SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 28, 1997
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.
Yes X No
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 March 31, 1997:
4,823,958 shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes No X
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Form 10-QSB
for the Period Ended February 28, 1997
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
Item 2. Managements Discussion and Analysis or
Plan of Operation 8 - 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
2
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
February 28, November 30,
1 9 9 7 1 9 9 6
Current assets:
Cash $2,635,923 $3,241,360
Marketable securities 2,079,581 2,042,681
Accounts receivable (net of allowance for
doubtful accounts of $9,206) 1,079,354 899,851
Inventory 1,381,995 1,332,644
Prepaid expenses and taxes 44,963 21,827
Cash surrender value 16,473 16,472
Total current assets 7,238,289 7,554,835
Fixed assets - net of accumulated depreciation
of $119,931 and $107,114, respectively 161,316 169,777
Other assets:
Security deposits 2,985 2,985
Total assets $7,402,590 $7,727,597
See accompanying notes to consolidated financial statements.
3
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, November 30,
1 9 9 7 1 9 9 6
Current liabilities:
Loan payable bank $ 166,390 $ 164,232
Accounts payable 809,743 969,954
Accrued expenses 103,709 220,792
Corporation taxes payable 1,050 61,762
Total current liabilities 1,080,892 1,416,740
Long term debt:
Deferred income tax 5,038 4,488
Total liabilities 1,085,930 1,421,228
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
shares issued and outstanding respectively 4,824 4,824
Additional paid-in capital 6,335,862 6,335,862
Unrealized holding gain 37,811 35,751
Retained deficit (61,837) (70,068)
Total stockholders' equity 6,316,660 6,306,369
Total liabilities and stockholders' equity $7,402,590 $7,727,597
See accompanying notes to consolidated financial statements.
4
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
February 28, February 29,
1 9 9 7 1 9 9 6
Sales $2,137,379 $2,014,476
Less returns and allowances 7,767 8,586
Net sales 2,129,612 2,005,890
Cost of goods sold 1,565,271 1,531,898
Gross profit 564,341 473,992
Operating expenses:
General and administrative
Expenses 452,158 299,742
Selling and shipping expenses 146,945 117,136
Interest expense 11,486 12,160
Depreciation 13,766 4,425
Total operating expenses 624,355 433,463
Income from operations (60,014) 40,529
Investment income 71,100 8,776
Income before income taxes 11,086 49,305
Income taxes 2,855 12,743
Net income $ 8,231 $ 36,562
Weighted average shares outstanding 4,872,926 3,011,733
Earnings per share $ -- $ .01
See accompanying notes to consolidated financial statements.
5
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
February 28, February 29,
1 9 9 7 1 9 9 6
OPERATING ACTIVITIES:
Net income $ 8,231 $ 36,562
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 13,766 4,425
Deferred income taxes 550 32
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (179,503) (64,336)
Inventory (49,351) 16,981)
Prepaid expenses and taxes (23,136) (6,035)
Accounts payable (160,211) (35,002)
Accrued expenses and taxes (177,795) (175,249)
Customer deposit -- (24,837)
NET CASH USED IN OPERATING ACTIVITIES (567,449) (281,421)
INVESTING ACTIVITIES
Purchase of marketable securities (34,840) --
Acquisition of fixed assets (5,305) (9,523)
NET CASH USED IN INVESTING ACTIVITIES (40,145) (9,523)
FINANCING ACTIVITIES
Deferred offering costs -- (110,434)
Net borrowings under letter-of-credit agreement 2,157 206,123
Proceeds from issuance of stock -- 325,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,157 420,689
NET CHANGE IN CASH (605,437) 129,745
CASH AT BEGINNING OF PERIOD 3,241,360 679,995
CASH AT END OF PERIOD $2,635,923 $ 809,740
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 74,607 $ 2,272
Interest paid $ 11,486 $ 12,160
See accompanying notes to consolidated financial statements.
6
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1997
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 February 28, 1997 and November
30, 1996 and the results of operations and cash flows for the three months
ended February 28,1997 and February 29,1996.
The accounting policies followed by the Company are set forth in Note 2 to the
Companys financial statements included in its Annual Report on Form 10-KSB, for
the year ended November 30, 1996.
The results of operations for the three months ended February 28, 1997 and
February 29, 1996 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 STOCK OPTION AGREEMENT
In January 1997, the Company granted five-year incentive stock options under
the Companys 1995 Employee Stock Option Plan (the Option Plan) to two employees
to purchase 20,000 common shares each. The options became effective on January
8, 1997, are exercisable at $3.50 per common share and vest ratably over a four
year period. The Company also granted nonqualified stock options under the
Option Plan to purchase 10,000 common shares to each of two members of the
Board of Directors. The options became effective on January 8, 1997 and are
exercisable at $3.50 per common share at any time on or after January 8, 1997.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company currently accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion No
25 Accounting for Stock Issued to Employees. Since the Company is not required
to adopt the fair value based recognition provisions prescribed under SFAS No.
123, it has elected only to comply with the disclosure requirements set forth
in the statement which includes disclosing pro forma net income and earnings
per share as if the fair value based method of accounting had been applied.
The proforma net loss and loss per share for the quarter ended February 28,
1997 would have been $66,468 and $.01 had the new method been applied.
7
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 three months ended February 28, 1997 increased by $123,722 or 6%, to
$2,129,612 as compared to net sales of $2,005,890 for the three months ended
February 29, 1996. This increase was attributable primarily to increased sales
volumes with existing customers who purchased newly introduced products, as
well as existing Surge products which they had not previously purchased. The
Company introduced various new product lines in the fourth quarter Fiscal 1996.
The Company negotiated with a new Asian manufacturer to market one of these
product lines, which had patent protection until recently. This new line
protects the product from high intensity heat found in products such as,
ballast lighting fixtures and automotive products.
The Companys gross profit for the three months ended February 28, 1997
increased by $ 90,349, or 19%, as compared to the three months ended February
29, 1996. This increase was due primarily to lower purchasing costs and
increased sales volumn. The increased inventory, related to the Companys
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 Company has used inventory warehousing and shipping
services from a California firm. The Company plans to open additional
warehousing facilities in the later part of 1997.
General and administrative expenses for the three months ended February
28, 1997 increased by $152,416, or 51%, as compared to the three months ended
February 29, 1996. The increase is primarily due to the hiring of additional
staff such as an engineer, national sales manager, public relations firm,
investment banking consulting fees and the general costs incurred by a public
reporting company. In addition, the Companys investment in personnel is
expected to significantly increase costs prior to the generation of increased
sales attributable from such additional employees during the fiscal year ending
November 30, 1997 (Fiscal 1997) or later.
Selling and shipping expenses for the three months ended February 28,
1997 increased by $29,809, or 25%, as compared to the three months ended
February 29, 1996. This increase is primarily due to increased commissions
resulting from the increase in sales volume and increased participation of
independent sales representatives which received commissions typically at a
rate of 5% of net sales. The Company is committed to increasing sales through
qualified sales representatives, literature, participation in trade shows and
utilization of a marketing/public relations firm.
8
Interest expense remained relatively unchanged for the three months ended
February 28, 1997 and February 29, 1996. The Company intends to continue
utilizing letters of credit and bankers acceptances on an as needed basis based
on its cash needs.
Investment income increased by $ 62,324 for the three months ended
February 28, 1997 as compared to the three months ended February 29, 1996.
This is a result from the income derived from the investment of any unused
funds from the public offering or excess operation funds.
As result of the foregoing, the Company had net income of $8,231 for the
three months ended February 28, 1997, as compared to a net income of $36,562
for the three months ended February 29, 1996.
Liquidity and Capital Resources
Working capital increased by $19,302 during the three months ended February 28,
1997 from $6,138,095 at November 30, 1996, to $6,157,397 at February 28, 1997.
This increase resulted primarily from the increase in accounts receivable
netted against additional spending related to the Companys expansion plans. The
Companys Current Ratio improved to 6.7:1 at February 28, 1997, as compared to
5.3:1 at November 30, 1996. Inventory turned less in the three months ended
February 28, 1997 as a result of the Companys commitment to increase stock
inventory levels. The average number of days to collect receivables remained
the same at 42 days. Working capital levels are adequate to meet the current
operating requirements of the Company.
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 prime rate plus one percent per annum. The agreement also provides for
the creation of banker's acceptance (a draft drawn on and accepted by a bank).
Direct borrowings are limited to advances based on 80% of eligible receivables
and 25% of eligible inventory capped at $100,000. The Company is charged
one-half percent (1/2%) upon opening of the letter of credit, one-half percent
(1/2%) on negotiation and two percent (2%) per annum over the banker's
acceptance rate over the borrowed term. The agreement requires the Company to
be in compliance with certain financial ratios including a debt to equity ratio
and a minimum amount of tangible net worth. The Company was in compliance
with the required financial ratios as of February 28, 1997. As of February
28, 1997 and February 29, 1996, there was no outstanding direct borrowings,
although outstanding banker's acceptances and letters of credit totaled
approximately $207,406 and $621,529, respectively. Borrowings are
collateralized by the assets of the Company and guaranteed by officers of the
Company.
The Company intends to expand its facilities over the next several years in
order to achieve and maintain the growth expected primarily through the
increased penetration of the OEM and distribution market, the introduction
9
of new products and the upgrade of existing product lines. In order to effect
this expansion, the Company has allocated a portion of the net proceeds of the
Public Offering toward the significant up-front expenditures associated with the
expansion of office and warehouse space at its current facilities in addition
to potentially establishing additional sales/stocking facilities in other
strategic locations. The renovation of its current facilities is expected to
commence in late 1997. Additionally, the renovation plans contain provisions
for space for test labs, which will allow the Company to provide customers with
prompt information regarding the specifications and quality aspects of its
products.
In addition to the costs associated with the expansion of the Company's
facilities, the Company expects to continue to incur significant operating
costs. These costs consist principally of payroll and facilities related
charges, as well as professional fees associated with being a public reporting
company. Upon the updating of its current facilities and the potential opening
of new facilities, facilities related charges are expected to rise
dramatically. Staffing requirements for any new facilities may substantially
increase payroll related costs. The future profitability of the Company will
therefore depend on increased future sales levels. In that regard the Company
does not plan on opening new facilities unless market potential and/or demand
warrants such opening.
Effective January 1, 1996, Challenge entered into an agreement to supply
audible transducers for computer motherboards to Intel Corporation. The
agreement is for one year with a one year renewal option; however, it is
terminable at will by Intel Corporation.
The Company is in the process of upgrading its equipment, procedures and
personnel which it hopes will better enable itself to attract new customers as
well as increase the sales volume with its existing customers. The Company
hopes to expand sales to its existing customer base by offering a broad range
of complementary products. The Company has initiated a public relations program
to promote these products through various trade journals. The Company has
hired a national sales manager to assist in achieving these goals.
During the three months ended February 28, 1997, the Company had net cash
used in operating activities of $567,449, as compared to $281,421 used in
operating activities in the three months ended February 29, 1996. The increase
in cash used in operating activities resulted from an increase in accounts
receivable and inventory and decreased accounts payable and accrued expenses
and taxes.
During the three months ended February 28, 1997, The Company had net cash
provided by financial activities of $2,157 as compared with $420,689 in the
three months ended February 29, 1996. The decrease in the cash provided by
financing activities was the result of the proceeds from the issuance of stock
and net borrowings under the letter-of-credit agreement during the first
quarter of 1996. As a result of the forgoing, the Company had a net decrease
in cash of $605,437 during the three months ended February 28, 1997 as compared
to an increase in cash of $129,745 during the three months ended February 29,
1996.
10
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
11.1 Statement re: Computation of per share earnings.
27. Statement re: Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter
for which this report is filed.
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: April 10, 1997
11
SURGE COMPONENTS, INC. AND SUBSIDIARY
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended
February 28, February 29,
1 9 9 7 1 9 9 6
Net income $ 8,231 $ 36,562
Shares:
Weighted common shares outstanding 4,823,958 2,049,233
Employees stock options 48,968 --
Options to The Harriman Group -- 962,500
A warrants -- --
Underwriter options -- --
Total weighted shares outstanding 4,872,926 3,011,733
Earnings per share $ -- $ .01
<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> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> FEB-28-1997
<CASH> 2,635,923
<SECURITIES> 2,079,581
<RECEIVABLES> 1,088,560
<ALLOWANCES> 9,206
<INVENTORY> 1,381,995
<CURRENT-ASSETS> 7,238,289
<PP&E> 281,247
<DEPRECIATION> 119,931
<TOTAL-ASSETS> 7,402,590
<CURRENT-LIABILITIES> 1,080,892
<BONDS> 0
0
0
<COMMON> 4,824
<OTHER-SE> 6,311,836
<TOTAL-LIABILITY-AND-EQUITY> 7,402,590
<SALES> 2,129,612
<TOTAL-REVENUES> 2,200,712
<CGS> 1,565,271
<TOTAL-COSTS> 624,355
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,486
<INCOME-PRETAX> 11,086
<INCOME-TAX> 2,855
<INCOME-CONTINUING> 8,231
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