SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended August 31, 1996
Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ____________
Commission file number 1 - 14188
Surge Components, Inc.
______________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
New York 11-2602030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1016 Grand Boulevard, Deer Park, NY 11729
________________________________________________________________________________
(Issuers telephone number, including area code)
(516) 595 1818
________________________________________________________________________________
(Issuers telephone number, including area code)
_______________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 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. (The
registrant has been subject to the filing requirements since July 31, 1996.)
Yes _______ No ___X____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: As of October 8, 1996: 4,823,958
shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes _______ No __X______
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
Index to Financial Statements
for the Period Ended August 31, 1996
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Managements Discussion and Analysis or Plan of Operation 9 - 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
<TABLE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
August 31, November 30,
1 9 9 6 1 9 9 5
<S> <C> <C>
ASSETS
Current assets:
Cash $5,450,638 $ 679,995
Accounts receivable (net of allowance
for doubtful accounts of $7,018) 1,154,969 1,027,417
Inventory 808,541 736,356
Prepaid expenses and taxes 24,454 7,611
Cash surrender value 6,914 6,914
Deposits on merchandise -- 1,150
Total current assets 7,445,516 2,459,443
Fixed assets - net of accumulated depreciation
of $95,334 and $77,921, respectively 93,302 73,455
Other assets:
Deferred offering costs -- 87,691
Security deposits 2,985 2,985
Total assets $7,541,803 $2,623,574
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
August 31, November 30,
1 9 9 6 1 9 9 5
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable - bank $ 378,611 $ 129,843
Accounts payable 776,902 735,971
Accrued expenses 143,115 404,530
Corporation taxes payable 25,387 1,733
Customer deposit 25,855 24,837
Total current liabilities 1,349,870 1,296,914
Long term debt:
Deferred income tax 5,986 4,288
Total liabilities 1,355,856 1,301,202
Stockholders' equity:
Preferred stock - $.001 par value stock,
1,000,000 shares authorized, none issued
and outstanding -- --
Common stock - $.001 par value stock,
25,000,000 shares authorized, 4,823,958
and 1,748,958 shares issued and
outstanding respectively 4,824 1,749
Additional paid-in capital 6,299,206 1,529,829
Retained deficit (118,083) (209,206)
Total stockholders' equity 6,185,947 1,322,372
Total liabilities and stockholders' equity $7,541,803 $2,623,574
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Three Months Ended
August 31, August 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
<S> <C> <C> <C> <C>
Sales $6,331,125 $6,682,933 $2,045,479 $2,772,307
Less returns and allowances 21,034 29,934 6,435 14,257
Net sales 6,310,091 6,652,999 2,039,044 2,758,050
Cost of goods sold 4,813,015 5,197,323 1,593,927 2,151,473
Gross profit 1,497,076 1,455,676 445,117 606,577
Operating expenses:
General and administrative
expenses 972,049 992,717 324,406 467,167
Selling and shipping expenses 354,279 317,674 82,167 118,326
Interest expense 35,563 33,744 12,905 9,924
Depreciation 17,413 11,639 6,903 5,295
Total operating expenses 1,379,304 1,355,774 426,381 600,712
Income from operations 117,772 99,902 18,736 5,865
Interest income 27,560 9,779 9,368 3,357
Income before income taxes 145,332 109,681 28,104 9,222
Income taxes 54,209 38,849 8,636 1,246
Net income $ 91,123 $ 70,832 $ 19,468 $ 7,976
Weighted average shares outstanding 3,258,102 2,711,458 3,561,534 2,711,458
Earnings per share $ .03 $ .03 $ .01 $ --
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
August 31,
1 9 9 6 1 9 9 5
<CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 91,123 $ 70,832
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 17,413 11,639
Deferred income taxes 1,698 (1,125)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (126,402) (404,943)
Inventory (72,185) (55,269)
Prepaid expenses and taxes (16,843) 5,901
Accounts payable 40,931 (7,186)
Accrued expenses and taxes (237,761) 209,729
Customer deposit 1,018 (4,864)
NET CASH USED IN OPERATING ACTIVITIES (301,008) (175,286)
INVESTING ACTIVITIES
Acquisition of fixed assets (37,260) (37,777)
FINANCING ACTIVITIES
Deferred offering costs (1,104,857) (42,500)
Net borrowings under
letter-of-credit agreement 248,768 76,289
Receipt of subscription -- 1,200
Advances to employees -- 2,500
Advances to officers -- (2,231)
Proceeds from exercise of warrant 120,000 --
Proceeds from private offering 325,000 --
Proceeds from public offering 5,520,000 --
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,108,911 35,258
NET CHANGE IN CASH 4,770,643 (177,805)
CASH AT BEGINNING OF PERIOD 679,995 573,560
CASH AT END OF PERIOD $5,450,638 $ 395,755
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 26,399 $ 56,077
Interest paid $ 35,563 $ 33,744
Payment of legal services through issuance
of stock $ 25,000 $ --
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying financial statements of Surge
Components Inc. and Subsidiary contain all adjustments necessary to present
fairly the Companys financial position as of August 31, 1996 and November 30,
1995 and the results of operations for the nine and three months ended August
31, 1996 and 1995 and cash flows for the nine months ended August 31, 1996 and
1995.
The accounting policies followed by the Company for the year ended November 30,
1995 are set forth in Note 2 to the Companys financial statements included in
its Registration Statement on Form SB-2 declared effective by the Securities
and Exchange Commission on July 31, 1996.
The results of operations for the nine and three months ended August 31, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - LETTERS OF CREDIT TO BANK
In May 1996, the Company renewed the letter of credit agreement with a bank
allowing the Company to obtain up to $800,000 in outstanding letters of credit
and $200,000 in direct borrowings. The direct borrowings incur interest at a
rate of prime plus one percent per annum. All other terms and conditions are
identical to the prior agreement.
NOTE 3 - STOCKHOLDERS' EQUITY
Warrant Agreement
In April 1994, the Company entered into a warrant agreement with The Harriman
Group, Inc. in consideration for the services rendered under the above-
described financial advisory and investment banking agreement. In exchange
for $1,200, the investment banker received 1,000,000 warrants which were
exercisable for 1,000,000 shares of the Company's common stock at $.12 per
share for a one-year period commencing on the date the Company's common stock
became listed on any stock exchange, or sooner, upon mutual agreement of the
Company and The Harriman Group, Inc. In July 1996, the warrants were
exercised.
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 3 - STOCKHOLDERS' EQUITY (Continued)
Public Offering
On August 8, 1996, the Company grossed $5,520,000 and netted approximately
$4,807,000 from the completion of a public offering under the Securities Act
of 1933 as amended. The offering consisted of 1,725,000 units, at a selling
price of $3.20 per unit. Each unit consisted of one Common Share (the Common
Shares) and one redeemable Class A Common Share Purchase Warrant (the
Warrants). Each Warrant entitles the holder to purchase one Common Share for
a period of five years commencing two years after the effective date of the
offering at a price of $5.00.
<PAGE>
Item 2. Managements Discussion and Analysis or Plan of Operation
Results of Operations
Net sales for Surge Components, Inc. and Subsidiary (the Company) for the
nine months ended August 31, 1996 decreased by $342,908 or 5%, to $6,310,091
as compared to net sales of $6,652,999 for the nine months ended August 31,
1995. The Companys net sales for the three months ended August 31, 1996
decreased by $719,006, or 26%, to $2,039,044 as compared to net sales of
$2,758,050 for the three months ended August 31, 1995. This decrease was
primarily attributable to the economic effect of the broker distributor market
in which the Companys subsidiary, Challenge Surge Inc. (Challenge), operated.
This market currently has an over abundance of electronic components causing
Challenges customers to purchase more of their component needs from authorized
distributors. This condition may continue into 1997. The net sales for the
Company without Challenges sales increased by 14% for the nine months ended
August 31, 1996. This increase was attributable primarily to increased sales
volumes with existing customers who purchased items from new product lines,
as well as items previously sold by the Company.
The Companys gross profit for the nine months ended August 31, 1996
increased by $41,400, or 3%, as compared to the nine months ended August 31,
1995. This increase was due primarily to lower purchasing costs. The
increased inventory, related to the Company expansion plans, is expected to
make operations more efficient and further reduce inventory acquisition
costs, including air shipment costs, by purchasing inventory in larger
quantities, at more opportune times and at more favorable prices. The
Companys gross profit for the three months ended August 31, 1996 decreased
by $161,460, or 27%, as compared to the nine months ended August 31, 1995.
The decrease was due primarily to the above market conditions related to
Challenges products.
General and administrative expenses for the nine months ended
August 31, 1996 decreased by $20,668, or 2%, as compared to the nine months
ended August 31, 1995. For the three months ended August 31, 1996, general
and administrative expenses decreased by $142,760, or 31%, as compared to the
three months ended August 31, 1995. The difference is primarily the result of
bonus declared for certain employees during the third quarter of fiscal 1995,
partially offset by an increase in payroll due to the hiring of an engineer
and an outside salesman during fiscal 1996.
<PAGE>
Selling and shipping expenses for the nine months ended August 31, 1996
increased by $36,605, or 12%, as compared to the nine months ended August 31,
1995. For the three months ended August 31, 1996, selling and shipping
expenses decreased by $36,159, or 31%, as compared to the three months ended
August 31, 1995. The increase for the nine months ended August 31, 1996 is
primarily due to the Companys commitment to sales promotion and literature.
The Company began to more actively promote itself and its products in fiscal
1996 through attendance at various trade shows and through association with
a marketing/public relations firm. The decrease in selling and shipping
expense for the three months ended August 31, 1996 is primarily due to
reduced commissions resulting from the decrease in sales volume experienced
by Challenge.
Interest expense remained relatively unchanged for the nine months and
three months ended August 31, 1996 and 1995. The Company intends to decrease
costs associated with the current letter of credit agreement by lowering its
borrowing levels with the bank.
As result of the foregoing, the Company had net income of $91,123 for
the nine months ended August 31, 1996, as compared to a net income of $70,832
for the nine months ended August 31, 1995. The Company had net income of
$19,468 for the three months ended August 31, 1996, as compared to a net
income of $7,976 for the three months ended August 31, 1995.
Liquidity and Capital Resources
Working capital increased by $4,933,117 during the nine months ended August 31,
1996 from $1,162,529 at November 30, 1995, to $6,095,646 at August 31, 1996.
This increase resulted primarily from the receipt of the proceeds received
from the August 1996 public offering under the Securities Act of 1933. The
Companys Current Ratio improved to 5.5:1 at August 31, 1996, as compared to
1.9:1 at November 30, 1995. Inventory turned less in the nine months ended
August 31, 1996 as a result of the Companys commitment to increase stock
inventory levels. The average number of days to collect receivables
increased from 38 days to 44 days returning to the levels of fiscal 1994.
Working capital levels are adequate to meet the current operating
requirements of the Company.
<PAGE>
In May 1996, the Company renewed its letter of credit agreement with a
bank allowing the Company to obtain up to $800,000 in outstanding letters of
credit and $200,000 in direct borrowings. The direct borrowings incur
interest at a prime rate plus one percent per annum. All other terms and
conditions are identical to the prior agreement. As of August 31, 1996, there
was no outstanding direct borrowings, although outstanding bankers
acceptances and letters of credit totaled approximately $543,000. The Company
was in compliance with the required financial ratios.
On August 8, 1996, the Company completed a public offering under the
Securities Act of 1933, as amended, for which it grossed $5,520,000 and
netted $4,807,027. The offering consisted of 1,725,000 units, at a selling
price of $3.20 per unit. Each unit consisted of one Common Share and one
redeemable Class A Common Share Purchase Warrant. Each Warrant entitles the
holder to purchase one Common Share for a period of five years commencing two
years after the effective date of the offering at a price of $5.00.
In June 1996, warrants purchased by The Harriman Group, Inc. in 1994
were exercised into 1,000,000 shares of the Companys common stock for which
the Company received $120,000.
Although the Company has yet to obtain warehouse space as part of its
expansion plans, the Company plans to open a warehouse facility during the
early part of 1997.
The Company is in the process of updating its equipment, procedures and
personnel which it hopes will better enable itself to increase and expand the
sales volume to the existing customer base, as well as attracting new
customers, by offering a broad range of complementary products and to
introduce new product lines. The Company has initiated a formal marketing
program to promote these products through a marketing organization. The
Company has hired a national sales manager, who was previously employed by a
competitor, to assist in achieving these goals.
The Company plans to introduce a new product line in the fourth quarter
of fiscal 1996. The patent on a competitors product expired and the Company
has completed negotiations with an Asian manufacturer to produce this new
line which handles high intensity heat used in lighting fixtures and
automobiles more efficiently.
<PAGE>
During the nine months ended August 31, 1996, the Company had net cash
used in operating activities of $301,008, as compared to $175,286 used in
operating activities in the nine months ended August 31, 1995. The increase
in cash used in operating activities resulted from an increase in accounts
receivable and inventory and decreased accrued expenses and taxes, partially
offset by income from operations and increased accounts payable.
The Company had net cash provided by financing activities of $5,108,911
in the nine months ended August 31, 1996, as compared to $35,258 in the nine
months ended August 31, 1995. This increase resulted primarily from the net
receipt of proceeds from the stock offerings and the exercise of warrants as
well as through additional borrowings under the letter of credit agreement
for the nine months ended August 31, 1996. As a result of the foregoing, the
Company had a net increase in cash of $4,770,643 during the nine months ended
August 31, 1996, as compared to a net decrease of $177,805 in the nine months
ended August 31, 1995.
PART II
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
Statement re: Computation of per share earnings.
Statement re: Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SURGE COMPONENTS INC.
By: /s/ Steven J Lubman
Steven J. Lubman
Vice President, Principal
Financial Officer, Secretary and
Director
Dated: October 14 , 1996
<TABLE>
<CAPTION>
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
<S> <C> <C> <C> <C>
Primary earnings:
Net income $ 91,123 $ 70,832 $ 19,468 $ 7,976
Shares:
Weighted average number of common shares
and common share equivalents outstanding 3,258,102 2,711,458 3,561,534 2,711,458
Primary earnings per common share $ .03 $ .03 $ .01 $ --
Fully diluted earnings:
Net income $ 91,123 $ 70,832 $ 19,468 $ 7,976
Net (after tax) interest expense related
to convertible debt -- -- -- --
Net income as adjusted $ 91,123 $ 70,832 $ 19,468 $ 7,976
Shares:
Weighted average number of common shares
and common share equivalents outstanding 3,258,102 2,711,458 3,561,534 2,711,458
Fully diluted earnings per common share $ .03 $ .03 $ .01 $ --
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Balance Sheet and Statements of Income filed as part
of the report on Form 10QSB and is qualified in its entirety
by reference to such report on Form 10QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 5,450,638
<SECURITIES> 0
<RECEIVABLES> 1,161,987
<ALLOWANCES> 7,018
<INVENTORY> 808,541
<CURRENT-ASSETS> 7,445,516
<PP&E> 188,636
<DEPRECIATION> 95,334
<TOTAL-ASSETS> 7,541,803
<CURRENT-LIABILITIES> 1,349,870
<BONDS> 0
0
0
<COMMON> 4,824
<OTHER-SE> 6,181,123
<TOTAL-LIABILITY-AND-EQUITY> 7,541,803
<SALES> 6,310,091
<TOTAL-REVENUES> 6,337,651
<CGS> 4,813,015
<TOTAL-COSTS> 1,343,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,563
<INCOME-PRETAX> 145,332
<INCOME-TAX> 54,209
<INCOME-CONTINUING> 91,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,123
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
