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Pursuant to Rule 424(b)(3)
Registration Number 333-63371
PROSPECTUS
SURGE COMPONENTS, INC.
453,313 Common Shares, $.001 Par Value, and 300,000
Redeemable Class A Common Share Purchase Warrants
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This Prospectus relates to 153,313 Common Shares (the "Selling
Securityholders' Shares"), $.001 par value (the "Common Shares"), and 300,000
Class A Warrants (the "Warrants") of Surge Components, Inc. ("Surge" or the
"Company"), which are being offered for sale by certain selling
securityholders (the "Selling Securityholders"). This Prospectus also relates
to the issuance of up to an aggregate of 300,000 Common Shares issuable upon
exercise of the Warrants. Each Warrant entitles the holder to purchase one
Common Share for $5.00 subject to adjustment in certain events, at any time
commencing on August 1, 1998 until August 1, 2003. The Company may call the
Warrants for redemption, at a price of $.05 per Warrant at any time commencing
August 1, 1998 on not less than 45 days' prior written notice to the
Warrantholders if the closing bid price of the Common Shares for the 20
consecutive trading days ending on the third day prior to the date on which
the notice of redemption is given has been at least $7.50. In addition, the
Selling Securityholders may exercise the Warrants and sell the underlying
Common Shares. The Selling Securityholders' Shares and the Warrants are
sometimes collectively referred to herein as the "Selling Securityholders'
Securities" or the "Securities". See "Selling Securityholders" and "Plan of
Distribution."
The Common Shares and Warrants are quoted on the Nasdaq SmallCap Market
under the symbols "SRGE" and "SRGEW" and on the Boston Stock Exchange ("BSE")
under the symbols "SRG" and "SRGW". On December 7, 1998, the closing sale price
of the Common Shares and Warrants were $.50 and $.062, respectively, on the
Nasdaq SmallCap Market. See "Market for Common Equity and Related Stockholder
Matters."
The date of this Prospectus is December 8, 1998.
The Company will not receive any of the proceeds from the sales of
the Selling Securityholders' Securities by the Selling Securityholders.
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The Selling Securityholders' Securities offered by this Prospectus
may be sold from time to time by the Selling Securityholders, their pledgees
and/or their donees. No underwriting arrangements have been entered into by
the Selling Securityholders. The distribution of the Selling Securityholders'
Securities by the Selling Securityholders, their pledgees and/or their donees,
may be effected in one or more transactions that may take place in the
over-the counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more dealers for
resale of such shares as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders, their pledgees and/or
their donees, in connection with sales of the Selling Securityholders'
Securities.
The Selling Securityholders, their pledgees and/or their donees, may
be deemed to be "underwriters" as defined in the Securities Act of 1933, as
amended (the "Securities Act"). If any broker-dealers are used by the Selling
Securityholders, their pledgees and/or their donees, any commission paid to
broker-dealers and, if broker-dealers purchase any Selling Securityholders'
Securities as principals, any profits received by such broker-dealers on the
resale of the Selling Securityholders' Securities may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition,
any profits realized by the Selling Securityholders, their pledgees and/or
their donees, may be deemed to be underwriting commissions. All costs,
expenses and fees in connection with the registration of the Selling
Securityholders' Securities will be borne by the Company except for any
commission paid to broker-dealers.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Pursuant to Rule 429 under the Securities Act, this Registration
Statement relates to the Company's Registration Statement on Form SB-2 (File
no. 333-630-NY), as amended, pursuant to which an aggregate of 3,765,060
shares of Common Stock and 1,700,000 Class A Common Stock Purchase Warrants
were originally registered.
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company may be inspected and copied at the
Public Reference Room maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at
Seven World Trade Center, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60611. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-800-SEC-0330.
Copies of such material may be obtained, at prescribed rates, by writing to
the Commission, Public Reference Room, 450 Fifth Street, N.W. Washington, D.C.
20549. The Commission maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically. The Common Stock and Warrants are listed
on the Nasdaq SmallCap Market, and Boston Stock Exchange, reports and other
information concerning the Company can be inspected at such exchange.
A registration statement on Form S-3 with respect to the Shares (the
"Registration Statement") has been filed with the Commission under the
Securities Act. This Prospectus constitutes the Prospectus of the Company that
is filed with such Registration Statement with respect to the sale of the
Securities by the Selling Securityholders. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement and reference is hereby made to the
Registration Statement for further information with respect to the Company and
the Securities.
DOCUMENTS INCORPORATED BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
Company's Annual Report on Form 10-KSB for the fiscal year ended November 30,
1997 ("Form 10-K"), Quarterly Reports on Form 10-QSB for the quarters ended
February 28, 1998, May 31, 1998 and August 31, 1998 ("Forms 10-QSB"); the
description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A (File No. 001-14188) filed pursuant to
Section 12(b) of the Exchange Act, including any amendment or report filed for
the purpose of updating such information; and Proxy Statement on Schedule 14a
dated June 9, 1998.
All documents subsequently filed by the Company after the date of this
Prospectus pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act,
prior to the termination of the offering, shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a previously filed document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein modifies
or supersedes such statement; and any statement contained
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herein shall be deemed to be modified or superseded to the extent that a
statement in any document subsequently filed, which is incorporated by
reference herein, modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy
of this Prospectus is delivered, upon written or oral request of such person,
a copy of any or all of the information that has been incorporated by
reference in this Prospectus (not including exhibits to such information,
unless such exhibits are specifically incorporated by reference into the
information which this Prospectus incorporates). Written requests for copies
of such information should be directed to the Company at 1016 Grand Boulevard,
Deer Park, New York, 11729, Attention: Corporate Secretary. Telephone requests
may be directed to the Corporate Secretary at (516) 595-1818.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements and the notes thereto appearing elsewhere
in, or incorporated by reference into, this Prospectus. This Prospectus
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act) regarding the Company and
its business, financial condition, results of operations and prospects. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions or variations of such words are intended
to identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Prospectus.
Although forward-looking statements in this Prospectus reflect the
good faith judgment of the Company's management, such statements can only be
based on facts and factors currently known by the Company. Consequently,
forward-looking statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors that could cause
or contribute to such differences in results and outcomes include without
limitation those discussed under "Risk Factors," as well as those discussed
elsewhere in this Prospectus and in any documents that are incorporated into
this Prospectus by reference. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Prospectus. The Company undertakes no obligation to revise or update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this Prospectus. Readers are urged to carefully
review and consider the various disclosures made by the Company in this
Prospectus, as well as the various documents listed under the heading
"Documents Incorporated By Reference," all of which have been filed with the
Commission, and attempt to advise interested parties of the risks and factors
that may affect the Company's business, financial condition and results of
operations and prospects.
The Company
The Company is a supplier of electronic products and components.
These products include capacitors, which are electrical energy storage devices
and discrete components, such as semiconductor rectifiers, transistors and
diodes, which are single function low power semiconductor products that are
packaged alone as compared to integrated circuits such as microprocessors. The
Company's products are typically utilized in the electronic circuitry of
diverse products, including, but not limited to, automobiles, cellular
telephones, computers, consumer electronics, garage door openers, household
appliances, power supplies and smoke detectors. The Company's products are
sold to both original equipment manufacturers ("OEMs") who incorporate them
into their products and to distributors of Surge's product lines.
Surge's products are manufactured predominantly in Asia by
approximately 20 independent manufacturers. The Company does not have any
written long-term supply, distribution or franchise agreements with it
distributors. The Company acts as the exclusive
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sales agent through independent sales representative organizations in North
America for many of its manufacturers pursuant to oral agreements. Through the
Company's wholly-owned subsidiary, Challenge/Surge, Inc., the Company also
engages in the broker distribution business. In such business, Challenge
purchases name brand electronic components and products, typically from domestic
manufacturers and authorized distributors to fill specific customer orders.
Challenge purchases such components and products in the open market on the best
available terms and generally keeps small inventories in the range of $20,000
to $120,000. Challenge's revenues are generally derived from the mark-up on the
sale of tangible products. Challenge operates as a separate entity and has
certain sales representatives of its own, but generally shares management and
facilities with the Company.
The Company's products are marketed by independent sales
representative organizations with which the Company has exclusive written
agreements for the sale of its products to both end users and authorized
distributors. Sales representatives market the Company's products to their
customers. The sales representatives sell other companies' products, but are
prohibited from selling competitive products.
In 1982, the Company commenced operations as a distributor of passive
electronic components, such as capacitors, which were purchased domestically
and sold principally to OEMs, and to a lesser extent, to other distributors.
The Company began marketing its own brand of ceramic capacitors in the United
States in 1983 and shortly thereafter introduced a broad line of capacitor
products under the "Surge" private label.
The Company supplies a wide variety of electronic components bearing
the Company's private "Surge" label which can be broadly divided into two
categories--capacitors and discrete components. For the fiscal years ended
November 30, 1996 ("Fiscal 1996") and November 30, 1997 ("Fiscal 1997"),
capacitors accounted for approximately 83% and 75%, respectively, of the
Company's sales while discrete components accounted for approximately 17% and
25%, respectively. The Company does not claim its reputation is based on name
recognition. As the Company intensifies its marketing efforts, the Company
will continue to attempt to increase its market share for its various
products. The Company's business strategy is to offer one-stop shopping for
its customers' needs by promoting both capacitors and discrete components to
the same customers. Management believes that the Company's reputation is based
on its history of providing high quality products at competitive prices, as
well as its providing "creative services" normally available only from
companies with much greater resources. These creative services which are
currently available from the Company include factory to factory shipments and
just-in-time deliveries.
The Company was incorporated on November 24, 1981 in the State of
New York. The Company's executive offices are located at 1016 Grand Boulevard,
Deer Park, New York, 11729, and the telephone number is (516) 595-1818.
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The Offering
Common Shares Outstanding........... 4,852,958(1)
Securities Registered............... 453,313 Common Shares
300,000 Class A Warrants
This Registration Statement, of
which the Selling Securityholders'
Prospectus is a part, includes up
to 300,000 Common Shares issuable
upon the exercise of the Warrants
by certain selling
securityholders. See "Selling
Securityholders."
Nasdaq Symbols. . . . . . . . . . . Common Shares: SRGE
Warrants: SRGEW
BSE Symbols. . . . . . . . . . . . . Common Shares: SRG
Warrants: SRGW
Risk Factors........................ This offering involves a high
degree of risk. See "Risk
Factors".
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(1) Issued and outstanding as of November 19, 1998.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. The following risk factors should be considered
carefully, in addition to the other information in this Prospectus before
purchasing the Common Stock offered by this Prospectus.
Absence of Substantial Historical Profitability; and Future Operating
Results. The Company achieved increasing levels of sales during the last several
years prior to a decrease in sales from $7,437,760 in the nine-month period
ended August 31, 1997 ("Fiscal 1997 Period") to $6,233,828 in the nine-month
period ended August 31, 1998 ("Fiscal 1998 Period"). Further, net income for the
fiscal year ended November 30, 1997 ("Fiscal 1997") was only $75,350 and the
Company incurred a net loss of $225,361 for the Fiscal 1998 Period as compared
with net income of $32,060 in the Fiscal 1997 Period. Inasmuch as the Company
will continue to have a high level of operating expenses, and is required to
make significant up-front expenditures in connection with the continuing
expansion of its operations, the Company's future profitability will depend upon
corresponding increases in revenues from operations which have not occurred. As
of October 15, 1998 the Company has incurred approximately $220,000 of expenses
and expects to expend an additional $50,000 in connection with the expansion of
its operations. The Company has sufficient funds to complete the expansion. Such
funds were received from the Company's July 1996 public offering.
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The electronics and semiconductor industries have been characterized
by intense price cutting which could materially adversely affect the Company's
future operating results. Given the Company's limited financial resources, its
anticipated expenses and the highly competitive environment in which the
Company operates, there can be no assurance that the Company's current rate of
revenue growth will continue in the future or that the Company's future
operations will remain profitable.
Lack of Written Long-Term Supply Contracts with Manufacturers and
Dependence on Three Suppliers. The Company does not have any written long-term
supply, distribution or franchise agreements with any of its manufacturers.
The Company acts as the exclusive sales agent in North America for many of its
manufacturers, pursuant to oral agreements. While the Company believes that it
has established close working relationships with its principal manufacturers,
the Company's success depends, in large part, on maintaining these
relationships and developing new supplier relationships for its existing and
future product lines. Because of the lack of long-term contracts, there can be
no assurance that the Company will be able to maintain these relationships.
For Fiscal 1997, two suppliers and for 1996, three suppliers, respectively,
each accounted for in excess of 10% of the Company's net purchases. Purchases
from these two suppliers in Fiscal 1997 were $1,376,457 and $1,034,783 or
18.1% and 13.6% of total purchases, respectively. During Fiscal 1996 purchases
from these three suppliers were $1,154,262, $1,085,932 and $794,267, or 18%,
17% and 13%, respectively, of the Company's total purchases. While the Company
believes that there are alternative semiconductor and capacitor manufacturers
whose replacement products may be acceptable to its customers, the loss of, or
a significant disruption in the relationship with, one or both of the
Company's two major suppliers would most likely have a material adverse effect
on the Company's business and results of operations.
Need to Maintain Large Inventory; Price Fluctuations. In order to
adequately service its customers, the Company believes that it is necessary to
maintain a large inventory of its products. Accordingly, the Company attempts
to maintain a three to four month inventory of those products it offers which
are in high demand. As a result of the Company's strategic inventory
purchasing policies, under which the Company, in order to obtain preferential
pricing, waives the rights to manufacturers' inventory protection agreements
(including price protection and inventory return rights), the Company bears
the risk of increases in the prices charged by its manufacturers and decreases
in the prices of products held in its inventory or covered by purchase
commitments. If prices of components held in inventory by the Company decline
or if new technology is developed that displaces products sold by the Company
and held in inventory, the Company's business could be materially adversely
affected.
Dependence on Certain Customers. For Fiscal 1996 approximately 13.2% of
the Company's net sales were derived from sales to the Company's only customer
which accounted for in excess of 10% of the Company's revenues. During Fiscal
1997 two new customers accounted for approximately 16.8% (Harman Consumer
Manufacturing) and 13.1% (Leviton Manufacturing Co.) of the Company's net sales.
Although the Company's customer base has increased, the loss of its largest
customers as well as, to a lesser
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extent, the loss of any other principal customer, would be expected to have a
materially adverse effect on the Company's operations during the short-term
until the Company is able to generate replacement business, although there can
be no assurance of obtaining such replacement business.
Intense Competition. The Company faces intense competition, in both its
selling efforts and purchasing efforts, from the significant number of companies
that manufacture or distribute electronic components and semiconductors. The
Company's principal competitors in the sale of capacitors include Nichicon,
Panasonic, Illinois Capacitors and NIC. Its principal competitors in the sale of
discrete components include General Instrument Corp., Motorola, Inc., Microsemi,
Diodes, Inc. and Samsung. Many of these companies are well established with
substantial expertise, and possess substantially greater assets and possess
substantially greater financial, marketing, personnel, and other resources than
does the Company. Many larger competing suppliers also carry product lines which
the Company does not carry. Generally, large semiconductor manufacturers and
distributors do not focus their direct selling efforts on small to medium sized
OEMs and distributors, which constitute the majority of the Company's customers.
As the Company's customers increase in size, however, competitors may find it
cost effective to focus direct selling efforts on those customers, which could
result in increased competition, the loss of customers or pressure on profit
margins for the Company. There can be no assurance that the Company will be able
to continue to compete effectively with existing or potential competitors.
Potential Shortage of Components. The semiconductor component business
has, from time to time, experienced periods of extreme shortages in product
supply, generally as the result of demand exceeding available supply. When these
shortages occur, suppliers tend to either increase prices or reduce the number
of units sold to customers. While the Company believes that, due to the depth of
its inventory and its relationship with its manufacturers, it has not been
adversely affected by recent shortages in certain discrete semiconductor
components, no assurance can be given that future shortages will not adversely
impact the Company.
Ability to Manage Growth. The Company is currently expanding its
current level of operations through the opening of additional sales/stocking
offices, the expansion of its headquarters office and warehouse facility and an
increase in inventories. The Company believes that it has sufficient funds,
which were derived from the Company's public offering in July, 1996, to carry
out its plans for expansion of its current facilities. There can be no assurance
that the Company will be able to expand its operations beyond its current plans.
Additional expansion of the Company's operations will depend on, among other
things, the continued growth of the electronics and semiconductor industries,
the Company's ability to withstand intense price competition, its ability to
obtain new clients, retain sales and other personnel in order to expand its
marketing capabilities, secure adequate sources of products which are then in
demand on commercially reasonable terms, successfully manage growth (including
monitoring an expanded level of operations and controlling costs) and the
availability of adequate financing.
The Company may also seek to expand its operations through potential
acquisitions. The Company may acquire all or a portion of existing companies
in businesses which the Company
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believes are compatible with its business including, but not limited to,
competitors of the Company. Any decision to make an acquisition will be based
upon a variety of factors, including, among others, the purchase price and
other financial terms of the transaction, the business prospects and the
extent to which any acquisition would enhance the Company's prospects. To the
extent that the Company may, depending upon the opportunities available to it,
finance an acquisition with a combination of cash and equity securities, any
such issuance of equity securities could result in dilution to the interests
of the Company's shareholders. Additionally, to the extent that the Company,
or the acquisition or merger candidate itself, issues debt securities in
connection with an acquisition, the Company may be subject to risks associated
with incurring indebtedness, including the risks of interest rate fluctuations
and insufficiency of cash flow to pay principal and interest. The Company is
not currently engaged in identifying any potential acquisition and has no
plans, agreements, understandings or arrangements for any acquisitions. There
can be no assurance that the Company will be able to successfully consummate
any acquisition or successfully integrate into its business any acquired
business or portion thereof.
Decline of Broker Distribution Business. Challenge's broker
distribution business fills orders from customers which need electronic
components and products that are not readily available from their suppliers. As
a result of the economic disturbances in Asia and a general decrease in the
electronics industry, there is an abundance of electronics products in the
United States markets. The abundance of electronics products has resulted in
decreased business among the broker distributors as customers choose to purchase
the products from suppliers with direct factory relationships due to the
customer service provided, such as, technical support, rescheduling of
deliveries, returning of goods, the general ease of doing business and better
pricing. The decrease in Challenge's broker distribution business is reflected
in the decrease in net sales for the nine months ended August 31 from
$3,488,909 in 1997 to $2,261,137 in 1998.
Although the Company cannot be certain, it believes that the broker
distribution business will continue to change and that many of such businesses
will have difficulties surviving if they have insufficient resources to compete
with the factory direct distributors. In light of this belief, Challenge is
considering developing a product line or group of lines manufactured in Asia to
be sold under the name of Challenge, in addition to its broker distribution
business.
Unfavorable Product Mix; Declining Profit Margins. The Company's gross
profit margins in 1997 decreased by 3.4 percentage points from 1996 as a result
of increased competition in the electronics industry. The unavailability of
products at favorable prices and the inability of the Company to continue its
favorable sales mix, could adversely impact sales and gross profit margins. The
electronics industry has historically been cyclical and has experienced periodic
downturns, as well as price cutting trends. The semiconductor industry is
experiencing a decline reflecting a slowdown in personal computer sales and
rapidly falling prices for memory chips. These factors are difficult to predict
and as the electronics industry is currently experiencing price cutting, the
Company's future performance, particularly its profit margin, may be adversely
affected.
Possible Need for Additional Financing. The Company intends to expand
its facilities over the next several years in order to achieve growth 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 is expending funds toward the expansion of
office and warehouse space at its current facilities in addition to establishing
additional sales/stocking facilities in other strategic locations. The Company
is renovating the office facilities to allow for expansion of the sales
department, clerical, finance and purchasing departments. The Company believes
the new working environment will lead to greater productivity. Additionally, the
renovations include additional space for test labs, which will allow the Company
to provide customers with prompt information regarding the specifications of its
products and additional sales staff are expected to manage the Company's sales
growth.
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, marketing and
facilities related charges. Upon the updating of its current facilities and
the opening of new facilities, facilities related charges are expected to rise
dramatically.
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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 demand warrants such opening which is not
currently contemplated. In the event that future sales levels do not increase or
in the event that the Company is unable to obtain such additional financing as
it becomes necessary, the Company will not be able to achieve all of its
business plans. The Company has sufficient funds to complete the expansion of
its current facilities. Any inability to obtain additional financing could have
a material adverse effect on the Company, including possibly requiring the
Company to significantly curtail its planned expansion.
Adverse Effects of Trade Regulation and Foreign Economic Conditions.
Approximately 49% of the total goods purchased by the Company in 1997 were
manufactured in foreign countries, with the majority purchased in Taiwan
(24.2%), China (18.7%), South Korea (3.6%), India (1.4%) and Hong Kong (1.2%).
The purchase of goods manufactured in foreign countries, such as the foregoing,
is subject to a number of risks, including economic disruptions, transportation
delays and interruptions, foreign exchange rate fluctuations, imposition of
tariffs and import and export controls and changes in governmental policies, any
of which could have a materially adverse effect on the Company's business and
results of operations. In addition, the current economic conditions in Southeast
Asia may severely impact the Company's business. Potential concerns may include
drastic devaluation of currencies, loss of supplies and increased competition
within the region.
The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on the Company's
business. The Company's ability to remain competitive could also be affected
by other governmental actions related to, among other things, anti-dumping
legislation and international currency fluctuations. While the Company does
not believe that any of these factors have adversely impacted its business in
the past, there can be no assurance that these factors will not materially
adversely affect the Company in the future.
Electronics Industry Cyclicality. The electronics industry has been
affected historically by general economic downturns, which have had an adverse
economic effect upon manufacturers and end-users of capacitors and
semiconductors. In addition, the life-cycle of existing electronic products
and the timing of new product developments and introductions can affect demand
for semiconductor components. Any downturns in the electronics distribution
industry could adversely affect the Company's business and results of
operations.
Absence of Patents, Trademarks and Proprietary Information. The Company
holds no patents and has no trademarks or copyrights registered in the United
States Patent and Trademark Office or in any state. The Company relies on the
know-how, experience and capabilities of its management personnel. Without
trademark and copyright protection, however, the Company has no protection from
other parties attempting to offer similar services.
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Although the Company believes that its products do not and will not
infringe patents or trademarks, or violate proprietary rights of others, it is
possible that infringement of existing or future patents, trademarks or
proprietary rights of others may occur. In the event the Company's products
infringe proprietary rights of others, the Company may be required to modify
the design of its products, change the name of its products and/or obtain a
license. There can be no assurance that the Company will be able to do so in a
timely manner, upon acceptable terms and conditions or at all. The failure to
do any of the foregoing could have a material adverse effect upon the Company
or its operations. In addition, there can be no assurance that the Company
will have the financial or other resources necessary to enforce or defend a
patent infringement or proprietary rights violation action. Moreover, if the
Company's products infringe patents, trademarks or proprietary rights of
others, the Company could, under certain circumstances, become liable for
damages, which also could have a material adverse effect on the Company.
Control by Management and Current Shareholders. As of October 28, 1998,
Management of the Company beneficially owned 752,624 Common Shares, or
approximately 15.5% of the then issued and outstanding Common Shares. In view of
the Shareholder Rights Protection Plan described below, the Company's present
Management may be able to effectively control the Company, elect all of the
Company's directors, increase the authorized capital, dissolve, merge or sell
all of the assets of the Company, and generally direct the affairs of the
Company. Ira H. Levy and Steven J. Lubman, President and Vice President,
respectively, entered into a stock purchase agreement pursuant to which each
agreed to vote their shares, for as long as the other party continues to own
voting shares of the Company, in such manner as to elect each of them as a
director of the Company.
Dependence Upon Key Personnel. The Company is highly dependent upon
the services of Ira Levy, and Steven J. Lubman. The success of the Company, to
date, has been largely dependent upon the efforts and abilities of Messrs.
Levy and Lubman, and the loss of either of their services for any reason could
have a material adverse effect upon the Company. In addition, the Company's
work force includes executives and employees with significant knowledge and
experience in the electronics distribution industry. The Company's future
success will be strongly influenced by its ability to continue to recruit,
train and retain a skilled work force. While the Company believes that it
would be able to locate suitable replacements for its executives or other
personnel if their services were lost to the Company, there can be no
assurance that the Company would be able to do so on terms acceptable to the
Company.
On February 1, 1996, the Company entered into five-year employment
agreements with Messrs. Levy and Lubman commencing on July 31, 1996.
Nevertheless, should either of their services become unavailable for any
reason, the location and hiring of a suitable replacement for Mr. Levy and/or
Mr. Lubman could be very difficult. The Company has purchased key-man life
insurance policies on Mr. Levy and Mr. Lubman with benefits of $1,000,000
payable to the Company in the event of each person's death. The benefits
received under these policies might
-12-
<PAGE>
not be sufficient to compensate the Company for the loss of Mr. Levy's or Mr.
Lubman's services should a suitable replacement not be employed.
Risk of Loss of Uninsured Cash Balances. The Company maintains its
cash balances in several financial institutions. Accounts at each financial
institution are secured by the FDIC for up to $100,000. Uninsured balances at
August 31, 1998 were approximately $108,674 which could be lost if any of these
banks fail.
No Dividends. The Company does not intend, for the foreseeable
future, to declare or pay any dividends and intends to retain earnings, if
any, for the future operation and expansion of the Company's business.
Shares Eligible for Future Sale. The Company as of October 28,
1998, had 4,852,958 Common Shares outstanding. Of the Common Shares issued and
outstanding, an aggregate of 4,153,098 Common Shares including the 1,500,000
Common Shares sold in the July 1996 Public Offering, 333,333 Common Shares
sold in the Company's initial public offering, which closed in September of
1984; and any other shares which were sold pursuant to Rule 144, or
otherwise exempt from registration are freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by an "affiliate" of the
Company within the meaning of Rule 144 under the Securities Act ("Rule 144").
The remaining 699,860 Common Shares are "restricted securities," as that term
is defined under Rule 144, and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemption provided by Rule 144. All of such shares are currently
eligible for sale under Rule 144(k).
No prediction can be made as to the effect, if any, that market sales
of Common Shares or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Shares may be sold in the public market may
adversely affect prevailing market prices for the Common Shares and could
impair the Company's ability to raise capital through the sale of its equity
securities.
Effect of Outstanding Warrants and Options. Commencing on August 1,
1998, all of the Company's 3,425,000 Warrants became exercisable. As of October
29, 1998 there were 293,000 shares issuable upon exercise of options. The
exercise of the Warrants and the Underwriters's Warrants (from its July 1996
Public Offering) (and the Warrants included therein) may adversely affect
prevailing market prices for the Common Shares and may dilute the interests of
existing shareholders. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected since the holders
of such outstanding securities can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the Warrants and the
Underwriters's Warrants. The Company has granted certain demand and "piggy-back"
registration rights to the Underwriters with respect to the securities issuable
upon exercise of the Underwriters's Warrants.
-13-
<PAGE>
Blank Check Preferred Stock, "Poison Pill" and Control of Company.
The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered without further shareholder approval, but subject to
the Representative's prior written consent during the next two years, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders
of the Common Shares. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. Although the Company has no
current intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future.
On June 30, 1997, the Board of Directors of the Company unanimously
adopted a Shareholder Rights Protection Plan, commonly referred to as a poison
pill (the "Plan"). The Plan is not intended to prevent a tender offer or proxy
contest to take-over the Company, but rather to prevent a party from gaining
control in the open market at currently less than fair prices. Under the Plan,
each shareholder of record on July 10, 1997 (the "Record Date"), except someone
who becomes a 20% shareholder, will receive two common share purchase rights
(each, a "Right") for each Common Share held on the Record Date or issued after
the Record Date and before a person acquires 20% or more of the outstanding
shares. Each Right entitles the holder to purchase one Common Share, at $.01 per
share, in the event a person acquires 20% or more of the Company's outstanding
shares other than through a tender offer, proxy contest or other exempt
transactions, where shareholders enjoy statutory safeguards. Unless a person
limits his holdings to less than 20% or is prepared to pay fair value to all
shareholders, the Plan will deter someone from acquiring 20% or more of the
Common Share at very low prices. The Board may redeem the Rights prior to an
event occurring under the Plan.
Penny Stock Regulation. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current prices and volume information with respect to
transactions in such securities are provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes
-14-
<PAGE>
subject to the penny stock rules. If the Company's securities become subject
to the penny stock rules, investors in this Offering may find it more
difficult to sell their securities.
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean something
other than the year 2000. These problems are widely expected to increase in
frequency and severity as the year 2000 approaches, and are commonly referred to
as the "Year 2000 Problem."
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company has been
advised that its computer systems are Year 2000 compliant. The Company has spent
approximately $15,600 to become Year 2000 compliant and does not anticipate
incurring any additional costs.
Systems Other than Information Technology Systems. In addition to
computers and related systems, the operation of office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators, and other common devices may be affected by the Year 2000 Problem.
The Company is currently assessing the potential effect of, and costs of
remediating, the Year 2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
Suppliers and Customers. The Company will commence a program to pursue
compliance by those with whom it electronically interconnects and will initiate
communications with third party suppliers and customers to identify and, to the
extent possible, to resolve issues involving the Year 2000 Problem. The
Company's accounting system is not linked to any outside software system.
However, the Company has limited or no control over the actions of these third
party suppliers and customers. Thus, while the Company expects that it will be
able to resolve any significant Year 2000 Problems with these systems, there can
be no assurance that these suppliers and customers will resolve any or all Year
2000 Problems with these systems before the occurrence of a material disruption
to the business of the Company or any of its customers. Any failure of these
third parties to resolve Year 2000 Problems with their systems in a timely
manner could have a material adverse effect on the Company's business, financial
condition, and results of operation..
<PAGE>
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and
inefficiencies for the Company and its customers that may divert
management's time and attention and financial and human resources
from its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its customers to prevent or
alleviate material business disruptions.
Contingency Plans. The Company is currently developing contingency
plans to be implemented as part of its efforts to identify and correct Year 2000
Problems affecting its internal systems. The Company expects to complete its
contingency plans by the end of 1998. Depending on the systems affected, these
plans could include accelerated replacement of affected equipment or software,
short to medium-term use of backup equipment and software, increased work hours
for Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Based on the activities described above, the Company does not believe
that the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
and unanticipated problems identified in the ongoing compliance review.
15
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and Class A Warrants are traded in the over-the
counter market and are quoted on the National Association of Securities
Dealers Automated Quotation System, Inc. SmallCap Market ("Nasdaq") under the
symbols "SRGE" and "SRGEW", respectively. In addition, the Common Shares and
Warrants are listed on the Boston Stock Exchange under the symbols "SRG" and
"SRGW", respectively.
The following table sets forth for the periods indicated,
the high and low trade prices of the Company's Common Shares and Warrants, as
reported by Nasdaq.
<TABLE>
<CAPTION>
Security Trading Period High Low
- -------- -------------- ---- ---
Common Shares FISCAL YEAR ENDED NOVEMBER 30, 1997
-----------------------------------
<S> <C> <C> <C>
FIRST QUARTER
(December 1, 1996 - February 28, 1997) 5 3/8 3 1/2
SECOND QUARTER
(March 1, 1997 - May 31, 1997) 5 5/8 2
THIRD QUARTER
(June 1, 1997 - August 31, 1997) 2 3/16 1/2
FOURTH QUARTER
(September 1, 1997 - November 30, 1997) 2 3/8 5/8
FISCAL YEAR ENDING NOVEMBER 30, 1998
------------------------------------
FIRST QUARTER
(December 1, 1997 - February 28, 1998) 2 13/16 1 15/32
SECOND QUARTER
(March 1, 1998- May 31, 1998) 3 1/8 1 1/8
THIRD QUARTER
(June 1, 1998- August 31, 1998) 2 1/2 11/16
FOURTH QUARTER
(September 1, 1998- September 9, 1998) 25/32 3/8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Security Trading Period High Low
- -------- -------------- ---- ---
<S> <C> <C> <C>
Warrants FISCAL YEAR ENDED NOVEMBER 30, 1997
-----------------------------------
FIRST QUARTER
(December 1, 1996 - February 28, 1997) 2 1/8 1/2
SECOND QUARTER
(March 1, 1997 - May 31, 1997) 13/16 7/32
THIRD QUARTER
(June 1, 1997 - August 31, 1997) 5/16 3/32
FOURTH QUARTER
(September 1, 1997 - November 30, 1997) 13/16 1/8
FISCAL YEAR ENDING NOVEMBER 30, 1998
------------------------------------
FIRST QUARTER
(December 1, 1997 - February 28, 1998) 1 3/32 3/8
SECOND QUARTER
(March 1, 1998- May 31, 1998) 1 1/2 31/32
THIRD QUARTER
(June 1, 1998- August 31, 1998) 1 1/2 1/4
FOURTH QUARTER
(September 1, 1998- September 3, 1998) 1/2 3/8
</TABLE>
On November 19, 1998, the closing sale price of a Common
Share was $.50 and on November 18, 1998, the closing sale price of a Warrant
was $.156.
On September 10, 1998, the Company had 182 and 36
recordholders of its Common Stock and Warrants, respectively, and reasonably
believed it had in excess of 300 beneficial holders of its Common Stock.
-16-
<PAGE>
The Company has not paid any cash dividends on its Common Stock
during the last two years and does not anticipate paying any in the
foreseeable future. The Board of Directors intends to retain any earnings to
support the growth of the Company's business.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities. However, the Company expects to use the proceeds from the exercise
of the Warrants for working capital and other general corporate purposes.
SELLING SECURITYHOLDERS
The table below sets forth with respect to each Selling Stockholder,
based upon information available to the Company as of November 19, 1998, the
number of shares of Common Stock beneficially owned before and after the sale
of the shares offered hereby, the number of shares to be sold, and the percent
of the outstanding shares of Common Stock owned before and after the sale of
the Common Stock offered hereby. Although there can be no assurance that the
Selling Securityholders will sell any or all of the Securities, the following
table assumes that each of the Selling Securityholders will sell all of the
Securities offered by this Prospects.
This Registration Statement, of which the Selling Securityholders'
Prospectus is a part, relates to 153,313 Common Shares, 300,000 Warrants and
300,000 Common Shares issuable upon the exercise of Warrants by certain
Selling Securityholders. In addition, the Selling Securityholders may exercise
the Warrants and sell the underlying Common Shares.
<TABLE>
<CAPTION>
Beneficial
Ownership
Beneficial Amount of After
Ownership Prior Percentage of Common Shares/ Selling
to Selling Common Class A Warrants Securityholders'
Securityholders' Shares Owned and Underlying Offering if All
Offering Before Common Shares Shares/Warrants
Selling Securityholder Shares (1) Offering(1) Being Registered are Sold
- ------------------------------- ----------------------- ------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Palmyra Lin 150,000 3% 50,000 shs. 0
100,000 wts.
100,000 shs.
Estate of Andrew 89,791 1.8% 1,271 shs. 13,520
Dembrowski 25,000 shs.
50,000 wts.
50,000 shs.
Frank Brooks 75,000 1.5% 25,000 shs. 0
50,000 wts.
50,000 shs.
</TABLE>
* Less than 1%
-17-
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Ownership
Beneficial Amount of After
Ownership Prior Percentage of Common Shares/ Selling
to Selling Common Class A Warrants Securityholders'
Securityholders' Shares Owned and Underlying Offering if All
Offering Before Common Shares Shares/Warrants
Selling Securityholder Shares (1) Offering(1) Being Registered are Sold
- ------------------------------- ----------------------- ------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Andrew Licari 75,000 1.5% 25,000 shs. 0
50,000 wts.
50,000 shs.
Jerome Springier 75,000 1.5% 25,000 shs. 0
50,000 wts.
50,000 shs.
Edward Kravitz 18,333 * 2,042 shs. 16,291
- ------------------------------------------------------------------------------------------------------------------------
3,313 shs.
150,000 shs.
300,000 wts.
300,000 shs.
-------
Total: 483,124 453,313 shs. 29,811
======= ======= ======
</TABLE>
* Less than 1%
(1) Based on 4,852,958 Common Shares outstanding as of November 19, 1998. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by
any other person) and which are exercisable within 60 days from the date
hereof have been exercised.
PLAN OF DISTRIBUTION
The shares of Common Stock, Class A Warrants and shares of Common
Stock issuable upon exercise of Class A Warrants (collectively
the"Securities") offered hereby are being offered by the Selling
Securityholders and/or their transferees, assignees, pledgees or other
successors for their own account and not for the account of the Company.
The Selling Securityholders may continue to sell the Securities directly to
purchasers or, alternatively, may offer the Securities from time to time
through other agents, brokers, dealers or underwriters, who may receive
compensation in the form of concessions or commissions from the Selling
Securityholders. Sales of the Securities may be made in one or more
transactions on NASDAQ, in privately negotiated transactions or otherwise, and
such sales may be made at the market price prevailing at the time of sale, a
price related to such prevailing market price or a negotiated price. Sales of
Securities are subject to the prospectus delivery and other requirements of
the Securities Act.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to the Common Stock of the
-18-
<PAGE>
Company during the applicable "cooling off" period (nine business days) prior
to the commencement of such distribution. In addition, and without limiting
the foregoing, the Selling Securityholders will be subject to applicable
provisions of the Exchange Act and the regulations thereunder, including,
without limitation, Rule 102 of Regulation M, which provisions may limit the
timing of purchases and sales of the Securities by the Selling
Securityholders. To the extent required, the Company will use its best efforts
to file, during any period in which offers or sales are being made, one or
more amendments or supplements to this Prospectus or a new registration
statement with respect to the Common Stock and Class A Warrants to describe
any material information with respect to the plan of distribution not
previously disclosed in this Prospectus, including the name or names of any
additional underwriters, dealers or agents, if any, the purchase price paid by
the underwriter for Securities purchased from a Selling Securityholder, and
any discounts, commissions or concessions allowed or reallowed or paid to
dealers.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be
passed upon for the Company by Snow Becker Krauss P.C., New York, New York.
EXPERTS
The consolidated financial statements of Surge Components, Inc. and its
subsidiary and for the two years ended November 30, 1996 and 1997 included in
this Prospectus have been included in reliance upon the report of Seligson &
Giannattasio, LLP, independent certified public accountants, given upon the
authority of said firm as experts in accounting and auditing.
-19-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Financial Statements
For the Year Ended November 30, 1997
Independent Auditors' Report F - 2
Consolidated Balance Sheet F - 3 - 4
Consolidated Statements of Income F - 5
Consolidated Statements of Stockholders' Equity F - 6
Consolidated Statements of Cash Flows F - 7 - 8
Notes to Consolidated Financial Statements F - 9 - 22
For the Period Ended August 31, 1998
Consolidated Balance Sheets F-23-24
Consolidated Statements of Income F-25
Consolidated Statements of Cash Flows F-26
Notes to Consolidated Financial Statements F-27-28
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Surge Components, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Surge
Components, Inc. and Subsidiary as of November 30, 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two years ended November 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surge Components, Inc. and
Subsidiary as of November 30, 1997 and the results of their operations and
their cash flows for the two years ended November 30, 1997 in conformity with
generally accepted accounting principles.
Seligson & Giannattasio, LLP
N. White Plains, New York
January 26, 1998
F - 2
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1997
ASSETS (Note 4)
Current assets:
Cash (Note 2) $ 2,895,695
Marketable securities (Note 2) 2,217,370
Accounts receivable (net of allowance for
doubtful accounts of $15,724) 1,544,536
Inventory 1,228,941
Prepaid expenses and taxes 130,844
Cash surrender value 29,789
-----------
Total current assets $8,047,175
Fixed assets - net of accumulated depreciation
of $160,858 (Note 3) 123,942
Other assets:
Security deposits 2,985
----------
Total assets $8,174,102
==========
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable - bank (Note 4) $ 495,495
Accounts payable 960,073
Accrued expenses 294,734
Corporation taxes payable 456
-----------
Total current liabilities $1,750,758
Long term debt:
Deferred income tax (Note 7) 1,396
----------
Total liabilities 1,752,154
Commitments and contingencies (Notes 4 through 12)
Stockholders' equity (Note 6):
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 4,824
Additional paid-in capital 6,335,862
Unrealized holding gain (Note 2) 75,980
Retained earnings 5,282
----------
Total stockholders' equity 6,421,948
----------
Total liabilities and stockholders' equity $8,174,102
==========
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
November 30,
1 9 9 7 1 9 9 6
------- -------
Sales $ 10,887,608 $ 8,501,318
Less returns and allowances 53,810 31,420
------------ ------------
Net sales 10,833,798 8,469,898
Cost of goods sold 8,224,670 6,144,152
------------ ------------
Gross profit 2,609,128 2,325,746
------------ ------------
Operating expenses:
General and administrative
expenses 1,955,306 1,590,942
Selling and shipping expenses 719,185 529,888
Depreciation 54,693 29,193
------------ ------------
Total operating expenses 2,729,184 2,150,023
------------ ------------
Income (loss) from operations (120,056) 175,723
Other Income and (Expenses)
Investment income 265,307 94,285
Interest expense (56,012) (41,435)
------------ ------------
Income before income taxes 89,239 228,573
Income taxes (Note 9) 13,889 89,435
------------ ------------
Net income $ 75,350 $ 139,138
============ ============
Weighted average shares outstanding
Basic 4,823,958 3,623,890
Diluted 4,964,983 3,650,662
Earnings per share
Basic $ .02 $ .04
Diluted $ .02 $ .04
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Unrealized Retained Total
Preferred Stock Common Stock Paid-In Holding Earnings Stockholders'
Shares Amount Shares Amount Capital Gain (Deficit) Equity
--------- --------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 1, 1995 -- $ -- 1,748,958 $ 1,749 $1,529,829 $ -- $ (209,206) $1,322,372
Net unrealized gain in
marketable securities -- -- -- -- -- 35,751 -- 35,751
Proceeds from issuance of
private offering -- -- 350,000 350 286,533 -- -- 286,883
Proceeds from exercise of
warrants -- -- 1,000,000 1,000 119,000 -- -- 120,000
Proceeds from issuance of
public offering -- -- 1,725,000 1,725 4,400,500 -- -- 4,402,225
Net income for the period -- -- -- -- -- -- 139,138 139,138
--------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - November 30, 1996 -- -- 4,823,958 4,824 6,335,862 35,751 (70,068) 6,306,369
Proceeds from issuance
of stock -- -- -- -- -- -- -- --
Net unrealized gain in
marketable securities -- -- -- -- -- 40,229 -- 40,229
Net income for the period -- -- -- -- -- -- 75,350 75,350
--------- --------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - November 30, 1997 -- $ -- 4,823,958 $ 4,824 $6,335,862 $ 75,980 $ 5,282 $6,421,948
========= ========= ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
OPERATING ACTIVITIES:
Net income $ 75,350 $ 139,138
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 54,693 29,193
Deferred income taxes (3,092) 200
Provision for losses on
accounts receivable 6,518 2,188
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (651,203) 125,378
Inventory 103,703 (596,288)
Prepaid expenses and taxes (109,017) (14,216)
Deposit on merchandise -- 1,150
Cash surrender value (13,317) (9,558)
Accounts payable (9,881) 233,983
Accrued expenses and taxes 12,636 (123,709)
Customer deposit -- (24,837)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (533,610) (237,378)
----------- -----------
INVESTING ACTIVITIES
Purchase of marketable securities (134,460) (2,006,930)
Acquisition of fixed assets (8,858) (125,515)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (143,318) (2,132,445)
----------- -----------
See accompanying notes to consolidated financial statements
F - 7
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
FINANCING ACTIVITIES
Deferred offering costs $ -- $(1,068,201)
Net borrowings under
letter-of-credit agreement 331,263 34,389
Proceeds from public offering -- 5,520,000
Proceeds from private offering -- 325,000
Proceeds from exercise of warrant -- 120,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 331,263 4,931,188
----------- -----------
NET CHANGE IN CASH (345,665) 2,561,365
CASH AT BEGINNING OF PERIOD 3,241,360 679,995
----------- -----------
CASH AT END OF PERIOD $ 2,895,695 $ 3,241,360
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 150,908 $ 26,749
=========== ===========
Interest paid $ 56,012 $ 41,435
=========== ===========
Payment of legal services through issuance
of stock (Note 8) $ -- $ 25,000
=========== ===========
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF COMPANY'S BUSINESS
Surge Components, Inc. was incorporated in the State of New York and commenced
operations on November 24, 1981 as an importer of electronic products, primarily
capacitors and rectifiers, to customers located principally throughout the
United States. On June 1, 1988 the Company formed Challenge/Surge Inc., a
wholly-owned subsidiary to engage in the distribution of electronic component
products from established brand manufacturers to customers located principally
throughout the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All material intercompany balances and transactions
have been eliminated in consolidation.
Marketable Securities
Effective November 1, 1993, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) Number 115
"Accounting for Certain Investments in Debt, and Equity Securities". Under this
standard, certain investments in debt and equity securities will be reported at
fair value. The Company's marketable securities, which consist primarily of
mutual funds, are being reported as securities held for sale. The market value
of these securities at November 30, 1997 is as follows:
Aggregate cost $2,141,390
Gross unrealized gain 75,980
Gross unrealized loss --
----------
$2,217,370
==========
Cost of the securities used in the computation of realized gains and losses is
determined using the specific identification method. During 1997 and 1996,
there were no sales of these securities.
F - 9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, which consist solely of goods held for resale, are stated at the
lower of cost (first-in, first-out method) or market. The Company measures
inventory and cost of goods sold for interim financial statements by use of a
historically developed gross profit percentage. Annually, the Company adjusts
the inventory to reflect the results of a physical count. No material
adjustments were made to adjust to the physical count for the years ended
November 30, 1997 and 1996.
Depreciation and Amortization
Fixed assets are recorded at cost. Depreciation is generally provided on an
accelerated method (double-declining balance) for personal property and on the
straight-line method for real property over the estimated useful lives of the
various assets as follows:
Furniture, fixtures and equipment 5 - 7 years
Transportation equipment 3 - 5 years
Leasehold Improvements 10 - 39 years
Maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized.
Reserve for Bad Debts
The Company, due to its customer base has experienced an insignificant amount of
bad debts. As a result, the Company has not provided for a material change in
the reserve for bad debts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains substantially all its cash balances in two financial institutions. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At November 30, 1997 and 1996, the Company's uninsured cash balances
totaled $1,190,696 and $3,114,300, respectively. The Company performs periodic
reviews of the relative credit rating of its bank to lower its risk. The Company
believes that concentration with regards to accounts receivable is limited due
to its large customer base.
F - 10
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accrued Vacation Pay
Employees are required to take vacation in the year of entitlement. Accrued
unpaid vacation entitlement has not been significant and, as a result, no
accrual has been provided for.
Deferred Offering Costs
Costs and fees incurred in conjunction with the private placement (Note 6) were
deferred and have been charged against gross proceeds of the securities on a
prorata basis. Costs and fees incurred in conjunction with the public offering
(Note 6) were deferred and charged against the gross proceeds of the securities.
Income Taxes
The Company's deferred income taxes arise primarily from the differences in the
recording of the depreciation expense for financial reporting and income tax
purposes. Income taxes are reported based upon the Company's adoption of the
Statement of Financial Accounting Standards (SFAS) number 109 "Accounting for
Income Taxes".
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 11
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value
The Company has a number of financial instruments, none of which are held for
trading purposes. The carrying value of cash, receivables and accounts payable
approximates fair value due to the short maturity of these instruments. The
carrying value of short-term debt approximates fair value based on discounting
the projected cash flows using market rates available for similar maturities.
The Company estimates that the fair value of all financial instruments at
November 30, 1997, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheets. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable
judgment is necessarily required in interpreting market data to develop the
estimates of fair value, and accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
Earnings Per Share
Effective December 1, 1997, the Company Adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards Number 128, "Earning Per
Share". Under this standard, the method for calculation of earnings per share
was changed and requires the presentation of "basic" and "diluted" earnings per
share. Prior period earnings per share have been restated to conform with these
provisions.
F - 12
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following at November 30, 1997:
Furniture and fixtures $ 35,967
Leasehold improvements 53,258
Computer equipment 195,575
--------
284,800
Less - accumulated depreciation 160,858
--------
Total fixed assets $123,942
Depreciation expense for the years ended November 30, 1997 and 1996 was $54,693
and $29,193, respectively.
NOTE 4 - LETTERS OF CREDIT TO BANK
In May 1996, the Company entered into a 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 a rate of prime plus
one percent per annum.
In July 1997, the Company renewed its letter of credit agreement. The terms and
conditions pursuant to this agreement remain unchanged except direct borrowings
incur interest at the prime rate. On November 30, 1997 and 1996, the bankers
acceptances totaled $495,495 and $164,232 and the outstanding letters of credit
totaled $82,390 and $141,350, respectively. At November 30, 1997 and 1996, there
were no direct borrowings outstanding.
F - 13
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 5 - 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%) of the employee's salary. Net assets in the plan as of November 30, 1997
totaled $33,983. Pension expense for the year ended November 30, 1997 was
$2,931.
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred Stock
In February 1996, the Company amended its Certificate of Incorporation to
authorize the issuance of 1,000,000 shares of preferred stock in one or more
series, with each series to have such designations, rights and preferences as
may be determined from time to time by the Board of Directors. At November 30,
1997, none of the shares has been designated.
Warrant Agreement
In April 1994, the Company entered into a warrant agreement with The Harriman
Group, Inc., a broker-dealer registered with the United States Securities and
Exchange Commission, in consideration for the services rendered under a
financial advisory and investment banking agreement. In exchange for $1,200, the
investment banker received 1,000,000 warrants 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 has been listed on any stock exchange, or
sooner, upon mutual agreement of the Company and The Harriman Group, Inc. In
June 1996, the warrants were exercised.
F - 14
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
Private Placement
Pursuant to a Private Placement Memorandum dated October 3, 1995 the Company
completed a private offering of securities pursuant to Regulation D of the
Securities Act of 1933, as amended. This exempt offering consisted of a minimum
of $500,000 (consisting of 10 units, totaling 500,000 shares, at $50,000 per
unit) and a maximum of $1,000,000 (20 units, totaling 1,000,000 shares, at
$50,000 per unit). Each unit, as amended, consisted of one share of the
Company's common stock and one Class A Warrant plus an additional Class A
Warrant, which warrants are identical to those issued in the public offering. In
November 1995, the Company grossed $500,000 and netted $397,500 from the
issuance of the units. In December 1995, the Company completed the offering
raising aggregate net proceeds totaling $683,500 for the Company consisting of
the sale of 16-1/2 units.
Additional Shares Issued
In January 1996, the Company issued 25,000 shares and 50,000 Class A warrants to
a partnership whose partners are members of a law firm retained by the Company,
in exchange for legal services rendered. The shares and Class A warrants are
identical in all respects to those issued in the private placement.
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 (the "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 July 31,
1996 effective date of the Public Offering at a price of $5.00.
Stock Split
In February 1996, the Company effected a one-for-twelve reverse stock split. The
effect of the split is being presented retroactively for all periods presented.
F - 15
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
1995 Employee Stock Option Plan
In January 1996, the Company adopted, and shareholders ratified in February
1996, the 1995 Employee Stock Option Plan ("Option Plan"). The plan provides for
the grant of options to qualified employees of the Company and its subsidiary,
independent contractors, consultants and other individuals to purchase an
aggregate of 350,000 common shares.
Stock option incentive plan activity is summarized as follows:
Option Price
Shares Per Share
------ ---------
Options outstanding December 1, 1995 -- --
Granted 146,000 $ 3.20
Exercised -- --
--------
Options outstanding November 30, 1996 146,000 $3.20
Granted 336,000 $1.25 - $3.50
Canceled (178,000) $3.20 - $3.50
Exercised -- --
--------
Options outstanding November 30, 1997 304,000 $1.25 - $3.20
========
Options exercisable November 30, 1997 203,250
========
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 pro
forma net income and earnings per share for the years ended November 30, 1997
and 1996 would have been $(94,091) and $(.02) and $17,049 and $.01, respectively
had the new method been applied.
F - 16
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
1995 Employee Stock Option Plan (Continued)
Compensation for non-employees is accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 154%, 118% and 37% for 1997 and 32% for
1996; risk free interest rate of 6.75%; and expected lives of 4 to 5 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1996. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.
Consulting Agreement
The Company retained the services of the underwriter for the Public Offering
pursuant to a consulting agreement. Under the agreement, the underwriter
performed certain financial advisory and investment banking services for the
Company in exchange for fees totaling $92,000, which were paid over a one-year
period.
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 the date of this report, no such purchases have been made.
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.
F - 17
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates in effect in the years in which the differences are expected to reverse.
Deferred income tax liabilities are comprised as follows at November 30, 1997:
Deferred tax liability:
Fixed assets $1,396
The Company's income tax expense consists of the following:
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
Current:
Federal $13,186 $77,847
States 3,795 11,388
------- --------
$16,981 $89,235
======= =======
Deferred:
Federal $ (1,715) $ 140
States (1,377) 60
--------- ---------
$ (3092) $ 200
========= =========
Provision for income taxes $13,889 $89,435
======= =======
F - 18
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 7 - INCOME TAXES (Continued)
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective rate is as follows:
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
U.S. Federal income tax statutory rate 34% 34%
State income tax, net of Federal income tax benefit 6 6
Nontaxable Dividends (18) (1)
Benefit From Lower Tax Brackets (15) (1)
Nondeductible Expenses 9 1
---- --
Effective tax rate 16% 39%
=== ==
F - 19
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 8 - RELATED PARTY TRANSACTIONS
Lease
The Company leases office and warehouse space through December 31, 1998 from a
corporation which is controlled by officers of the Company. In December 1994,
the Company received a five year extension on the lease. The following is a
schedule of future minimum rental payments required at November 30, 1997:
Year Ending November 30,
1998 $ 60,595
1999 5,070
--------
$ 65,665
========
Rental expense for the years ended November 30, 1997 and 1996, was $64,729 and
$58,821, respectively.
Employment Agreements
Effective February 1, 1996, the Company entered into employment agreements with
two officers of the Company. Among other provisions, the agreement allows for a
base salary of $200,000 plus bonuses based on performance over a five year
period commencing on the effective date of the Public Offering. The agreement
also contains provisions prohibiting the officers from engaging in activities
which are competitive with those of the Company during employment and for one
year following termination. The agreements further provide that in the event of
a change of control, the current officers are not elected to the Board of
Directors of the Company and/or is not elected as an officer of the Company
and/or there has been a change in the ownership of at least 25% of the issued
and outstanding stock of the Company, and such issuance was not approved by
either officer, then the non-approving officer may elect to terminate his
employment contract and receive 2.99 times his annual compensation (or such
other amount then permitted under the Internal Revenue Code without an excess
penalty), in addition to the remainder of his compensation under his existing
employment contract.
F - 20
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 9 - INDEPENDENT REPRESENTATIVES
The Company has agreements with independent representatives who receive
commissions of 5% on the net amount of invoices rendered by the representative
after all trade discounts, freight, transportation allowances, sales taxes,
insurance and the like have been deducted. The representatives agree to not
represent any person or entity manufacturing or selling products which are
competitive with products and services sold by the Company throughout the term
of the agreement. The agreements continue unless terminated by written notice by
either party or the agreement is breached by either party.
NOTE 10 - MAJOR CUSTOMERS
Revenues to single customers in excess of 10% of the Company's total sales
consists of the following:
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
Customer A $ -- $1,114,488
Customer B 1,818,659 --
Customer C 1,419,976 --
NOTE 11 - MAJOR SUPPLIERS
Inventory purchased from one supplier in excess of 10% of the Company's total
purchases consists of the following:
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
Supplier A $ -- $1,154,262
Supplier B 1,034,783 1,085,932
Supplier C 1,376,457 794,267
F - 21
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
NOTE 12 - EXPORT SALES
Export sales consist of the following:
Year Ended
November 30,
1 9 9 7 1 9 9 6
------- -------
Surge Components Inc.
Canada $ 18,835 $ 12,524
Europe 16,284 --
Asia 27,298 15,775
Challenge/Surge Inc.
Canada $ 73,232 $ 59,417
Europe 54,346 28,709
Asia 310,736 128,575
F - 22
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
August 31, November 30,
1998 1997
---------- ------------
<S> <C> <C>
Current assets:
Cash $1,930,468 $2,895,695
Marketable securities 3,155,991 2,217,370
Accounts receivable (net of allowance for
doubtful accounts of $15,724) 1,214,033 1,544,536
Inventory 1,144,555 1,228,941
Prepaid expenses and taxes 116,075 130,844
Cash surrender value 29,789 29,789
---------- ----------
Total current assets 7,590,911 8,047,175
Fixed assets - net of accumulated depreciation
of $197,657 and $160,858, respectively 313,028 123,942
Other assets:
Security deposits 2,985 2,985
---------- ----------
Total assets $7,906,924 $8,174,102
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
August 31, November 30,
1998 1997
---------- ------------
<S> <C> <C>
Current liabilities:
Loan payable - bank $ 402,720 $ 495,495
Accounts payable 1,120,590 960,073
Accrued expenses 111,175 294,734
Corporation taxes payable 16,757 456
----------- -----------
Total current liabilities 1,651,242 1,750,758
Long term debt:
Deferred income tax -- 1,396
----------- -----------
Total liabilities 1,651,242 1,752,154
----------- -----------
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, 4,852,958 and
4,823,958 shares issued and outstanding 4,853 4,824
Additional paid-in capital 6,369,708 6,335,862
Unrealized holding gain 101,200 75,980
Retained earnings (deficit) (220,079) 5,282
----------- -----------
Total stockholders' equity 6,255,682 6,421,948
----------- -----------
Total liabilities and stockholders' equity $ 7,906,924 $ 8,174,102
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales $6,374,365 $7,466,138 $2,119,241 $2,847,282
Less returns and allowances 140,537 28,378 28,896 10,865
---------- ---------- ---------- ----------
Net sales 6,233,828 7,437,760 2,090,345 2,836,417
Cost of goods sold 4,732,721 5,646,320 1,586,988 2,225,884
---------- ---------- ---------- ----------
Gross profit 1,501,107 1,791,440 503,357 610,533
---------- ---------- ---------- ----------
Operating expenses:
General and administrative
expenses 1,435,835 1,366,738 531,512 458,697
Selling and shipping expenses 434,109 511,576 112,068 159,787
Depreciation 36,800 41,020 18,312 13,761
---------- ---------- ---------- ----------
Total operating expenses 1,906,744 1,919,334 661,892 632,245
---------- ---------- ---------- ----------
Loss from operations (405,637) (127,894) (158,535) (21,712)
Other income and (expense):
Investment income 215,236 201,751 72,396 71,496
Interest expense (33,971) (37,466) (14,756) (14,887)
---------- ---------- ---------- ----------
Income (loss) before income taxes (224,372) 36,391 (100,895) 34,897
Income taxes 989 4,331 97 4,176
---------- ---------- ---------- ----------
Net income (loss) $ (225,361) $ 32,060 $ (100,992) $ 30,721
========== ========== ========== ==========
Weighted average shares outstanding
Basic 4,831,480 4,823,958 4,839,067 4,823,958
Diluted 4,831,480 4,929,490 4,839,067 4,929,490
Earnings (loss) per share
Basic $ (.05) $ .01 $ (.02) $ .01
Diluted $ (.05) $ .01 $ (.02) $ .01
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
SURGE COMPONENTS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (225,361) $ 32,060
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 36,800 41,020
Deferred income taxes (1,396) (1,538)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 330,503 (512,172)
Inventory 84,386 (72,603)
Prepaid expenses and taxes 14,766 (100,143)
Accounts payable 160,520 (14,061)
Accrued expenses and taxes (167,258) (181,468)
Customer deposit -- --
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 232,960 (808,905)
---------- ----------
INVESTING ACTIVITIES
Purchase of marketable securities (913,401) (100,824)
Acquisition of fixed assets (225,886) (11,908)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (1,139,287) (112,732)
---------- ----------
FINANCING ACTIVITIES
Net borrowings under
letter-of-credit agreement (92,775) 506,848
Proceeds from issuance of stock 33,875 --
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (58,900) 506,848
---------- ----------
NET CHANGE IN CASH (965,227) (414,789)
CASH AT BEGINNING OF PERIOD 2,895,695 3,241,360
---------- ----------
CASH AT END OF PERIOD $1,930,468 $2,826,571
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 1,962 $ 127,326
========== ==========
Interest paid $ 33,932 $ 37,466
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial statements
of Surge Components Inc. and Subsidiary contain all adjustments necessary to
present fairly the Company's consolidated financial position as of August 31,
1998 and November 30, 1997 and the consolidated results of operations for the
nine and three months ended August 31, 1998 and 1997 and consolidated cash flows
for the nine months ended August 31, 1998 and 1997.
Except as follows, 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, 1997.
The consolidated results of operations for the nine and three months ended
August 31, 1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
Earnings per Share - Effective December 1, 1997, the Company adopted Financial
Accounting Standards Board Statement of Financial Accounting Standards Number
128, "Earnings Per Share". Under this standard, the method for calculation of
earnings per share was changed and requires the presentation of "basic" and
"diluted" earnings per share. Prior period earnings per share have been restated
to conform with these provisions.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards Number 130 "Reporting Comprehensive Income". This standard
requires disclosures regarding comprehensive income, the change in an entity's
equity during a period from transactions and events other than those resulting
from investments by and distributions to owners. Had the new standard been
adopted effective December 1, 1996, comprehensive income (loss) for the nine
months ended August 31, 1998 and 1997 would have been $ (200,141) and $ 61,645,
respectively.
F-27
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998
NOTE 3 - ISSUANCE OF ADDITIONAL SHARES
In June 1998, the Company approved the issuance of 18,000 shares of the
Company's $.001 par value common stock to an officer of the Company. On August
10, 1998 the company issued the shares to the officer of the Company in
connection with a settlement of a lawsuit.
NOTE 4 - AGREEMENT FOR ADDITIONAL OFFICE SPACE
In July 1998, the Company renewed their lease for office and warehouse space
through December 31, 2008 with a corporation controlled by officers of the
Company. Among other provisions, the agreement allows the Company to occupy an
additional 2,500 square feet at its current premises and allows for annual
increases in the rental payments.
F-28
<PAGE>
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Securities offered by this Prospectus, or an offer to
sell or a solicitation of an offer to buy any security, by any person in any
jurisdiction in which such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstances, imply that the information in this Prospectus is correct as of
by any time subsequent to the date of this Prospectus.
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TABLE OF CONTENTS
Page
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Available Information....................................................3
Documents Incorporated by Reference......................................3
Prospectus Summary.......................................................5
Risk Factors.............................................................7
Market for Common Equity and
Related Stockholder Matters....................................16
Use of Proceeds.........................................................17
Selling Securityholders.................................................17
Plan of Distribution....................................................18
Legal Matters...........................................................19
Experts.................................................................19
Index to Financial Statements..........................................F-1
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<PAGE>
453,313 Common Shares
300,000 Class A Warrants
SURGE COMPONENTS, INC.
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PROSPECTUS
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December 8, 1998
