<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 29, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ____________
Commission file number 0 - 14188
Surge Components, Inc.
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(Exact name of small business issuer as specified in its charter)
New York 11-2602030.
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1016 Grand Boulevard, Deer Park, NY 11729
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(Address of principal executive offices)
(631) 595-1818
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 31, 2000:
4,969,058 shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes _______ No ____X___
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Form 10-QSB/A
for the Period Ended February 29, 2000
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3-4
Consolidated Statements of Income and Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
2
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SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, November 30,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
ASSETS (Note 4)
Current assets:
Cash $5,716,090 $ 159,612
Note receivable - Global DataTel, Inc. 2,165,876 1,000,000
Note receivable - MailEncrypt.com, Inc. 750,000 --
Marketable securities 2,233,406 2,232,294
Accounts receivable (net of allowance for
doubtful accounts of $22,634) 2,485,514 2,251,640
Inventory 1,318,459 1,442,067
Prepaid expenses and taxes 60,042 201,153
Other current assets 122,698 145,874
------------- ------------
Total current assets 14,852,085 7,432,640
----------- ----------
Fixed assets - net of accumulated depreciation
of $195,823 and $183,290 329,991 321,406
----------- -----------
Other assets:
Loan costs - net of accumulated amortization
of $97,317 486,583 --
Security deposits 2,985 2,985
Deferred tax asset 91,373 89,223
------------ -----------
Total other assets 580,941 92,208
------------ -----------
Total assets $15,763,017 $7,846,254
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 29, November 30,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,268,746 $1,283,067
Accrued expenses and taxes 1,476,109 408,941
Debenture payable 5,933,272 --
----------- ----------
Total current liabilities 8,678,127 1,692,008
----------- ----------
Stockholders' equity:
Preferred stock - $.001 par value, 1,000,000
authorized; 269,000 shares Series A Preferred
Stock authorized, 239,000 issued and held in
escrow account by Surge in name of Global
DataTel, Inc. as of February 29, 2000, none
issued at November 30,1999 -- --
Common stock - $.001 par value,
25,000,000 shares authorized,
4,932,558 and 4,858,958 shares issued
and outstanding, respectively 4,933 4,859
Additional paid-in capital 6,533,029 6,386,063
Unrealized holding loss (88,336) (52,856)
Retained deficit 635,264 (183,820)
------------- -----------
Total stockholders' equity 7,084,890 6,154,246
------------ ----------
Total liabilities and stockholders' equity $15,763,017 $7,846,254
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
2 0 0 0 1 9 9 9
-------- -------
<S> <C> <C>
Sales $7,890,922 $2,224,966
Less returns and allowances 37,888 19,063
------------- ------------
Net sales 7,853,034 2,205,903
Cost of goods sold 5,173,939 1,628,287
----------- ----------
Gross profit 2,679,095 577,616
---------- -----------
Operating expenses:
General and administrative
expenses 850,242 464,811
Selling and shipping expenses 458,685 250,429
Depreciation and amortization 109,850 11,085
------------ ------------
Total operating expenses 1,418,777 726,325
---------- -----------
Income (loss) from operations 1,260,318 (148,709)
---------- ----------
Other income (expense):
Investment income 92,554 52,989
Interest expense (77,416) (996)
------------ ----------
Total other income (expense) 15,138 51,993
------------ ----------
Income (loss) before income taxes 1,275,456 (96,716)
Income taxes 456,372 1,903
----------- ----------
Net income (loss) 819,084 (98,619)
Other comprehensive loss, net of tax
unrealized holding loss on securities
arising during the period (35,480) (138,155)
----------- -----------
Total comprehensive income (loss) $ 783,604 $ (236,774)
========== ===========
Weighted average shares outstanding
Basic 4,888,535 4,855,169
Diluted 6,729,992 4,855,169
Earnings per share
Basic $ .17 $ (.02)
Diluted $ .12 $ (.02)
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income(loss) $ 819,084 $ (98,619)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 109,850 11,085
Deferred income taxes (2,150) (458)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (233,874) 21,071
Inventory 123,608 144,136
Other current assets 164,287 21,736
Accounts payable (14,322) (427,398)
Accrued expenses and taxes 1,067,168 (191,296)
---------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,033,651 (519,743)
----------- -------------
INVESTING ACTIVITIES
Net advances to Global DataTel, Inc. (1,165,876) --
Net advances to MailEncrypt.com, Inc. (750,000) --
Purchase of marketable securities (36,591) (53,682)
Acquisition of fixed assets (21,118) (22,075)
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (1,973,585) (75,757)
------------ -------------
FINANCING ACTIVITIES
Proceeds from debenture payable 5,933,272 --
Loan costs (583,900) --
Proceeds from exercise of stock options 147,040 7,500
----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,496,412 7,500
---------- -------------
NET CHANGE IN CASH 5,556,478 (588,000)
CASH AT BEGINNING OF PERIOD 159,612 1,387,222
----------- -----------
CASH AT END OF PERIOD $5,716,090 $ 799,222
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 1,000 $ 800
============= ==============
Interest paid $ 4,191 $ 996
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying consolidated financial statements
of Surge Components Inc., Challenge/Surge, Inc. and Superus Holdings, Inc.
contain all adjustments necessary to present fairly the Company's financial
position as of February 29, 2000 and November 30, 1999 and the statements of
income and comprehensive income and cash flows for the three months ended
February 29, 2000 and February 28, 1999.
The consolidated results of operations for the three months ended February 29,
2000 and February 28, 1999 are not necessarily indicative of the results to be
expected for the full year.
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, 1999.
Formation of Subsidiary
-----------------------
In March 2000, the Company formed Superus Holdings, Inc. ("Superus"), a Delaware
corporation, as a wholly owned subsidiary of the Company. The Company is
currently doing business under the assumed name Superus Holdings.
Reclassifications
-----------------
Certain prior year information has been reclassified to conform to the current
year's reporting presentation.
NOTE 2 - PENDING ACQUISITION OF GLOBAL DATATEL, INC.
In October 1999, the Company entered into a merger agreement with Global
DataTel, Inc. ("Global"). In December 1999, the parties terminated the merger
agreement and the Company entered into an asset purchase agreement with Global.
Among other provisions, the Company agreed to purchase the assets of Global and
its subsidiaries in exchange for 239,000 shares of the Company's Series A
Redeemable Convertible Preferred Stock ("Series A Preferred"), which are being
held in escrow by Surge. Following approval of the acquisition by the
shareholders of the Company and Global
7
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 2 - PENDING ACQUISITION OF GLOBAL DATATEL, INC. (continued)
and a recapitalization of the Company including its merger with and into
Superus, each share of the Series A Preferred will automatically convert into
100 shares of Superus' Class B Common Stock, which is intended to be a tracking
stock reflecting Global's assets and includes other Internet operations. Each
holder of the current Class A Common Stock Warrants shall have the right to
purchase one share of the Class B Common Stock pursuant to the same conditions
as currently exists. In addition, each holder of the Company's current common
stock shall have the right to exchange two shares of the Company's Common Stock
for one share of Superus Class B Common Stock for a period of six months
following the effective date of the issuance of the Class B Common Stock. The
purchase is conditioned on the completion of regulatory and other approvals and
other conditions precedent.
NOTE 3 - PENDING ACQUISITION OF MAILENCRYPT.COM, INC.
In February 2000, the Company entered into a merger agreement to purchase
MailEncrypt.com, Inc. ("Mail") in exchange for 1,821,400 shares of the Superus
Class B Common Stock. The acquisition is subject to shareholder approval and the
satisfaction of conditions precedent.
NOTE 4 - ISSUANCE OF STOCK OPTIONS
In December 1999, the Company granted options to certain of its employees and
consultants, pursuant to the Option Plan, to purchase 209,000 shares of the
Company's Common Stock at an exercise price of $2.6875 per share.
From December 1, 1999 through February 29,2000 options and warrants totaling
73,600 shares at an aggregate exercise price of $147,040 were exercised.
8
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 5 - PRIVATE PLACEMENT OFFERING
As of February 29, 2000, the Company had raised $5,933,272 through the sale of
convertible promissory notes in a private placement offering ("Private
Placement") pursuant to Regulation D under the Securities Act of 1933, as
amended. The offering, as amended, is seeking to raise up to $7,000,000 of
principal amount of promissory notes. The use of substantially all proceeds from
the Private Placement, other than the repayment of $1,000,000 to the Company,
will be used to fund the activities of Global and Mail. These notes accrue
interest at the rate of 12% per annum and are due on or before December 31,
2000. Upon approval of the acquisition of Global, these notes will automatically
be converted into Superus Class B Common Stock at a conversion price of $3 per
share. In the event, the Global acquisition does not occur, these notes will
automatically be converted into the Company's current common stock at a
conversion price of $2.50 per share. Under no circumstances will the promissory
notes convert into more than 19.9% of the equity shares of the Company, without
prior shareholder approval. In March 2000, the Company completed the Private
Placement and received gross proceeds of $7,000,000.
NOTE 6 - SUBORDINATED CONVERTIBLE PROMISSORY NOTE
In February 2000, the Company replaced the previous note receivable with Global
with a Subordinated Convertible Promissory Note ("Convertible Note") totaling up
to $6,250,000. Through February 29, 2000, $2,165,876 has been loaned to Global,
and the remaining $4,084,124 may be loaned to Global, upon satisfaction of
certain conditions. The Convertible Note accrues interest at the rate of 10% per
annum. Upon completion of the acquisition of Global by the Company, the
Convertible Note and all accrued interest shall automatically be forgiven. If
the acquisition does not occur by October 1, 2000, as extended by oral consent,
the Company may, at its own discretion, convert this note into the common stock
of Global on a dollar for dollar basis, at the conversion price equal to 90% of
average closing price of Global stock for the preceding 20 trading days or
demand repayment. The Convertible Note is secured by the pledge of certain
shares of stock owned by the President of Global.
NOTE 7 - NOTE PAYABLE TO BANK
In December 1999, the Company entered into two note agreements with a bank for
aggregate borrowings of $500,000. The notes, which accrue interest at the prime
rate, are due on December 31, 1999. These notes were repaid.
9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 8 - NOTE RECEIVABLE - MAILENCRYPT.COM, INC.
In February 2000, the Company entered into an agreement with Mail whereby the
Company loaned $750,000 to Mail. The note bears interest at the rate of 10% per
annum and is due July 30, 2000. Upon completion of the acquisition of Mail by
the Company, the note and all accrued interest shall automatically be forgiven.
In the event the acquisition of Mail is terminated, the note is convertible into
the common stock of Mail at an agreed upon valuation of $15,000,000.
NOTE 9 - PROPOSED REORGANIZATION
Subject to shareholder approval and the approval of the Global acquisition, the
Company intends to transfer all assets and liabilities of Surge Components, Inc.
and Challenge/Surge, Inc. to a newly-formed wholly-owned subsidiary. Surge
Components, Inc. would then merge into Superus, which would become the parent
company.
NOTE 10 - EMPLOYMENT AGREEMENTS
On February 16, 2000, the Company entered into an employment agreement with Adam
Epstein. The agreement, which names Mr. Epstein as Chairman of the Board and
acting Chief Executive Officer, calls for a base salary of $200,000 per annum,
subject to increase in certain circumstances. Pursuant to the agreement, Mr.
Epstein also received 5 years options to purchase 1,500,000 shares of Superus
Class B Common Stock, 300,000 of which are immediately exercisable and the
balance exercisable ratably on a monthly basis over 36 months.
In February 2000, the two founders of Mail each entered into one-year employment
agreements with Superus which are to be followed by six-month consulting
agreements. They have, in turn, licensed to the Company the software language
they developed specifically for Mail.
10
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
NOTE 11 - SUPERUS STOCK OPTION PLAN
In February 2000, Superus adopted, and the Company as sole shareholder ratified,
the Superus 2000 Stock Incentive Plan (the "Superus Plan"). The Superus Plan
provides for the grant of options to qualified employees, independent
contractors, consultants and other individuals to purchase an aggregate of 15
million shares of common stock. Options have been granted pursuant to the
Superus Plan to purchase an aggregate of 4,350,000 shares of Class B Common
Stock. Upon shareholder approval of the Global acquisition and recapitalization,
the Company's management will relinquish all contractual rights and entitlement
to the 5,300,000 options granted by Surge in December 1998.
NOTE 12 - SUBSEQUENT EVENT
On March 24, 2000, the Company setup a bonus pool for certain of its employees,
totaling 10% of the pretax income for the quarter ended February 29, 2000.
11
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Except for historical information, the materials contained in this
Management's Discussion and Analysis or Plan of Operation is forward-looking
(within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act) and involve a number of risks and uncertainties. These include the
Company's ability to complete its pending merger, acquisition and
recapitalization, obtain shareholder and other necessary approvals, the merged
entity's ability to combine and work together and grow the companies, periodic
downturns in their respective industries, dependence on the Internet, timely
acceptance of new products, intense price competition in their respective
industries, lack of historical profitability, need to manage the Company's
growth, seasonality of quarterly results, and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
Although forward-looking statements in this Report 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. Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report and the
Company's Annual Report on Form 10-KSB for the year ended November 30, 1999,
both of which have been filed with the Commission. These reports 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
forward-looking statements made herein speak only as of the date hereof and the
Company disclaims any obligation to provide updates, revisions or amendments to
any forward-looking statements made herein to reflect changes in the Company's
expectations or future events.
Results of Operations
Net sales for Surge Components, Inc. and Subsidiaries (the "Company") for
the three months ended February 29, 2000 increased by $5,647,131, or 256%, to
$7,853,034 as compared to net sales of $2,205,903 for the three months ended
February 28, 1999. The net sales for the Company without Challenge/Surge, Inc.
("Challenge"), one of the Company's subsidiaries, sales increased by $447,281 or
26% when compared to the three months ended February 28, 1999. This growth was
attributable primarily to increased sales volumes as a result of the Company's
investment in an increased sales force. In addition, the Company's existing
customers are buying additional product lines. The net sales for Challenge
increased by $5,227,216 when compared to the three months ended February 28,
1999. This increase was primarily attributable to the economic effect of the
shortage of electronic components during the first quarter fiscal 2000 in the
broker distributor market in which, Challenge operates. This shortage has
resulted in a higher demand of electronic products in the broker market. There
can be no assurance, however, that these substantially improved conditions will
continue throughout 2000.
12
<PAGE>
The Company's gross profit for the three months ended February 29, 2000
increased by $ 2,101,479, or 364%, as compared to the three months ended
February 28, 1999. Gross margin as a percentage of net sales, however, increased
from 26.2% for the three months ended February 28, 1999 to 34.1% for the three
months ended February 29, 2000. The increase in the Company's gross profit was a
result of increased sales and higher profit margins. The higher margins were
primarily a result of the economic effect of the shortage of electronic
components in the broker distributor market. Also, the Company is making its
operations more efficient by reducing inventory acquisition costs. The Company
is making an effort to improve the efficiency of inventory management and has
instituted a policy of increasing direct shipments to its customer's factories
overseas. This has resulted in a substantial reduction of import related fees.
General and administrative expenses for the three months ended February 29,
2000 increased by $385,431, or 83%, as compared to the three months ended
February 28, 1999. The increase is primarily due to performance bonuses and
costs associated with the acquisition of Global and Mail. The Company also hired
additional staff such as office, purchasing and warehouse personnel in the
latter part of 1999.
Selling and shipping expenses for the three months ended February 29, 2000
increased by $208,256, or 83%, as compared to the three months ended February
28, 1999. This increase is primarily due to the increased sales commissions
resulting from the increase in sales for the quarter. The Company is committed
to increasing sales through authorized distributors, global and domestic sales
representatives, an Internet Web site, literature, and participation in trade
shows.
Interest expense for the three months ended February 29, 2000 increased by
$76,420 as compared to the three months ended February 28, 1999. This increase
is primarily due to the Company incurring debt in the amount of approximately
$5,993,000, as a result of a private offering of Convertible Promissory Notes in
December 1999 through February 29, 2000.
Investment income for the three months ended February 29, 2000 increased by
$39,565, or 75%, as compared to the three months ended February 28, 1999. This
increase is primarily due to the Company recording interest due from Global
DataTel, Inc. and MailEncrypt.com, Inc.
As result of the foregoing, the Company had a net income from operations of
$1,260,318 for the three months ended February 29, 2000, as compared to a net
loss from operations of $148,709 for the three months ended February 28, 1999.
The Company had net income of $819,084 for the three months ended February 29,
2000, as compared to a net loss of $98,619 for the three months ended February
28, 1999.
13
<PAGE>
Liquidity and Capital Resources
Working capital increased by $433,326 during the three months ended
February 29, 2000 from $5,740,632 at November 30, 1999, to $6,173,958 at
February 29, 2000. This increase resulted primarily from the increase in cash,
note receivables and accounts receivable, as partially offset by the increase in
debenture payable, decrease in inventory and prepaid expenses and taxes. The
Company's Current Ratio decreased to 1.7:1 at February 29, 2000, as compared to
4.4:1 at November 30, 1999. Inventory turned about twice as much in the three
months ended February 29, 2000 as compared to the three months ended February
28, 1999. The average number of days to collect receivables decreased from 51
days to 27 days. This resulted primarily from an acceleration in terms on the
additional sales from the shortage of electronic components in the broker
distributor market. Management believes that working capital levels are adequate
to meet the current operating requirements of the Company.
In April 1998, the Company renewed the letter of credit agreement with its
bank through May 31,1999 allowing the Company to obtain up to $800,000 in
outstanding letters of credit and $300,000 in direct borrowings with a maximum
borrowing limit of $1,000,000. The direct borrowings incur interest at the
bank's prime rate per annum. The agreement also provides for the creation of
banker's acceptances (drafts drawn on and accepted by a bank). Direct borrowings
are limited to advances based on 80% of eligible receivables and 25% of eligible
inventory capped at $100,000. The Company is charged one-half percent (1/2%)
upon opening of the letter of credit, one-half percent (1/2%) on negotiation and
two percent (2%) per annum over the banker's acceptance rate over the borrowed
term. The agreement requires the Company to be in compliance with certain
financial ratios including a debt to equity ratio and a minimum amount of
tangible net worth. In May 1999, the letter of credit agreement with the bank
expired. The Company is negotiating a new agreement with the bank.
The Company renovated its current facilities during 1998 at a total cost of
$237,000. Additionally, the renovation provides additional space for test labs,
which allows the Company to provide customers with prompt information regarding
the specifications of its products and provides space for additional sales
staff. In May 1998, the Company leased an additional 2,500 square feet at its
corporate headquarters to facilitate the above changes and improvements,
increase warehouse space, improve efficiency and provide for the future
expansion of staffing needs.
14
<PAGE>
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 increased payroll and marketing
related charges. The future profitability of the Company will therefore depend
on maintaining increased sales levels. In March 1999, the Company opened a
marketing office in Taiwan. This office provides marketing and customer service
for the Asian market. The cost and related expenses of this office have been
minimal since the Company is utilizing the same office space used by its
supplier management group.
Effective January 1, 2000, Challenge entered into a verbal agreement to
supply audible transducers for computer keyboards to Intel Corporation. The
agreement is for one year; however, it is terminable at will by Intel
Corporation. There can be no assurance that Challenge will continue to have a
relationship with Intel.
In March 1999, the Company entered into an agreement with Future
Electronics Inc. ("Future") for the marketing, promotion and distribution of
Surge's products. The agreement is for a one-year period and automatically
renews for one-year periods unless terminated in writing by either party. Future
is a world wide authorized distributor of passive components. Management
anticipates that this relationship with Future will introduce Surge's products
to many new potential customers.
The Company has updated its equipment, procedures and personnel in the
hopes that it will better enable itself to attract new customers as well as
increase the sales volume with its existing customers, and is seeking to expand
sales to its existing customer base by offering a broad range of complementary
products. In 1997, the Company established a Web site, giving the engineering
community exposure and access to any and all information about the Company and
its products, which they would consider to include in their design. In January
2000, the Company updated its Web site capability.
In March 1999, the underwriters exercised a portion of their warrants
received during the Company's July 1996 Public Offering. In exchange for $8,736,
the underwriters received 54,600 Warrants. These Warrants are identical to those
issued pursuant to the Company's Public Offering. In February and March 2000,
the underwriters exercised a portion of their warrants received during the
Company's July 1996 Public Offering in exchange for $116,640, the underwriters
received 23,400 Shares.
In December 1999, the Company entered into two note agreements with a bank
for aggregate borrowings of $500,000. The notes, which accrue interest at the
prime rate, were due on December 31, 1999. These notes have been repaid.
15
<PAGE>
During the three months ended February 29, 2000, the Company had net cash
provided by operating activities of $2,033,651, as compared to $519,743 used in
operating activities in the three months ended February 28, 1999. The increase
in cash provided by operating activities resulted from the Company's significant
increase in revenues and earnings and accrued expenses and taxes.
The Company had net cash used in investing activities of $1,973,585 for the
three months ended February 29, 2000, as compared to $75,757 for the three
months ended February 28, 1999. As discussed more fully below, the Company
loaned an aggregate of $1,915,876 to Global Datatel, Inc. ("Global") and
MailEncrypt.com, Inc. ("Mail").
The Company had net cash provided by financing activities of $5,496,412 for
three months ended February 29, 2000, as compared to $7,500 for the three months
ended February 28, 1999. This increase in the cash provided by financing
activities was a result of proceeds from a private placement and the result of
the proceeds from the exercise of stock options offset by loan costs. As a
result of the foregoing, the Company had a net increase in cash of $5,556,478
during the three months ended February 29, 2000, as compared to a net decrease
of $588,000 for the three months ended February 28, 1999.
The Company expects that its cash flow from operations, current investment
program and the Company's private placement will be sufficient to meets its
current financial requirements over at least the next twelve months.
In December 1999, the Company granted options to certain of its employees
and consultants, pursuant to the Option Plan, to purchase 209,000 shares of the
Company's Common Stock at an exercise price of $2.6875 per share.
From December 1, 1999 through February 29, 2000, stock options totaling
62,700 shares at an aggregate exercise price of $92,400 were exercised.
In February 2000, the Company formed, a Delaware corporation, Superus
Holdings, Inc. ("Superus") as a wholly owned subsidiary of the Company. Subject
to shareholder approval and the approval of the Global Acquisition, the Company
intends to transfer all assets and liabilities of Surge Components, Inc. and
Challenge/Surge Inc. to a newly formed wholly owned subsidiary. The Company
would then merge into Superus, which would become the parent company
(collectively, the "Recapitalization").
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On December 8, 1999, the Company entered into an Asset Purchase Agreement
which provides for the purchase of all of the assets and assumption of certain
liabilities of Global, in exchange for approximately 239,000 shares of the
Company's Series A Preferred Stock, which will be converted into the 23,900,000
shares of Superus' Class B Common Stock, a "tracking stock" of Global's business
if the Global Acquisition is approved and consummated. The assets of Global will
be held by a wholly owned Delaware subsidiary of Superus. Additionally, on
February 16, 2000, the Company entered into a Merger Agreement and Plan of
Reorganization to acquire Mail, the terms of which provide for the issuance of
1,821,000 shares of Superus' Class B Common Stock to the four shareholders of
Mail, and the merger of Mail into a wholly owned subsidiary of Superus. The
merger of Mail into Superus is also conditioned on the consummation of the
Global Acquisition. The Class B Common Stock will also track the business of
Mail. Superus was formed for the purpose of effectuating the Mail Merger and
Global Acquisition, issuing the Class A Common Stock, Class B Common Stock and
Class B Warrants, and becoming the holding Company of the businesses of the
Company, Mail and Global. The Company intends to issue a Joint
Proxy/Registration Statement on Form S-4 to all shareholders of Global (unless
earlier approved by consent of Global shareholders) and the Company for purposes
of approving said transactions.
As of February 29, 2000, the Company has incurred debt in the amount of
approximately $5,933,000 as a result of a private offering of Convertible
Promissory Notes. The Convertible Promissory Notes accrue interest at the rate
of 12% per annum commencing February 1, 2000, or approximately $712,000 per
annum, and is payable on or before December 31, 2000 if the Global Acquisition
is not consummated. In March 2000, the Company completed the Private Placement.
On October 8, 1999, the Company made a secured loan to Global, in the
principal amount of $1,000,000, and received a 10% Convertible Secured
Promissory Note in exchange therefore (the "Global Note"). The Global Note was
secured by all of the assets of and is junior to certain secured bank credit
facilities of Global. Additionally, the loan was secured by 300,000 Global
Shares, which were pledged by Mr. Richard Baker, the President of Global. The
Global Note was convertible into one Global Share for every three dollars
($3.00) of principal and interest outstanding on the loan, if the originally
contemplated merger with Global was not consummated.
In February 2000, the Company replaced the Global Note with a Subordinated
Convertible Promissory Note ("Convertible Note") totaling $6,250,000 and
increased the conversion ratio from $3.00 to $1.00 of principal and interest
outstanding on the Global Note for every share of Global converted into.
Simultaneously therewith, the number of shares pledged by Mr. Richard Baker was
increased from 300,000 Global Shares to 500,000 Global Shares. Through February
29, 2000, $2,165,876 has been loaned to Global, and the remaining $4,084,124 may
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be loaned to Global, upon satisfaction of certain conditions. The Convertible
Note accrues interest at the rate of 10% per annum. Upon completion of the
acquisition of Global by the Company, the Convertible Note and all accrued
interest shall automatically be forgiven. If the acquisition does not occur by
October 1, 2000, as extended by oral consent, the Company may, at its own
discretion, convert this note into the common stock of Global on a dollar for
dollar basis, at the conversion price equal to 90% of average closing price of
Global stock for the preceding 20 trading days or demand repayment. The
Convertible Note is secured by the pledging of certain shares of stock owned by
the President of Global.
If the Global Acquisition is not consummated by October 1, 2000,
as extended by oral consent, the Global Note will become convertible, or payable
upon demand. The Company does not believe that Global would be able to pay the
amount due under the Convertible Note if the Global Acquisition is not
consummated. Additionally, none of Global's securities are registered for
resale. As such, in the event of a default on the Convertible Note, or failure
of the Global Acquisition to be consummated for any reason, the Company has
reason to believe that the security and assets of Global may not be sufficient
to satisfy Global's obligation under the Convertible Note. As such, the failure
of the Global Acquisition to close, could have material adverse consequences to
the Company.
In February 2000, the Company entered into an agreement with Mail whereby
the Company loaned $750,000 to Mail. The Note bears interest at the rate of 10%
per annum and is due July 30, 2000. Upon completion of the acquisition of Mail
by the Company, the note and all accrued interest shall automatically be
forgiven. In the event the acquisition of Mail is terminated, the Note is
convertible into the Common Stock of Mail.
On February 16, 2000, the Company entered into an employment agreement with
Adam Epstein. The agreement, which names Mr. Epstein as Chairman of the Board
and acting Chief Executive Officer, calls for a base salary of $200,000 per
annum, subject to increase in certain circumstances. Pursuant to the agreement,
Mr. Epstein also received 5 year options to purchase 1,500,000 shares of Superus
Class B Common Stock, 300,000 of which are immediately exercisable and the
balance exercisable ratably on a monthly basis over 36 months.
In February 2000, the two founders of Mail each entered into one-year
employment agreements with Superus, which are to be followed, by six-month
consulting agreements. They have, in turn, licensed to the Company the software
language they developed specifically for Mail.
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On March 24, 2000, the Company set up a bonus pool for certain of its
employees, totaling 10% of the pretax income for the quarter ended February 29,
2000.
Inflation And Increasing Interest Rates
In recent years, the effects of inflation have "tightened" slightly, as
indicated by the average consumer price index, which has increased slightly over
the past two years. The Company has generally been able to offset the impact of
rising costs through purchase price reductions. As a result, inflation has not
had, nor is it expected to have, a significant impact on the Company's business.
However, inflation and increasing interest rates have had a significant effect
on the economy in general and, therefore, could affect the Company's future
operating results. Moreover, recent announcements by the Federal Reserve, as
well as increases in salaries and the GDP generally, has had interest rates
during 2000. Even minor increases in interest rates can increase the Company's
cost of capital and offset revenues. Moreover, the Company has recently incurred
approximately $6,000,000 of debt as a result of the Note Offering, which totaled
$7,000,000.
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PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
11.1 Statement re: Computation of per share earnings.
27. Statement re: Financial Data Schedule
(b) A current report on Form 8-K was filed by the Company
on December 17, 1999 to report on Item 5, an "Other
Event" which occurred on December 8, 1999. A current
report on Form 8-K was filed by the Company on
February 28, 2000 to report on Item 5, an "Other
Event" which occurred on February 16, 2000.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SURGE COMPONENTS, INC.
By: /s/ Steven J Lubman
--------------------------------
Steven J. Lubman
Vice President, Principal
Financial Officer, Secretary and
Director
Dated: August 24, 2000
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