended June 30, 2000 by 15.1% over the
six months ended June 30, 1999, and increased as a percentage of net sales;
$1,970,000 (or 27.1% of net sales) in 2000, as compared to $1,672,000 (or 19.5%
of net sales) in 1999.
Sales and marketing expenses decreased for both the three months and
six months ended June 30, 2000 over the comparable periods in 1999, and
decreased in each case as a percentage of net sales. Such expenses for second
quarter decreased from $367,000 (or 7.0% of net sales) in 1999 to $203,000 (or
5.2% of net sales) in 2000, and for the six-month period, decreased from
$651,000 (or 7.6%
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<PAGE>
of net sales) in 1999 to $418,000 (or 5.8% of net sales) in 2000. The decrease
is primarily due to significantly lower sales commissions due to lower sales
volume.
General and administrative expenses increased for the three months
ended June 30, 2000 as compared to the same period in 1999, and also increased
as a percentage of net sales, from $482,000 (or 9.2% of net sales) in 1999 to
$779,000 (or 19.9% of net sales) in 2000. For the six months ended June 30,
2000, general and administrative expenses increased over the comparable period
in 1999, and increased as a percentage of net sales. Such expenses for the
six-month period increased from $1,021,000 (or 11.9% of net sales) in 1999 to
$1,552,000 (or 21.4% of net sales) in 2000. This increase was primarily due to
increased salaries for sales and marketing personnel.
INTEREST EXPENSE. Interest expense as a percentage of sales
increased slightly in both periods, as a result of higher bank borrowings and
rate increases. Interest expense was $144,000 (3.7% of net sales) in the three
months ended June 30, 2000, as compared to $171,000 in the three months ended
June 30, 1999 (3.3% of net sales). Interest expense was $263,000 (3.6 % of net
sales) for the six months ended June 30, 2000, as compared to $283,000 (3.3% of
net sales) for the six months ended June 30, 1999. The increase was primarily
due to the Company's increased borrowings in connection with its increased
inventory needs and the replacement and entire upgrade of its computer system.
Increased interest obligations resulted as the Company increased its revolving
line of credit to fund working capital, increased its long-term debt by moving
an outstanding working capital line to term debt, and incurred new lease
financing of approximately $450,000 for new a computer system and for candle
making equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations, bank and lease financing.
Effective April 2000, the Company amended its Loan Agreement with
Chase Bank of Texas, National Association ("Lender"). Under the amended Loan
Agreement, the Company currently has three outstanding term loans and a
revolving line of credit to be used for working capital purposes. The Company
has (a) a construction/term loan in the original principal amount of $2,300,000
("Original Term Loan") with a final maturity in April 2005; (b) a term loan, in
the original principal amount of $400,000 ("Second Term Loan") with a maturity
of February 2004; and (c) a term loan, in the original principal amount of
$1,000,000 ("Third Term Loan") with a maturity of April, 2003. An aggregate of
approximately $3,436,000 was outstanding at June 30, 2000 under all three term
loans.
The Company's current revolving line ("Revolving Note") with the
Lender is based, under the amended Loan Agreement, on eligible accounts and
eligible inventory and has a final maturity of May 8, 2001. Amounts currently
available under the Revolving Note include the lesser of (A) 80% of Eligible
Accounts (as defined), plus, on any date between April 1, 2000 and July 31, 2000
or between January 1, 2001 and May 8, 2001, the lesser of 50% of current
inventory balance and (x) $1.2 million, or (B) $3,000,000. As of August 1, 2000,
the Company had $900,000 outstanding under the Revolving Note and $600,000 in
excess borrowing capacity.
Under the current Loan Agreement, (a) interest on each of the Second
and Third Term Loans and the Revolving Note will float at the Lender's Prime
Rate plus 1%, and (b) interest on the Original Term Loan will be fixed at 8.50%.
The Company and the Lender have amended the financial covenants
under the Loan Agreement on several occasions to provide for reduced financial
covenants. Currently, the Loan
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<PAGE>
Agreement contains (among other requirements) the following covenants which are
tested quarterly. The Company must maintain:
(a) a current ratio of not less than 1.25 to 1.00 as of the end of each
calendar quarter after June 30, 1999;
(b) a debt to tangible net worth ratio not greater than 2.25 to 1.00 as
of the end of each calendar quarter after June 30, 1999; and
(c) a debt service coverage ratio, beginning with quarter ending March
31, 2000, of not less than 1.20 to 1.00, with the numerator of the
debt service coverage ratio being calculated on a rolling four
quarters basis, tested for compliance as of the end of each calendar
quarter.
At June 30, 2000, the Company was not in compliance with either the
debt service coverage ratio or the debt to tangible net worth covenant set forth
above and has received a waiver from the Lender for such non-compliance.
Interest on each of the term loans and the Revolving Note is payable
monthly. Under the Loan Agreement, the Company is required to pay down the
Revolving Note and maintain a zero balance for 30 consecutive days once prior to
its maturity in April 2001. Principal and interest on the term loans is payable
in monthly installments, which aggregate approximately $43,700 per month,
increasing to approximately $46,200 per month after April 2001.
The Loan Agreement also limits indebtedness by the Company,
restricts borrowing under certain equipment leases to $2,000,000, restricts the
Company from making or incurring capital expenditures exceeding $2,000,000 in
any 12 month period, restricts indebtedness in connection with acquisition of
equipment to $200,000 and limits sales of assets. The Loan Agreement also
restricts the Company from making any dividends or distributions on its capital
stock unless net income equals or exceeds $2,000,000, repurchasing or redeeming
any capital stock (other than pursuant to the terms of the Company's Warrants,
provided no default would occur under the bank loans), paying any bonus or other
non-salary compensation, replacing its President or Chief Financial Officer, or
entering into certain related party transactions without prior written consent
of Lender.
The Company leases certain pieces of its manufacturing equipment
pursuant to capital leases. The capital leases currently in effect have maturity
dates ranging from dates during 2000 to 2003. Such leases provide that if no
event of default exists thereunder the Company may purchase the equipment
subject to the lease at the expiration of the lease or may renew the lease.
The Company has a lease line of credit with Key Corporate Capital,
Inc. (due in 2005) which provides for a $1,562,000 leasing line of credit. The
Company drew the entire amount under this line of credit in 1998. The Chief
Executive Officer of the Company has personally guaranteed this lease line of
credit. Payments under this line are approximately $288,400 per year or $24,000
per month.
The Company also has two three year capital lease lines of credit,
originally with Winthrop Resources, Inc., in the aggregate amount of
approximately $777,000. The Company has fully utilized these lines of credit.
Payments under these two lines of credit total approximately $300,000 per year
or $25,000 per month.
The Company also has a three year capital lease line of credit,
originally entered into in March 1999 with Amembal Capital Corporation, in the
total amount of approximately $416,000. Payments under this line of credit are
approximately $70,900 per year or $5,900 per month.
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<PAGE>
During second quarter 2000, the Company completed a system-wide
replacement and upgrade of its computer system. The final cost of this
replacement was $325,000, which has been financed through a three-year operating
lease with Softech Financial. The Company began drawing on the lease line in
first quarter and the final lease closed in July 2000. Payments under this line
of credit are approximately $114,000 per year or $9,500 per month.
During second quarter 2000 the Company added an additional
seven-year $125,000 operating lease line of credit to provide financing for its
new candle production line. The development of this new production line was
financed out of operating funds, $125,000 of which has been replaced by the
proceeds of this line of credit during second quarter 2000. Payments under this
line of credit are expected to be approximately $36,000 per year or $3,000 per
month.
The Company believes that cash expected to be provided by future
operations and its current bank loans and financing leases will be sufficient to
meet its working capital and anticipated capital expenditure requirements during
2000. However, the Company may need to seek additional working capital financing
if net sales increase more than currently anticipated.
The Company experiences seasonal fluctuations in operating results,
with sales and revenues generally higher during the third and fourth calendar
quarters, reflecting primarily orders for the holiday retail season. Orders
shipped in the third and fourth quarters generally account for approximately 60%
of the Company's total net sales for the year.
FORWARD LOOKING INFORMATION
Statements contained in this report regarding the Company's future
operations, including its growth strategy, future performance and results, its
ability to meet its working capital and capital expenditure needs, increased
sales, anticipated liquidity, and any reduction in expenses 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 continued receipt of large orders from the
Company's significant customers, including Bath & Body Works, the Company's
ability to effectively manage its costs of operation, its ability to continue to
increase its marketing and sales efforts in order to take advantage of its
increased production facilities, and the continued availability of all of the
Company's current and anticipated lines of credit.
Any forward looking information regarding an increase in the
Company's gross profit margin also will be affected by the Company's ability to
implement its strategy of increasing sales and its customer base, focusing on
the sales of higher margin products, and the Company's ability to efficiently
utilize its expanded facilities and effectively manage its labor costs. There
can be no assurance that the Company will be successful in efficiently managing
its growth in order to maximize potential production and contain costs.
PART II: OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is, from time to time, involved in legal proceedings
arising in the normal course of business. No current proceeding is expected to
result in any material loss to the Company.
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<PAGE>
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 27, 2000, proxy statements were mailed to the holders of
record of 2,472,727 shares of common stock to solicit proxies in connection with
the Annual Meeting of Shareholders on May 2, 2000. Shareholders holding
2,454,418 shares were present, in person or by proxy. Four proposals were
submitted to a vote of shareholders.
Vote
-----------------------------------
Matter For Withhold Authority
------ --- ------------------
1. Election of Directors: 2,440,068 1,000
John B. van der Hagen 2,440,068 1,000
Martin J. van der Hagen 2,440,068 1,000
Mary A. van der Hagen 2,440,068 1,000
Bruce Masucci 2,440,068 1,000
G. Thomas MacIntosh 2,440,068 1,000
2. Approval and Adoption of 2000 Long-Term Incentive Plan
-----------------------------------------------------
For Against Abstain
--- ------- -------
1,393,280 40,250 1,317
3. Approval and Adoption of Amendment to 1997 Non-Employee
Directors' Plan
-----------------------------------------------------
For Against Abstain
--- ------- -------
1,377,580 55,950 1,317
4. Ratification and Appointment of Grant Thornton as independent
auditors for fiscal year 2000
-----------------------------------------------------
For Against Abstain
--- ------- -------
2,448,418 5,000 1,000
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ITEM 5 OTHER INFORMATION
In July 2000, the Company was notified by The Nasdaq that it was not
currently in compliance with the continued listing requirement that its stock
price maintain a bid price of $1.00 or above. Under The Nasdaq rules, the
Company has until October 12, 2000 to come into compliance with such
requirement; otherwise, The Nasdaq has the right to delist the Company's common
stock.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. - Financial Data Schedule
(b) The Company filed no Reports on Form 8-K during the reporting
period.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SURREY, INC.
(Registrant)
Date: August 11, 2000 By: /s/ Martin van der Hagen
--------------------------------------
Martin van der Hagen
President
By: /s/ Mark van der Hagen
--------------------------------------
Mark van der Hagen
Chief Financial Officer
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