<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ (Mark One) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended August 31, 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 September 30, 2000:
4,986,089 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
for the Period Ended August 31, 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 - 10
Item 2. Management's Discussion and Analysis or
Plan of Operation 11-20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 22
2
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,367,488 $ 159,612
Note receivable - Global DataTel, Inc. -- 1,000,000
Note receivable - MailEncrypt.com, Inc. 750,000 --
Marketable securities 2,261,380 2,232,294
Accounts receivable - net of allowance for
doubtful accounts of $147,303 and $22,634 5,159,591 2,251,640
Inventory 2,695,307 1,442,067
Prepaid expenses and taxes 1,176,837 201,153
Other current assets 167,210 145,874
----------- ----------
Total current assets 15,577,813 7,432,640
----------- ----------
Fixed assets - net of accumulated depreciation
of $231,088 and $183,290 822,347 321,406
----------- ----------
Other assets:
Loan costs - net of accumulated amortization
of $368,161 173,528 --
Goodwill, net of accumulated amortization
of $72,840 5,538,001 --
Organization costs - net of accumulated
amortization of $757 7,122 --
Deposits 651,783 2,985
Deferred tax asset 90,438 89,223
----------- ----------
Total other assets 6,460,872 92,208
----------- ----------
Total assets $22,861,032 $7,846,254
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, banks $ 816,574 $ --
Accounts payable 4,583,227 1,283,067
Accrued expenses and taxes 2,364,340 408,941
Notes payable 7,000,000 --
----------- ----------
Total current liabilities 14,764,141 1,692,008
Mortgage payable 65,156 --
----------- ----------
Total liabilities 14,829,297 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 August 31, 2000,
none issued at November 30, 1999 -- --
Common stock - $.001 par value,
25,000,000 shares authorized,
4,986,089 and 4,858,958 shares issued
and outstanding, respectively 4,986 4,859
Additional paid-in capital 6,704,613 6,386,063
Retained earnings (deficit) 1,447,623 (183,820)
Accumulated other comprehensive income
Unrealized holding loss (131,257) (52,856)
Foreign currency translation adjustment 5,770 --
----------- ----------
Total stockholders' equity 8,031,735 6,154,246
----------- ----------
Total liabilities and stockholders' equity $22,861,032 $7,846,254
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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SURGE COMPONENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31, August 31,
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $30,906,187 $7,902,558 $15,632,174 $3,365,161
Less returns and allowances 222,907 62,772 4,592 24,012
------------ ---------- ------------ ----------
Net sales 30,683,280 7,839,786 15,627,582 3,341,149
Cost of goods sold 20,743,645 5,785,762 10,715,818 2,465,767
------------ ---------- ------------ ----------
Gross profit 9,939,635 2,054,024 4,911,764 875,382
------------ ---------- ------------ ----------
Operating expenses:
General and administrative
expenses 4,310,014 1,440,718 2,505,225 506,396
Selling and shipping expenses 1,937,877 747,204 1,052,574 255,835
Depreciation and amortization 612,676 35,624 353,282 12,893
------------ ---------- ------------ ----------
Total operating expenses 6,860,567 2,223,546 3,911,081 775,124
------------ ---------- ------------ ----------
Income (loss) from operations 3,079,068 (169,522) 1,000,683 100,258
Other income and (expense):
Investment income 230,400 166,043 4,412 55,637
Interest expense (535,107) (9,281) (243,780) (6,613)
Loss on sale of securities -- (10,323) -- (10,323)
------------ ---------- ------------ ----------
Income (loss) before income taxes 2,774,361 (23,083) 761,315 138,959
Income taxes 1,142,898 (3,029) 407,307 (4,304)
------------ ---------- ------------ ----------
Net income (loss) 1,631,463 (20,054) 354,008 143,263
Other comprehensive (loss) income:
Unrealized holding (loss) gain on securities
arising during the period, net of tax (78,401) (206,450) (8,223) (48,341)
Reclassification adjustment loss
on sale of securities -- 10,323 -- 10,323
Foreign currency translation 71,362 -- 71,362 --
------------ ---------- ------------ ----------
Total comprehensive (loss) income $ 1,624,424 $ (216,181) $ 417,147 $ 105,245
============ ========== ============ ==========
Weighted average shares outstanding
Basic 4,949,049 4,857,713 4,984,207 4,858,958
Diluted 7,316,291 4,857,713 7,351,449 4,985,030
Earnings (loss) per share
Basic $ .33 $ -- $ .07 $ .03
Diluted $ .22 $ -- $ .05 $ .03
</TABLE>
See accompanying notes to consolidated financial statements.
5
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SURGE COMPONENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,631,463 $ (20,054)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 612,676 35,624
Deferred income taxes (1,215) (5,266)
Allowance for bad debts 124,669 --
Loss on sale of securities -- 10,323
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (2,526,538) (904,424)
Inventory (692,259) (111,555)
Other current assets (756,383) 30,528
Accounts payable 126,108 246,469
Accrued expenses and taxes 1,153,744 (145,783)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (327,735) (864,138)
------------ ------------
INVESTING ACTIVITIES
Purchase of marketable securities (107,485) (151,585)
Acquisition of fixed assets (183,693) (38,432)
Organization costs (7,879) --
Net advances to Global Datatel Inc. (2,311,458) --
Net advances to MailEncrypt.com (750,000) --
Proceeds from marketable securities -- 149,583
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,360,515) (40,434)
------------ ------------
FINANCING ACTIVITIES
Proceeds from notes payable 7,000,000 --
Loan costs (541,689) --
Net advances on loans payable (301,000) --
Proceeds from exercise of options and warrants 294,884 16,236
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,452,195 16,236
------------ ------------
NET EFFECT ON CASH OF CURRENCY FLUCTUATIONS 71,362 --
------------ ------------
NET CHANGE IN CASH 2,835,307 (888,336)
CASH AT BEGINNING OF PERIOD 532,181 1,387,222
------------ ------------
CASH AT END OF PERIOD $3,367,488 $ 498,886
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 567,407 $ 1,962
============ ============
Interest paid $ 48,582 $ 33,932
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 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., Superus
Holdings, Inc. and Global Datatel, Inc. ("Global") contain all adjustments
necessary to present fairly the Company's consolidated financial position
as of August 31, 2000 and November 30, 1999 and the consolidated statements
of income and comprehensive income for the nine and three months ended
August 31, 2000 and 1999 and consolidated cash flows for the nine months
ended August 31, 2000 and 1999.
The consolidated results of operations for the nine and three months ended
August 31, 2000 and 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.
As a result of a loan and pledge agreement with Global and certain of the
stockholders, Surge took effective control of Global's assets and
operations on June 2, 2000. The assets and operations are consolidated
beginning on the date Surge took effective control of Global.
Revenue Recognition
Revenues from the U.S. operations are recognized when the product is
shipped. Revenues from the South American operations are recognized when
earned and cash is collected as a result of the tightening credit
conditions by the Colombian banking system, the general downturn of the
Colombian economy and the increase in the average number of days to collect
accounts receivable.
Goodwill
Goodwill, which represents the excess of acquisition costs over net assets
controlled, is amortized on the straight-line method over 20 years.
7
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Translation of Foreign Currency
Global's Colombian subsidiaries are translated in accordance with Statement
of Financial Accounting Standards No. 52 (SFAS NO. 52), which requires that
foreign currency assets and liabilities be translated using the exchange
rates in effect at the balance sheet date. Results of operations are
translated using the average exchange rates prevailing during the period.
For purposes of SFAS No. 52, the Company considers the Colombian Peso to be
the functional currency. The effects of unrealized exchange fluctuations on
translating foreign currency assets and liabilities into U.S. dolars are
accumulated as the cumulative translation adjustment in shareholders'
equity. Realized gains and losses from foreign currency transactions are
included in the results of operation for the period. Fluctuations arising
from intercompany transactions are long-term in nature and are accumulated
as accumulative translation adjustments.
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.
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 the ("Global Acquisition") 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 Global Acquisition by the shareholders of the Company and Global
8
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 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 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, those of Mail (defined below)
and will include other Internet operations. Each holder of the current
Class A Common Stock Warrants shall have the right to exchange his warrants
for Class B Common Stock Warrants each 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 existing 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 Global
Acquisition is conditioned on the completion of regulatory and other
approvals and other conditions precedent. The Company has entered into an
agreement with its financial advisor to pay one million shares of Superus
Class B Common Stock contingent upon the closing of the Global Acquisition.
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 Merger is subject to shareholder approval
and the satisfaction of conditions precedent. The Company is paying a
finder's fee of one hundred thousand shares of Superus Class B Common Stock
upon completion of the merger.
NOTE 4 - EXERCISE OF OPTIONS
During the quarter ended August 31, 2000, 3,500 options were exercised by
employees and consultants in exchange for $8,695.
9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 5 - 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 Superus, a newly-formed
wholly-owned subsidiary. Surge Components, Inc. would then merge with and
into Superus, which would become the parent company.
NOTE 6 - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Surge Internet
Operations Operations Total
---------- ---------- -----
(Since June 2, 2000)
<S> <C> <C> <C>
Nine months ended August 31, 2000
Revenues $28,116,471 $2,566,809 $30,683,280
Income before income taxes 1,456,045 175,418 1,631,463
Total segment assets 14,362,627 8,498,405 22,861,032
Nine months ended August 31, 1999
Revenues $ 7,839,786 $ -- $ 7,839,786
Loss before income taxes (23,083) -- (23,083)
Total segment assets 7,555,138 -- 7,555,138
</TABLE>
Included in the Surge operations are costs associated with the acquisition
of Global's assets and proposed merger with Mail totaling approximately
$500,000 during Fiscal 2000 and corporate overhead expenses of
approximately $874,384 and $214,000 for the nine months ended August 31,
2000 and 1999, respectively.
NOTE 7 - SUBSEQUENT EVENTS
Bonus Pool
In October 2000, the Company set up a bonus pool for certain of its
employees, totaling 10% of certain pretax income from Surge's operations
for the quarter ended August 31, 2000.
Stockholder Meeting
In September 2000, the Company held a meeting of its shareholders, where
the shareholders approved, among other things, the Global Acquisition, the
Mail merger, the Superus Stock Option Plan and the acceleration of certain
options granted under the Superus Stock Option Plan.
10
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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 and improvements 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
The Company is presenting a separate discussion for each of its operating
segments. As a result of a loan and pledge agreement, Surge took effective
control of Global's assets and operations on June 2, 2000. Global's operations
currently comprise the Internet Operations segment. The prior year information
for Global relates to those reported by Global and is presented for comparison
purposes only and is not included in the Company's results of operations prior
to June 2, 2000.
Surge Operations
Nine and Three Months Ended August 31, 2000 as compared to the Nine and
Three Months Ended August 31, 1999.
Net sales for Surge Components, Inc. and Subsidiary ("Surge") for the
nine months ended August 31, 2000 increased by $20,276,685, or 259%, to
$28,116,471 as compared to net sales of $7,839,786 for the nine months ended
August 31, 1999. Surge's net sales for the three months ended August 31, 2000
increased by $9,719,626, or 291%, to $13,060,774 as compared to net sales of
$3,341,149 for the three months ended August 31, 1999. The net sales for Surge
without Challenge/Surge, Inc. ("Challenge"), one of Surge's subsidiaries,
increased by $1,348,313, or 25% when compared to the nine months ended August
31, 1999. This growth was attributable
11
<PAGE>
primarily to increased sales volumes with new customers, 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 $18,903,500, or 760% when compared to the nine months
ended August 31, 1999. This increase was primarily attributable to the economic
effect of the shortage of certain electronic components during the first half of
fiscal 2000 in the broker distributor market in which Challenge primarily
operates. This shortage has resulted in a higher demand for electronic products
in the broker market. There can be no assurance, however, that these
substantially improved conditions will continue throughout 2000 and thereafter.
Surge's gross profit for the nine months ended August 31, 2000
increased by $5,990,580, or 292%, to $8,044,604, as compared to $2,054,024 for
the nine months ended August 31, 1999. The Company's gross profit for the three
months ended August 31, 2000 increased by $2,141,352, or 245%, to $3,016,734, as
compared to $875,382 for the three months ended August 31, 1999. Gross margin as
a percentage of net sales increased from 26.2% in the nine months ended August
31, 1999 to 28.6% in the nine months ended August 31, 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,
Surge is making its operations more efficient by reducing inventory acquisition
costs and has instituted a policy of increasing direct shipments to its
customers' factories overseas. This has resulted in a substantial reduction of
import related fees.
General and administrative expenses for the nine months ended August
31, 2000 increased by $1,897,212, or 132%, to $3,337,930, as compared to
$1,440,718 for the nine months ended August 31, 1999. For the three months ended
August 31, 2000, general and administrative expenses increased by $1,026,745, or
203%, to $1,533,141, as compared to $506,396 for the three months ended August
31, 1999. The increase is primarily due to performance bonuses (primarily in the
Challenge division) 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. The Company's subsidiary,
Superus Holdings, Inc. ("Superus") incurred approximately $590,000 of expenses
relating to salaries, rent, professional fees, public relations and consulting
fees.
Selling and shipping expenses for the nine months ended August 31, 2000
increased by $755,933, or 101%, to $1,503,137, as compared to $747,204 for the
nine months ended August 31, 1999. For the three months ended August 31, 2000,
selling and shipping expenses increased by $361,999, or 141%, to $617,834, as
compared to $255,835 for the three months ended August 31, 1999. This increase
is primarily due to the increased sales commissions resulting from the increase
in sales for the year, as well as an increase in travel and entertainment both
primarily in the Challenge division. 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.
12
<PAGE>
Interest expense for the nine months ended August 31, 2000 increased by
$489,466, as compared to the nine months ended August 31, 1999. Interest expense
for the three months ended August 31, 2000 increased by $200,806, as compared to
the three months ended August 31, 1999. This increase is primarily due to the
Company incurring debt in the amount of $7,000,000, as a result of a private
offering of Convertible Promissory Notes in December 1999 through March 2000.
Investment income for Surge's operations increased by $ 273,970 for the
nine months ended August 31, 2000 as compared to the nine months ended August
31,1999. Investment income increased by $158,388 for the three months ended
August 31, 2000, as compared to the three months ended August 31, 1999. This
increase is primarily due to the interest due on the notes due from Global
DataTel, Inc. and MailEncrypt.com, Inc.
Internet Operations
Three months ended August 31, 2000 as compared to the three months
ended August 31, 1999.
Net sales for the operations of Global DataTel, Inc. ("Global") for the
three months ended August 31, 2000 increased by $286,827, or 13%, to $2,566,809,
as compared to $2,279,982 for the three months ended August 31, 1999. This
increase was primarily a result of Global's change in its revenue recognition
policy to the modified cash basis. Global in the three months ended August 31,
2000 collected accounts receivable billed from earlier in the year. Global made
this change as a result of the tightening credit conditions by the Colombian
banking system, the general downturn of the Colombian economy and the increase
in the average number of days to collect accounts receivable.
Global's gross profit for the three months ended August 31, 2000
increased by $1,015,819, or 116%, to $1,895,031, as compared to $879,212 for the
three months ended August 31, 1999. The increase in the gross profit resulted
primarily from the change to the modified cash method for revenue recognition.
Global has reduced the amount of inventory it keeps on hand and the related
carrying costs as a result of Global's main supplier selling directly to the
customer. Additionally, a greater percentage of the sales during 2000 were from
services provided to customers. These sales have historically had a higher gross
profit than those of the sales of products. Global's receipt of commissions on
the sales made by Global's main supplier directly to the Global's customers and
the greater efficiency in inventory management resulting from the consolidation
of operations of the Colombian operating entities have also resulted in an
increased gross profit. Global's conversion to the modified cash basis on
January 1, 2000 resulted in a substantial increase in the gross profit as a
percentage of sales as many of the costs associated with sales in the three
months ended August 31, 2000 were incurred earlier in the year. Global adopted
this method as a result of tightening credit conditions by the Colombian banking
system, the general downturn of the Colombian economy and the increase in the
average number of days to collect accounts receivable. As a result, gross profit
as a percentage of sales increased from 39% for the three months ended August
31, 1999 to a gross profit of 74% for the three months ended August 31, 2000.
13
<PAGE>
Selling, general and administrative expenses decreased by $574,355, or
29%, to $1,406,824 for the three months ended August 31, 2000, as compared to
$1,981,179 for the three months ended August 31, 2000. The decrease in expenses
relates to cost savings associated with reductions in staffing and the combining
of the Colombian subsidiaries during 1999.
Consolidated Net Income
As a result of the above, the Company on a consolidated basis had net
income of $1,631,463 for the nine months ended August 31, 2000, as compared to a
net loss of $20,054 for the nine months ended August 31, 1999. The Company has
net income of $354,008 for the three months ended August 31, 2000, as compared
to net income of $143,263 for the three months ended August 31, 1999.
Global accounted for $175,418 of the consolidated net income for the
three months ended August 31, 2000. Because Global's results are only reported
on a consolidated basis since June 2, 2000, neither its results for the nine
months ended August 31, 1999, nor its results for 2000 prior to June 2, 2000 are
included herein.
Liquidity and Capital Resources
Working capital decreased by $4,926,960 during the nine months ended
August 31, 2000 from $5,740,632 at November 30, 1999, to $813,672, at August 31,
2000. This decrease resulted primarily from use of the funds obtained in the
private placement offering of convertible notes for the Company's Internet
Operations. The Company's Current Ratio decreased to 1.1:1 at August 31, 2000,
as compared to 4.4:1 at November 30, 1999. Inventory turned about twice as much
in the nine months ended August 31, 2000 as compared to the nine months ended
August 31, 1999. The average number of days to collect receivables decreased
from 51 days to 33 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. However, in order to
expand Global's operations to reach critical mass the Company expects it will
need to raise additional funds.
Surge Operations
In April 1998, Surge renewed the letter of credit agreement with its
bank through May 31,1999 allowing Surge to obtain up to $800,000 in outstanding
letters of credit and $200,000 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. Surge 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 Surge 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.
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Surge continues to incur significant operating costs. These costs
consist principally of payroll and marketing related charges. The future
profitability of Surge will therefore depend on maintaining increased sales
levels. As a result of the current growth, Surge expects to move to larger
quarters in the near term. In March 1999, Surge 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 has been minimal since
Surge 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 Surge 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. As a result of
this relationship with Future, Surge's products have been introduced to many new
potential customers.
Surge has updated its equipment, procedures and personnel to 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,
Surge established a Web site, giving the engineering community exposure and
access to any and all information about Surge 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 Surge'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 Surge's
July 1996 Public Offering in exchange for $116,640, the underwriters received
23,400 Shares.
In December 1999, Surge 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.
During the nine months ended August 31, 2000, the Company had net cash
used in operating activities of $327,735, as compared to $864,138 used in
operating activities in the nine months ended August 31, 1999. The increase in
cash used in operating activities resulted from the Company's significant
increase in revenues and earnings and accrued expenses and taxes, offset, in
part, by increases in accounts receivable, inventory, depreciation and
amortization.
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The Company had net cash used in investing activities of $3,360,515 for
the nine months ended August 31, 2000, as compared to $40,434 for the nine
months ended August 31, 1999. As discussed more fully below, the Company loaned
an aggregate of $3,061,458 to Global and Mail.
The Company had net cash provided by financing activities of $6,452,195
for nine months ended August 31, 2000, as compared to $16,236 for the nine
months ended August 31, 1999. This increase in the cash provided by financing
activities was a result of the net proceeds from a private placement and the
result of the proceeds from the exercise of stock options offset in part by loan
costs and net advances on loans payable. As a result of the foregoing, the
Company had a net increase in cash of $2,835,307 during the nine months ended
August 31, 2000, as compared to a net decrease of $888,336 for the nine months
ended August 31, 1999.
Surge expects that its cash flow from operations and current investment
program will be sufficient to meets its current financial requirements over at
least the next twelve months. However, as described below under Internet
Operations, it is expected that the Company will need to raise additional funds
for Global's operations.
In December 1999, Surge granted options to certain of its employees and
consultants, pursuant to the Option Plan, to purchase 209,000 shares of Surge's
Common Stock at an exercise price of $2.6875 per share.
From December 1, 1999 through August 31, 2000 stock options totaling
102,700 shares at an aggregate exercise price of $173,089 were exercised.
In March 2000, Surge 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, Surge intends
to transfer all assets and liabilities of Surge Components, Inc. and
Challenge/Surge Inc. to a newly formed wholly owned subsidiary. Surge would then
merge into Superus, which would become the parent company (collectively, the
"Recapitalization").
On December 8, 1999, Surge entered into an Asset Purchase Agreement, as
amended, which provides for the purchase of all of the assets and assumption of
certain liabilities of Global incurred in the ordinary course of Global's
business, in exchange for approximately 239,000 shares of Surge'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,
Surge entered into a Merger Agreement and Plan of Reorganization to acquire
Mail, the terms of which provide for the issuance of 1,821,400 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
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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 Surge, Mail and Global.
As of May 31, 2000, Surge has incurred debt in the amount of $7,000,000
as a result of a private offering of Convertible Promissory Notes, completed in
March 2000. 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.
On October 8, 1999, Surge 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 then CEO 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, Surge 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 stock issued upon
conversion. Simultaneously therewith, the number of shares pledged by Mr.
Richard Baker was increased from 300,000 Global Shares to 500,000 Global Shares.
Through August 31, 2000, $4,057,675 has been loaned to Global, and the remaining
$2,192,325 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 Surge, 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, Surge 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 former CEO of
Global.
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On June 2, 2000, Surge executed a pledge agreement where by it took
effective control of the assets of Global. Under the terms of the Agreement, the
Board of Directors and a sufficient number of shareholders of Global have
consented to pledge all of the company's assets and certain of its liabilities
to Superus in furtherance of satisfying a condition precedent to closing the
sale of such assets to Superus.
In February 2000, Surge entered into an agreement with Mail whereby
Surge 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
Surge, 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, Surge 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 five 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.
On March 20, 2000, Surge entered into an agreement with Craig Carlson.
The agreement, which names Mr. Carlson as Vice President of Corporate
Development, calls for a base salary of $150,000 per annum, subject to increase
in certain circumstances. Pursuant to the agreement, Mr. Carlson also received
four year options to purchase 200,000 shares of Superus Class B Common Stock,
35,000 of which are exercisable six months after the Effective Date of the
Recapitalization and the balance exercisable ratably on a monthly basis over 42
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.
Internet Operations
As 95% of Global's operations are currently conducted in Colombia,
Global is subject to special consideration and significant risks not typically
associated with companies operating in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. Global's results may be adversely
affected by changes in the political and social conditions in Colombia, and by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittance abroad, and rates
and methods of taxation among other things. Since its working capital has been
limited, obligations and commitments have gone unfulfilled. Global's current
financial situation, as well as the ongoing funding to support the initial and
continuing operations of eHola, will require the Company to obtain additional
financing in order to meet its obligations during the next twelve months. As a
result, Global has not
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been able to adequately fund the marketing of eHola. Consequently, revenues for
eHola totaled less than $71,000 for the three months ended August 31, 2000.
Global has obtained funds through a convertible note with Surge that has been
used in part to sustain the operations of Global. A significant amount of
additional funding is anticipated from the potential exercise of Surge warrants
subsequent to the completion of the proposed acquisition by Surge.
On March 14, 1996, a subsidiary of Global obtained a mortgage from a
bank for the purchase of their office facility in Bogota, Colombia. The mortgage
expires on March 2012 and had an initial principal balance of $99,400. The
mortgage agreement allows for an increase in the outstanding principal balance
due to monetary adjustments as mandated by the Colombian Central Bank.
The Colombian subsidiaries of Global obtain short-term financing from
banks and financing companies. Interest on such obligations range between 18%
and 28% annually and is determined by the financing source subsequent to the
availability of funds. Global has obtained the financing in part to supplement
cash flow due to extended payment terms on accounts receivable. Global has not
been able to pass these charges through to their customers. Global has been able
to reduce their financing costs through financial arrangements with United
States based banks. Officers of Global personally guarantee a portion of these
obligations and the balance owed as of August 31, 2000 approximated $684,000.
The U.S. subsidiaries of Global have available lines of credit
aggregating $148,750, at 10% interest per annum, personally guaranteed by the
majority stockholder of Global, for working capital purposes. As of August 31,
2000, the balance owed on this line of credit was approximately $132,000.
In December 1999, Global granted options to purchase 550,000 shares of
Global's Common Stock to an officer of Global. The options are exercisable over
a three year period at an exercise of $.52 per share. In March 2000, the options
were exercised using the cashless method into 492,800 shares of Global's Common
Stock.
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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 resulted in increased
interest rates during 2000. Even minor increases in interest rates can increase
the Company's cost of capital and offset revenues. Moreover, the Company
incurred approximately $7,000,000 of debt as a result of the Note
Offering which was completed in March 2000.
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PART II
Item 4. Submission of Matters To a Vote of Security Holders
a) A Special Meeting of Stockholders (the "meeting") was held on
September 26, 2000.
b) Ira Levy, Mario Habib and Adam Epstein were elected to the Board
of Directors. Steven J. Lubman, David Siegel and Mark Siegel did
not run for re-election.
c) (i) The election of the Board of Directors:
For Against or Withheld
--- -------------------
Ira Levy 1,816,872 5,709
Adam Epstein 1,817,101 5,480
Mario Habib 1,816,872 5,709
(ii) The vote for the approval of the recapitalization of Surge
into Superus Holdings, Inc. was adjourned to October 17,
2000 at which time the proposal was approved by in excess of
two-thirds of the outstanding voting shares of the Company,
including the 239,000 shares of the Nonvoting Redeemable
Convertible Series A Preferred Stock which, in accordance
with New York law, voted on the Recapitalization only.
For 3,512,676; against 55,209;
absentions or non-votes 4,058.
(iii)The approval of the asset Purchase Agreement dated December
8, 1999 by and among Surge Components, Inc., Global DataTel
Inc. and GDIS Acquisition Corp. and issuance of Class B
Common Stock to Global's stockholders.
For 1,817,101; against 5,080; abstentions or non-votes 400
(iv) The approval of the Merger Agreement and Plan of
Reorganization with MailEncrypt.com Inc. and issuance of
Class B Common Stock to Mail stockholders.
For 1,817,301; against 5,080; abstentions or non-votes 200
(v) The ratification, on a non-binding basis, of the adoption of
the Superus 2000 Stock Incentive Plan.
For 1,789,572; against 33,009; abstentions or non-votes 0
(vi) The ratification of the acceleration of exercisability of
Superus options issued to Surge Management under the Superus
2000 Stock Incentive Plan.
For 1,789,022; against 33,559; abstentions or non-votes 0
(vii)The ratification of the appointment of Seligson &
Giannattasio, LLP as auditors.
For 1,821,001; against 1,000; abstentions or non-votes 580
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
11.3 Statement re: Computation of per share earnings.
27. Statement re: Financial Data Schedule
(b) Reports on Form 8K
1. A current report on Form 8-K and Amendment No. 1 thereto, were
filed by the Company to report on Item 2, the "Acquisition or
Disposition of Assets," specifically the execution of a Pledge
Agreement with Global Datatel, Inc.
2. A current report on Form 8-K was filed by the Company to
report on Item 5, "Other Events," concerning a pledge
agreement and management changes at Global.
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/ Ira Levy
-------------------------
Ira Levy
President, Principal
Financial Officer and Director
Dated: October 19, 2000
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