UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT.
Commission File Number 33-13058-C
-----------------------
SURG II, INC.
(Name of small business issuer in its charter)
Minnesota 58-1486040
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
825 Southgate Plaza, 5001 W. 80th Street, Bloomington, MN 55437
(Address if principal executive offices)
(952) 830-1230
(Issuer's telephone number)
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 periods that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] YES [ ] NO
7,447,085 shares of Common Stock, no par value, outstanding at
March 31, 2002
Transitional Small Business Disclosure Format. [ ] YES [X] NO
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SURG II, INC.
___________________________________________________________________________
CONTENTS PAGE
___________________________________________________________________________
FINANCIAL STATEMENTS
Balance sheets 3
Statements of operations 5
Statements of cash flows 6
Notes to financial statements 7
____________________________________________________________________________
____________________________________________________________________________
SURG II, INC.
BALANCE SHEETS
____________________________________________________________________________
March 31, December 31,
2002 (unaudited) 2001
___________________________________________________________________________
ASSETS
___________________________________________________________________________
Current Assets
Cash $ 64,794 $ 8,150
Accounts receivable, less
allowance for doubtful
accounts of $4,200 in 2001 - 44,734
Inventories - 124,712
Prepaid expenses 2,776 12,243
___________________________________________________________________________
Total current assets 67,570 189,839
___________________________________________________________________________
Furniture and Equipment, at cost - 353,917
Less accumulated depreciation
and amortization - 338,003
___________________________________________________________________________
Total furniture and
equipment - 15,914
___________________________________________________________________________
Other Assets
Patents and trademarks, net
of accumulated amortization
of $19,020 in 2001 - 3,627
___________________________________________________________________________
Total assets $ 67,570 $ 209,380
===========================================================================
See Notes to Financial Statements.
SURG II, INC.
BALANCE SHEETS (continued)
___________________________________________________________________________
March 31, December 31,
2002 (unaudited) 2001
LIABILITIES AND STOCKHOLDERS' DEFICIT
___________________________________________________________________________
Current Liabilities
Current maturities of capital
lease $ - $ 5,000
Notes payable to officers
and directors - 8,474
Other notes payable 20,000 61,646
Accounts payable 38,475 119,210
Accrued expenses 30,000 56,401
___________________________________________________________________________
Total current liabilities 88,475 250,731
___________________________________________________________________________
Capital lease obligation,
less current maturities - 5,507
___________________________________________________________________________
Stockholders' Deficit
Series A Preferred stock,
authorized 1,600,000 shares;
$400,000 liquidation preference,
1,600,000 shares
Issued and outstanding 400,000 400,000
Common stock, no par value;
authorized 200,000,000 shares;
Issued and outstanding
7,447,085 shares 4,616,266 4,606,266
Accumulated deficit (5,037,171) (5,053,124)
___________________________________________________________________________
Total stockholders' deficit (20,905) (46,858)
___________________________________________________________________________
Total liabilities and
stockholders' deficit $ 67,570 $ 209,380
___________________________________________________________________________
See Notes to Financial Statements
SURG II, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
___________________________________________________________________________
March 31, March 31,
Three Months Ended 2002 2001
___________________________________________________________________________
Net sales $ 33,133 $ 130,064
Cost of goods sold 31,524 93,828
___________________________________________________________________________
Gross profit 1,609 36,236
Operating expenses
Research and development 1,026 3,548
Sales and marketing 2,977 9,333
General and administrative 39,039 70,203
___________________________________________________________________________
Total operating expenses 43,042 83,084
___________________________________________________________________________
Operating loss (41,433) (46,848)
Other Income (expense)
Net gain on sale of net assets 57,067
Interest income 1 14
Interest expense (210) (1,185)
Other 528 32
___________________________________________________________________________
Net income (loss) $ 15,953 $ (47,987)
===========================================================================
Basic and diluted net income (loss)
per common share $ - $ (0.01)
===========================================================================
Weighted average common shares
outstanding-basic 7,447,085 7,447,085
===========================================================================
Weighted average common shares
outstanding-diluted 10,647,085 7,447,085
===========================================================================
See Notes to Financial Statements
SURG II, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
____________________________________________________________________________
March 31, March 31,
Three Months Ended 2002 2001
____________________________________________________________________________
Cash Flows from Operating Activities
Net income (loss) $ 15,953 $ (47,987)
Adjustments to reconcile net
income (loss) to net
Cash provided by operating activities:
Net gain on sale of net assets (57,067) -
Depreciation and amortization - 24,635
Noncash compensation 10,000 -
Changes in assets and liabilities,
net of effect of sale of
net assets:
Accounts receivable 6,267 (7,379)
Inventories 6,474 25,584
Prepaid expenses 9,467 (39)
Accounts payable and
accrued expenses (33,556) 19,237
____________________________________________________________________________
Net cash provided by (used in)
operating activities (42,462) 14,051
____________________________________________________________________________
Cash Flows from Investing Activities
Net proceeds from sale of net assets 149,226 -
Cash Flows from Financing Activities
Payments on notes payable (50,120) -
Payments on capital lease obligation - (1,109)
____________________________________________________________________________
Net cash used in financing
activities (50,120) (1,109)
____________________________________________________________________________
Increase in cash 56,644 12,942
Cash:
Beginning 8,150 33,924
____________________________________________________________________________
Ending $ 64,794 $ 46,866
============================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 6,105 $ 623
Supplemental Disclosures of Non-cash Investing and Financing Activities
Common stock warrant issued for
services $ 10,000 $ -
See Notes to Financial Statements
SURG II, INC.
____________________________________________________________________________
NOTES TO FINANCIAL STATEMENTS (unaudited)
____________________________________________________________________________
Note. 1 Financial Statements
The balance sheet as of March 31, 2002 and the statements of operations and
cash flows for the three month periods ended March 31, 2002 and 2001 have
been prepared by the Company without audit. In the opinion of management,
all adjustments (consisting solely of normal, recurring adjustments)
necessary to present fairly the financial position at March 31, 2002; the
results of operations and cash flows for the three month periods ended
March 31, 2002 and March 31, 2001, have been made. Certain information and
footnote disclosures normally included in the financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted, pursuant to such rules and
regulations, although management believes the disclosures are adequate to
make the information presented not misleading. The balance sheet at December
31, 2001 has been taken from the audited financial statements at that date.
These interim financial statements should be read in conjunction with the
Company's annual financial statements and related notes there to included
in the Company's form 10-KSB for the year ended December 31, 2001. Results
of operations for the interim periods are not necessarily indicative of
future financial conditions or operating results, especially considering the
sales of net assets discussed in Note 2.
Note 2. Sale of Net Operating Assets and Going Concern Considerations:
On January 22, 2002, pursuant to an agreement, the Company closed on the
sale of substantially all of its net operating assets. The sale resulted in
gross proceeds of $200,000 and a gain of approximately $4,000 after
considering total transaction costs of $104,000 including $55,000 that were
incurred and expensed in 2001. After the sale the Company has no sources of
revenue as the net operating assets sold represent substantially all of its
operations. The Company believes that the asset sale will enable the Company
to seek a business combination or other transaction with an opportunity that
will be more attractive than the Company's former wound drainage business.
The Company hopes to utilize its remaining capital structure to attract a
business opportunity that will maximize potential value to shareholders, see
Note 3. However, there can be no assurance that a business combination or
similar transaction will occur. Moreover, without a source of revenues,
the Company's ability to continue as a going concern is dependent on a
business combination or other transaction occurring. The Company currently
has no continuing operations. The financial statements do not reflect any
adjustments that might be necessary should the Company not remain as a
going concern.
A summary of the asset sale is as follows:
Proceeds $200,000
Transaction costs 104,000
Net proceeds $ 96,000
Less net book value of assets sold (92,160)
Gain $3,840
The actual gain recorded in the statements of operations for the three
months ended March 31, 2002 is approximately $57,000 as $54,000 of the
total transaction costs of $104,000 were incurred and expensed in 2001.
The net proceeds of approximately $150,000 reflected in the accompanying
March 31, 2002 statement of cash flows is comprised of the gross proceeds
received of $200,000 less the transaction costs incurred and expensed in
2002 of approximately $50,000.
A summary of the net assets sold is as follows:
Accounts receivable $ 38,467
Inventories 118,238
Other assets 3,627
Furniture and equipment 15,914
Long-term debt (10,506)
Accounts payable (73,580)
Net assets sold $ 92,160
Because the Company sold all of its net operating assets, on a pro forma
basis there would have been no sales in either period presented, assuming
the transaction had been effective January 1, 2001.
Note 3. Letter of Intent with Metalclad Corporation Regarding Sale of
Capital Stock
On March 21, 2002, the Company signed a non-binding letter of intent with
Metalclad Corporation (NASDAQ: MTLC) to sell a majority ownership interest
in the Company's capital stock to Metalclad or its subsidiary for
$3,000,000 through the sale of a sufficient number of shares to provide
Metalclad with 90% of the outstanding shares assuming the conversion of the
Preferred shares outstanding, conversion of all warrants outstanding and
any shares issued in connection with compensating investor's investment
banker and executives and directors of the Company. Metalclad Corporation
provides insulation and asbestos abatement services, primarily on the West
Coast, to a wide range of industrial, commercial and public agency clients.
The anticipated operation of the Company, as well as the board of director
and officer positions, following such stock sale has not yet been
determined. One officer of the Company currently owns less than one
percent of the outstanding common stock of Metalclad Corporation.
The consummation of the sale of common stock to Metalclad Corporation is
contingent upon the occurrence of a number of events, including completion of
due diligence by Metalclad Corporation. There is no assurance that the
Company will close on the sale of common stock to Metalclad Corporation.
If the Company does not close on the sale of common stock to Metalclad
Corporation, it intends to continue to explore strategic opportunities
for raising capital for the Company.
Note 4. Income taxes
No income tax provision has been presented for the period ended March 31,
2002 due to the utilization of net operating losses.
Note 5.Net Earnings (Loss) Per Share
Basic per-share amounts are computed, generally, by dividing net income by
the weighted-average number of common shares outstanding. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive. Because the Company
incurred a loss for the three month period ended March 31, 2001, the
inclusion of the common stock equivalents in the calculation of the diluted
loss per share would have an anti-dilutive effect. Therefore basic and
diluted loss per share are the same in the three month period ended March
31, 2001. The diluted earnings per share calculation for the three month
period ended March 31, 2002, includes the 3,200,000 shares of common stock
resulting from the assumed conversion of the preferred stock.
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Results of Operations - 2002 compared to 2001
Overview: On January 22, 2002, pursuant to an agreement and shareholder
approval, the Company closed on the sale of substantially all of its net
operating assets. The sale resulted in a gain of approximately $4,000 with
gross cash proceeds of $200,000. See Note 2 to the financial statements for
further information. After the sale the Company has no sources of revenue
as the net operating assets sold represented substantially all of its
operations. The Company believes that the asset sale will enable the
Company to seek a business combination or other transaction with an
opportunity that will be more attractive than the Company's former wound
drainage business. The Company hopes to utilize its remaining capital
structure to attract a business opportunity that will maximize potential
value to shareholders. On March 21, 2002, the Company signed a non-binding
letter of intent with Metalclad Corporation to sell a majority ownership
interest in the Company's common stock, see Note 3 to the interim financial
statements above. However, there can be no assurance that this transaction
will close on terms acceptable to the Company. Moreover, without a source
of revenues, the Company's ability to continue as a going concern is
dependent on such a business combination or other transaction occurring.
Sales. Sales for the first three months of fiscal 2002 were $33,133, compared
to $130,064 in fiscal 2001, a decrease of approximately 75%. This decrease
was primarily related to the sale of net assets, as sales activity ceased
after January 22, 2002.
Gross Profit. Gross profit expressed as a percentage of sales decreased from
approximately 28% for the first three months of 2001 to approximately 5% for
the same period in 2002 due primarily to less sales volume in which to spread
certain fixed manufacturing costs.
Operating Expenses. Operating expenses decreased from $83,084 for the
three-month period ended March 31, 2001 to $43,042 for the period ended
March 31, 2002. The decrease was primarily the result of the sale of net
assets, as operating activities ceased after January 22, 2002.
Liquidity and Capital Resources.
At March 31, 2002, the Company had a working capital deficit of $20,905
compared to working capital deficit of $60,892 at December 31, 2001. The
slight improvement in the working capital deficit was primarily the result
of the proceeds form the net asset sale as offset by payments made to retire
notes payable and satisfy other operating liabilities.
The net cash used in operating activities for the three month period ended
March 31, 2002 of $42,462 was comprised of the net income of $15,953 offset
by the net gain on asset sale of $57,067, noncash compensation of $10,000
and the negative net change in operating assets and liabilities of $11,348.
Net cash from investing activities was comprised of the net proceeds received
from the net asset sale. Net cash used in financing activities was the
result of payments made to retire the note payable obligations.
As discussed in the overview above, the ability of the Company to continue
as a going concern and its short-term liquidity is dependent upon obtaining
additional debt and/or equity financing to fund a business combination or
other transaction. The Company hopes to utilize its remaining capital
structure to attract a business opportunity that will maximize potential
value to shareholders. However, there can be no assurance that the
possible sale of Company's common stock to Metalclad Corporation, as
discussed above and in Note 3 to the interim financial statements, will
actually close. Moreover, without a source of revenues, the Company's
ability to continue as a going concern is dependent on a business
combination or other transaction occurring. Without raising additional
debt or equity, the Company may be forced to cease any further activities in
the near term.
Recently Issued Accounting Pronouncements
In July 2001, FAS 141, Business Combinations, and FAS 142, Goodwill and
Other Intangible Assets, were issued. These pronouncements provide that
all business combinations initiated after June 30, 2001 be accounted for
using the purchase method and that goodwill be reviewed for impairment
rather than amortized, beginning on January 1, 2002. The adoption of these
pronouncements did not have a material effect on its financial statements.
Any business combination transactions in the future would be accounted for
under this new guidance.
In September 2001, the FASB issued Statement 143, Asset Retirement
Obligations. This Statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement will be
effective for the Company's fiscal year ending December 2003. The Company
does not believe that the adoption of this pronouncement will have a
material effect on its financial statements.
In August 2001, the FASB issued Statement 144, Accounting for Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Statement will be effective for the Company's fiscal year
ending December 2002. The Company does not believe that the adoption of
this pronouncement will have a material effect on its financial statements.
Forward-looking statements contained in this annual report on Form 10-QSB,
including without limitation in Management's Discussion and Analysis, are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Certain important factors could cause
results to differ materially from those anticipated by some statements
made herein. Investors are cautioned that all forward-looking statements
involve risks and uncertainties. A number of factors that could cause
results to differ materially are those discussed in our Annual Report on
Form 10-KSB and other recent filings with the Securities and Exchange
Commission. Additional factors that could cause results to differ materially
include but are not limited to, the Company's ability to consummate the sale
of capital stock to Metalclad Corporation or to identify, negotiate and
consummate another transaction that raises capital for the Company if
the stock sale to Metalclad Corporation is not completed. All such
forward-looking statements, whether written or oral, and whether made
by or on behalf of the Company are expressly qualified by these cautionary
statements. In addition, the Company disclaims any obligation to update
forward-looking statements to reflect events or circumstances after the
date hereof.
Risk Factors
The Company may not consummate the sale of common stock to Metalclad
Corporation. There is no assurance that the Company will close on the
sale of common stock to Metalclad Corporation or that, if consummated,
it will be on as favorable terms as contemplated by the Letter of Intent.
If the Company does not close with Metalclad Corporation it intends to
continue to explore strategic opportunities for raising capital for the
Company. However, there can be no assurance that the Company will be able
to complete a transaction with another operating business. Further, even
if such a transaction is completed with Metalclad Corporation or another
operating business, there can be no assurances that the market price of the
Company's common stock will improve.
The Company has no current operations. The Company sold all its net
operating assets in January 2002. Therefore the Company has no sources
of revenues and essentially no operating activities. The Company's
continuing existence is dependent upon either closing on the pending
transaction with Metalclad or consummating a similar transaction in
the near term.
The Company's current shareholders will be diluted if we close on the
sale of common stock to Metalclad Corporation. The sale of shares of the
Company's common stock to Metalclad Corporation will immediately reduce the
percentage ownership of our then current shareholders.
The Company's current shareholders may be diluted if the Company is
successful in its efforts to convert outstanding preferred stock into common
stock and to have certain of its outstanding warrants exercised. The Company
intends to make a proposal to its preferred shareholders to convert each
share of preferred stock into two shares of common stock. In addition, the
Company intends to make a proposal to some of its warrant holders to
exercise their warrants such that a certain number of warrants will be
cancelled in exchange for a certain number of shares of the Company's
common stock, and no cash would be paid for such exercise and exchange. The
issuance of the Company's common stock upon such preferred share conversions
and warrant exercises may cause our shareholders to incur substantial
dilution in net book value per share of common stock.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3 and 5. Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) A special meeting of the shareholders of the Company was held
on January 22, 2002.
(c) At the meeting, the shareholders approved the following
items: (i) the sale of substantially all of the assets of the Company
pursuant to the Asset Purchase Agreement by and between the Company and
Oxboro Medical, Inc. (n/k/a Sterion Incorporated) dated October 4, 2001,
as amended - 5,906,249 shares voting For, 1,500 shares voting Against and
27,250 shares Abstaining; (ii) an amendment to the Company's Articles of
Incorporation to increase from the number of authorized shares to
200,000,000 -5,889,049 shares voting For, 18,200 shares voting Against and
27,750 shares Abstaining; (iii) an amendment to the Company's Articles of
Incorporation to change the Company's name to Surg II, Inc. - 5,905,249
shares voting For, 1,500 shares voting Against and 28,250 shares Abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
4.2 Secured Promissory Note to Gray, Plant,
Mooty, Mooty & Bennett, P.A.
(b) Reports on Form 8-K
A Form 8-K was filed on February 6, 2002 regarding the
January 22, 2002 sale of net operating assets.
-----------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SURG II, INC.
(Registrant)
Date: May 17, 2002 /s/ Theodore A. Johnson
By: Theodore A. Johnson
President and Principal
Accounting Officer
EXHIBIT 4.2
SECURED PROMISSORY NOTE
$20,000 January 22, 2002
FOR VALUE RECEIVED, the undersigned Maker promises to pay to Gray,
Plant, Mooty, Mooty & Bennett, P.A., at 3400 City Center, 33 South Sixth
Street, Minnesota, or such other place as the holder of this Note may
designate in writing to Maker, the principal sum of Twenty Thousand Dollars
($20,000). Principal is due and payable in lawful money of the United
States of America.
Principal is due and payable on demand on the earlier of a) such
time as the Maker completes in one or more offerings of debt or equity which
in part or in aggregate equals or exceeds Fifty Thousand Dollars, b) at any
time after January 22, 2003, or c)immediately in the event Maker makes an
assignment for the benefit of creditors or become insolvent, either because
its liabilities exceed its assets or it is unable to pay its debts as they
become due, or d) immediately, if a default occurs under the terms of any
other transaction document or e) immediately if it fails to satisfy or
appeal any judgment against it.
Therefore by way of example, if the Company raises $25,000 on
January 30, 2001 and $30,000 on February 15, 2001 the Principal on this
note will be due on February 15, 2001.
This Note may be fully or partially prepaid at any time during the
term of this Note without penalty or premium.
Maker waives presentment, dishonor, protest, demand, diligence,
notice of protest, notice of demand, notice of dishonor, notice of
nonpayment, and any other notice of any kind otherwise required by law in
connection with the delivery, acceptance, performance, default,
enforcement or collection of this Note and expressly agrees that this Note,
or any payment hereunder, may be extended or subordinated (by forbearance or
otherwise) at any time, without in any way affecting the liability of Maker.
Maker agrees to pay on demand all costs of collecting or enforcing
payment under this Note, including attorneys' fees and legal expenses,
whether suit be brought or not, and whether through courts of original
jurisdiction, courts of appellate jurisdiction, or bankruptcy courts, or
through other legal proceedings.
This Note may not be amended or modified, nor shall any waiver of
any provision hereof be effective, except only by an instrument in writing
signed by the party against whom enforcement of any amendment, modification,
or waiver is sought.
If this Note is signed by more than one person as Maker, the term
"Maker" shall refer to each of them separately and to both or all of them
jointly and all such persons shall be bound both severally and jointly
with the other(s).
This Note shall be governed by and construed according to the laws
of the State of Minnesota without regard to the conflict of laws and
principles thereof.
MAKER:
SURGIDYNE, INC.
By /s/ Ted Johnson
Ted Johnson, Chairman and CEO