Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 67± 281K
2: EX-11 Statement re: Computation of Earnings Per Share 1 7K
3: EX-14 Material Foreign Patent 4± 19K
4: EX-21 Subsidiaries of the Registrant 1 5K
5: EX-23.1 Consent of Experts or Counsel 1 7K
6: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 12K
7: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) 1 8K
8: EX-99.1 Miscellaneous Exhibit 1 7K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended November 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number: 0-14188
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SURGE COMPONENTS, INC.
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(Name of small business issuer 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.)
95 East Jefryn Boulevard, Deer Park, New York 11729
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (631) 595-1818
----------------------------
Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share; Redeemable Class A
Common Stock Purchase Warrants
--------------------------------------------------------------
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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 [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's net revenues for its most recent fiscal year:
$11,225,294.
------------------------------------------------------------
The aggregate market value of the 8,743,326 shares of common
stock held by non-affiliates (all shareholders other than
officers, directors and 5% or greater shareholders) of the
registrant was $450,361, as of February 23, 2004, based on the
last sale price of the registrant's common stock on such date of
$.06 per share, quoted on the over-the-counter "pink sheets"
maintained by Pink Sheets LLC.
There were a total of 8,743,326 shares of the registrant's
common stock outstanding as of February 23, 2004, the latest
practicable date.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
Throughout this Annual Report on Form 10-KSB, the terms
"we," "us," "our", "our company" and "the company" refer to Surge
Components, Inc. ("Surge" or the "Company") and, unless the
context indicates otherwise, includes Surge's wholly-owned
subsidiaries, Challenge/Surge, Inc. ("Challenge"), Superus
Holdings, Inc. ("Superus"), Surge Components, Limited ("Surge
Limited") and Surge Acquisition Corporation, as well as the
majority-owned joint venture Surge/Lelon LLC.
Introductory Comment - Forward-Looking Statements.
-------------------------------------------------
Statements contained in this report include "forward-looking
statements" within the meaning of such term in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Forward-looking statements involve known and unknown
risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements
expressed or implied by such forward-looking statements not to
occur or be realized. Such forward-looking statements generally
are based on our best estimates of future results, performances
or achievements, based upon current conditions and the most
recent results of the companies involved and their respective
industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "will,"
"project," "expect," "believe," "estimate," "anticipate,"
"intends," "continue," "potential," "opportunity" or similar
terms, variations of those terms or the negative of those terms
or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among
other things, such factors as:
- our business strategies and future plans of operations;
- general economic conditions in the United States and
elsewhere, as well as the economic conditions affecting the
industries in which we operate;
- political and regulatory matters affecting the foreign
countries in which we operate or purchase goods and materials
including the current turmoil with Iraq;
o the market acceptance and amount of sales of our products
and services;
- the extent that our distribution network and marketing
programs achieve satisfactory response rates;
- the effect of the current surplus of electronic component
parts in the broker distributor market on sales by our
Challenge subsidiary;
- our historical losses;
- the competitive environment within the electronic
components industry;
- our ability to raise additional capital, if and as
needed;
- the cost-effectiveness of our product development
activities;
- the effect of the delisting of our common stock, par
value $.001 per share (the "Common Shares") from The NASDAQ Stock
Market and the delisting of our Common Shares from The Boston
Stock Exchange;
- the extent of any further investigations or proceedings
with respect to certain potentially questionable payments made by
Surge during its fiscal year ended November 30, 2000 ("Fiscal
2000") and its quarter ended February 28, 2001; and
- the other factors and information discussed in other
sections of this report.
Shareholders and others reading this report should carefully
consider such risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to
differ materially from those provided in the forward-looking
statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 1. Description of Business.
--------------------------------
Business Development
--------------------
Surge was incorporated under the laws of the State of New
York on November 24, 1981. Surge, a supplier of electronic
products and components, completed an initial public offering of
its securities in 1984 and a second offering of its securities in
August 1996. Challenge, a New York corporation formed in 1988 and
a wholly-owned subsidiary of Surge, is a broker and distributor
of electronic components. Superus, a Delaware corporation, was
formed in March 2000 to ultimately become a Delaware parent
holding company through the proposed merger of Surge with and
into Superus (which did not occur). Superus is currently inactive
and filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy
Code. In June 2002, the Trustee assigned to the case filed a
report certifying, among other things, that the case had been
fully administered and that there were no assets available for
distribution to creditors. In December 2003, the Bankruptcy
Court issued an Order approving the Trustee's Report and closing
the case.
In May 2002, Surge and an officer of Surge became sole
owners of Surge Components, Limited ("Surge Limited"), a Hong
Kong corporation. Under current Hong Kong law, Surge Limited is
required to have at least two shareholders. Surge owns 999 shares
of the outstanding common stock and an officer of Surge owns one
share of the outstanding common stock. The officer of Surge has
assigned his rights regarding his one share to Surge. Surge
Limited started doing business in July 2002. The Company has
opened this office and hired direct sales people in order to
effectively handle the transfer business from United States
customers purchasing and manufacturing in Asia after they do the
design in America. This office has strengthened its global
capabilities and service to its customer base.
Surge's and Challenge's principal executive offices are
located at 95 East Jefryn Boulevard, Deer Park, New York 11729;
and the telephone number is (631) 595-1818.
Business of Our Company
-----------------------
Surge is a supplier of electronic products and components.
These products include capacitors, which are electrical energy
storage devices, and discrete components, such as semiconductor
rectifiers, transistors and diodes, which are single function low
power semiconductor products that are packaged alone as compared
to integrated circuits such as microprocessors. Surge's products
are typically utilized in the electronic circuitry of diverse
products, including, but not limited to, automobiles, cellular
telephones, computers, consumer electronics, garage door openers,
household appliances, power supplies and security equipment.
Surge's products are sold to both original equipment
manufacturers, commonly referred to as OEMs, who incorporate them
into their products, and to distributors of Surge's product
lines, who resell these products within their customer base.
Surge's products are manufactured predominantly in Asia by
approximately sixteen independent manufacturers. Surge does not
have any binding long-term supply, distribution or franchise
agreements with its manufacturers. Surge acts as the exclusive
sales agent utilizing independent sales representative
organizations in North America to sell and market the products
for many of its manufacturers pursuant to oral agreements. In
addition, in December 2000, Surge launched a joint-venture
limited liability company with Lelon Electronics Corporation
("Lelon"), a Taiwan corporation, whereby the joint venture acts
as sales and marketing agent in North America for all Lelon
products utilizing Surge's existing organization and resources.
The joint venture commenced operations in August 2002. The
Company established this joint venture to become the direct sales
and marketing office for Lelon, as opposed to previous operations
as a master distributor for Lelon products. The Company expects
that this change will give greater comfort to the customers, now
that they are dealing with the manufacturer and not the middle
man. Therefore, because of the additional customer confidence
and closer cooperation and support from Lelon, the Company
expects that this will result in additional business for the
Company.
Challenge engages in the electronic components and products
broker distribution business. Challenge purchases name brand
electronic components and products, typically from domestic
manufacturers and authorized distributors, to fill specific
customer orders. Challenge purchases these components and
products in the open market on the best available terms and
generally keeps inventories of these products. Challenge's
revenues are principally derived from the sale of these products.
In 1999, Challenge began a division to sell audible components.
This division has shown steady growth every year. We have
recently added additional products that include battery snaps and
coin cell holders, which we hope will add up to significant sales
going forward. We are continuing to add distributors and
representatives every month, which will allow Challenge to sell
in territories in which it is currently weak. Challenge`s other
division is the broker division which is slowly improving. There
seems to be more shortages in the electronics market, and lead
times for components are stretching out, which may enable us to
secure more orders going forward.
We have achieved consolidated net sales during the last
three years of approximately $11,225,000 in our fiscal year
ended November 30, 2003 ("Fiscal 2003"), $10,917,000 in our
fiscal year ended November 30, 2002 ("Fiscal 2002") and
$15,723,000 in Fiscal 2001. The net sales for Fiscal 2003 for
Surge without Challenge, its principal subsidiary, decreased by
approximately $321,019, or 4% when compared to Fiscal 2002. The
decrease in sales reflects the significant price competition in
the electronic component market and decreased demand of certain
key customers' products. The net sales for Challenge increased
to $4,075,000 in Fiscal 2003 from $3,722,000 in Fiscal 2002.
Challenge continues to experience depressed sales in its broker
division due to a slowdown in manufacturing among computer,
telecommunications and phone manufacturers. This slowdown
adversely affected Challenge's sales for 2003. Any future
improvements in sales (and possible profitability) are expected
to be based on future demand and supply for Challenge's product
mix. Sales of speakers, fans and buzzers by Challenge's audible
products division has increased steadily since its introduction
through the addition of sales representatives and promotions.
Currently, the majority of Challenge's sales are comprised from
the audible products division.
The electronic components industry has been characterized by
intense price cutting, which could materially adversely affect
our future operating results. Due to our limited financial
resources, anticipated expenses and the highly competitive
environment in which we operate, there can be no assurance that
we will obtain revenue growth, sustain our current levels of
revenue in the future or that our future operations will become
profitable. We expect to continue to incur operating losses at
least for the better part of our fiscal year ending November 30,
2004 ("Fiscal 2004").
In the past few years, we expanded our operations through
the opening of additional sales/stocking offices, the expansion
of our headquarters office and warehouse facility and the
increase of our inventories. In April 2001, we relocated Surge's
and Challenge's office and warehouse facilities to a new location
in the same local area as our facility and increased the total
square footage for their facility from approximately 7,500 square
feet to approximately 23,000 square feet. In order for us to
grow, we will depend on, among other things, the restored growth
of the electronics and semiconductor industries, our ability to
withstand intense price competition, our ability to obtain new
clients, our ability to retain sales and other personnel in order
to expand our marketing capabilities, our ability to secure
adequate sources of products, which are in demand on commercially
reasonable terms, our success in managing growth, including
monitoring an expanded level of operations and controlling costs,
and the availability of adequate financing.
Industry Background
-------------------
The United States electronics distribution industry is
composed of manufacturers, national and international
distributors, as well as regional and local distributors.
Electronics distributors market numerous products, including
active components (such as transistors, microprocessors,
integrated circuits and semiconductors), passive components (such
as capacitors and resistors), and electro mechanical,
interconnect (such as connectors and wire) and computer products.
Surge focuses its efforts on the distribution of capacitors and
discrete components, a small subset of the electronic components
market.
The electronics industry has been characterized by intense
price cutting and rapid technological changes and development,
which could materially adversely affect our future operating
results. In addition, the industry has been affected historically
by general economic downturns, which have had an adverse economic
effect upon manufacturers and end-users of our products, as well
as distributors. Furthermore, the life-cycle of existing
electronic products and the timing of new product development and
introduction can affect the demand for electronic components,
including our products. Accordingly, any downturn in the
electronics industry in general could adversely affect our
business and results of operations.
There are forces of change affecting the wholesale
distribution industry, including the electronics industry. Those
forces of change, as described in the 1998 Arthur Andersen report
entitled "Facing the Forces of Change" (published by Distribution
Research and Education Foundation, Washington, D.C.), include
electronic commerce, supply chain integration, strategic
alliances and globalization. We are addressing these dynamics as
part of our strategy for the next several years.
The industry is also experiencing a strong move by U.S.
manufacturers to design products in the United States, but then
shift manufacturing and purchasing to Asia to benefit from this
low cost labor region using their own factory or a subcontractor.
Surge responded to this trend by setting up a Hong Kong
corporation, Surge Components, Limited, and hiring sales staff to
better position the Company in the Asian markets.
Products
--------
Surge supplies a wide variety of electronic components (some
of which bear our private "Surge" label) which can be broadly
divided into two categories--capacitors and discrete components.
For Fiscal 2003 and Fiscal 2002, capacitors accounted for
approximately 94% and 93% of Surge's sales, respectively.
Discrete components accounted for Surge's remaining sales in
Fiscal 2003 and Fiscal 2002. Capacitors and discrete components
can be categorized based on various factors, including function,
construction, fabrication and capacity. The principal products
sold by Surge under the Surge name or by Challenge are set forth
below.
Capacitors
----------
A capacitor is an electrical energy storage device used in
the electronics industry for varied applications, principally as
elements of resonant circuits, coupling and bypass applications,
blockage of DC current, frequency determining and timing
elements, filters and delay-line components, and voltage
transient suppression (circuit protection devices). All products
are available in traditional leaded as well as surface mount
(chip) packages.
Our product line of capacitors includes:
o Aluminum Electrolytic Capacitors. These capacitors,
which are Surge's principal product, are storage devices used in
power applications to store and release energy as the electronic
circuitry demands. They are commonly used in power supplies
and can be found in a wide range of consumer electronics
products. Our supplier has one of the largest facilities for
these products in Taiwan. This facility is fully certified for
the International Quality Standard ISO 9001 and 9000, which
means that it meets the strictest requirements established by
the automotive industry and adopted throughout the world to
ensure that the facility's manufacturing processes, equipment
and associated quality control systems will satisfy specific
customer requirements. This system is also intended and
designed to facilitate clear and thorough record keeping of
all quality control and testing information and to ensure
clear communication from one department to another about the
information (i.e., quality control, production or
engineering). This certification permits us to monitor quality
control/manufacturing process information and to respond to
any customer questions.
o Ceramic Capacitors. These capacitors are the least
expensive, and are widely used in the electronics industry. They
are commonly used to bypass or filter semiconductors in resonant
circuits and are found predominantly in a wide range of low
cost products including computer, telecom, appliances, games
and toys.
o Mylar Film Capacitors. These capacitors are frequently
used for noise suppression and filtering. They are commonly used
in telecommunication and computer products. Surge's supplier in
Korea has a facility fully certified for the International
Quality Standard ISO 9002.
Discrete Components. Discrete components, such as
semiconductor rectifiers, transistors and diodes, are packaged
individually to perform a single or limited function, in contrast
to integrated circuits, such as microprocessors and other
"chips", which contain from only a few diodes to as many as
several million diodes and other elements in a single package,
and are usually designed to perform complex tasks. Surge almost
exclusively distributes discrete, low power semiconductor
components rather than integrated circuits.
Our product line of discrete components includes:
Rectifiers. Low power semiconductor rectifiers are devices
that convert alternating current, or AC power, into one
directional current, or DC power, by permitting current to flow
in one direction only. They tend to be found in most electrical
apparatuses, especially those drawing power from an AC wall
outlet.
Surge offers a wide variety of rectifiers, including:
- Schottky barrier rectifiers;
- super-fast rectifiers;
- ultra-fast/high efficiency rectifiers;
- fast recovery rectifiers, the time within which
the current recovers from spikes of voltage or current;
- fast recovery glass passivated rectifiers, a chip
coated with a glass material to protect the component from
thermal stress in a circuit;
- silicon rectifiers, which utilize silicon
rectifying cells designed to withstand large currents and high
voltages;
- soft recovery/fast switching rectifiers;
- high voltage rectifiers;
- bridge rectifiers, which connect multiple circuits
in parallel;
- self packaged surface mount rectifiers, chip style
without leads and used in miniaturization; and
- auto rectifiers.
All products are available in traditional leaded as well as
surface mount (chip) packages. Surge's main rectifier supplier
has QS 9000 automotive certification, giving us an opportunity to
market our products to the automotive industry.
Transistors. Transistors send a signal to the circuit for
transmission of waves. They are commonly used in applications
involving the processing or amplification of electric current and
electric signals, including data, television, sound and power.
All products are available in traditional leaded as well as
surface mount (chip) packages. Surge sells many types of ISO 9002
transistors, including:
- small signal transistors, designed for lower
levels of current; and
- power transistors, designed for large currents to
safely dissipate large amounts of power.
Diodes. Diodes are two-lead or surface mount components that
allow electric current to flow in only one direction. They are
used in a variety of electronic applications, including signal
processing and direction of current.
All products are available in traditional leaded as well as
surface mount (chip) packages. Diodes sold include:
- zener diodes;
- high speed switching diodes; and
- rectifiers, the most popular type of diode.
Circuit Protection Devices. Our circuit protection devices
include transient voltage suppressors and metal oxide varistors,
which protect circuits against switching, lightning surges and
other uncontrolled power surges and/or interruptions in circuits.
Transient voltage suppressors, which offer a higher level of
protection for the circuit, are required in telecommunication
products and are typically higher priced products than the metal
oxide varistors, which are more economically priced and are used
in consumer products. All products are available in traditional
leaded as well as surface mount (chip) packages.
Audible Components. These include audible transducers and
Piezo buzzers and speakers which produce an audible sound for,
and are used in back-up power supplies for computers, alarms,
appliances, smoke detectors, automobiles, telephones and other
products which produce sounds. Challenge has initiated marketing
relationships with certain Asian manufacturers of audible
components to sell these products worldwide. All products are
available in traditional leaded as well as surface mount (chip)
packages.
New Products. We periodically introduce new products, which
are intended to complement our existing product lines. These
products are ones that are commonly used in the same circuit
designs as other of our products and will further provide a one-
stop-shop for the customer. Some of these products are common
items used in all applications and others are niche items with a
focus towards a particular application. We are currently
marketing surface mount rectifiers, which are used in miniature
or compact products such as cellular telephones and pagers. These
new products include fuses, printed circuit boards and switches.
All products are available in traditional leaded as well as
surface mount (chip) versions.
Inventory
---------
In order to adequately service our customers' needs, we
believe that it is necessary to maintain large inventories, which
makes us more susceptible to price and technology changes. At any
given time, we attempt to maintain a three-to-four month
inventory on certain products in high demand for distributors and
at least one month for other products. Our inventory currently
contains more than 100 million component units consisting of more
than 3,000 different part numbers. Although the number of
components and products will continue to increase, we plan to
generally maintain a three-to-four month inventory. Our products
range in sales price from less than one cent for a commercial
diode to more than $2.00 for high power capacitors and
semiconductors. As of November 30, 2003, Surge and Challenge
maintained an inventory valued at $1,052,448 and $753,063,
respectively. The balance of the inventory, $6,567 is held by
Surge Components Limited and Surge Lelon LLP. Our inventories
for Surge and Challenge at November 30, 2002 were valued at
$1,163,268 and $957,930, respectively.
As a result of our strategic inventory purchasing policies,
under which we obtain preferential pricing, we generally waive
rights to manufacturers' inventory protection agreements
(including price protection and inventory return rights), and
thereby bear the risk of increases in the prices charged by our
manufacturers and decreases in the prices of products held in our
inventory or covered by purchase commitments. If prices of
components, which we hold in inventory decline, or if new
technology is developed that displaces products that we sell, our
business could be materially adversely affected.
Challenge is in the broker distribution business and fills
orders from customers that need electronic components and
products that are not readily available from their suppliers.
Throughout Fiscal 2003, there was an excess of electronics
products in the United States markets. The excess of electronics
products resulted in decreased business among broker
distributors. Challenge has obtained and is seeking to obtain
additional product rights to certain brand name product lines and
to establish direct relationships with those manufacturers for
the audible products and fans.
Although Challenge cannot be certain, it believes that the
broker distribution business will continue to change and that
many of such businesses will have difficulties surviving if they
have insufficient resources to compete with the factory-direct
distributors. In furtherance of this belief, in late 1999
Challenge began to develop a new product division of speakers,
fans and buzzers manufactured in Asia sold under the Challenge
name, and as a result Challenge's net sales increased from
approximately $3,722,000 in Fiscal 2002 to $4,075,000 in Fiscal
2003.
Product Availability
--------------------
Surge obtains substantially all of its products from
manufacturers in Asia, while Challenge historically purchases its
products both domestically and from Asia. However, in Fiscal 2003
and Fiscal 2002, Challenge purchased approximately 69% and 74%,
respectively, of its products overseas as a result of Challenge's
introduction of new product lines. Of the total goods purchased
by Surge and Challenge in Fiscal 2003, those foreign manufactured
products were supplied from manufacturers in Taiwan (41%), Hong
Kong (22%), elsewhere in Asia (20%) and overseas outside of Asia
(1%). Surge purchases its products from approximately sixteen
different manufacturers, for many of which we act as exclusive
sales agent in North America based on an oral agreement.
In December 2000, Surge launched a joint-venture limited
liability company with Lelon, a Taiwan corporation, whereby the
joint venture acts as sales and marketing agent in North America
for all Lelon products. Lelon, in business since 1976 and
publicly traded in Taiwan, is a world-class manufacturer of
aluminum electrolytic capacitors and has been supplying products
to Surge for over ten years on a master-distributor basis. The
joint venture operates under the name Surge/Lelon, LLC and
markets and sells the full range of product offerings in North
America that are currently manufactured under the Lelon name. As
a result of the synergies created by Surge/Lelon, we have
increased the addressable market and breadth of our product
offerings, and also share in revenue from all North American
sales with Lelon and also from all North American joint-venture
sales. Surge/Lelon is operating from our existing location in
Deer Park, NY, and is headed by Ira Levy, Surge's President.
Most of the facilities that manufacture products for Surge
have obtained or have applied for the International Quality
Standard ISO 9002 certification. We predominantly purchase our
products in United States currency in order to minimize the risk
of currency fluctuations. In most cases, Surge utilizes two or
more alternative sources of supply for each of its products with
one primary and one complementary supplier for each product. In
all cases but Lelon, the products are manufactured to our order
with the "Surge" logo and label. Surge is continually building
relationships with suppliers and from time to time adds new
suppliers when needed. Surge's relationships with many of its
suppliers date back to the commencement of our import operations
in 1983.
We have established payment terms with our manufacturers of
between 30 and 60 day open account terms.
We do not have any written long-term supply, distribution or
franchise agreements with any of our manufacturers, other than
Surge/Lelon. We act as the exclusive sales agent in North America
for many of our manufacturers, pursuant to oral agreements. While
we believe that we have established close working relationships
with our principal manufacturers, our success depends, in large
part, on maintaining these relationships and developing new
supplier relationships for our existing and future product lines.
Because of the lack of long- term contracts, we may not be able
to maintain these relationships.
For Fiscal 2003 and Fiscal 2002, one of Surge's vendors, DB
Products, accounted for 9.5% and 11% of Surge's consolidated
purchases for Fiscal 2003 and Fiscal 2002, respectively and Lelon
accounted for 33% and 36%, for Fiscal 2003 and Fiscal 2002,
respectively, of Surge's consolidated purchases.
We do not regard any one supplier as essential to our
operations, since equivalent replacements for most of the
products are either readily available from one or more of our
other suppliers or are available from various other sources at
competitive prices. Nevertheless, the loss of, or a significant
disruption in the relationship with any of our major suppliers
could have a material adverse effect on our business and results
of operations until a suitable replacement could be obtained.
The components business has, from time to time, experienced
periods of extreme shortages in product supply, generally as the
result of demand exceeding available supply. When these shortages
occur, suppliers tend to either increase prices or reduce the
number of units sold to customers. We believe that because of our
inventory and our relationships with our manufacturers, we have
been able to mitigate the effect of any of these shortages in
components. However, should there be shortages in the future,
such shortages could have both a beneficial or an adverse effect
upon our business. Conversely, due to poor market demand, there
could be an excess of components in the market, causing stronger
competition and an erosion of prices.
Marketing and Sales
-------------------
Surge's sales efforts are directed towards OEM customers in
numerous industries where our products have wide application.
Surge currently employs twelve sales and marketing personnel,
including two of its executive officers, who are responsible for
certain key customer relationships. Our executive officers also
devote a significant amount of time to developing and maintaining
continuing relations with our key customers.
We use independent sales representatives or organizations,
which often specialize in specific products and areas and have
specific knowledge of and contacts in particular markets. As of
November 30, 2003, we had representation agreements with
approximately 41 sales representative organizations. Sales
representative organizations, which are generally paid a 5%
commission on net sales, are generally responsible in their
respective geographic markets for identifying customers and
soliciting customer orders. Pursuant to arrangements with our
independent sales representatives, they are permitted to
represent other electronics manufacturers, but are generally
prohibited from carrying a line of products competitive with our
products. These arrangements can be terminated on written notice
by either party or if breached by either party. These
organizations normally employ between one and twelve sales
representatives. The individual sales representatives employed by
the sales organizations generally possess an expertise which
enhances the scope of our marketing and sales efforts. This
permits us to avoid the significant costs associated with
creating a direct marketing network. We have had relationships
with certain sales organizations since 1988 and continue to
engage new sales organizations as needed. We believe that
additional sales organizations and representatives are available
to us, if required.
We engage independent sales representative organizations in
various regions throughout the world for marketing to OEM
customers and distributors. Sales by the independent sales
representative organization Win-Cor Electronics Sales Corp. in
the New York metropolitan area represented 12% of Surge's sales
in Fiscal 2003 and 15% in Fiscal 2002.
We have initiated a formal national distribution program to
attract more distributors to promote our products. We have a
National Distribution Manager to develop and manage this program.
We expect this market segment to contribute significantly to our
sales growth over time.
Many OEMs require their suppliers to have a local presence
and Surge's network of independent sales representatives are
responsive to these needs. In this regard, in order to service
the growing importance of the electronics community, Surge has a
quality support/engineering location and a sales location in
California. Surge also opened a contracted warehouse space in
Phoenix, Arizona to stock products for customers in the western
region. Surge pays for this space on a monthly basis. Surge also
has a marketing office in Taiwan that provides marketing and
customer service for the Asian market. The cost and related
expenses of this office have been minimal since Surge is
utilizing the same office space used by one of its supplier
management groups. Surge formed a Hong Kong corporation, Surge
Components, Limited and hired a regional sales manager to service
the Hong Kong/Greater China region customers.
We utilize the services of the Progressive Marketing Corp.
of Melville, New York, an unaffiliated marketing/public relations
organization ("Progressive"), which publicizes our achievements
and helps us develop greater name recognition and positioning
within the electronics industry. Progressive places announcements
in trade journals concerning our new product introductions,
hiring of key personnel, new sales organizations and
representatives.
Other marketing efforts include generation and distribution
of our product catalogs and brochures and attendance at trade
shows. We have produced an exhibit for display at electronics
trade shows throughout the year. Our products have been exhibited
at the electronic distribution show in Las Vegas, Nevada and we
will continue our commitment and focus on the distribution
segment of the industry by our visibility at the Electronic
Distributor Trade Show.
Customers
---------
Our products are sold to distributors and OEMs in such
diverse industries as the automotive, computer, communications,
cellular telephones, consumer electronics, garage door openers,
security equipment and household appliances industries. We
request our distributors to provide point of sales reporting,
which enables us to gain knowledge of the breakdown of industries
into which our products are sold. For Fiscal 2003, one customer
accounted for 12% of Surge's consolidated net sales. The same
customer accounted for 3% of Surge's consolidated net sales in
Fiscal 2002. For Fiscal 2002, a customer, Millennium Components,
a company owned by a director employee of Challenge, accounted
for 1% of Surge's consolidated net sales. Millennium accounted
for 2% of Surge's consolidated net sales in Fiscal 2003. Our
discrete components are often sold to the same clients as our
capacitors. These OEM customers typically accept samples for
evaluation and, if approved, we work towards procuring the next
orders for these items.
Typically, we do not maintain contracts with our customers
and generally sell products pursuant to customer purchase orders.
Although our customer base has increased, the loss of our largest
customers as well as, to a lesser extent, the loss of any other
material customer, could have a materially adverse effect on our
operations during the short-term until we are able to generate
replacement business, although we may not be able to obtain such
replacement business. Because of our contracts and good working
relationships with our distributors, we offer the OEMs, when
purchasing through distributors, extended payment terms, just-in-
time deliveries and one-stop shopping for many types of
electronic products.
Competition
-----------
We conduct business in the highly competitive electronic
components industry. We expect this industry to remain
competitive. We face intense competition in both our selling
efforts and purchasing efforts from the many companies that
manufacture or distribute electronic components. Our principal
competitors in the sale of capacitors include Nichicon,
Panasonic, Illinois Capacitor, NIC, AVX, Murata and Kemet. Our
principal competitors in the sale of discrete components include
General Instrument Corp., Motorola, Inc., Microsemi Corp.,
Diodes, Inc. and Samsung. Our principal competition in the
audible business include AVX, Murata, Panasonic, Projects
Unlimited, International Components Corp. and Star Micronics.
Many of these companies are well established with substantial
expertise, and have much greater assets and greater financial,
marketing, personnel, and other resources than we do. Many larger
competing suppliers also carry product lines which we do not
carry. Generally, large semiconductor manufacturers and
distributors do not focus their direct selling efforts on small
to medium sized OEMs and distributors, which constitute most of
our customers. As our customers become larger, however, our
competitors may find it beneficial to focus direct selling
efforts on those customers, which could result in our facing
increased competition, the loss of customers or pressure on our
profit margins. We are finding increased competition from
manufacturers located in Asia due to the increased globalization
nature of the business. There can be no assurance that we will
be able to continue to compete effectively with existing or
potential competitors.
Other factors that will affect our success in these markets
include our continued ability to attract additional experienced
marketing, sales and management talent, and our ability to expand
our support, training and field service capabilities. Our motto
is "never say no," as we offer same day fulfillment without
minimum purchase order requirements and generally maintain
flexibility to ensure complete customer satisfaction.
Management Information Systems
------------------------------
We have made an investment in computer hardware and
software. Our management information systems consultants are
responsible for software and hardware upgrades, maintenance of
current software and related databases, and designing custom
systems. All sales personnel of Surge are equipped with computer
terminals to assist in providing up-to-date reliable information
to customers. Surge's purchasing department manages our inventory
on a real time computer system offering the sales and accounting
departments complete knowledge regarding inventory availability,
income and expense levels, sales and product line information.
Management also analyzes various reports, including product,
profit, and sales trends using our computer system. We intend to
continually evaluate and upgrade our IBM-compatible computer
system as our requirements evolve.
Customer Service
----------------
We have two full-time customer service employees whose time
is dedicated largely to respond to customer inquiries such as
price quote requests, delivery status of new or existing purchase
orders, changes of existing order dates, quantities, dates, etc.
We intend to increase our customer service capabilities, as
necessary.
Foreign Trade Regulation
------------------------
Most products sold by Surge are manufactured in Asia,
including such countries as Taiwan, South Korea, Hong Kong,
India, Japan and China. The purchase of goods manufactured in
foreign countries is subject to a number of risks, including
economic disruptions, transportation delays and interruptions,
foreign exchange rate fluctuations, impositions of tariffs and
import and export controls, and changes in governmental policies,
any of which could have a material adverse effect on our business
and results of operations. Potential concerns may include drastic
devaluation of currencies, loss of supplies and increased
competition within the region.
From time to time, protectionist pressures have influenced
United States trade policy concerning the imposition of
significant duties or other trade restrictions upon foreign
products. We cannot predict whether additional United States
customs quotas, duties, taxes or other charges or restrictions
will be imposed upon the importation of foreign components in the
future or what effect such actions could have on our business,
financial condition or results of operations.
Our ability to remain competitive with respect to the
pricing of imported components could be adversely affected by
increases in tariffs or duties, changes in trade treaties,
strikes in air or sea transportation, and possible future United
States legislation with respect to pricing and import quotas on
products from foreign countries. Our ability to remain
competitive could also be affected by other governmental actions
related to, among other things, anti-dumping legislation and
international currency fluctuations. While we do not believe that
any of these factors adversely impact our business at the present
time, there can be no assurance that these factors will not
materially adversely affect us in the future. Any significant
disruption in the delivery of merchandise from our suppliers,
substantially all of whom are foreign, could have a materially
adverse impact on our business and results of operations.
Government Regulation
---------------------
Various laws and regulations relating to safe working
conditions, including the Occupational Safety and Health Act, are
applicable to our company. We believe we are in substantial
compliance with all material federal, state and local laws and
regulations regarding safe working conditions. We believe that
the cost of compliance with such governmental regulations is not
material.
Patents, Trademarks and Proprietary Information
-----------------------------------------------
The Company has registered the logo for "Surge" and the
phrase "quality on board & design" as trademarks with the United
States Patent and Trademark Office.
Although we believe that our products do not and will not
infringe patents or trademarks, or violate proprietary rights of
others, it is possible that infringement of existing or future
patents, trademarks or proprietary rights of others may occur. In
the event our products infringe proprietary rights of others, we
may be required to modify the design of our products, change the
name of our products and/or obtain a license. There can be no
assurance that we will be able to do any of these things in a
timely manner, upon acceptable terms and conditions or at all.
Our failure to do any of the foregoing could have a material
adverse effect upon our operations. In addition, there can be no
assurance that we will have the financial or other resources
necessary to enforce or defend a patent infringement or
proprietary rights violation action. Moreover, if our products
infringe patents, trademarks or proprietary rights of others, we
could, under certain circumstances, become liable for damages,
which also could have a material adverse effect on our business.
Backlog
-------
As of November 30, 2003, our backlog was approximately
$4,652,000, as compared with $4,892,000 at November 30, 2002.
Substantially all backlog is expected to be shipped by us within
90 to 180 days. Year to year comparisons of backlog are not
necessarily indicative of future operating results.
Employees
---------
As of November 30, 2003, Surge and Challenge employed 24
persons, two of whom are employed in executive capacities, eight
are engaged in sales, one in engineering, three in purchasing,
three in administrative capacities, two in customer service, two
in accounting and three in warehousing. As of November 30, 2003,
Superus had no employees. None of our employees are covered by a
collective bargaining agreement, and we consider our relationship
with our employees to be good.
Item 2. Description of Property.
-----------------------
Surge and Challenge each lease their current executive
offices and warehouse facilities, located at 95 Jefryn Boulevard,
Deer Park, New York, 11729, at an aggregate annual rental for
each of Surge and Challenge of $92,960 during Fiscal 2003. The
Lessor is Great American Realty of Jefryn Blvd., LLC ("Great
American"), an entity owned equally by Ira Levy, Surge's
president, Steven Lubman, Surge's vice president and one of its
former directors, Mark Siegel. These leases expire on September
30, 2010. Each lease is subject to a 3% annual increase. Each
tenant occupies approximately 11,625 square feet of office space
and warehouse space. Each lease was negotiated in an arm's
length transaction and the rental rate is typical for the type
and location of Surge's and Challenge's facilities.
Item 3. Legal Proceedings.
-----------------
By letters dated October 9, 2001 and January 17, 2002, we
were contacted by the Securities and Exchange Commission ("SEC")
regarding certain potentially questionable payments, in which we
were requested to voluntarily furnish various documents. By
letters dated October 23, 2001 and November 28, 2001, we
voluntarily responded and provided the SEC with such documents.
On March 13, 2002, we provided a supplemental response to the
SEC. We have not had any contact with, or received any letters
from, the SEC concerning this matter since March 2002. See Item
6. "Management's Discussion and Analysis or Plan of
Operation-Results of Operations."
By letter dated June 20, 2001 we were contacted by NASDAQ
regarding these potentially questionable payments. By letter
dated August 6, 2001 we were contacted by NASDAQ regarding its
determination to delist the Company's securities from NASDAQ and
advising us that we may appeal such determination pursuant to a
hearing request. We appealed such determination. By letter
dated August 14, 2001, NASDAQ formally notified us that our
request for continued listing on the NASDAQ SmallCap Market would
be considered at an oral hearing and requested various documents.
The hearing was held on September 28, 2001 before a NASDAQ
Listing Qualifications Panel. By letter dated November 29, 2001,
NASDAQ informed us that pursuant to the September 28, 2001
hearing, it had determined that the Company's securities would be
delisted on November 30, 2001, based on public interest concerns
related to the potentially questionable payments and additionally
for the failure of certain of our officers and directors to
submit to an interview by NASDAQ regarding these payments.
On or about March 8, 2002, Superus filed a voluntary
petition seeking relief under Chapter 7 of the United States
Bankruptcy Code (the "Code") (Title 11) in the United States
Bankruptcy Court for the District of Delaware. A trustee was
appointed in the case and he held a meeting of creditors as
required by the Code. On June 18, 2002, the trustee filed his
report with the Court stating that the case was a no asset case
that had been fully administered and requesting that it be
discharged. In December 2003, the Bankruptcy Court issued an
Order approving the Trustee's Report and closing the case.
On March 7, 2003 we filed with the SEC and the Boston Stock
Exchange (the "BSE") an Application for Withdrawal from Listing
of Securities from the BSE (the "Application"). This was due to
the low trading volume of our Common Stock and Purchase Warrants
and our failure to meet the minimum public float requirements of
the BSE. In May 2003, the BSE approved the Application.
The Company received a letter from a lawyer from a
collection agency dated February 13, 2003 on behalf of Snow
Becker & Krauss P.C. ("SBK"), our former legal counsel asserting
a claim for legal fees of approximately $665,000. These fees
relate to services rendered by SBK between one and two years ago.
In February 2004, the Company and SBK entered into an agreement
releasing each for claims against the other and settling the
amount owed to SBK. As a result, the Company has written off
$676,016 of the debt and has reported this as income for the year
ended November 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted during the fourth quarter of the
year ended November 30, 2003.
PART II
Item 5. Market for Common Equity and Related Stockholder
------------------------------------------------
Matters.
-------
(a) Market Information
------------------
On November 30, 2002, our Common Shares were delisted from
the NASDAQ SmallCap Market. Since such date, our Common Shares
have been quoted on the over-the-counter "pink sheets" maintained
by Pink Sheets LLC (formerly the National Quotation Bureau),
under the symbol "SPRS". In March 2003, the Company elected to
voluntarily delist its common stock from listing on the Boston
Stock Exchange which occurred in May 2003.
The following tables set forth the range of high and low
prices for our common stock for the periods indicated as derived
from reports furnished by The NASDAQ Stock Market and Pink Sheets
LLC. The information reflects inter-dealer prices, without retail
mark-ups, mark-downs or commissions:
High Low
---- ---
Fiscal 2002:
-----------
Quarter Ended February 28, 2002 0.08 0.04
Quarter Ended May 31, 2002 0.08 0.05
Quarter Ended August 31, 2002 0.05 0.04
Quarter Ended November 30, 2002 0.17 0.03
Fiscal 2003:
-----------
Quarter Ended February 28, 2003 0.15 0.05
Quarter Ended May 31, 2003 0.07 0.05
Quarter Ended August 31, 2003 0.08 0.05
Quarter Ended November 30, 2003 0.09 0.05
Fiscal 2004
-----------
Quarter Ended February 28, 2004 0.06 0.05
On February 23, 2004, the closing price of our Common Shares
as reported by the Pink Sheets was $.06. As of February 23, 2004,
(i) we had 271 holders of record of our Common Shares, (ii)
8,743,326 Common Shares were outstanding, (iii) 42,700 shares of
our Series C preferred stock were outstanding, and (iv) 427,000
Common Shares were reserved for issuance upon conversion of our
Series C preferred stock.
Dividends and Dividend Policy
-----------------------------
We have not paid any cash dividends on our Common Shares
during the last two fiscal years and we do not anticipate paying
any dividends on our Common Shares in the foreseeable future. We
currently intend to retain any future earnings for reinvestment
in our business. Any future determination to pay cash dividends
will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations,
capital requirements and other relevant factors. In addition, we
are required to give preference in any declaration and payment of
dividends to the Series C preferred stock. Series C preferred
stock requires an annual dividend payment of $.50 per share, or
currently $21,350 in the aggregate. We paid no dividends to
Series C preferred stockholders during Fiscal 2003.
Securities Authorized for Issuance Under Equity Compensation Plans.
------------------------------------------------------------------
The following table includes information as of November 30, 2003
for Surge's compensation plans under which equity securities of
Surge are authorized for issuance, aggregated as follows:
[Download Table]
Equity Compensation Plan Information
--------------------------------------------------------------------
(a) (b) (c)
--------------------------------------------------------------------
Plan category Number of Weighted-average Number of
Securities to exercise price of securities
be issued outstanding remaining
upon exercise options, warrants available for
of outstanding and rights future
options, issuance
warrants under equity
and rights compensation
plans
(excluding
securities
reflected in
column (a))
--------------------------------------------------------------------
Equity
compensation
plans approved
by security
holders
Surge 685,500 $1.99 16,000
Superus 2,850,000 $2.96 12,420,000
--------------------------------------------------------------------
Equity
compensation
plans not
approved
by security
holders
Surge 9,670,000 $2.13 -
--------------------------------------------------------------------
Total 13,205,500 $2.30 1,258,000
--------------------------------------------------------------------
Item 6. Management's Discussion and Analysis or Plan of Operation.
----------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the
audited Consolidated Financial Statements and accompanying notes.
Estimates are used for, but not limited to, the accounting for
the allowance for doubtful accounts, inventories, income taxes
and loss contingencies. Management bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting
policies, among others, may be impacted significantly by
judgment, assumptions and estimates used in the preparation of
the audited Consolidated Financial Statements:
The allowance for doubtful accounts is maintained to
provide for losses arising from customers' inability to make
required payments. If there is deterioration of our customers'
credit worthiness and/or there is an increase in the length of
time that the receivables are past due greater than the
historical assumptions used, additional allowances may be
required. During February 2003, the Company obtained $2,000,000
of credit insurance covering most of its customers.
Inventories, which consist solely of products held for
resale, are stated at the lower of cost (first-in, first-out
method) or market. Products are included in inventory when
shipped from the supplier. The Company, at November 30, 2003,
has a reserve against slow moving and obsolete inventory of
approximately $676,000.
The Company's deferred income taxes arise primarily from
the differences in the recording of net operating losses,
allowances for bad debts, inventory reserves and depreciation
expense for financial reporting and income tax purposes. Income
taxes are reported under the liability method pursuant to SFAS
No. 109 "accounting for income taxes". A valuation allowance is
provided when the likelihood of realization of deferred tax
assets is not assured. The Company has provided for a
valuation allowance totaling approximately $7,284,000.
Current accounting guidance allows for several options in
the reporting of stock options granted to employees or directors
as compensation. The Company has adopted the disclosure only
provisions of SFAS Number 123, "Accounting for Stock-Based
Compensation." Under these provisions, the Company has not
provided for a charge for compensation in its statements of
operations related to the granting of options to its employees
and directors. No such options were granted during the fiscal
years ended November 30, 2003 or 2002.
Results of Operations
---------------------
Consolidated net sales for Fiscal 2003 increased by
$307,855, or 3%, to $11,225,294 as compared to net sales of
$10,917,439 for Fiscal 2002.
The net sales for the Fiscal 2003 for Challenge increased by
$352,505, or 9% when compared to Fiscal 2002. Challenge
continues to experience depressed sales in their broker division
due to a slowdown in manufacturing among computer,
telecommunications and phone manufacturers. This slowdown
adversely affected Challenge's sales for Fiscal 2003. Any future
improvements in sales (and possible profitability) are expected
to be based on the demand for Challenge's products. Sales of
speakers, fans and buzzers from Challenge's audible products
division, started in 1999, increased steadily since its
introduction through the addition of sales representatives and
promotions. Currently, the majority of Challenge's sales are
comprised from these audible products.
The semiconductor industry has historically experienced wide
fluctuations in the supply and demand of semiconductors. These
fluctuations have helped produce many occasions when supply and
demand for semiconductors have not been in balance. The supply
currently far exceeds the demand and resulted in declining
average selling prices for our products as companies seek to sell
their inventories. Accordingly, the Company's ability to maintain
or increase revenues will be highly dependent on its ability to
increase sales volume of existing products and to successfully
introduce and sell new products.
Surge Components, Limited and Surge/Lelon, LLC comprise the
remainder of the sales for Fiscal 2003 totaling $248,268 and
$54,501, respectively.
While we cannot predict future performance, we believe
opportunities exist for growth in the United States and Asia. We
are continually looking into new product lines and strategic
partnerships, which could assist in the Company's growth.
Our gross profit for Fiscal 2003 decreased by $211,840, or
7%, as compared to Fiscal 2002. Gross margin as a percentage of
net sales decreased to 24% in Fiscal 2003 compared to 27% for
Fiscal 2002. The decrease in our gross profit was a result of
decreased sales from the economic slowdown of electronic
components and industry pricing pressures requiring us to lower
our prices. The gross profit percentage for Fiscal 2003 was
affected adversely by the obsoleteness of some of Challenge's
inventory of approximately $354,000. Beginning in Fiscal 2001,
the Company created a reserve against slow moving and obsolete
inventory. During the year ended November 30, 2003, the Company
determined approximately $729,000 of the reserve to be obsolete
and removed it from the Company's inventory. As of November 30,
2003 the reserve was approximately $676,000.
Selling and shipping expenses for Fiscal 2003 increased by
$39,301, or 4%, as compared to Fiscal 2002. This increase
primarily is due to commissions paid on the increase in sales.
General and administrative expenses for Fiscal 2003
decreased by $637,868, or 19%, as compared to Fiscal 2002. The
decrease is primarily due to decreased professional fees and
through the Company's efforts to reduce overhead.
No financial consulting fees and expenses were incurred
during Fiscal 2003. Financial consulting fees and expenses for
Fiscal 2002 were approximately $264,000, representing the cost of
the securities issued in payment of such fees. These fees and
expenses were incurred in connection with an agreement with our
investment banker regarding services through May 2001 and
reimbursement of expenses. In April 2002, the Company entered
into a settlement agreement with an investment banker, as more
fully explained below in the Liquidity and Capital Resources
section.
Superus Holdings, Inc. ("Superus"), a Delaware corporation,
a wholly owned subsidiary, filed a petition for bankruptcy under
Chapter 7 of the Bankruptcy Code in March 2002. In December
2003, the court approved the Trustee's report and closed the
bankruptcy case. As a result, the Company has written off the
balance of the Superus liabilities totaling $247,985 during the
year ending November 30, 2003 and has reported this amount as
income for the year.
The Company received a letter from a lawyer from a
collection agency dated February 13, 2003 on behalf of Snow
Becker & Krauss P.C. ("SBK"), our former legal counsel asserting
a claim for legal fees of approximately $676,000. These fees
relate to services rendered by SBK between one and two years ago.
In February 2004, the Company and SBK entered into an agreement
releasing each for claims against the other and settling the
amount owed to SBK. As a result, the Company has written off
$676,016 of the debt and has reported this as income for the year
ended November 30, 2003.
Investment income decreased by $31,702, or 63%, for Fiscal
2003, as compared to Fiscal 2002. This decrease is primarily
related to our use of cash and cash equivalents to fund losses
and the reduction of interest rates on our invested funds.
Interest expense for Fiscal 2003 increased by $44,478, or
77%, as compared to Fiscal 2002. This increase primarily is
related to the Company borrowing funds from an asset-based lender
starting in July 2002.
During the year ended November 30, 2000 and the quarter
ended February 28, 2001, we made certain potentially questionable
payments totaling approximately $2,137,000 and $774,000,
respectively. Such payments were made to the wife of an employee
of one of our suppliers in return for help obtaining components
from that supplier and another distributor. According to
management personnel responsible for making the payments, prior
to making any payment, the transaction was disclosed to our legal
counsel to determine whether payments to an employee of a
supplier would be legal. Management personnel believed they had
received reasonable assurances at the time, and thereafter, that
such payments were not illegal, so long as the recipient of the
payments received an IRS Form 1099, and all payments were made by
check. The costs of such payments were recorded in our books and
records and financial statements. We duly issued a Form 1099 to
the recipient of the payments. According to Steven Lubman, Vice
President, in mid-March 2001 he became aware of a document in a
criminal proceeding unrelated to us in which similar payments
were described as kickbacks. This caused management to seek the
affirmation of the legal advice previously given. Legal counsel
advised us by letter on or about March 22, 2001, that, since the
payments had been described in a document in the unrelated
criminal action as kickbacks, disclosure of the document should
be made to our auditors, which was done. Such counsel stated in
the letter that no conclusion had been reached that such payments
were kickbacks. On April 17, 2001, we disclosed in our Form 10-
QSB Quarterly Report filing that the potentially questionable
payments had been made.
After receipt of the March 22, 2001 letter referred to
above, the Board determined to investigate the payments and ask
for the return of the payments. The Company requested that the
$3 million be repaid. $1 million was repaid to the Company. In
May 2001, the law firm of Mintz Levin Cohn Ferris Glovsky and
Popeo, P.C. was formally engaged by the Company to assist in an
investigation concerning the payments and to recommend policies
to prevent any similar future payments. Due in part to the
previously disclosed resignation of our outside counsel and such
counsel's refusal to be interviewed as part of the
investigation, we were unable to confirm what legal advice was
rendered as to the making of such payments. The investigation
did not uncover any additional payments similar to the
previously disclosed "potentially questionable payments". We
have taken steps to ensure that such payments are not made in
the future, including requiring that all payments above $5,000
be made to a party on a list approved by our audit committee,
requiring co-signatures on each check for more than $10,000,
adopting a Code of Conduct, and seeking to add additional Board
and Audit Committee members, as well as, as soon as economically
feasible, a controller and chief financial officer. The Company
has not been contacted by the SEC regarding its investigation
since March 2002. Except for the SEC inquiry referred to above,
we are not aware of any pending proceedings relating to the
potentially questionable payments.
The Company's substantial savings in general and
administrative expenses have significantly reduced the Company's
loss in the current fiscal year, but have been partially offset
by the decrease in the Company's gross profit percentage and
increases in selling and interest expenses.
As a result of the foregoing, we had a consolidated net loss
of $131,636 for Fiscal 2003, as compared to $1,740,379 for Fiscal
2002.
Liquidity and Capital Resources
-------------------------------
Working capital increased by $80,924 during Fiscal 2003 to
$2,540,472 at November 30, 2003, from $2,459,548, at November 30,
2002. This increase resulted primarily from the decrease in
accounts payable and accrued expenses and loan payable offset, in
part, by a decrease in inventory. Our current ratio increased
from 1.8:1 at November 30, 2002, to 2.2:1 at November 30, 2003.
Inventory turned 4.3 times during Fiscal 2003 as compared to 3.6
times during Fiscal 2002. The average number of days to collect
receivables remained relatively unchanged at 54 days. We believe
that our working capital levels and available financing are
adequate to meet our operating requirements during the next
twelve months.
In July 2002, the Company entered into a financing agreement
(the "Financing Agreement") with an asset-based lender (the
"Lender") providing for borrowings up to $1,000,000 (the "Credit
Line"). Borrowings under the Credit Line accrue interest at the
greater of the prime rate plus two percent (2.0%) or 6.75% per
annum (6.75% at November 30, 2003). The Company pays one-quarter
of one percent (1/4 of 1%) annually as an unused line fee for the
difference between $1,000,000 and the average daily outstanding
balance under the Credit Line. The Credit Line is collateralized
by substantially all the Company's non-cash assets and contains
various financial covenants pertaining to the maintenance of
working capital and tangible net worth. During Fiscal 2003, the
agreement was amended to adjust the financial covenants. In
December 2003, the Company entered into a Security Agreement with
the lender establishing a restricted cash collateral account
totaling $200,000. At November 30, 2003, the Company was in
compliance with the financial covenants. At various times prior
to the amendment of the covenants, the Company has not been in
compliance with these covenants. The Lender may declare the
Company in default at any time these covenants are not met and
has the following rights, among others: (1) to demand immediate
repayment of borrowings under the Credit Line; (2) to receive a
charge at the rate of two percent per month upon the unpaid
balance of the obligations under the Financing Agreement (the
"Obligations") from the date of default until the date of our
full payment of the Obligations, which charge is in lieu of
interest; (3) to receive all costs, disbursements, charges and
expenses that it incurs in the collection and enforcement of the
Obligations, including attorneys fees; and (4) to enforce payment
of or settle any of our receivables and apply the net cash
proceeds resulting from such payment or settlement to the payment
of the Obligations. While we do not believe that the Lender will
elect to exercise such rights, if it did so at an inopportune
time for the Company, it could result in a severe liquidity
crisis for the Company, forcing us to use our available cash,
which may or may not be sufficient, and obtain alternative
financing at a difficult time.
We incur substantial operating costs. These costs
principally consist of rent, payroll, professional fees,
insurance premiums and marketing related charges. Our ability to
operate profitably in the future depends on increasing sales
levels and decreasing our expenses. To accomplish this goal, we
are attempting to streamline our operations and reviewing other
possible areas of cost reductions.
Our headquarters are leased from a company owned by certain
of our officers, directors and shareholders. Rental costs for the
premises were approximately $186,000 for the year ended November
30, 2003. The lease agreement calls for a three percent (3%)
increase each year and terminates September 30, 2010.
Amortization of the leasehold improvements is made ratably over
the shorter of the ten-year term of the lease or the life of the
improvements.
In November 2002, the Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common
stock at a price between $.04 and $.045. No action has been taken
on the above authorization, since the stock is currently trading
at a higher amount.
During Fiscal 2003, we had net cash used in operating
activities of $636,719, as compared to $1,825,191 in Fiscal 2002.
The decrease in cash used in operating activities resulted from
the decrease in the Company's net loss, and decreases in accrued
expenses and inventory, partially offset by an increase in
accounts receivable and inventory provision for losses on
inventory.
We had net cash used in investing activities of $39,923 for
Fiscal 2003, as compared to net cash provided by investing
activities of $1,890,683 for Fiscal 2002. The net cash used in
investing activities during Fiscal 2003 resulted primarily from
the purchase of marketable securities and fixed assets. The net
cash provided by investing activities during Fiscal 2002 resulted
primarily from the sale of marketable securities and amounts
collected under a repurchase agreement.
We had net cash used in financing activities of $122,379 for
Fiscal 2003, as compared to net cash provided by financing
activities of $398,768 for Fiscal 2002. The cash used in
financing activities during Fiscal 2003 was a result of the
payments to the credit line. The cash provided by financing
activities in Fiscal 2002 resulted primarily from borrowings on
the credit line.
As a result of the foregoing, the Company had a net decrease
in cash and equivalents of $799,021 during Fiscal 2003, as
compared to a net increase in cash and equivalents of $464,260
for Fiscal 2002.
In April 2002, in connection with a Mutual Release,
Settlement, Standstill and Non-Disparagement Agreement by and
among the Company and Equilink Capital Partners, LLC, Robert
DePalo, Old Oak Fund Inc. and Kenneth Orr (collectively, the
"Investors"), the Investors released the Company from potential
claims relating to services provided by the Investors,
transferred back to the Company 252,000 Common Shares, 19,300
shares of Series C preferred stock, and certain warrants,
representing all of the Company's securities held by the
Investors, and agreed, among other things, not to purchase any
securities of the Company and not to disparage the Company in
any manner, in exchange for $225,000. In addition, the Company
and the Investors mutually agreed to release each other from all
claims each party had, now has, or in the future might have
against the other. The Company recorded a $194,000 expense
during Fiscal 2002 in connection with this settlement.
In March 2002, we entered into an agreement with two
shareholders to settle a dispute as to the form of payment of
interest on certain 12% Convertible Promissory Notes. We agreed
to pay these shareholders an aggregate of $32,854, in exchange
for 17,522 Common Shares issued to them for converted interest.
In July 2000, Surge entered into a joint venture agreement
with Lelon (a supplier of component parts to Surge) to form
Surge/Lelon LLP, a Delaware limited liability partnership. The
Company has membership interests in the joint venture totaling
55%. Operations commenced in August 2002. These operations have
been consolidated with those of the Company. The ownership of
Lelon in this joint venture, totaling 45%, has been reported as a
minority interest. This joint venture was started in order to
more effectively market the products of the Lelon name brand. To
date, these operations have been relatively small.
In May 2002, Surge and an officer of Surge became the sole
owners of Surge Components, Limited, a Hong Kong corporation.
Under current Hong Kong law, Surge Components, Limited is
required to have at least two shareholders. Surge owns 999 shares
of the outstanding common stock and an officer of Surge owns one
share of the outstanding common stock. The officer of Surge has
assigned his rights regarding his one share to Surge. Operations
commenced in July 2002. These operations have been consolidated
with those of the Company. Surge Components, Limited was created
to better position the Company in the Asian markets.
We purchase a significant amount of our products from the
Asian market and in addition a number of our customers have
factories located in Asia. In Fiscal 2003, the Company purchased
approximately 84% of its inventory from factories in Asia.
Approximately 12% of the Company's sales were shipped to Asia.
Surge Components Limited will help us service these clients more
effectively and in addition will assist in the obtaining of new
opportunities.
Inflation and Increasing Interest Rates
---------------------------------------
In the past two fiscal years, inflation has not had a
significant impact on our business. However, any significant
increase in inflation and interest rates could have a significant
effect on the economy in general and, thereby, could affect our
future operating results. In addition, the interest on the
Company's line of credit is based upon the prime rate. Any
significant increase in the prime rate could significantly impact
our future operating results.
Item 7. Financial Statements.
--------------------
Set forth below is a list of our financial statements
included in this Annual Report on Form 10-KSB and their location.
Item Page
---- ----
Independent auditors' report ......................... F-1
Consolidated balance sheet at November 30, 2003 ...... F-2-F-3
Consolidated statements of operations and comprehensive
loss for the years ended November 30, 2003 and 2002... F-4
Consolidated statements of shareholders' equity
for the years ended November 30, 2003 and 2002 ........F-5
Consolidated statements of cash flows for the years
ended November 30, 2003 and 2002 .......................F-6-F-7
Notes to consolidated financial statements .............F-8-F-26
Item 8. Changes In and Disagreements With Accountants on
------------------------------------------------
Accounting and Financial Disclosure.
-----------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
----------------------------------------------------
Persons; Compliance With Section 16(a) of the
---------------------------------------------
Exchange Act.
------------
Our Executive Officers and Directors
------------------------------------
Surge's current executive officers and directors, and their ages,
positions and offices with us are as follows:
Name Age Positions and Offices with Surge
---- --- --------------------------------
Ira Levy 47 Chief Executive Officer, President
and Director
Steven J. Lubman 48 Vice President, Principal Financial
Officer, Secretary and Director
Alan Plafker 45 Director, Member of the Audit
Committee and Member of the
Compensation Committee
David Siegel 77 Director, and Chairman of the
Compensation Committee
Lawrence Chariton 46 Director, Member of the Audit
Committee
Gary Jacobs 46 Director, Member of the Audit
Committee
Set forth below is a brief description of the background of
each of the executive officers and directors of Surge, based on
information provided to us by them.
Ira Levy has served as President, Chief Executive Officer
and a director of Surge since its inception in November 1981.
From 1976 to 1981, Mr. Levy was employed by Capar Components
Corp., an importer and supplier of capacitor and resistor
products.
Steven J. Lubman has served as Surge's Vice President,
Principal Financial Officer, Secretary and a director since its
inception in November 1981. From 1975 to 1981, Mr. Lubman was
employed by Capar Components, Inc.
David Siegel has served as a director since 1983, as well as
Chairman of the Board from 1983 to February 2000. Mr. Siegel also
serves on the boards of directors of Kent Electronics Corp. and
Micronetics, Inc., each of which is a publicly traded company.
which leases facilities to Surge. David Siegel is the father-in-
law of Ira Levy.
Alan Plafker has served as a director since June 2001. Mr.
Plafker is the President and Chief Executive Officer of Member
Brokerage Service LLC, a credit union service organization owned
by Melrose Credit Union. Mr. Plafker has over 20 years of
management experience in the insurance and credit union
industries.
Lawrence Chariton has served as a director since August
2001. For the last 25 years, Mr. Chariton has worked as a Sales
Manager for Linda Shop, a retail jewelry business, and is
involved in charitable organizations benefiting the State of
Israel. Mr. Chariton graduated from Hofstra University in 1979
with a Bachelor's Degree in accounting.
Gary M. Jacobs is currently the President of The Innovative
Companies, a supplier, fabricator and installer of natural and
man-made stone products. Mr. Jacobs previously held the position
of Executive Vice President-Operations and Secretary of The Hain
Celestial Group, Inc., a manufacturer, marketer and distributor
of natural, specialty, organic and snack food products. Prior to
this position, Mr. Jacobs served as Executive Vice President-
Finance/CFO, Secretary and Treasurer of Hain. Hain is listed on
NASDAQ. Before coming to Hain, he spent six years as the Chief
Financial Officer of Graham Field Health Products, Inc., a
leading manufacturer and distributor of healthcare products.
After graduating from Adelphi University, Mr. Jacobs spent 13
years with the accounting firm of Ernst & Young LLP.
Director Compensation
---------------------
Currently, our directors, other than David Siegel, receive
$500 compensation per month for serving on our Board of
Directors. David Siegel receives $750 per month to serve on our
Board of Directors and as Chairman of the Compensation Committee.
See "Item 12. Certain Relationships and Related Transactions."
Directors are reimbursed for their reasonable expenses incurred
in attending meetings.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
-----------------------------------------------------
Board of Directors
------------------
During Fiscal 2003, the Board of Directors, consisting of
Ira Levy, David Siegel, Steven Lubman, Alan Plafker, Lawrence
Chariton and Gary Jacobs met four times.
Audit and Compensation Committees
---------------------------------
During Fiscal 2003, the Compensation Committee, consisting
of Mr. David Siegel, had no meetings.
During Fiscal 2003, the Audit Committee (the "Audit
Committee"), consisting of Messrs. Chariton, Plafker and Jacobs,
met six times.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
---------------------------------------------------------------
1934.
----
Section 16(a) of the Securities Exchange Act of
1934 requires the Company's executive officers and directors,
and persons who own more than ten percent of a registered class
of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange
Commission. Based solely on its review of the copies of such
forms received by it, the Company believes that during Fiscal
2003 all executive officers and directors of the Company
complied with all applicable filing requirements.
AUDIT COMMITTEE REPORT
----------------------
The Audit Committee consists of independent directors all of
whom meet the independence and experience requirements of Nasdaq
Marketplace Rule 4200(a)(14). The Audit Committee's
responsibilities are as described in a written charter adopted by
the Board, which is attached as Appendix A to the Company's Proxy
Statement for Fiscal 2002.
The Audit Committee has reviewed and discussed the Company's
audited financial statements for Fiscal 2003 with management and
with the Company's independent auditors, Seligson & Giannatassio
LLP (S&G). The Audit Committee has discussed with S&G the
matters required to be discussed by the Statement on Auditing
Standards No. 61 relating to the conduct of the audit. The Audit
Committee has received the written disclosures and the letter
from S&G required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has discussed
with S&G its independence. Based on the Audit Committees review
of the audited financial statements and the review and
discussions described in the foregoing paragraph, the Audit
Committee recommended to the Board that the audited financial
statements for Fiscal 2003 be included in the Company's
Annual Report on Form 10-KSB for Fiscal 2003 for filing
with the Securities and Exchange Commission.
Submitted by the members of the Audit Committee:
Alan Plafker
Lawrence Chariton
Gary Jacobs
AUDIT FEES; FINANCIAL INFORMATION SYSTEMS DESIGN AND
IMPLEMENTATION FEES; ALL OTHER FEES
----------------------------------------------------------
Audit fees billed to the Company by S&G during Fiscal 2003
for review of the Company's annual financial statements and
those financial statements included in the Company's quarterly
reports on Form 10-QSB totaled $152,867. The Company did not
engage S&G to provide advice to the Company regarding financial
information systems design and implementation during Fiscal
2003. The Company also engaged S&G during Fiscal 2003 for the
preparation of the Company's tax returns totaling $7,500 in
services.
Code of Business Conduct and Ethics
-----------------------------------
Surge has a adopted a Code of Business Conduct and Ethics
(the "Code") which is applicable to its chief executive officer,
its financial officer, its accounting officer and its controller.
The Code sets forth certain of Surge's expectations, including
that the officer's will act with honesty and integrity, will
avoid actual and apparent conflicts of interests, will comply
with all applicable laws, will disclosure information that it is
complete and understandable and will act in good faith and
responsibly. The Code also requires the prompt internal
reporting of violations to the Chair of the Audit Committee. The
Company will disclosure information regarding any amendment to
the Code or any waiver from any of its provisions. The Company
undertakes to provide without charge to any person, upon written
or verbal request of such person, a copy of the Code. Request
should be directed in writing to Surge Components, Inc., 95 East
Jefryn Blvd., Deer Park, NY 11729. A copy of the Code has been
filed as Exhibit 14 to this Annual Report on Form 10-KSB.
Item 10. Executive Compensation.
----------------------
The following table sets forth all compensation awarded to,
earned by, or paid for all services rendered to Surge during the
fiscal years ended November 30, 2003, 2002 and 2001 by those
persons who served as chief executive officer and any executive
officer who received compensation in excess of $100,000 during
such years.
[Download Table]
Summary Compensation Table
--------------------------
Long-
Term Compensat-
Name and Other ion Shares
Principal Annual Compensation Annual Comp- Underlying
Position Year Salary Bonus ensation(1) Options
--------- ---- ------ ----- ------ ----------
Ira Levy, 2003 $200,000 $ 0(3) 0 0
President and Chief 2002 $200,000 $ 0(3) 0 0
Executive Officer(2) 2001 $200,000 $ 48,736(3) 0 0
Steven J. Lubman, 2003 $200,000 $ 0(3) 0 0
Vice President 2002 $200,000 $ 0(3) 0 0
2001 $200,000 $161,230(3) 0 0
Adam Epstein, 2001 $184,615 $ 0 0 500,000(4)
Former Chairman
of the Board and Former Chief
Executive Officer(2)
----------------------
<FN>
<F1>
(1) The above compensation figures do not include the cost
for the use of automobiles leased by us, the cost of benefits and
any other perquisites provided by us to such persons in
connection with our business, all of which does not exceed the
lesser of $50,000 or 10% of such person's annual salary and bonus
for the subject fiscal year.
</FN>
<F2>
(2) Mr. Epstein became Acting Chief Executive Officer of
Surge in 2000 until his separation from Surge in July 2001. Mr.
Levy served as Chief Executive Officer during all of Fiscal 1998,
Fiscal 1999 and until February 2000, and became Chief Executive
Officer again in July 2001.
</FN>
<F3>
(3) Messrs. Levy and Lubman participated in the Surge bonus
pool, which consisted of 10% of Surge's and Challenge's combined
net profits, defined as income before income taxes, accrued
interest charges and annualized costs, and also excluding
interest on Surge's $7 million private placement of its 12%
convertible promissory notes, specifically identifiable costs
relating entirely to Superus and costs associated with the
terminated acquisition of Global, but before the payment of
bonuses.
</FN>
<F4>
(4) Pursuant to his Termination and Separation Agreement in
July 2001, all of Mr. Epstein's options terminated except for an
option to purchase up to 125,000 shares of Common Stock at an
exercise price of $2.90 per share, which shall remain exercisable
until the earlier of a material breach by Mr. Epstein of his
agreement or one year and one day after the date of such
agreement. These options expired in July 2002.
</FN>
Employment Agreements
---------------------
Employment Agreements for Messrs. Levy and Lubman
-------------------------------------------------
Surge entered into employment agreements, each dated as of
February 1, 1996, with Ira Levy, our president, and Steven J.
Lubman, our vice president. These employment agreements provide
that Messrs. Levy and Lubman shall devote all of their business
time to Surge, each in consideration of an annual salary of
$200,000 for five-year periods commencing on July 31, 1996.
Bonuses to Messrs. Levy and Lubman are to be based upon the
performance of Surge and Challenge and determined at the
discretion of our board of directors. Their salaries may be
increased annually during the term of their employment, at the
discretion of our board or its compensation committee. These
employment agreements provide that, during the term of their
employment with Surge and Challenge and for a period of one year
following termination of employment, Messrs. Levy and Lubman are
prohibited from engaging in activities which are competitive with
those of Surge. In March 1998, the employment agreements were
amended to extend their respective terms to July 30, 2003 and to
provide that, unless terminated in writing by either party, on
July 30th of each successive year of the employment agreements,
the employment agreements shall automatically renew for an
additional one-year term, so that on each July 30th there will be
five years remaining on the terms of the agreements. The
employment agreements further provide that in the event of a
change of control where Messrs. Levy or Lubman is not elected to
the Board of Directors of Surge and/or is not appointed as a
Surge officer and/or there has been a change in ownership of at
least 25% of the issued and outstanding stock and such issuance
was not approved by either Mr. Levy or Mr. Lubman, then the non-
approving person(s) may elect to terminate his employment
contract and receive 2.99 times his annual compensation including
benefits, or such other amount then permitted under the Internal
Revenue Code without an excess penalty, in addition to the
remainder of his compensation under his existing employment
contract.
In July 2001, we entered into a Termination and Separation
Agreement with Mr. Epstein. Mr. Epstein had served as our
Chairman and Acting Chief Executive Officer since February 2000,
positions he resigned from effective July 11, 2001. Under the
terms of this agreement, we made severance payments to Mr.
Epstein totaling $100,000 over a six month period. These
severance payments have been completed and we have no further
obligations in connection with this agreement. All of Mr.
Epstein's options terminated except for an option to purchase up
to 125,000 shares of Common Stock at an exercise price of $2.90
per share, which remained exercisable until the earlier of a
material breach by Mr. Epstein of his agreement or one year and
one day after the date of the agreement. These options have now
expired.
Stock Option Plans
------------------
In 1996, we adopted and our shareholders ratified, our 1995
Employee Stock Option Plan. The option plan, as amended, provides
for the grant of options to purchase an aggregate of 850,000
shares of our common stock to our qualified employees, officers,
directors, independent contractors, consultants and other
individuals. The exercise price of options must be at least 85%
of fair market value of the common stock on the date of grant
(100% of fair market value, in the case of incentive stock
options). As of November 30, 2003, options to purchase 685,500
shares were outstanding and 12,000 shares were available for
grant.
[Download Table]
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
-----------------------------------------------
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at November 30,2003 at November 30, 2003(1)
------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Ira Levy 315,555 0 $0 $0
Steven J.
Lubman 200,000 0 $0 $0
<FN>
<F1>
(1) Based on a closing price of $.06 per share on November 30,
2003.
</FN>
Option Grants in Last Fiscal Year
---------------------------------
There were no options granted in Fiscal 2003.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT.
----------
[Download Table]
The following table sets forth as of February 23, 2004,
The number of shares of Common Stock held of record or
beneficially (i) by each person who held of record, or was
known by the Company to own beneficially, more than five
percent of the outstanding shares of Common Stock, (ii) by
each director and (iii) by all officers and directors as a
group:
Percentage of
Amount and Nature Surge Common
Name and address of of Surge Common Stock Stock Benefi-
Beneficial Owner Beneficially Owned cally Owned
------------------- --------------------- -------------
Ira Levy(2) 568,855(3) 6.3%
Steven J. Lubman(2) 455,000(4) 5.1%
Lawrence Chariton(2) 101,795(5) 1.2%
Alan Plafker(2) 20,916(6) *
David Siegel(2) 75,000(7) *
Gary Jacobs (2) 0 0
All directors and
executive officers
as a group (6 persons) 1,237,303(8) 13.30%
---------------------
* Less than 1% of the issued and outstanding shares of
Common Stock.
<FN>
<F1>
(1) Based on 8,743,326 shares of Common Stock issued and
outstanding as of February 23, 2004.
</FN>
<F2>
(2) The business and mailing address for each of these
individuals is c/o Surge Components, Inc., 95 East Jefryn
Boulevard, Deer Park, New York 11729.
</FN>
<F3>
(3) Includes 315,555 shares of Common Stock issuable upon
exercise of options granted to Mr. Levy, which options are
exercisable within the next 60 days. Also includes shares of
Common Stock held by Mr. Levy which are subject to certain voting
and transfer restrictions pursuant to a stock purchase agreement
between Mr. Lubman and Mr. Levy. Does not include (a) 105,553
shares of Common Stock issuable upon exercise of a Surge option
granted to Mr. Levy, which options are not exercisable within 60
days, or (b) 1,025,000 shares of Common Stock issuable upon
exercise of options subject to shareholder approval.
</FN>
<F4>
(4) Includes 200,000 shares of Common Stock issuable upon
exercise of options granted to Mr. Lubman, which options are
exercisable within the next 60 days. Also includes shares of
Common Stock held by Mr. Lubman which are subject to certain
voting and transfer restrictions pursuant to a stock purchase
agreement between Mr. Lubman and Mr. Levy. Does not include
1,000,000 shares of Common Stock issuable upon exercise of
options granted subject to shareholder approval.
</FN>
<F5>
(5) Includes 1,810 shares of Common Stock issuable upon
exercise of warrants held by Mr. Chariton, which warrants are
exercisable within the next 60 days.
</FN>
<F6>
(6) Includes 20,000 shares of Common Stock issuable upon
exercise of options granted to Mr. Plafker, which options are
exercisable within the next 60 days.
</FN>
<F7>
(7) Includes 40,000 shares of Common Stock issuable upon
exercise of options granted to Mr. Siegel, which shares are
exercisable within the next 60 days. Does not include 400,000
shares of Common Stock issuable upon exercise of an option
subject to shareholder approval.
<FN>
<F8>
(8) Includes an aggregate of 617,365 shares of Common Stock
issuable upon exercise of options and warrants held by Surge's
executive officers and directors, which options and warrants are
exercisable within the next 60 days.
</FN>
The Company is unaware of any arrangement, the operation of
which, at a subsequent date, may result in a change of control of
the Company.
Item 12. Certain Relationships And Related Transactions.
----------------------------------------------
In October 2000, we entered into a lease with Great American
Realty of Jefryn Blvd., LLC, a company whose stock is owned 33-
1/3% each by Messrs. Ira Levy and Lubman, two of our executive
officers and directors, and Mr. Mark Siegel, a former director,
for a 23,250 square foot executive office and warehouse facility,
which we occupied in April 2001. The yearly rental for this
facility is approximately $175,000 for the first year, increasing
by 3% annually to approximately $228,000 in the final year of the
lease. This lease expires on September 30, 2010. Our monthly
rental cost for such lease was $15,416 during Fiscal 2003. The
lease was negotiated in an arm's length transaction and the
rental rate is typical for the type and location of facilities.
On November 24, 2000, the Company entered into an agreement
with a financial consultant, Equilink Capital Partners, LLC
("Equilink"), for which the consultant received 900,000 Common
Shares, 70,000 shares of the Series C Preferred Stock and five
year warrants to purchase 2,000,000 shares of Common Stock
exercisable at $3 per share, for past and future services and
expenses. Included in the past services were fees totaling
$338,438 relating to services and expenses on an aborted
merger, $302,812 relating to a terminated acquisition, $226,812
for expenses relating to the $7 million convertible note
offering and $3,704,999 relating to another terminated
acquisition.
Pursuant to a Redemption Agreement, dated as of April 3,
2001, with Equilink and R. DePalo, its sole shareholder, the
Company purchased from Equilink 423,000 shares of Common Stock
and 8,000 shares of Series C Preferred Stock for $650,000 in
cash. The purchase price for these securities wais based upon
approximately 95% of the average closing price of the shares of
Common Stock for the five trading days ended on April 2, 2001.
The Company received general releases from Equilink, Mr. DePalo
and a third party and the Company agreed not to pursue any
action against Equilink or Mr. DePalo, except in limited
specified situations, in connection with the closing of the
redemption transaction.
In April 2002, in connection with a Mutual Release,
Settlement, Standstill and Non-Disparagement Agreement by and
among the Company and Equilink, Robert DePalo, Old Oak Fund Inc.
and Kenneth Orr (collectively, the "Investors"), among other
provisions, the Investors transferred back to the Company
252,000 shares of Common Stock, 19,300 shares of Series C
Preferred Stock, and certain warrants, representing all of the
Company's securities held by the Investors, and agreed, among
other things, not to purchase any securities of the Company and
not to disparage the Company in any manner, in exchange for
$225,000. In addition, the Company and the Investors mutually
agreed to release each other from all claims each party had, now
has, or in the future might have against the other.
We believe that the terms of each of the foregoing
transactions were no less favorable to us than we could have
obtained from non-affiliated third parties, although no
independent appraisals were obtained. We anticipate that all
future transactions with our affiliates, if any, will be on terms
believed by our management to be no less favorable than are
available from unaffiliated third parties and will be approved by
a majority of disinterested directors.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------------------------------------
The Board of Directors has selected S&G, independent
certified public accountants, auditors of the Company's
financial statements for FY2003, as the auditors of the
financial statements of the Company for its current fiscal
year ending November 30, 2004.
Item 13. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
Set forth below is a list of the exhibits to this Annual
Report on Form 10-KSB.
Exhibit
Number Description
------- -----------
3.1 Composite of the Certificate of Incorporation of Surge
Components, Inc., as amended to date. (1)(2)
3.2 By-Laws of Surge Components, Inc., as amended to date.(2)
4.1 Form of Underwriter's Unit Purchase Option. (2)
4.2 Warrant Agreement, among Surge Components, Inc.
Continental Stock Transfer & Trust Company and
Maidstone Financial, Inc. (2)
4.3 Specimen of the Surge common stock certificate. (2)
4.4 Specimen of the Surge Class A common stock purchase
warrant certificate. (2)
10.1 Surge Components 1995 Employee Stock Option Plan. (2)
10.2 Superus Holdings, Inc. Incentive Stock Plan. (3)
10.3 Form of sales representative agreement. (2)
10.4 Termination, Release and Debt Discharge Agreement,
dated as of December 4, 2000, among Global DataTel,
Inc. and all of its subsidiaries, Surge Components,
Inc., GDIS Acquisition Corp. and Superus Holdings, Inc.(4)
Exhibit
Number Description
------- -----------
10.5 Subordinated Convertible Promissory Note of Global
DataTel, Inc. in the principal amount of $1,250,000 and
payable to Surge Components, Inc. (4)
10.6 Lease, dated October 1, 2000, between Great American
Realty of 95 Jefryn Blvd., LLC and Surge Components,
Inc. (5)
10.7 Lease, dated October 1, 2000, between Great American
Realty of 95 Jefryn Blvd., LLC and Surge/Challenge,
Inc. (5)
10.8 Agreement, dated as of March 6, 2001, by, and among
Surge Components, Inc., MailEncrypt, Inc. and the
former stockholders of MailEncrypt.com Inc. (5)
10.9 Stock Exchange Agreement dated as of October 23, 2001,
by and among Surge Components, Inc. and David Bird,
Adam J. Epstein, Chris Harano, Michael Patchen and
Thomas Taulli (6)
10.10 Financing Agreement dated July 2, 2002, by and among
Surge Components, Inc. and Rosenthal & Rosenthal, Inc. (7)
10.11 Mutual Release, Settlement, Standstill and Non-
Disparagement Agreement, dated as of April 12, 2002, by
and among Surge Components, Inc. and Equilink Capital
Partners, LLC, Robert DePalo, Old Oak Fund Inc. and
Kenneth Orr. (8)
10.12 Redemption Agreement, dated as of April 3, 2001 by and
among Surge Components, Inc., Robert DePalo and
Equilink Capital Partners, LLC. (9)
10.13 Termination and Separation Agreement dated as of July
9, 2001, among Craig Carlson, Surge Components, Inc. and Superus
Holdings, Inc. (10)
Exhibit
Number Description
------- -----------
10.14 Termination and Separation Agreement dated as of July
11, 2001, among Adam J. Epstein, Surge Components, Inc. and
Superus Holdings, Inc. (10)
11 Statement re computation of per share earnings.
14 Code of Business Conduct and Ethics.
21 Subsidiaries of Surge Components, Inc.
23.1 Consent of Seligson & Giannattasio, LLP.
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Order and Notice by the U.S. Bankruptcy Court for the
District of Delaware in Re a petition for relief under
Chapter 7 of Title 11, U.S. Code, filed by Superus
Holdings, Inc.
----------------------------
(1) Incorporated by reference from our Current Report on
Form 8-K (Date of Report: November 16, 2000) filed with
the SEC on December 1, 2000.
(2) Incorporated by reference from our Registration
Statement on Form SB-2 (No. 333-630 NY) declared
effective by the Securities and Exchange Commission on
July 31, 1996, as amended by our Registration Statement
on Form S-3 (No. 333-63371) declared effective by the
SEC on December 8, 1998.
(3) Incorporated by reference from our Registration
Statement on Form S-4 (No. 333-32790) declared
effective by the SEC on September 16, 2000.
(4) Incorporated by reference from our Current Report on
Form 8-K (Date of Report: December 4, 2000) filed with
the SEC on December 4, 2000.
(5) Incorporated by reference from our Annual Report on
Form 10-KSB, for the fiscal year ended November 30,
2000, filed with the SEC on March 15, 2001.
(6) Incorporated by reference from our Current Report on
Form 8-K (Date of Report: October 23, 2001) filed with
the SEC on November 2, 2001.
(7) Incorporated by reference from our Quarterly Report on
Form 10-QSB, for the fiscal quarter ended August 31,
2002, filed with the SEC on October 21, 2002.
(8) Incorporation by reference from our Quarterly Report on
Form 10-QSB, for the fiscal quarter ended February 28,
2002, filed with the SEC on April 22, 2002.
(9) Incorporation by reference from our Quarterly Report on
Form 10-QSB, for the fiscal quarter ended February 28,
2001, filed with the SEC on April 19, 2001.
(10) Incorporation by reference from our Quarterly Report on
Form 10-QSB, for the fiscal quarter ended May 31, 2001,
filed with the SEC on July 23, 2001.
(b) Reports on Form 8-K
None.
Item 14. Controls and Procedures
-----------------------
The Company maintains "disclosure controls and procedures",
as such term is defined in Rules 13a-15e and 15d-15e of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
that are designed to ensure that information required to be
disclosed in its reports, pursuant to the Exchange Act, is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to its management,
including its Chief Executive Officer and Principal Executive
Officer, as appropriate, to allow timely decisions regarding the
required disclosures. In designing and evaluating the disclosure
controls and procedures, management has recognized that any
controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost benefit
relationship of possible controls and procedures.
The Company's Chief Executive Officer and Principal
Financial Officer (its principal executive officer and principal
financial officer, respectively) have evaluated the effectiveness
of its "disclosure controls and procedures" as of the end of the
period covered by this Annual Report on Form 10-KSB. Based on
their evaluation, the principal executive officer and principal
financial officer concluded that its disclosure controls and
procedures are effective. There were no significant changes in
its internal controls or in other factors that could
significantly affect these controls subsequent to the date the
controls were evaluated.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
Index to Financial Statements
for the Year Ended November 30, 2003
Contents
--------
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations and
Comprehensive Loss F-4
Consolidated Statements of Changes in
Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-9 - F-27
Signatures F-28
Exhibit Index F-29
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Surge Components, Inc.
We have audited the accompanying consolidated balance sheet of
Surge Components, Inc. and subsidiaries as of November 30, 2003
and the related consolidated statements of operations and
comprehensive loss, changes in shareholders' equity and cash
flows for the two years then ended. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of Surge Components, Inc. and subsidiaries as
of November 30, 2003 and the consolidated results of their
operations and their consolidated cash flows for the two years
then ended in conformity with accounting principles generally
accepted in the United States of America.
Seligson & Giannattasio, LLP
N. White Plains, New York
February 6, 2004
(except for Note M as to which
the date is February 9, 2004)
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Balance Sheet
November 30, 2003
ASSETS
------
Current assets:
Cash $ 695,420
Marketable securities - available for sale 277,643
Accounts receivable (net of allowance for
doubtful accounts of $40,335) 1,775,293
Inventory, net 1,812,078
Prepaid expenses and income taxes 71,054
----------
Total current assets $4,631,488
Fixed assets - net of accumulated depreciation
and amortization of $1,071,572 946,872
Other assets 7,789
----------
Total assets $5,586,149
==========
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Balance Sheet
November 30, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Loan payable $ 341,192
Accounts payable 1,162,716
Accrued expenses 587,108
------------
Total current liabilities 2,091,016
Deferred rent 62,288
------------
Total liabilities 2,153,304
------------
Minority interest 20,849
------------
Commitments and contingencies
Shareholders' equity
Preferred stock - $.001 par value stock,
1,000,000 shares authorized:
Series A - 260,000 shares authorized,
none outstanding.
Series B - 200,000 shares authorized,
none outstanding, non-voting, convertible,
redeemable.
Series C - 100,000 shares authorized,
42,700 shares issued and outstanding,
redeemable, convertible, and a
liquidation preference of $5 per share 43
Common stock - $.001 par value stock,
25,000,000 shares authorized,
8,743,326 shares issued and outstanding 8,744
Additional paid-in capital 22,959,605
Stock subscriptions receivable -
Accumulated other comprehensive loss -
unrealized loss on marketable securities -
available for sale (19,510)
Accumulated deficit (19,536,886)
-----------
Total shareholders' equity 3,411,996
-----------
Total liabilities and shareholders' equity $ 5,586,149
============
See notes to financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Statements of Operations and Comprehensive Loss
Year Ended November 30,
2003 2002
---------- ----------
Net sales $11,225,294 $10,917,439
Cost of goods sold 8,504,371 7,984,676
---------- ----------
Gross profit 2,720,923 2,932,763
---------- ----------
Operating expenses:
Selling and shipping 1,042,217 1,002,916
General and administrative 2,679,831 3,317,699
Financial consulting services - 263,850
Cancellation of Superus' liabilities
(247,985) -
Settlement of amount due to lawyers (676,016) -
--------- ---------
Total operating expenses 2,798,047 4,584,465
--------- ---------
Loss before other income (expense)
and income taxes (77,124) (1,651,702)
--------- ---------
Other income (expense):
Investment income 19,014 50,716
Interest expense (102,164) (57,686)
Loss on sale of securities - (81,282)
--------- ---------
Other income (expenses) (83,150) (88,252)
--------- ---------
(160,274) (1,739,954)
Minority interest (38,229) (8,407)
--------- ---------
Loss before income taxes (122,045) (1,731,547)
Income taxes 9,591 8,832
--------- ---------
Net loss $(131,636) $(1,740,379)
Dividends on preferred stock 47,525 26,175
---------- ---------
Net loss available to
common shareholders $(179,161) $(1,766,554)
========== =========
Other comprehensive loss:
Net loss $(131,636) $(1,740,379)
Unrealized holding loss on
investment securities (2,071) (44,473)
Reclassification adjustment - loss
on sale of securities - 81,282
--------- ---------
Total comprehensive loss $(133,707) $(1,703,570)
========= =========
Weighted average shares outstanding
Basic 8,743,326 8,848,530
Diluted 8,743,326 8,848,530
(Loss) available to common
shareholders per share
Basic $(.02) $ (.20)
Diluted $(.02) $ (.20)
See notes to financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Statements of Changes in Shareholders' Equity
Years ended November 30, 2003 and 2002
Additional Stock
Series C Preferred Common Paid-In Subscriptions
Shares Amount Shares Amount Capital Receivable
------ ------ ------ ------ ---------- -------------
Balance -
November 30, 2001 62,000 $ 62 9,022,448 $9,023 $23,080,835 $ (9,200)
Repurchase and
retirement of
shares (19,300) (19) (279,122) (279) (73,705) --
Repayment of loan
from employee to
exercise options -- -- -- -- -- 5,700
Preferred stock
dividends -- -- -- -- (26,175) --
Net unrealized gain
on available for
sale securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
------ ------ --------- ----- ---------- -------
Balance -
November 30, 2002 42,700 $43 8,743,326 $8,744 $22,980,955 $(3,500)
Repayment of loan
from employees to
exercise options -- -- -- -- -- 3,500
Preferred stock
dividends -- -- -- -- (21,350) --
Net unrealized loss on
available for
sale securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
------ ------ --------- ----- ---------- -------
Balance -
November 30, 2003 42,700 $43 8,743,326 $8,744 $22,959,605 $ --
====== ====== ========= ===== ========== =======
See notes to financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Statements of Changes in Shareholders' Equity
Years ended November 30, 2003 and 2002
Net Unrealized Unearned
Gain (Loss) Compensation
On Investment Equity Accumulated
Securities Instruments Deficit Total
-------------- ------------ ----------- ----------
Balance -
November 30, 2001 $(61,912) $ -- $(17,664,871) $5,353,937
Repurchase and
retirement of
shares -- -- -- (74,003)
Repayment of loan
from employee to
exercise options -- -- -- 5,700
Preferred stock
dividends -- -- -- (26,175)
Net unrealized gain
on available for
sale securities 44,473 -- -- 44,473
Net loss -- -- (1,740,379) (1,740,379)
------ ------ ---------- ---------
Balance -
November 30, 2002 $(17,439) -- (19,405,250) 3,563,553
Repayment of loan
from employees to
exercise options -- -- -- 3,500
Preferred stock
dividends -- -- -- (21,350)
Net unrealized loss on
available for
sale securities (2,071) -- -- (2,071)
Net loss -- -- (131,636) (131,636)
------ ---- -------- ---------
Balance -
November 30, 2003 $(19,510) -- $(19,536,886) $3,411,996
======= ===== =========== ==========
See notes to financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Statements Of Cash Flows
Year Ended November 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(131,636) $(1,740,379)
Adjustments to reconcile net
loss to net cash provided by operating
activities:
Depreciation and amortization 257,067 338,799
Inventory provision for losses on
inventory (375,248) 19,249
Minority interest (4,479) 25,328
Loss on sale of securities - 81,282
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (217,346) 52,085
Inventory 684,368 170,965
Prepaid expenses and taxes 45,892 25,508
Other assets (3,735) 3,931
Accounts payable (612,022) (541,020)
Accrued expenses and taxes (293,562) (280,335)
Deferred rent 13,982 19,396
--------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (636,719) (1,825,191)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (9,569) (31,011)
Sale of marketable securities - 900,590
Net amounts due under repurchase agreement - 1,054,602
Acquisition of fixed assets (30,354) (33,498)
--------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES (39,923) 1,890,683
--------- ----------
See notes to financial statements.
SURGE COMPONENTS, INC. AND SUBSIDIARIES
[Download Table]
Consolidated Statements Of Cash Flows
Year Ended November 30,
2003 2002
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock subscriptions 3,500 5,700
Net borrowings from loan payable (125,879) 467,071
Purchase and retirement
of treasury stock - (74,003)
--------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (122,379) 398,768
--------- ----------
NET INCREASE (DECREASE) IN CASH (799,021) 464,260
CASH AT BEGINNING OF YEAR 1,494,441 1,030,181
--------- ----------
CASH AT END OF YEAR $ 695,420 $1,494,441
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 10,613 $ 11,277
========= =========
Interest paid $ 99,789 $ 57,686
======== =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrued dividends on preferred stock $ 21,350 $ 26,175
See notes to financial statements.
NOTE A - ORGANIZATION, DESCRIPTION OF COMPANY'S BUSINESS AND
BASIS OF PRESENTATION
Surge Components, Inc. ("Surge") was incorporated in the State
of New York and commenced operations on November 24, 1981 as an
importer of electronic products, primarily capacitors and
rectifiers, to customers located principally throughout the
United States. On June 24, 1988, Surge formed Challenge/Surge
Inc., ("Challenge") a wholly-owned subsidiary to engage in the
distribution of electronic component products from established
brand manufacturers to customers located principally throughout
the United States.
In March 2000, Surge formed Superus Holdings, Inc. ("Superus"), a
Delaware corporation, as a wholly owned subsidiary. Superus,
inactive at March 8, 2002, filed a petition for bankruptcy under
Chapter 7 of the Bankruptcy Code. In December 2003, the court
approved the trustees' report and closed the bankruptcy case. As
a result, the Company has written off the balance of the Superus
liabilities totaling $247,985 during the year ending November 30,
2003.
In July 2000, Surge entered into a joint venture agreement with
Lelon Electronics Corp. (a supplier of component parts to Surge)
to form Surge/Lelon LLP, a Delaware limited liability company.
The Company has membership interests in the joint venture
totaling 55%. Operations commenced in August 2002. Surge/Lelon
LLP operations have been consolidated with the Company. The
ownership of Lelon Electronics in this joint venture, totaling
45%, has been reported as a minority interest.
In May 2002, Surge and an officer of Surge became sole owners of
Surge Components, Limited ("Surge Limited"), a Hong Kong
corporation. Under current Hong Kong law, Surge Limited is
required to have at least two shareholders. Surge owns 999 shares
of the outstanding common stock and the officer of Surge owns 1
share of the outstanding common stock. The officer of Surge has
assigned his rights regarding his 1 share to Surge. Surge Limited
started doing business in July 2002. Surge Limited operations
have been consolidated with the Company.
NOTE A - ORGANIZATION, DESCRIPTION OF COMPANY'S BUSINESS AND
BASIS OF PRESENTATION (Continued)
The accompanying financial statements have been prepared
assuming that the Company will be able to sustain its operations
through November 30, 2004. While the Company has experienced
recurring net losses, management has estimated that the Company
will be able to reduce operating expenses and maintain adequate
liquidity based on information currently available, to meet its
obligations without having to dispose of assets in other than
the normal course of business.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of Consolidation:
The consolidated financial statements include the accounts of
Surge, Challenge, Superus, Surge/Lelon and Surge Limited
(collectively the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
[2] Revenue Recognition:
Revenue is recognized when product is shipped from the Company's
warehouse. For direct shipments, revenue is recognized when
product is shipped from the Company's supplier.
The Company performs ongoing credit evaluation of its customers
and maintains reserves for potential credit losses. During
February 2003, the Company obtained $2,000,000 of credit
insurance covering most of their customers.
[3] Marketable Securities:
The Company accounts for marketable securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No.
115 "Accounting for Certain Investments in Debt, and Equity
Securities". Under this standard, certain investments in debt
and equity securities are reported at fair value. The Company's
marketable securities, which consist primarily of mutual funds,
are being reported as securities available for sale.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
[3] Marketable Securities (Continued):
The unrealized loss on these securities is reflected as a
separate component of shareholders' equity and any changes in
their value are included in comprehensive loss. The value of
these securities at November 30, 2003 is as follows:
Cost $297,153
Cumulative unrealized loss 19,510
--------
$277,643
========
Cost used in the computation of realized gains and losses is
determined using the average cost method. During 2002, the
Company sold $900,590 of marketable securities and had a realized
loss of $81,282. There were no sales of marketable securities
during the year ended November 30, 2003.
[4] Inventories:
Inventories, which consist solely of products held for resale,
are stated at the lower of cost (first-in, first-out method) or
market. Products are included in inventory when shipped from
the supplier. Inventory in transit principally from foreign
suppliers at November 30, 2003 approximated $411,329. The
Company, at November 30, 2003, has a reserve against slow moving
and obsolete inventory of $675,752.
[5] Depreciation and Amortization:
Fixed assets are recorded at cost. Depreciation is generally on
a straight line method and amortization of leasehold
improvements is provided for on the straight-line method over
the shorter of the lease term or the estimated useful lives of
the various assets as follows:
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
[5] Depreciation and Amortization (Continued):
Furniture, fixtures and equipment 5 - 7 years
Computer equipment 5 years
Leasehold Improvements Estimated useful
life or lease
term, whichever is
shorter
Maintenance and repairs are expensed as incurred while renewals
and betterments are capitalized.
[6] Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of notes and
accounts receivable. The Company maintains substantially all of
its cash balances in two financial institutions. The balances
are each insured by the Federal Deposit Insurance Corporation up
to $100,000. At November 30, 2003, the Company's uninsured cash
balances totaled approximately $ 387,313.
[7] Income Taxes:
The Company's deferred income taxes arise primarily from the
differences in the recording of net operating losses, allowances
for bad debts, inventory reserves and depreciation expense for
financial reporting and income tax purposes. Income taxes are
reported under the liability method pursuant to SFAS No. 109
"Accounting for Income Taxes". A valuation allowance is
provided when the likelihood of realization of deferred tax
assets is not assured.
[8] Cash Equivalents:
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
[9] Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
[10] Accounting for Stock-Based Compensation:
The Company accounts for its employee stock-based compensation
plans under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related
interpretations. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which established a fair value-based method of
accounting for stock-based compensation plans. The Company
utilizes the intrinsic value method for grants to employees and
directors and has adopted the disclosure only alternative under
SFAS No. 123. SFAS No. 123 requires disclosure of the pro forma
effects on net income (loss) and net income (loss) per share as
if the stock-based compensation was measured utilizing the fair
value method as well as certain other information. The Company
accounts for stock-based compensation to nonemployees using the
fair value method in accordance with SFAS No. 123.
[11] Fair Value of Financial Instruments:
Cash balances and the carrying amount of the accrued expenses
approximate their fair value based on the nature of those items.
Estimated fair values of financial instruments are determined
using available market information. In evaluating the fair
value information, considerable judgment is required to
interpret the market data used to develop the estimates. The
use of different market assumptions and/or different valuation
techniques may have a material effect on the estimated fair
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
[11] Fair Value of Financial Instruments (Continued):
value amounts. Accordingly, the estimates of fair value
presented herein may not be indicative of the amounts that could
be realized in a current market exchange.
[12] Earnings (Loss) Per Share:
The Company calculates earnings (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share". The earnings (loss)
has been adjusted for cumulative dividends on preferred stock.
Basic earnings (loss) per share was computed by dividing net
income (loss) by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares
outstanding and is adjusted for the dilutive effect of shares
issuable upon the exercise of options and warrants and the
conversion of notes payable and preferred stock. The Company had
a net loss for Fiscal 2003 and Fiscal 2002, and accordingly,
potential common share equivalents are excluded from this
computation as the effect would be anti-dilutive. These
potential dilutive common shares consist of the following:
Potential Dilutive Common Shares
2003 2003
---------- -----------
Preferred Series C stock 427,000 427,000
Stock options 11,745,501 6,445,501
Warrants 2,000,000 5,423,969
---------- ----------
14,172,501 12,296,470
========== ==========
NOTE C - DUE UNDER REPURCHASE AGREEMENT
In September 2001, the Company entered into an agreement with a
subsidiary of Invensys Plc. ("Maple Chase") pursuant to which the
Company paid approximately $1,250,000 for certain inventory held
by Maple Chase who agreed to repay the Company, in non-
NOTE C - DUE UNDER REPURCHASE AGREEMENT (Continued)
interest installments over 12 months for such inventory (the
"Repurchase Agreement"). For accounting purposes, the amount
paid by the Company under the Repurchase Agreement was treated as
a one year financing. All amounts due under the agreement were
repaid prior to November 30, 2002.
NOTE D - FIXED ASSETS
Fixed assets consist of the following at November 30, 2003:
Furniture and fixtures $ 350,988
Leasehold improvements 854,338
Computer equipment 813,118
---------
2,018,444
Less - accumulated depreciation 1,071,572
---------
Total fixed assets $ 946,872
=========
Depreciation and amortization expense for the years ended
November 30, 2003 and 2002 was $257,067 and $338,799,
respectively.
NOTE E - RETIREMENT PLAN
In June 1997, the Company adopted a qualified 401(k) plan for
all full-time employees who are twenty-one years of age and
have completed twelve months of service. The Plan allows total
employee contributions of up to fifteen percent (15%) of the
eligible employee's salary through salary reduction. The
Company makes a matching contribution of twenty percent (20%)
of each employee's contribution for each dollar of employee
deferral up to five percent (5%) of the employee's salary. Net
assets for the plan, as estimated by Best of America Group
Pension Series, which maintains the plan's records, were
approximately $325,000 at November 30, 2003. Pension expense
for the years ended November 30, 2003 and 2002 was $1,151 and
$2,544, respectively.
NOTE F - SHAREHOLDERS' EQUITY
[1] Preferred Stock:
In February 1996, the Company amended its Certificate of
Incorporation to authorize the issuance of 1,000,000 shares of
preferred stock in one or more series.
In January 2000, the Company authorized 260,000 shares of
preferred stock as Non-Voting Redeemable Convertible Series A
Preferred Stock which was to be issued in connection with the
acquisition of Global. None of the Series A preferred stock is
outstanding as of November 30, 2003.
In November 2000, the Company authorized 200,000 shares of
preferred stock as Voting Redeemable Convertible Series B
Preferred Stock ("Series B Preferred") in connection with the
acquisition of Mail. In November 2000, 182,140 shares of the
Series B Preferred were issued to the former shareholders of
Mail and were held in escrow until the Mail merger was unwound.
These shares were reacquired by the Company and were returned.
No shares of Series B Preferred Stock are currently issued or
outstanding.
In November 2000, the Company authorized 100,000 shares of
preferred stock as Non-Voting Redeemable Convertible Series C
Preferred Stock ("Series C Preferred") in payment of financial
consulting services. Each share of Series C Preferred is
automatically convertible into 10 shares of the Company's
Common Stock upon shareholder approval. If the Series C
Preferred was not converted into common stock on or before
April 15, 2001, these shares are entitled to cumulative
dividends at the rate of $.50 per share per annum commencing
April 15, 2001 payable on June 30 and December 31 of each year.
In November 2000, 70,000 shares of the Series C Preferred were
issued in payment of financial consulting services to Equilink,
its investment banker and a shareholder of the Company. In
April 2001, 8,000 shares of the Series C Preferred were
repurchased. Dividends aggregating $47,525 have not been paid
for the semiannual periods ended December 31, 2001 through
2003, respectively. The Company has accrued these dividends.
The December 31, 2003 dividend of $10,675 has not been declared
NOTE F - SHAREHOLDERS' EQUITY (Continued)
[1] Preferred Stock Continued:
or paid.
In April 2002, in connection with a Mutual Release,
Settlement, Standstill and Non-Disparagement Agreement by and
among the Company and Equilink Capital Partners, LLC, Robert
DePalo, Old Oak Fund Inc. and Kenneth Orr (collectively, the
"Investors"), among other provisions, the Investors
transferred back to the Company 252,000 shares of common
stock, 19,300 shares of Series C preferred stock, and certain
warrants, representing all of the Company's securities held by
the Investors, and agreed, among other things, not to purchase
any securities of the Company and not to disparage the Company
in any manner, in exchange for $225,000. (The shares were
held in escrow until the final payment was made.) In
addition, the Company and the Investors mutually agreed to
release each other from all claims each party had, now has, or
in the future might have against the other. The Company
recorded a charge of approximately $193,850, in connection
with the settlement.
At November 30, 2003, there are 42,700 shares of Series C
Preferred stock issued and outstanding.
[2] Warrants:
In connection with the Company's 1995 Private Placement,
1,700,000 warrants were issued with an exercise price of $5.00
per share. These warrants expired on July 31, 2003.
On August 8, 1996, the Company completed a public offering of
its Common Stock (the "Public Offering"). The offering
consisted of 1,725,000 units, at a selling price of $3.20 per
unit. Each unit consisted of one Common Share (the "Common
Shares") and one redeemable Class A Common Share Purchase
Warrant (the "Warrants"). Each Warrant entitles the holder to
purchase Common share for a period of five years commencing two
years after the July 31, 1996 effective date of the Public
NOTE F - SHAREHOLDERS' EQUITY (Continued)
[2] Warrants (Continued):
Offering at a price of $5.00 per share, subject to redemption.
1,031 of the warrants were exercised. These warrants expired on
July 31, 2003.
In connection with the Company's Public Offering, the
underwriters received Unit Purchase Options ("UPOs") to purchase
172,500 of the above units at $5.12 per unit. Each unit
consists of one Common share and one Warrant. In Fiscal 2000, a
portion of the UPO's aggregating 23,400 shares of Common shares
and 3,600 Warrants were purchased for aggregate proceeds of
$116,640. The remaining unexercised UPOs expired in August
2001.
Warrant transactions for the years ended November 30, 2003 and
2002 are as follows:
Warrants outstanding December 1, 2000 5,482,169
Expired (58,200)
---------
Warrants outstanding November 30, 2002 5,423,969
Expired 3,423,969
---------
Warrants outstanding November 30, 2003 2,000,000
=========
[3] 1995 Employee Stock Option Plan:
In January 1996, the Company adopted, and in February 1996 the
shareholders ratified, the 1995 Employee Stock Option Plan
("Option Plan"). The plan provides for the grant of options to
qualified employees of the Company, independent contractors,
consultants and other individuals to purchase an aggregate of
350,000 common shares. In March 1998, the Option Plan was
amended to increase the number of aggregate Common Shares
available under the plan to 850,000.
NOTE F - SHAREHOLDERS' EQUITY (Continued)
[3] 1995 Employee Stock Option Plan (Continued):
[Download Table]
Stock option incentive plan activity is summarized as follows:
Weighted Average
Shares Exercise Price
-------- --------------
Options outstanding November 30, 2001 689,500 $1.99
Granted - -
Exercised - -
Canceled (4,000) $1.91
--------
Options outstanding November 30,
2003 and 2002 685,500 $1.99
=======
Options exercisable November 30, 2003 685,500 $1.99
========
Exercise prices for options outstanding as of November 30, 2003
ranged from $1.25 to $4.56. The weighted-average remaining
contractual life of these options is approximately four years.
Exercise prices for outstanding stock options at November 30,
2003 are as follows:
Shares Exercise Price
------- --------------
170,000 $1.25
120,000 $1.46
111,000 $1.91
29,000 $2.00
20,000 $2.09
198,000 $2.69
27,500 $3.20
10,000 $4.56
-------
685,500
=======
NOTE F - SHAREHOLDERS' EQUITY (Continued)
[4] Additional Stock Options Granted:
In December 1998, the Company granted options to purchase
5,300,000 shares (the "December 1998 Options") of Common shares
to certain of its officers and directors. The December 1998
Options were exercisable four years from the grant date (December
28, 2002) at an exercise price of $2 per share (market value on
the date of the grant). The options expired in December 2003.
In November 2000, the Company granted options to purchase
1,435,000 shares of Common Shares to certain of its officers and
employees. The options are exercisable for a five year period at
an exercise price of $2.875 per share (market value on the date
of the grant). The options vest at various dates over two years.
In March 2001, the Company granted an officer/director an option
to purchase 500,000 Common Shares, of which options covering
375,000 Common Shares were cancelled. The exercise price of this
option was $2.90 per share, which exercise price exceeded the
market price on date of grant. In addition, the Company issued
to certain officers/directors ten year options to purchase an
aggregate of 80,000 Common Shares at an exercise price of $2.00
per share.
In March 2001, the Company granted options to certain
officers/directors to purchase an aggregate of 2,650,000 shares
of the Company's common stock exercisable at $2.00 per share.
The exercise of these options are subject to (i) obtaining
shareholder approval and (ii) the cancellation of options to
purchase 2,650,000 shares of Superus' common stock (see Note
I[5]).
In July 2001, the Company granted ten year options to certain
officers/directors to purchase 80,000 Common Shares at an
exercise price $1 per share.
NOTE F - SHAREHOLDERS' EQUITY (Continued)
[5] Superus Stock Option Plan:
In February 2000, Superus adopted, and the Company as sole
shareholder ratified, the Superus 2000 Stock Incentive Plan (the
"Superus Plan"). The Superus Plan provides for the grant of
options to qualified employees, independent contractors,
consultants and other individuals to purchase an aggregate of 15
million shares of common stock. During March 2000, the same
officers and directors of the Company discussed in [4] above,
were granted 2,650,000 options to purchase a proposed tracking
stock, with the same terms as the December 1998 options, except
that the exercise price is $2.69 per share. Upon shareholder
approval in September 2000, the options became immediately
exercisable. In December 2000, the options became exercisable
for Superus common stock since a determination was made that no
tracking stock would be issued. There were options to purchase
2,850,000 shares of Superus common stock outstanding at November
30, 2003 and 2002.
[6] Authorized Repurchase:
In November 2002, the Board of Directors authorized the
repurchase of up to 1,000,000 Common Shares at a price between
$.04 and $.045. The Company has not repurchased any shares to
date pursuant to such authority.
NOTE G - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes using the enacted tax rates in
effect in the years in which the differences are expected to
reverse. Because of the questionable ability of the Company to
utilize these deferred tax assets, the Company has established a
100% valuation allowance for these assets.
NOTE G - INCOME TAXES (Continued)
As of November 30, 2003, the Company's deferred income taxes are
comprised of the following:
Deferred tax assets
Net operating losses $ 6,925,640
Allowance for bad debts 16,110
Inventory 269,895
Capital loss 49,786
Deferred rent 24,878
Contribution 2,321
---------
Total deferred tax assets 7,288,630
Deferred tax liabilities
Depreciation 4,393
---------
Net deferred tax assets 7,284,237
Valuation allowance 7,284,237
---------
Deferred tax assets $ --
=========
The valuation allowance decreased by approximately $176,000
during the year ended November 30, 2003 and increased by
approximately $630,000 during the year ended November 30, 2002.
The Company's income tax expense consists of the following:
Year Ended
November 30,
2003 2002
Current: ------ -------
Federal $ -- $ --
States 9,591 8,832
------ -------
9,591 8,832
Deferred: ------ ------
Federal -- --
States -- --
------ -------
Provision for income taxes $9,591 $8,832
====== =======
NOTE G - INCOME TAXES (Continued)
The Company files a consolidated income tax return with its
wholly-owned subsidiaries and has net operating loss
carryforwards of approximately $17,340,000 for federal and state
purposes, which expire through 2023. The utilization of this
operating loss carryforward may be limited based upon changes in
ownership as defined in the Internal Revenue Code.
A reconciliation of the difference between the expected income
tax rate using the statutory federal tax rate and the Company's
effective rate is as follows:
Year Ended November 30,
2003 2002
------ ------
U.S. Federal income tax statutory rate (34)% (34)%
Valuation allowance 34% 34%
State income taxes 1% 1%
--- ---
Effective tax rate 1% 1%
=== ===
NOTE H - RENTAL COMMITMENTS
The Company leases its office and warehouse space through 2010
from a corporation that is controlled by officers/shareholders
of the Company ("Related Company"). Annual minimum rental
payments to the Related Company approximately $186,000 for the
Fiscal 2003, and increase at the rate of three per cent per
annum throughout the lease term.
Pursuant to the lease, rent expense charged to operations
differs from rent paid because of scheduled rent increases.
Accordingly, the Company has recorded deferred rent. Rent
expense is calculated by allocating to rental payments,
including those attributable to scheduled rent increases, on a
straight line basis, over the lease term.
NOTE H - RENTAL COMMITMENTS (Continued)
The future minimum rental commitments at November 30, 2003:
Year Ending November 30,
2004 $191,497
2005 197,242
2006 203,159
2007 209,254
2008 215,532
2009 221,998
2010 189,600
----------
$1,428,282
=========
Rental expense for Fiscal 2003 and 2002, were $213,536 and
$219,202, respectively, of which $185,920 and $180,728 were paid
to the Related Company.
NOTE I - EMPLOYMENT AND OTHER AGREEMENTS
The Company has employment agreements, with terms through July
30, 2003 (renewable on each July 30th for an additional one year
period) with two officers/stockholders of the Company, which
provides each with a base salary of $200,000, subject to certain
increases as defined, per annum, plus fringe benefits and
bonuses. The Compensation Committee of the Company's Board of
Directors determines the bonuses. There were no such bonuses
paid in Fiscal 2002 and Fiscal 2003. The agreement also contains
provisions prohibiting the officers from engaging in activities,
which are competitive with those of the Company during employment
and for one year following termination. The agreements further
provide that in the event of a change of control, as defined, or
a change in ownership of at least 25% of the issued and
outstanding stock of the Company, and such issuance was not
approved by either officer, or if they are not elected to the
Board of Directors of the Company and/or are not elected as an
officer of the Company, then the non-approving officer may elect
to terminate his employment agreement. If he elects to terminate
the agreement, he will receive 2.99 times
NOTE I - EMPLOYMENT AND OTHER AGREEMENTS (Continued)
his annual compensation (or such other amount then permitted
under the Internal Revenue Code without an excess penalty), in
addition to the remainder of his compensation under his existing
employment contract. In addition, if the Company makes or
receives a "firm commitment" for a public offering of Common
Shares, each officer will receive a warrant to purchase, at a
nominal value, up to 9.5% of the Company's common stock, provided
they do not voluntarily terminate employment.
NOTE J - MAJOR CUSTOMERS
The Company has one customer who accounted for 12% of net sales
for Fiscal 2003 and accounted for 15% of accounts receivable at
November 30, 2003. The Company had two other customers who
accounted for in excess of 10% (10% and 16%, respectively) of
accounts receivable at November 30, 2003.
NOTE K - MAJOR SUPPLIERS
During Fiscal 2003 there was one foreign supplier accounting for
33% of total inventory purchased. This supplier accounted for
36% of total inventory purchased during Fiscal 2002.
The Company purchases a significant portion of its products
overseas. For Fiscal 2003, the Company purchased 41% from
Taiwan, 22% from Hong Kong, 20% from elsewhere in Asia and 1%
overseas outside of Asia.
NOTE L - EXPORT SALES
The Company's export sales approximated:
Year Ended November 30,
2003 2002
----------- -----------
Canada $ 387,146 $ 444,095
Asia 1,343,220 1,492,723
Europe 50,730 21,608
Central America 12,600 38,339
NOTE M - CONTINGENCIES AND OTHER MATTERS
The Company received a letter from a lawyer from a collection
agency dated February 13, 2003 on behalf of Snow Becker & Krauss
P.C., our former legal counsel ("SBK") asserting a claim for
legal fees of approximately $676,000. These fees relate to
services rendered by SBK between one and two years ago. In
February 2004, the Company and SBK entered into an agreement
releasing each for claims against the other and settling the
amount owed to SBK. As a result, the Company has written off
$676,016 of the debt and has reported this as income for the year
ended November 30, 2003.
During Fiscal 2000 and Fiscal 2001, the Company made certain
potentially questionable payments of approximately $2,137,000
and $774,000, respectively. These payments are currently the
subject of an investigation by the Securities and Exchange
Commission. The recipient of these payments repaid the Company
$1,000,000 during Fiscal 2001, which was included in other
income.
In May 2001, the law firm Mintz Levin Cohn Ferris Glovsky and
Popeo, P.C., was engaged to assist in an investigation
concerning the payments referred to above and to recommend
policies to prevent any similar future payments. Due, in part to
the previously disclosed resignation of our outside counsel and
such counsel's refusal to be interviewed as part of the
investigation, the Company was unable to confirm what legal
advice was rendered as to the making of such payments. The
investigation did not uncover any additional payments similar to
the previously disclosed "potentially questionable payments".
The Company has taken steps to ensure that such payments are not
made in the future, including requiring that payments above
$5,000 not be made to any party except a party on a list
approved by our audit committee, requiring co-signatures on each
check for more than $10,000 and adopting a Code of Conduct.
Except for proceedings relating to the SEC inquiry commenced in
October 2001, the Company is not aware of any pending
proceedings relating to the questionable payments. There can be
no assurance that these potentially questionable payments and
related investigation will not lead to other proceedings.
NOTE N - LOAN PAYABLE
In July 2002, the Company obtained a financing commitment with
an asset-based lender totaling $1,000,000 (the "Credit Line").
Borrowings under the Credit Line accrue interest at the greater
of the prime rate plus two percent (2.0%) or 6.75%. In addition
the Company is obligated to pay one-quarter of one percent (1/4
of 1%) annually as an unused line fee for the difference between
$1,000,000 and the average daily balance of the Credit Line. The
Credit Line is collateralized by substantially all the Company's
assets and contains various financial covenants pertaining to
the maintenance of working capital and tangible net worth.
During Fiscal 2003, the agreement was amended to adjust the
financial covenants. In December 2003, the Company entered into
a Security Agreement with the lender establishing a restricted
cash collateral account totaling $200,000. At November 30,
2003, the Company was in compliance with the financial
covenants.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: February 26, 2004 Surge Components, Inc.
By:/s/Ira Levy
--------------------------
Ira Levy, President
and Chief Executive
Officer (Principal
Executive Officer and
Principal Financial
Officer)
/s/ Ira Levy
--------------------- President and Director February 26, 2004
Ira Levy (Principal Executive
Officer and Principal
Financial Officer)
/s/ Steven J. Lubman Vice President, February 27, 2004
--------------------- Secretary, Chief
Steven J. Lubman Financial Officer and
Director (Principal
Accounting Officer)
/s/ Lawrence Chariton Director February 27, 2004
---------------------
Lawrence Chariton
/s/ David Siegel
--------------------- Director February 27, 2004
David Siegel
/s/ Alan Plafker
--------------------- Director February 27, 2004
Alan Plafker
/s/ Gary Jacobs
--------------------- Director February 27, 2004
Gary Jacobs
EXHIBIT INDEX
-------------
11 Statement re Computation of Earnings per Common
Share.
14 Code of Business Conduct and Ethics.
21 List os Subsidiaries of Surge Components, Inc.
23.1 Consent of Seligson & Giannattasio, LLP
31.1 Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Order and Notice by the U.S. Bankruptcy Court for
the District of Delaware in Re a petition for
relief under Chapter 7 of Title 11, U.S. Code, filed
by Superus Holdings, Inc.
Dates Referenced Herein and Documents Incorporated by Reference
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