<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB / A
AMENDMENT NO. 1
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended August 31, 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)
N/A
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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 January 10, 2001:
5,987,276 shares of common stock, par value $.001 per share.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
1
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SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Form 10-QSB/A
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 - 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A for August 31, 2000 of Surge
Components, Inc. (the "Company"), is submitted in order to remove all
information concerning the financial statements of Global DataTel, Inc.
("Global"). As a result of a loan and pledge agreement with Global and certain
of its stockholders, under Nevada corporate law (Global's state of
incorporation) Surge began operating Global's assets and business on June 2,
2000 and designated such date as the effective date of the combination. Surge
was preparing to complete the Global acquisition on October 20, 2000, the
original date of filing this Form 10-QSB. It therefore consolidated the assets
and operations beginning on the date Surge took effective control of Global. On
November 3, 2000, Surge terminated the Global Acquisition due to the failure of
Global to satisfy various conditions precedent to closing, as described more
fully herein.
In addition, the financial statements have been retroactively adjusted
to reflect additional subscriptions received in excess of $7 million for the
Company's private placement of convertible notes which was converted into a
separate loan to the Company. Further, adjustments have been made to
retroactively reflect certain disbursements which were paid directly from the
escrow accounts established to collect the private placement proceeds.
Therefore, the Company hereby amends its Form 10-QSB in accordance with
Rule 12b-15 under the Securities Exchange Act of 1934.
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
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,089,604 $ 159,612
Note receivable - Global DataTel, Inc. 4,057,675 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 $22,634 and $22,634 5,025,003 2,251,640
Inventory 2,380,268 1,442,067
Prepaid expenses and taxes 160,492 201,153
Other current assets 185,116 71,691
------------ ------------
Total current assets 17,909,538 7,358,457
----------- -----------
Fixed assets - net of accumulated depreciation
of $235,374 and $183,290 429,233 321,406
----------- -----------
Other assets:
Loan costs - net of accumulated amortization
of $459,693 219,295 --
Security deposits 2,985 2,985
Deferred tax asset 90,438 89,223
Other assets 108,158 74,183
------------ -----------
Total other assets 420,876 166,391
----------- -----------
Total assets $18,759,647 $ 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
--------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,811,640 $ 1,283,067
Accrued expenses and taxes 1,827,506 408,941
Convertible notes payable 7,000,000 --
Loan payable 238,378 --
----------- -----------
Total current liabilities 10,877,524 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 6,680,840 6,386,063
Retained earnings (deficit) 1,327,554 (183,820)
Accumulated other comprehensive income
Unrealized holding loss (131,257) (52,856)
----------- -----------
Total stockholders' equity 7,882,123 6,154,246
----------- -----------
Total liabilities and stockholders' equity $18,759,647 $ 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
------- ------- ------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $28,339,378 $7,902,558 $13,065,365 $3,365,161
Less returns and allowances 222,907 62,772 4,592 24,012
------------ ----------- ------------ -----------
Net sales 28,116,471 7,839,786 13,060,773 3,341,149
Cost of goods sold 20,071,867 5,785,762 10,044,040 2,465,767
------------ ----------- ------------ -----------
Gross profit 8,044,604 2,054,024 3,016,733 875,382
------------ ----------- ------------ -----------
Operating expenses:
General and administrative expenses 3,381,561 1,440,718 1,533,141 506,396
Selling and shipping expenses 1,503,137 747,204 617,834 255,835
Depreciation and amortization 512,434 35,624 193,689 12,893
------------ ----------- ------------ -----------
Total operating expenses 5,397,132 2,223,546 2,344,664 775,124
------------ ----------- ------------ -----------
Income (loss) from operations 2,647,472 (169,522) 672,069 100,258
Other income and (expense):
Investment income 432,243 166,043 203,703 55,637
Interest expense (510,666) (9,281) (214,571) (6,613)
Loss on sale of securities -- (10,323) -- (10,323)
------------ ----------- ------------ -----------
Income (loss) before income taxes 2,569,049 (23,083) 661,201 138,959
Income taxes 1,057,675 (3,029) 361,391 (4,304)
------------ ----------- ------------ -----------
Net income (loss) 1,511,374 (20,054) 299,810 143,263
Other comprehensive (loss) income:
Unrealized holding (loss) 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
------------ ----------- ------------ -----------
Total comprehensive income (loss) $ 1,432,973 $ (216,181) $ 291,587 $ 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 $ .31 $ -0- $ .06 $ .03
Diluted $ .25 $ -0- $ .06 $ .03
</TABLE>
5
See accompanying notes to consolidated financial statements.
<PAGE>
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
-------- -------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,511,374 $ (20,054)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 512,434 35,624
Deferred income taxes (1,215) (5,266)
Loss on sale of securities -- 10,323
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (2,773,363) (904,424)
Inventory (938,201) (111,555)
Other current assets (106,739) 30,528
Accounts payable 528,573 246,469
Accrued expenses and taxes 1,418,565 (145,783)
------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 151,428 (864,138)
------------ -----------
INVESTING ACTIVITIES
Purchase of marketable securities (107,485) (151,585)
Acquisition of fixed assets (160,570) (38,432)
Net advances to Global DataTel Inc. (3,057,675) --
Net advances to MailEncrypt.com (750,000) --
Proceeds from marketable securities -- 149,583
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (4,075,730) (40,434)
------------ -----------
FINANCING ACTIVITIES
Proceeds from convertible notes payable 7,000,000 --
Loan costs (678,988) --
Proceeds from loan payable 238,378 --
Proceeds from exercise of options and warrants 294,904 16,236
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,854,294 16,236
------------ -----------
NET CHANGE IN CASH 2,929,992 (888,336)
CASH AT BEGINNING OF PERIOD 159,612 1,387,222
------------ -----------
CASH AT END OF PERIOD $ 3,089,604 $ 498,886
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 567,407 $ 1,962
============ ===========
Interest paid $ 12,222 $ 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., and its wholly-owned subsidiaries Challenge/Surge,
Inc. ("Challenge"), Superus Holdings, Inc. ("Superus") and MailEncrypt, Inc.
("Mail") (collectively, the "Company"), contain all adjustments, consisting of
normal recurring entries except as described below, 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.
Formations of Subsidiaries
In January 2000, the Company formed Mail Acquisition Corp., a Delaware
corporation, as a wholly-owned subsidiary of the Company. On November 16, 2000,
MailEncrypt.com, Inc., a California based infrastructure application service
provider offering Web-based encrypted e-mail solutions was merged with and into
Mail Acquisition Corp. which changed its name to MailEncrypt, Inc.
In March 2000, the Company formed 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.
Retroactive Adjustments
These revised financial statements have been retroactively adjusted to reflect
additional proceeds of approximately $238,000 received and interest thereon in
excess of the $7 million previously reported for the Company's private placement
of convertible notes. Further, adjustments have been made to retroactively
reflect certain disbursements amounting to approximately $241,000 which had been
paid from the escrow accounts established to collect the private placement
proceeds offset by approximately $3,000 of interest income.
The effect of these adjustments decreased the net income for nine and three
months ended August 31, 2000 by approximately $92,000 and $26,000 and fully
diluted net income per share by $.01 and $.01, respectively.
7
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 2 - TERMINATED ACQUISITION OF GLOBAL DATATEL, INC.
In October 1999, the Company entered into a merger agreement with Global Data
Tel, 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 (the "Global Acquisition") in exchange for 239,000 shares of
the Company's Series A Redeemable Convertible Preferred Stock ("Series A
Preferred"), which were being held in escrow by Surge. Following approval of the
Global Acquisition by the shareholders of both the Company and Global on
September 26, 2000, and of a proposed recapitalization of the Company including
its merger with and into Superus which has not yet occurred, each share of
Series A Preferred was to automatically convert into 100 shares of Superus Class
B Common Stock, which was intended to be a tracking stock reflecting Global's
assets, those of Mail (defined below) and other Internet operations. The Global
Acquisition was conditioned on the completion of regulatory and other approvals
and other conditions precedent.
On November 3, 2000, the Company terminated the Asset Purchase Agreement with
Global due to the failure of Global to fulfill various conditions precedent. The
Securities and Exchange Commission, Nasdaq Stock Market and U.S. Attorney's
Office all had substantial concerns about Global and certain principal
shareholders of Global. Following the termination, the Company entered into a
Termination, Release and Debt Discharge Agreement with Global in settlement of
up to approximately $3.25 million of indebtedness, plus accrued interest of
approximately $119,000, at November 3, 2000, due to the Company under the loan
and pledge agreement. Surge obtained a new note for the remaining $1,250,000
principal amount of indebtedness for a 12 month period ending December 4, 2001.
The note will then be cancelled if no litigation is commenced against Surge
relating to Global and/or its termination of the Global agreement. The Company
plans to provide a 100% reserve for this remaining note due to uncertainty of
collectability. In addition, the Company has guaranteed and co-signed Global
loans totaling $500,000, for which Global agreed to use its best efforts to have
the Company removed.
In addition, due to the termination of the Global transaction, the conversion
price of $3.00 was reduced to $2.50 for the $7 million of convertible notes
payable.
8
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 3 - 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. On November 13, 2000, the Company, Mail , Mail Acquisition
Corp. and the former Mail shareholders executed a Merger Agreement and Plan of
Reorganization superseding the February 2000 agreement to reflect the
termination of the Global Acquisition and the elimination of Superus Class B
Common Stock, one of the Company's proposed tracking stocks. On November 16,
2000, the Company completed the Mail merger and issued an aggregate of 182,140
shares of Voting Redeemable Convertible Series B Preferred Stock to the five
former shareholders of Mail. The Series B Preferred Stock is convertible into
common stock at a rate of 10 for 1 and has 5.4 votes per share of Series B
Preferred Stock. The Mail Merger Agreement provides that unless the Company
obtains confirmation from Nasdaq that its shareholders approved the Mail merger
at the September 26, 2000 meeting, the Company will need to obtain additional
shareholder approval for the conversion of the preferred stock into common stock
prior to March 15, 2001, otherwise the former Mail shareholders will be able to
unwind the transaction. The Company paid a finder's fee of one hundred thousand
shares of the Company's 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.
NOTE 5 - PROPOSED REORGANIZATION
Subject to shareholder approval, 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 then become the parent company.
The Company intends to hold a shareholders meeting to approve this
reorganization in early 2001, subject to market conditions.
9
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SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2000
NOTE 6 - 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 (totaling $1,924,827) from the Company's
operations for the quarter ended August 31, 2000, after adding back all accrued
interest charges and amortized costs of the Company's $7 million private
placement and all specifically identifiable costs which relate entirely to
Superus and the Global transactions. All bonuses subsequent to August 31, 2000,
will be based at the sole and exclusive discretion of the Company's Board of
Directors.
Stockholder Meeting
On September 26, 2000, the Company held a meeting of its shareholders, where the
shareholders approved, among other things, the reorganization, the Global
Acquisition, the Mail merger, the Superus Stock Option Plan and the acceleration
of certain options granted under the Superus Stock Option Plan. However, since
the Reorganization was conditioned upon the completion of the Global
Acquisition, the Reorganization described in Note 5 above, as well as certain
other matters, are scheduled to be voted upon again by the Company's
shareholders.
Additional Note Receivable From Mail
In September 2000, the Company entered into a second note receivable with Mail
totaling $125,000. The note bears interest at the rate of 10% per annum and is
due April 16, 2001.
Subsequent Charges
Subsequent to August 31, 2000, the Company has written off an aggregate of
approximately $3.25 million of loans made, including additional loans of
approximately $447,000 made subsequent to August 31, 2000 and the interest
receivable from Global pursuant to the Termination, Release and Debt Discharge
Agreement as disclosed in Note 2. The Company will also provide a 100% reserve
against the remaining $1.25 Million Note under the agreement.
In addition, on November 24, 2000, the Company entered into an agreement with
its investment banker which provides for the issuance of 1,600,000 shares of
Common Stock with a value of approximately $3.8 million, and warrants to
purchase 2,000,000 shares of Common Stock at $3.00 per share for past and future
services and disbursements. In accordance with NASDAQ rules, the Company issued
900,000 shares of Common Stock and 70,000 shares of Series C Preferred Stock
convertible into 700,000 shares of Common Stock upon shareholder approval. The
Series C Preferred Stock has a liquidation preference of $350,000 in the
aggregate and cumulative dividends of $.50 per share per annum, or $35,000. As a
result of these equity transactions, the Company will incur substantial charges
during the fourth quarter of the fiscal year ended November 30, 2000.
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 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 currently known by the
Company. Consequently, forward-looking statements are inherently subject to
risks and uncertainties, and actual results 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.
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 Subsidiaries (the "Company")
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. the Company's net sales for the three months ended August 31,
2000 increased by $9,719,624, or 291%, to $13,060,773 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.
Our growth was attributable 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 of electronic products in the broker market. There
can be no assurance, however, that these substantially improved conditions will
continue throughout 2000 and thereafter. It should be noted, however, that our
substantial increases in revenues and profitability of our electronic components
business has been offset by the expenses incurred by the termination of our
proposed acquisition of Global, as well as the costs of acquiring our Mail
subsidiary.
The Company's gross profits 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 profits for the three
months ended August 31, 2000 increased by $2,141,351, or 245%, to $3,016,733, 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 gross profit for
the nine months ended August 31, 2000 and 1999 were $1,852,920 and $1,430,177
for Surge and $6,191,684 and $623,847 for Challenge. The gross profit for the
three months ended August 31, 2000 and 1999 were $733,599 and $536,468 for Surge
and $2,283,134 and $338,914 for Challenge. The increase in the Company's gross
profit was a result of increased sales and higher profit margins. The higher
11
<PAGE>
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 $1,940,843, or 135%, to $3,381,561, 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 personnel in the latter part of 1999.
The Company's subsidiary, 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 resulted primarily from the increased sales commissions resulting from
the increase in sales for the August 31, 2000 periods presented, 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.
Interest expense for the nine months ended August 31, 2000 increased by
$501,385, as compared to the nine months ended August 31, 1999. Interest expense
for the three months ended August 31, 2000 increased by $207,958, 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 increased by $266,200 for the nine months ended
August 31, 2000 as compared to the nine months ended August 31,1999. Investment
income increased by $148,066 for the three months ended August 31, 2000, as
compared to the three months ended August 31, 1999. This increase resulted
primarily from the interest on the notes due from Global DataTel, Inc., which
was eliminated in the original consolidated filing, and MailEncrypt.com, Inc.
Liquidity and Capital Resources
Working capital increased by $1,365,565 during the nine months ended
August 31, 2000 from $5,666,449 at November 30, 1999, to $7,032,014, at August
31, 2000. This increase resulted primarily from net income of $1,511,374. The
Company's Current Ratio decreased to 1.6:1 at August 31, 2000, as compared to
4.4:1 at November 30, 1999. This resulted from the Company's private placement
described below. 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 its working capital levels are adequate to meet the
current operating requirements of the Company.
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). In May 1999, the letter of
credit agreement with the bank expired. 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. The Company has no existing line of credit and no
pending discussions regarding same with its bank.
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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 also 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.
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 and is
currently in effect. 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 in exchange for $116,640,
and received 23,400 shares.
In December 1999, Surge granted options to certain of its employees and
consultants, pursuant to the Company's Stock 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 were
exercised for 102,700 shares with proceeds of $173,089. In addition, in March
2000, Class A Warrants for 1,031 shares were exercised in exchange for $5,155.
During the nine months ended August 31, 2000, the Company had net cash
provided by operating activities of $151,428 as compared to $864,138 used in
operating activities in the nine months ended August 31, 1999. The increase in
cash provided by operating activities resulted from the Company's significant
increase in net income, accrued expenses and taxes, offset, in part, by
increases in accounts receivable and inventory.
The Company had net cash used in investing activities of $4,075,730 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, as of August 31,
2000, the Company loaned an aggregate of $4,807,675 to Global and Mail.
Subsequent to August 31, 2000, the Company loaned approximately $447,000 to
Global and $125,000 to Mail.
The Company had net cash provided by financing activities of $6,854,294
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. The net proceeds of the Company's $7
million private placement and the loan payable of approximately $238,000 were
used primarily to fund the operations of Global in the amount of approximately
$4,505,000 and $875,000 to fund the operations of Mail. Other than the repayment
of a $1 million bridge loan made by the Surge Components to Global and the
repayment of some miscellaneous expenses, Surge did not receive any of the net
proceeds of the offering which proceeds were disbursed by Superus. This private
placement was over-subscribed by approximately $238,000. An investor in the
private placement agreed to loan the Company this over-subscribed amount with
interest at 12% per annum, rather than accept a partial return of its
subscription. This amount is reflected as a loan payable at August 31, 2000. As
a result of the foregoing,
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the Company had a net increase in cash of $2,929,992 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 its investment
income will be sufficient to meet its current financial requirements over at
least the next twelve months. However, it is expected that the Company will need
to raise and/or lend additional funds for Mail's operations and for the start-up
activities of the Company's new subsidiary SolaWorks, Inc. Between November 2000
and January 2001, the Company sold approximately $518,000 of new convertible
promissory notes to two investors. This amount included the conversion of
$238,000 of prior debt plus accrued interest of $24,000 from the investor in the
Company's $7 million private placement whose over-subscription was loaned to the
Company outside of such private placement. The aggregate principal amount of
these notes bear interest at the rate of 6% per annum through December 31, 2000
and thereafter at 12%. These notes are convertible into common stock at $2.56
per share at the option of the noteholders. Further, MailEncrypt expects to
borrow up to $150,000 from Surge on a senior secured basis. Any further
borrowings to meet MailEncrypt's cash requirements are expected to be from a
third party lender.
In March 2000, Surge formed, a Delaware corporation, Superus Holdings,
Inc. ("Superus") as a wholly owned subsidiary of the Company. Subject to
shareholder approval, 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").
As of August 31, 2000, Surge has convertible 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 are payable in common stock on or before December 31, 2000, if the
Global Acquisition is not consummated. Since the Global Acquisition was
terminated, the Convertible Promissory Notes will convert into Surge Common
Stock at a $2.50 per share conversion rate.
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 for the Global Note. The Global Note was
secured by all of the assets of and was 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.
On December 8, 1999, Surge entered into an Asset Purchase Agreement, as
amended, which provided 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 were to convert into the 23,900,000 shares of Superus'
Class B Common Stock, a "tracking stock" of Global's business if the Global
Acquisition was approved and consummated.
In February 2000, Surge replaced the Global Note with a Subordinated
Convertible Promissory Note ("Convertible Note") totaling up to $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.
At August 31, 2000 and November 2, 2000, approximately $4,058,000 and
approximately $4,504,000, respectively, was due from Global. Through August 31,
2000, $118,922 in interest had been accrued on the convertible note.
On June 2, 2000, Surge executed a pledge agreement and took control of
Global's assets and business. Under the terms of the Agreement, the Global Board
of Directors and a sufficient
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number of shareholders of Global consented to pledge all of Global's assets and
certain of its liabilities to the Company in furtherance of satisfying a
condition precedent to closing the sale of such assets to Superus. As a result
of operating Global's assets and business and believing that all conditions to
closing had occurred when the Form 10-QSB was originally filed, Surge
consolidated the assets and business of Global as of June 2, 2000 and designated
this date as the effective date of the business combination. This amendment is
being filed to reflect the unwinding of this transaction as a result of the
Termination Agreement.
On November 3, 2000, the Company terminated the Asset Purchase
Agreement with Global due to the failure of Global to fulfill various conditions
precedent. Following the termination, the Company entered into a Termination,
Release, and Debt Discharge Agreement with Global dated December 4, 2000,
pursuant to which Surge released Global from payment of approximately $3,250,000
and will retain an additional $1,250,000 principal amount of indebtedness for a
12 month period ending December 4, 2001. The note will then be cancelled if no
litigation is commenced against Surge relating to Global and/or its termination
of the Global agreement. In addition, the Company has guaranteed and co-signed
Global loans totaling $500,000, for which Global agreed to use its best efforts
to have the Company removed.
Additionally, on February 16, 2000, Surge entered into a Merger
Agreement and Plan of Reorganization to acquire Mail, the terms of which
provided for the issuance of 1,821,400 shares of Superus' Class B Common Stock
to the former shareholders of Mail, and the merger of Mail into a wholly owned
subsidiary of Superus. 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. The merger of Mail into Superus was also
conditioned on the consummation of the Global Acquisition. On November 13, 2000,
the Company, Mail , Mail Acquisition Corp. and the former Mail shareholders
executed a Merger Agreement and Plan of Reorganization superseding the February
2000 agreement to reflect the termination of the Global Acquisition and the
elimination of Superus Class B Common Stock, one of the Company's proposed
tracking stocks. On November 16, 2000, the Company completed the Mail merger and
issued an aggregate of 182,140 shares of Voting Redeemable Convertible Series B
Preferred Stock to the five former shareholders of Mail. The Series B Preferred
Stock is convertible into common stock at a rate of 10 for 1 and has 5.4 votes
per share of Series B Preferred Stock. The Mail Merger Agreement provides that,
unless the Company obtains confirmation from Nasdaq that its shareholders
approved the Mail merger at the September 26, 2000 meeting, the Company will
need to obtain shareholder approval for the conversion of the preferred stock
into common stock prior to March 15, 2001; otherwise the former Mail
shareholders will be able to unwind the transaction. The Company paid a finder's
fee of one hundred thousand shares of the Company's Common Stock upon completion
of the merger.
In February 2000, Surge entered into an agreement with Mail whereby
Surge loaned $750,000 to Mail. This Note and a second note for $125,000 bear
interest at the rate of 10% per annum and are both due April 16, 2001, as
amended. In the event the acquisition of Mail is unwound, the Notes would be
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 ten year options to purchase 1,500,000 shares of the
Company's Common Stock, exercisable at $2.875 per share, 300,000 of which
options 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
ten-year options to purchase 200,000 shares of the Company's Common Stock,
exercisable at $2.875 per share, 35,000 of which options are exercisable six
months after the Effective Date of the Recapitalization and the balance
exercisable ratably on a monthly basis over 42 months.
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In February 2000, the two founders of Mail each entered into one-year
employment agreements with the Company, which are to be followed, by six-month
consulting agreements. The two founders are each being paid a base salary of
$125,000 per annum. They have, in turn, agreed to license to the Company the
software language they developed specifically for Mail.
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 increase interest charges.
PART II OTHER INFORMATION
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;
abstentions 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
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(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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
---------- -----------
11.2 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.
3. A current report on Form 8-K was filed by the Company to
report on item 4, "Changes in Registrant's Certifying
Accountant" reporting the Company's change in independent
auditors to Richard Eisner & Company.
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: January 12, 2001
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