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 May 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
(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 June 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 May 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. Managements Discussion and Analysis
or Plan of Operation 9 -11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
2
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, November 30,
1 9 9 7 1 9 9 6
Current assets:
Cash $2,773,574 $3,241,360
Marketable securities 2,105,014 2,042,681
Accounts receivable (net of allowance for
doubtful accounts of $9,206) 1,093,572 899,851
Inventory 1,306,261 1,332,644
Prepaid expenses and taxes 74,902 21,827
Cash surrender value 16,473 16,472
Total current assets 7,369,796 7,554,835
Fixed assets - net of accumulated depreciation
of $133,424 and $107,114, respectively 148,872 169,777
Other assets:
Security deposits 2,985 2,985
Total assets $7,521,653 $7,727,597
See accompanying notes to consolidated financial statements.
3
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, November 30,
1 9 9 7 1 9 9 6
Current liabilities:
Loan payable - bank $ 355,012 $ 164,232
Accounts payable 768,775 969,954
Accrued expenses 90,374 220,792
Corporation taxes payable 1,050 61,762
Total current liabilities 1,215,211 1,416,740
Long term debt:
Deferred income tax 3,593 4,488
Total liabilities 1,218,804 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 30,894 35,751
Retained deficit (68,731) (70,068)
Total stockholders' equity 6,302,849 6,306,369
Total liabilities and stockholders' equity $7,521,653 $7,727,597
See accompanying notes to consolidated financial statements.
4
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended Three Months Ended
May 31, May 31, May 31, May 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
Sales $4,618,856 $4,285,646 $2,481,477 $2,271,170
Less returns and
allowances 17,513 14,599 9,746 6,013
Net sales 4,601,343 4,271,047 2,471,731 2,265,157
Cost of goods sold 3,420,436 3,219,088 1,855,164 1,687,190
Gross profit 1,180,907 1,051,959 616,567 577,967
Operating expenses:
General and administrative
expenses 908,042 647,643 455,884 347,902
Selling and
shipping expenses 351,788 272,112 204,843 154,977
Interest expense 22,579 22,658 11,093 10,497
Depreciation 27,259 10,510 13,493 6,085
Total operating expenses 1,309,668 952,923 685,313 519,461
Income (loss)
from operations (128,761) 99,036 (68,746) 58,506
Interest income 130,255 18,192 59,154 9,416
Income (loss)
before income taxes 1,494 117,228 (9,592) 67,922
Income taxes 155 45,573 (2,698) 32,830
Net income (loss) $ 1,339 $ 71,655 $ (6,894) $ 35,092
Weighted average shares
outstanding 4,861,978 3,036,731 4,823,958 3,061,458
Earnings per share $ -- $ .02 $ -- $ .01
See accompanying notes to consolidated financial statements.
5
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
May 31, May 31,
1 9 9 7 1 9 9 6
OPERATING ACTIVITIES:
Net income $ 1,339 $ 71,655
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 27,259 10,510
Deferred income taxes (895) 838
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (193,721) (60,894)
Inventory 26,383 2,174
Prepaid expenses and taxes (53,078) (1,167)
Accounts payable (201,179) 114,412
Accrued expenses and taxes (191,130) (254,140)
Customer deposit -- (5,593)
NET CASH USED IN OPERATING ACTIVITIES (585,022) (122,205)
INVESTING ACTIVITIES
Purchase of marketable debt securities (67,190) --
Acquisition of fixed assets (6,354) (27,224)
NET CASH USED IN INVESTING ACTIVITIES (73,544) (27,224)
FINANCING ACTIVITIES
Deferred offering costs -- (141,446)
Net borrowings under
letter-of-credit agreement 190,780 214,606
Proceeds from issuance of stock -- 325,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 190,780 398,160
NET CHANGE IN CASH (467,786) 248,731
CASH AT BEGINNING OF PERIOD 3,241,360 679,995
CASH AT END OF PERIOD $2,773,574 $ 928,726
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 120,407 $ 17,700
Interest paid $ 22,579 $ 22,658
Payment of legal services
through issuance of stock $ -- $ 25,000
See accompanying notes to consolidated financial statements.
6
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 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 Companys financial position as of May 31, 1997 and November 30,
1996 and the results of operations and cash flows for the six and three
months ended May 31, 1997 and 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 six and three months ended May 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 - SUBSEQUENT EVENTS
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 employees salary through a salary reduction
mechanism. The Company will contribute an amount equal to twenty percent (20%)
of each employees contribution.
7
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1997
NOTE 3 - SUBSEQUENT EVENTS (CONTINUED)
PROPOSED STOCK REPURCHASE
In June 1997, the Company offered to repurchase up to $500,000 worth of the
Companys issued and outstanding common shares and warrants on the open market
subject to the rules and regulations of the Securities and Exchange Commission.
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.
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.
8
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 six months ended May 31, 1997 increased by $330,296 or 8%, to $4,601,343
as compared to net sales of $4,271,047 for the six months ended May 31, 1996.
The Companys net sales for the three months ended May 31, 1997 increased by
$206,574, or 9%, to $2,471,731 as compared to net sales of $2,265,157 for the
three months ended May 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 negotiated with a new
Asian manufacturer to market a new product line, which had patent protection
until recently. This new line protects the components from high intensity heat
found in products such as, ballast lighting fixtures and automotive products.
The Companys gross profit for the six months ended May 31, 1997
increased by $128,948, or 12%, as compared to the six months ended May 31,
1996. The Companys gross profit for the three months ended May 31, 1997
increased by $38,600, or 7%, as compared to the three months ended May 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 has used
inventory warehousing and shipping services from a California firm. The
Company plans to open additional warehousing facilities in the latter part
of 1997.
General and administrative expenses for the six months ended May 31, 1997
increased by $260,399, or 40%, as compared to the six months ended May 31,
1996. For the three months ended May 31, 1997, general and administrative
expenses increased by $107,982, or 31%, as compared to the three months ended
May 31, 1996. These increases were 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 Fiscal 1997 or later.
Selling and shipping expenses for the six months ended May 31, 1997
increased by $79,676, or 29%, as compared to the six months ended May 31,
1996. For the three months ended May 31, 1997, selling and shipping expenses
increased by $49,866, or 32%, as compared to the three months ended May 31,
1996. These increases were primarily due to the Companys 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
increasing sales through authorized distributors, sales representatives, an
internet website, literature, participation in trade shows and utilization
of a marketing/public relations firm.
9
Interest expense remained relatively unchanged for the six months and
three months ended May 31, 1997 and 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 $ 112,063 for the six months ended May 31,
1997 as compared to the six months ended May 31,1996. Investment income
increased by $49,738 for the three months ended May 31, 1997, as compared to
the three months ended May 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 $1,339 for the
six months ended May 31, 1997 as compared to a net income of $71,655 for the
six months ended May 31, 1996. The Company had net loss of $6,894 for the
three months ended May 31, 1997, as compared to a net income of $35,092 for the
three months ended May 31, 1996.
Liquidity and Capital Resources
Working capital increased by $16,490 during the six months ended May 31,
1997 from $6,138,095 at November 30, 1996, to $6,154,585 at May 31, 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 6.1:1 at May 31, 1997, as compared to
5.3:1 at November 30, 1996. Inventory turned more in the six months ended
May 31, 1997 as a result of the Companys increased sales. The average number
of days to collect receivables decreased to 39 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 May 31,
1997. As of May 31, 1997, there were no outstanding direct borrowings,
although outstanding banker's acceptances and letters of credit totaled
approximately $510,000. Borrowings are collateralized by the assets of the
Company and guaranteed by officers of the Company. Currently the Company is
in the process of renewing its agreement with the bank.
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 is
expected to commence in late 1997. Additionally, the renovation plans
contain provisions for additional space for test labs, which will allow the
Company to provide customers with prompt information regarding the
specifications and quality aspects of its products.
10
In addition to the costs associated with the expansion of the Companys
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 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 six months ended May 31, 1997, the Company had net cash used
in operating activities of $585,022, as compared to $122,205 used in operating
activities in the six months ended May 31, 1996. The increase in cash used
in operating activities resulted from an increase in accounts receivable and
prepaid expenses and taxes and decreased accounts payable and accrued
expenses and taxes.
During the six months ended May 31, 1997, the Company had net cash
provided by financing activities of $190,780 as compared with $398,160 in the
six months ended May 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 the first
quarter of 1996. As a result of the forgoing, the Company had a net decrease
in cash of $467,786 during the six months ended May 31, 1997, as compared to
an increase in cash of $248,731 during the six months ended May 31, 1996.
11
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: July 14, 1997
12
SURGE COMPONENTS, INC. AND SUBSIDIARY
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
Six Months Ended Three Months Ended
May 31, May 31, May 31, May 31,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
Net income $ 1,339 $ 71,655 $ (6,894) $ 35,092
Shares:
Weighted common shares outstanding4,823,958 2,074,231 4,823,958 2,098,958
Employees stock options 38,020 -- -- --
Options to The Harriman Group -- 962,500 -- 962,500
A warrants -- -- -- --
Underwriter options -- -- -- --
Total weighted shares outstanding 4,861,978 3,036,731 4,823,958 3,061,458
Earnings per share $ -- $ .02 $ -- $ .01
13
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 6-MOS
FISCAL-YEAR-END NOV-30-1997
PERIOD-END MAY-31-1997
CASH 2,773,574
SECURITIES 2,105,014
RECEIVABLES 1,102,778
ALLOWANCES 9,206
INVENTORY 1,306,261
CURRENT-ASSETS 7,369,796
PP&E 282,296
DEPRECIATION 133,424
TOTAL-ASSETS 7,521,653
CURRENT-LIABILITIES 1,215,211
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 4,824
OTHER-SE 6,298,025
TOTAL-LIABILITY-AND-EQUITY 7,521,653
SALES 4,601,343
TOTAL-REVENUES 4,731,598
CGS 3,420,436
TOTAL-COSTS 1,309,668
OTHER-EXPENSES 0
LOSS-PROVISION 0
INTEREST-EXPENSE 22,579
INCOME-PRETAX 1,494
INCOME-TAX 155
INCOME-CONTINUING 1,339
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 1,339
EPS-PRIMARY .00
EPS-DILUTED .00
14