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 August 31, 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
(Address of principal executive offices)
(516) 595 - 1818
(Issuer's 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 issuer's classes
of common equity, as of the latest practicable date: As of September 30,
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 August 31, 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 - 8
Item 2. Management's Discussion and Analysis
or Plan of Operation 9 - 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13 - 22
Signatures 13
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, November 30,
1 9 9 7 1 9 9 6
Current assets:
Cash $2,826,571 $3,241,360
Marketable securities 2,185,112 2,042,681
Accounts receivable (net of allowance for
doubtful accounts of $9,206) 1,412,023 899,851
Inventory 1,405,247 1,332,644
Prepaid expenses and taxes 121,970 21,827
Cash surrender value 16,472 16,472
Total current assets 7,967,395 7,554,835
Fixed assets - net of accumulated depreciation
of $147,185 and $107,114, respectively 140,665 169,777
Other assets:
Security deposits 2,985 2,985
Total assets $8,111,045 $7,727,597
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, November 30,
1 9 9 7 1 9 9 6
Current liabilities:
Loan payable - bank $ 671,081 $ 164,232
Accounts payable 955,893 969,954
Accrued expenses 101,088 220,792
Corporation taxes payable -- 61,762
Total current liabilities 1,728,062 1,416,740
Long term debt:
Deferred income tax 2,950 4,488
Total liabilities 1,731,012 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 77,358 35,751
Retained deficit (38,011) (70,068)
Total stockholders' equity 6,380,033 6,306,369
Total liabilities and stockholders' equity $8,111,045 $7,727,597
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Three Months Ended
August 31, August 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
Sales $7,466,138 $6,331,125 $2,847,282 $2,045,479
Less returns and allowances 28,378 21,034 10,865 6,435
Net sales 7,437,760 6,310,091 2,836,417 2,039,044
Cost of goods sold 5,646,320 4,813,015 2,225,884 1,593,927
Gross profit 1,791,440 1,497,076 610,533 445,117
Operating expenses:
General and administrative
expenses 1,366,738 972,049 458,697 324,406
Selling and shipping expenses 511,576 354,279 159,787 82,167
Interest expense 37,466 35,563 14,887 12,905
Depreciation 41,020 17,413 13,761 6,903
Total operating expenses 1,956,800 1,379,304 647,132 426,381
Income from operations (165,360) 117,772 (36,599) 18,736
Investment income 201,751 27,560 71,496 9,368
Income before income taxes 36,391 145,332 34,897 28,104
Income taxes 4,331 54,209 4,176 8,636
Net income $ 32,060 $ 91,123 $ 30,721 $ 19,468
Weighted average shares
outstanding 4,929,490 3,258,102 4,929,490 3,561,534
Earnings per share $ .01 $ .03 $ .01 $ .01
See accompanying notes to consolidated financial statements.<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
August 31,
1 9 9 7 1 9 9 6
OPERATING ACTIVITIES:
Net income $ 32,060 $ 91,123
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 41,020 17,413
Deferred income taxes (1,538) 1,698
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (512,172) (126,402)
Inventory (72,603) (72,185)
Prepaid expenses and taxes (100,143) (16,843)
Accounts payable (14,061) 40,931
Accrued expenses and taxes (181,468) (237,761)
Customer deposit -- 1,018
NET CASH USED IN OPERATING ACTIVITIES (808,905) (301,008)
INVESTING ACTIVITIES
Purchase of marketable securities (100,824) --
Acquisition of fixed assets (11,908) (37,260)
NET CASH USED IN INVESTING ACTIVITIES (112,732) (37,260)
FINANCING ACTIVITIES
Deferred offering costs -- (1,104,857)
Net borrowings under
letter-of-credit agreement 506,848 248,768
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 506,848 5,108,911
NET CHANGE IN CASH (414,789) 4,770,643
CASH AT BEGINNING OF PERIOD 3,241,360 679,995
CASH AT END OF PERIOD $2,826,571 $5,450,638
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 127,326 $ 26,399
Interest paid $ 37,466 $ 35,563
Payment of legal services through issuance
of stock $ -- $ 25,000
See accompanying notes to consolidated financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 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 Company's financial position as of August 31, 1997 and November
30, 1996 and the results of operations for the nine and three months ended
August 31, 1997 and 1996 and cash flows for the nine months ended August 31,
1997 and 1996.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's financial statements included in its Annual Report on Form
10-KSB, for the year ended November 30, 1996.
The results of operations for the nine and three months ended August 31, 1997
and 1996 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share which changes the method for calculating earnings per
share. SFAS No. 128 requires presentation of "basic" and "diluted"
earnings per share, as opposed to "primary" and "fully diluted" earnings
per share and is effective for periods ending after December 15, 1997. Early
adoption is not permitted. Management does not believe that earnings per
share reported in accordance with SFAS No. 128 will materially differ from
earnings per share as currently reported.
NOTE 3 LETTERS OF CREDIT TO BANK
In July 1997, 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 fees on the letters of credit are one
half percent (1/2%) upon opening 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. These borrowings are collateralized by the
Company's assets. The agreement also contains provisions for the creation
of banker's acceptances and covenants requiring the Company to maintain
specified levels of tangible net worth. The direct borrowings incur interest
at the prime rate.
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1997
NOTE 4 - RETIREMENT PLAN
In June 1997, the Company adopted a qualified 401(k) plan for all full-time
employees who are twenty-one years of age and have completed twelve months of
service. The Plan allows total employee contributions of up to fifteen
percent (15%) of the eligible employee's salary through a salary reduction
mechanism. The Company will make a matching contribution of twenty percent
(20%) of each employee's contribution for each dollar of employee deferral
up to five percent (5%).
NOTE 5 - PROPOSED STOCK REPURCHASE
In June 1997, the Company offered to repurchase up to $500,000 worth of the
Company's issued and outstanding common shares and warrants on the open
market subject to the rules and regulations of the Securities and Exchange
Commission. As of September 30, 1997 no such purchases have been made.
NOTE 6 - STOCK OPTONS
In June 1997, 126,000 of the stock options previously issued to certain
employees and directors were forfeited.
On June 30, 1997, the Company granted five year incentive stock options,
pursuant to its 1995 Stock Option Plan, to thirteen employees or directors
to purchase an aggregate of 176,000 common shares including 126,000 options
for the above ones forfeited. The options are exercisable at $1.25 and vest
ratably over a one to three year period.
NOTE 7 - SHAREHOLDER PROTECTION RIGHTS PLAN
The Company has adopted a Shareholder Protection Rights Plan (the "Rights
Plan") whereby each shareholder of record on June 30, 1997 receives two rights
to purchase common shares at $.01 a share for a five year period. The Rights
Plan provides that if a person acquires more than twenty percent (20%) of
the issued and outstanding common shares of the Company, all shareholders of
record, except someone who becomes a 20% shareholder, shall be entitled to
exercise the rights.
NOTE 8 SUBSEQUENT EVENT
In September 1997, the Company entered into a six month verbal agreement with
a public relations firm. The public relations firm will work to promote the
Company in the investment banking community in consideration of $1,500 per
month.
Item 2. Management's 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, 1997 increased by $1,127,669 or 18%, to
$7,437,760 as compared to net sales of $6,310,091 for the nine months ended
August 31, 1996. The Company's net sales for the three months ended August
31, 1997 increased by $797,373, or 39%, to $2,836,417 as compared to net
sales of $2,039,044 for the three months ended August 31, 1996. These
increases were 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 which
increased sales during the fiscal year ending November 30, 1997 ("Fiscal
1997"). The Company has negotiated with a group of Asian manufacturers to
market a new product line, which had had patent protection until recently.
This new product protects the components from high intense heat found in
products such as, ballast lighting fixtures and automotive products. It is a
more durable product under thermal stress conditions.
The Company's gross profit for the nine months ended August 31, 1997
increased by $294,364, or 20%, as compared to the nine months ended August 31,
1996. The Company's gross profit for the three months ended August 31, 1997
increased by $165,416, or 37%, as compared to the three months ended August
31, 1996. These increases were due primarily to lower purchasing costs and
increased sales volume. The Company is expected to make its 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 used inventory
warehousing and shipping services from a California firm prior to the
middle of July 1997.
General and administrative expenses for the nine months ended August 31,
1997 increased by $394,689, or 41%, as compared to the nine months ended
August 31, 1996. For the three months ended August 31, 1997, general and
administrative expenses increased by $134,291, or 41%, as compared to the
three months ended August 31, 1996. These increases were primarily due to the
hiring of additional staff such as an engineer and a regional sales manager
and a public relations firm, investment banking consulting fees and the
general costs incurred by a public reporting company. In addition, the
Company's investment in personnel is expected to significantly increase
costs prior to the generation of increased sales attributable from such
additional employees during Fiscal 1997 or later.
Selling and shipping expenses for the nine months ended August 31, 1997
increased by $157,297, or 44%, as compared to the nine months ended August 31,
1996. For the three months ended August 31, 1997, selling and shipping expenses
increased by $77,620, or 94%, as compared to the three months ended August 31,
1996. These increases were primarily due to the Company's commitment to sales
promotion and literature. The Company began to more actively promote itself
and its products through attendance at various trade shows and through
increased activity with a marketing/public relations firm. The increase in
selling and shipping expenses is also due to the increased internal
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 continuing to increase sales through authorized distributors, sales
representatives, an Internet website, literature, participation in trade
shows, the opening of new offices in strategic locations and utilization of
a marketing/public relations firm.
Interest expense remained relatively unchanged for the nine months and
three months ended August 31, 1997 and 1996. The Company intends to continue
utilizing letters of credit and banker's acceptances on an as needed basis
based on its cash needs.
Investment income increased by $ 174,191 for the nine months ended
August 31, 1997 as compared to the nine months ended August 31,1996.
Investment income increased by $62,128 for the three months ended August 31,
1997, as compared to the three months ended August 31, 1996. This resulted 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 $32,060 for
the nine months ended August 31, 1997 as compared to a net income of $91,123
for the nine months ended August 31, 1996. The Company had net income of
$30,721 for the three months ended August 31, 1997, as compared to a net
income of $19,468 for the three months ended August 31, 1996.
Liquidity and Capital Resources
Working capital increased by $101,238 during the nine months ended
August 31, 1997 from $6,138,095 at November 30, 1996, to $6,239,333 at
August 31, 1997. This increase resulted primarily from the increase in
accounts receivable reduced by additional spending related to the Company's
expansion plans. The Company's Current Ratio decreased to 4.6:1 at August 31,
1997, as compared to 5.3:1 at November 30, 1996. Inventory turned more in the
nine months ended August 31, 1997 as a result of the Company's increased sales.
The average number of days to collect receivables increased from 42 to 43 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
provided for the creation of banker's acceptances (drafts drawn on and
accepted by a bank). Direct borrowings were limited to advances based on 80%
of eligible receivables and 25% of eligible inventory capped at $1,000,000.
The Company was charged one-half percent (1/2%) upon opeing 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 required the Company to be in compliance with certain financial
ratios including a debt to equity ratio and a minimum amount of tangible net
worth. Borrowings are collateralized by the assets of the Company and
guaranteed by officers of the Company. In July 1997, the Company renewed the
letter of credit agreement with the bank through May 31, 1998. Pursuant to
the agreement all terms and conditions remain the same except for the
following: 1) the interest rate on direct borrowings has been reduced to the
prime rate, 2) the requirement of officer guarantees has been removed, 3)
amount of minimum tangible net worth was increased and the debt to equity
ratio decreased to more accurately reflect the Company's financial position.
The Company was in compliance with the required financial ratios as of August
31,1997. As of August 31, 1997, outstanding direct borrowings totaled
$250,000 and outstanding banker's acceptances and letters of credit totaled
approximately $587,000.
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
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 has been
delayed until early 1998. Additionally, the renovation plans contain
provisions for additional space for test labs, which will allow the Company
to provide customers with prompt technical support 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 high overhead
facilities unless market potential and/or demand warrants such opening.<PAGE>
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 that it hopes will better enable it 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.
During the nine months ended August 31, 1997, the Company had net cash
used in operating activities of $808,905, as compared to $301,008 used in
operating activities in the nine months ended August 31, 1996. The increase
in cash used in operating activities resulted from an increase in accounts
receivable and prepaid expenses and taxes and reduction in accounts payable
and accrued expenses and taxes.
During the nine months ended August 31, 1997, the Company had net cash
provided by financing activities of $506,848 as compared with $5,108,911 in
the nine months ended August 31, 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 1996.
During the nine months ended August 31, 1997, the Company had net cash
used in investing activities of $112,732 as compared with $37,260 in the nine
months ended August 31, 1996. The increase in the cash used by investing
activities was the result of the Company's investment in marketable
securities. As a result of the forgoing, the Company had a net decrease in
cash of $414,789 during the nine months ended August 31, 1997, as compared
to an increase in cash of $4,770,643 during the nine months ended August 31,
1996 when the public offering was completed.<PAGE>
PART II
Item 4. Submission of Matters To a Vote of Security Holders
a) The Annual Meeting of Stockholders (the "meeting") was held on
June 30, 1997.
b) The Board of Directors consisting of Ira Levy, Steven J. Lubman,
David Siegel and Mark Siegel were re-elected.
c) (i) The election of the Board of Directors:
Abstentions or
Against or Withheld Non-Votes
Ira Levy 4,076,078 34,424 -0-
Steven J. Lubman 4,101,578 8,924 -0-
David Siegel 4,101,578 8,924 -0-
Mark Siegel 4,075,078 35,424 -0-
(ii) Ratification of the appointment of Seligson & Giannattasio,
LLP as auditors.
4,081,634 For 4,950 Against 24,118 Non-votes
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
10. Revolving credit line agreement between European American Bank and the
Company
11.1 Statement re: Computation of per share earnings.
27. Statement re: Financial Data Schedule
(b) A Report on Form 8-K was filed for June 30, 1997 reporting an
event on item 5 The Company's adoption of a Shareholder Protection
Rights Plan.
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, 1997
EAB
July 14, 1997
Surge Components, Inc.
1016 Grand Blvd.
Deer Park, NY i 1729
Re: $1,000,000 borrowing base line of credit
Gentlemen:
European American Bank ("EAB") is pleased to advise you it holds
available for Surge Components, Inc. a borrowing base line of credit (the
"Line") in the amount of $1,000,000, subject to the following terms and
conditions:
1. Borrower:
The Borrower shall be Surge Components, Inc., a corporation
organized and in good standing under the laws of the State of New York.
2. Description of the Line:
There shall be available under the Line a sublimit for commercial
letters of credit (each, an "L/C" and collectively, the "L/Cs") and banker's
acceptances (each a "B/A" and collectively, the "B/A") in the amount of
$800,000 in the aggregate. The maximum tenor for each L/C shall be 360 days.
Each L/C issued under the Line shall be evidenced by EAB's standard Master
Letter of Credit Agreement. There shall be payable in respect of each L/C, a
fee equal to 1/2% upon the opening and 1/2% upon the negotiation thereof
together with EAB's standard fees and charges therewith.
B/As shall be evidenced by EAB's standard Acceptance Credit
Agreement which shall provide for the payment of a commission, upon the
discount and acceptance of each draft which shall constitute a B/A, equal to
EAB's the prevailing Discount Rate plus a margin of 2% per annum. Each B/A
shall have a maximum tenor of 90 days.
There shall also be available under the Line a sublimit for direct
loans in the amount of $200,000.
730 Veterans Memorial Highway
Hauppauge, NY 11788
(516) 360-7122
Fax (516) 360-7112<PAGE>
Loans provided under the Line shall be evidenced by EAB's standard
Master Note (the "Note") in the amount of $200,000, which Note shall bear
interest at a rate equal to EAB's Prime Rate (the rate~of interest stated by
EAB to be its Prime Rate in effect from time to time and adjusted when said
Prime Rate changes) computed on the basis of actual days elapsed in a 360 day
year.
Interest on the unpaid principal balance of the Note from time to time
outstanding shall be payable monthly in arrears commencing on the first day of
the month following the date of the first advance under the Note. Any advance
under the Line made by EAB in its discretion shall be in an amount not less
than $25,000 and the Borrower may prepay, in part or in full, at any time,
any loans outstanding under the Line in increments of not less than $25,000
with out premium or penalty.
Notwithstanding any provisions herein to the contrary, the maximum
availability under the Line shall not exceed an amount determined with
application to the following borrowing base formula:
The sum of (i) eighty percent (80%) of the Borrower's "Eligible
Accounts Receivable" and (ii) the lesser of twenty-five percent (25%) of the
Borrower's "Eligible Inventory" or $1,000,000. Terms used in this paragraph
shall have the meaning given to such terms in the Borrowing Base Certificate,
identified herein.
The Borrower acknowledges and agrees that the Line is uncommitted
and requests for advances or extensions of credit thereunder shall be approved
in the discretion of EAB, which may refuse to make an extension of credit under
the Line at any time without prior notice to the Borrower, and that the
performance or compliance by the Borrower of the agreements contained in this
letter, or in any other document or agreement evidencing or securing such
advances or extensions of credit, shall not obligate EAB to make an advance
or provide an extension of credit thereunder.
Subject to the terms and conditions hereof, the Line shall be
available until May 31, 1998.
3. Purpose of the Line:
The purpose of the Line shall be to finance the purchase and importation
of inventory and to support accounts receivables.
4. Security for the Line:
The Line shall be secured by a first priority security interest in all
assets and personal property of the Borrower pursuant to EAB's standard General
Security Agreement and duly filed WCC-1 Financing Statements.
5. Conditions Precedent:
Prior to the Borrower's initial request for an advance under the Line,
it shall have provided to EAB:
(i) A copy of the resolutions passed by the Borrower's Board of
Directors certified by its Secretary as being in full force and effect
authorizing the borrowing described herein and the execution of all documents
and agreements required by EAB to evidence and secure the Line; and
(ii) A certified copy of the certificate of incorporation of the
Borrower.
6. Financial Reporting:
The Borrower shall provide to EAB:
(i) As soon as available, but in any event within one hundred
twenty (120) days after the last day of its 1997 fiscal year, a balance sheet
of the Borrower, as of such last day of the fiscal year, and statements of
income and retained earnings and cash flows for such fiscal year prepared in
accordance with generally accepted accounting principles consistently applied,
in reasonable detail, such statements to be reviewed by a firm of independent
certified public accountants satisfactory to EAB.
(ii) As soon as available, but in any event within ninety (90)days
after the last day of each semi-annual period prior to the expiration of the
Line, a balance sheet of the Borrower as of the last day of such semi-annual
period, and statements of income and retained earnings and cash flows for
such period, each prepared in accordance with generally accepted accounting
principles consistently applied, in reasonable detail, such statements to be
prepared by the Borrower.
Each of the financial statements specified in Sections (i) and
(ii) above shall be accompanied by a certificate signed by the president or
chief financial officer of the Borrower to the effect that such statements
fairly present the financial condition of the Borrower as of the balance
sheet date and results of the operations of the Borrower for the period(s)
then ended in accordance with generally accepted accounting principles
consistently applied.
(iii) As soon as available, but in any event within twenty (20)
days after the end of each calendar month, a schedule of accounts receivable
aged to show the number of days each such account has been outstanding from
its invoice date, in form satisfactory to EAB and accompanied by a statement
signed by the Borrower's president or chief financial officer to the effect
that such statement is true, correct and complete.
(iv) As soon as available, but in any event within twenty (20)
days after the end of each calendar month, a Borrowing Base Certificate, in
form and substance satisfactory to EAB.
(v) Within ninety (90) days after the last day of the calendar
year, the personal financial statement of each Guarantor, on EAB's standard
form.
(vi) Such other financial or additional information as EAB may
from time to time request.
7. Special Requirements:
The Borrower agrees to maintain at all times:
(i) a minimum tangible net worth (the sum of capital surplus,
earned surplus, capital stock and such other items as are allowable under
generally accepted accounting principles minus deferred charges, intangibles,
receivables due from stockholders, officers or affiliates and treasury stock)
in an amount not less than $4,000,000.
(ii) a maximum leverage ratio (the ratio of total unsubordinated
liabilities to tangible net worth) of not greater than 1.0 to 1.0.
8. Annual Clean-up:
The Borrower covenants and agrees that for a period of not less
than thirty (30) consecutive days at any one time prior to the expiration of
the Line there shall be no loans outstanding thereunder.
9. Acceptance:
If the foregoing is acceptable, please so indicate by signing
and returning this letter before July 28, 1997, the date this letter will
otherwise expire, unless extended in writing by EAB.
Very truly yours,
EUROPEAN AMERICAN BANK
By: /s/ James D. Riley, Jr.
James D. Riley, Jr.
Vice President
Agreed and Accepted this
day of July, 1997
SURGE COMPONENTS, INC.
By: /s/ Ira Levy
Name: Ira Levy
Title: President
EAB
MASTER NOTE
S200,000 Date: , 1997
FOR VALUE RECEIVED, the undersigned, a New York corporation, promises to
pay to the order of EUROPEAN AMERICAN BANK (the "Bank"), on or before May 31,
1998 (the "Maturity Date"), the sum of Two Hundred Thousand Dollars ($200,000),
or, if less, the aggregate unpaid principal amount of all advances made by
the Bank pursuant to the line of credit, not to exceed an aggregate amount
at any one time outstanding of Two Hundred Thousand Dollars ($200,000),
available to the undersigned hereunder (the "Line").
The undersigned also promises to pay interest in like money on the unpaid
principal amount hereof from time time outstanding at a fluctuating rate per
annum equal to the rate of interest as is publicly announced by the Bank at
its principal office from time to time as its prime rate (the "Prime Rate")
plus a margin of 0% per annum (the "Prescribed Rate"). Any change in the
Prime Rate shall be effective on the date such change is announced by the
Bank. Interest shall be calculated on the basis of a 360-day year for the
actual number of days elapsed and shall be payable on the first day of each
month commencing on the first such date to occur after the date the first
advance is made, and on the Maturity Date. All payments hereunder shall be
payable in immediately available funds in lawful money of the United States.
The undersigned authorizes the Bank to charge any of the undersigned's
accounts for payments of principal or interest.
Any payment of principal of or interest payable hereunder which is not
paid when due, whether at maturity, by acceleration, or otherwise, shall bear
interest from the date due until paid in full at a rate per annum equal to
three percent (3 %) above the Prescribed Rate.
All requests for advances shall be irrevocable and shall be for a minimum
of $25,000 and must be received by the Bank no later than 12:00 noon on the
date of the proposed advance. The Bank may act without liability upon the basis
of telephonic notice believed by the Bank in good faith to be from the
undersigned. In each such case, the undersigned hereby waives the right to
dispute the Bank's record of the terms of such telephonic notice. The
undersigned shall immediately confirm to the Bank in writing each telephonic
notice. All advances under the Line are at the Bank's sole and absolute
discretion and the Bank, at its option and in its sole and absolute
discretion and without notice to the undersigned, may decline to make any
advance requested by the undersigned.
Subject to the terms and conditions hereof and the terms and conditions
set forth in any agreement in writing between the Bank and the undersigned,
the undersigned may borrow, repay in whole or in part, and reborrow on a
revolving basis, up to the maximum amount of the Line. dvances may be prepaid
without premium or penalty together with accrued interest thereon to and
including the date of prepayment. The Bank shall maintain its records to
reflect the amount and date of each advance and of each payment of principal
and interest thereon. All such records shall, absent manifest error, be
conclusive as to the outstanding principal amount hereof; provided, however,
that the failure to make any notation to the Bank's records shall not limit
or otherwise affect the obligations of the undersigned to repay each
advance made by the Bank, in accordance with the terms hereof.
As security for the payment of this Note and of all other obligations and
liabilities of the undersigned to the Bank, whether now or hereafter existing,
joint, several, direct, indirect, absolute, contingent, secured, matured or
unmatured, the undersigned grants to the Bank a right of setoff against, a
continuing security interest in, and an assignment and pledge of all moneys,
deposits (general or special), securities and other property of the undersigned
and the proceeds thereof, now or hereafter held by the Bank on deposit, in
safekeeping, in transit or otherwise, at any time credited by or due from the
Bank to the undersigned, or in which the undersigned shall have an interest.
Upon the occurrence and continuance of any of the following (each an Event
of Default"): (a) default in the payment when due of any amount hereunder; (b)
filing by or against the undersigned of a petition commencing any proceeding
under any bankruptcy, reorganization, rearrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or
hereafter in effect; (c) making by the undersigned of an assignment for the
benefit of creditors; (d) petitioning or applying to any tribunal for the
appointment of a custodian, receiver or trustee for the undersigned or for a
substantial part of its assets; (e) death or incapacity of the undersigned
(if an individual); (f) entry of any judgment or order of attachment,
injunction or governmental tax lien or levy issued against the undersigned
or against any properly of the undersigned; (g) consent by the undersigned
to assume, suffer or allow to exist, without the prior written consent of the
Bank, any lien, mortgage, assignment or other encumbrance on any of its assets
or personal property, now owned or hereafter acquired, except those liens,
mortgages, assignments or other encumbrances in existence on the date hereof
and consented to in writing by the Bank; (h) default in the punctual payment
or performance of this or any other obligation to the Bank or to any other
lender at any dme; (i) the existence or occurrence at any time of one or more
conditions or events which, in the sole opinion of the Bank, has resulted
or may result in a material adverse change in the business, properties or
financial condition of the undersigned; (j) failure on request to furnish any
financial information or to permit inspection of the books and records of the
undersigned; (k) any warranty, representation or statement in hereunder. No
change, amendment, modification, termination, waiver, or discharge, in whole
or in part, of any provision of this Note shall be effective unless in
writing and signed by the Bank, and if so given by the Bank, shall be
effectie only in the specific instance in which given. The undersigned
acknowledges this Note and the undersigned's obligations under this Note are,
and shall at all times continue to be, absolute and unconditional in all
respects, and shall at all times be valid and enforceable irrespective of
any other agreements or circumstances of any nature whatsoever which might
otherwise constitute a defense to this Note and the obligations of the
undersigned under this Note. The undersigned absolutely, unconditionally and
irrevocably waives any and all right to assert any set-off, counterclaim or
crossclaim of any nature whatsoever with respect to this Note or the
undersigned's obligations hereunder.<PAGE>
In the event any one or more of the provisions contained in this Note
should be invalid, illegal or unenforceable in any respect, the validly,
legally and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
The undersigned hereby waives presentment, demand for payment, protest,
notice of dishonor, and any and all other notices or demands in connection
with the delivery, acceptance, performance, default, or enforcement of this
Note.
The term "Bank" as used herein shall be deemed to include the Bank and
its successors and assigns, and any holder hereof.
The term "undersigned" as used herein shall, if this Note is signed by
more than one party, unless otherwise stated herein, mean the "undersigned
and each of them" and each undertaking herein contained shall be their joint
and several undertaking. The Bank may proceed against one or more of the
undersigned at one time or from time to time as it elects in its sole
and absolute discretion.
At no time shall the rate of interest charged under this Note exceed the
maximum rate of interest permitted under applicable law. If at any time the
Prescribed Rate shall exceed such maximum rate, and thereafter the Prescribed
Rate is below such maximum rate, then the Prescribed Rate shall be increased
to the maximum rate for such period of time as is required so that the total
amount of interest received by the Bank is that which would have been received
by the Bank but for the first sentence of this paragraph.
In the event that any change in applicable law or regulation, or in the
interpretation thereof by any governmental authority charged with the
administration thereof, shall impose on or deem applicable to the Bank
any reserve requirements against this Note or the Line or impose upon the
Bank any other costs or assessments, the undersigned shall pay to the Bank
on demand an amount sufficient to compensate the Bank for the additional cost
resulting from the maintenance or imposition of such reserves, costs or
assessments.
Any consents, agreements, instructions or requests pertaining to any
matter in connection with this Note, signed by any one of the undersigned,
shall be binding upon all of the undersigned. This Note shall bind the
respective successors, heirs or representatives of the undersigned. This
Note and the Line shall not be assigned by the undersigned without the Bank's
prior written consent.
IN WITNESS WHEREOF, the undersigned has duly executed this Note the day and
year first above written.
Surge Components, Inc.
Witness: /s/ James D. Riley, Jr. By: /s/ Ira Levy
James D. Riley, Jr. Name: Ira Levy
EAB Officer Title: President
Borrower's Address:
1016 Grand Blvd.
Deer Park, NY 11729<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
Nine Months Ended Three Months Ended
August 31, August 31, August 31, August 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
Net income $ 32,060 $ 91,123 $ 30,721 $ 19,468
Shares:
Weighted common shares
outstanding 4,823,958 3,226,776 4,823,958 3,530,208
Employees stock options 105,532 31,326 105,532 31,326
Options to The Harriman Group -- -- -- --
A warrants -- -- -- --
Underwriter options -- -- -- --
Total weighted shares
outstanding 4,929,490 3,258,102 4,929,490 3,561,534
Earnings per share $ .01 $ .03 $ .01 $ .01
<PAGE>
Exhibit 27
ARTICLE 5
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.
PERIOD-TYPE 9-MOS
FISCAL-YEAR-END NOV-30-1997
PERIOD-END AUG-31-1997
CASH 2,826,571
SECURITIES 1,421,229
ALLOWANCES 9,206
INVENTORY 1,405,247
CURRENT-ASSETS 7,967,395
PP&E 287,850
DEPRECIATION 147,185
TOTAL-ASSETS 8,111,045
CURRENT-LIABILITIES 1,728,062
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 4,824
OTHER-SE 6,375,209
TOTAL-LIABILITY-AND-EQUITY 8,111,045
SALES 7,437,760
TOTAL-REVENUES 7,639,511
CGS 5,646,320
TOTAL-COSTS 1 ,956,800
OTHER-EXPENSES 0
LOSS-PROVISION 0
INTEREST-EXPENSE 37,466
INCOME-PRETAX 36,391
INCOME-TAX 4,331
INCOME-CONTINUING 32,060
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 32,060
EPS-PRIMARY .01
EPS-DILUTED .01
