SPRS - Surge Components

[west]

For Japan day #3 out of ?? I would like to present a non-Japanese company: Surge Components.

 

Description from the Financial Times:

 

Surge Components, Inc. 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. The products that the Company sells are utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that the Company sells are sold to both original equipment manufacturers, (OEMs), who incorporate them into their products, and to distributors of the lines of products the Company sells, who resell these products within their customer base.

 

The numbers:

 

Current EV/EBIT: 1.65x

ROIC: >26% each of the last five years, although it has slowly declined.  Reinvestment has remained steady, with most of it going into working capital.

 

Current P/B: 0.66x

BVPS Growth over the last four years: Between 12%-66.1%.

 

Biggest risk: Massive key person risk.  There are a few key people for this business that if they get hit by a bus the business will be in a very bad situation.

 

Basic valuation:

 

Assume that current cash of $5.4m is worth 80% of its book value.  So ~$4.3m.

 

Assume that EBIT will remain what it has been each of the last four years, or about $1.5m, and assume a 40% tax rate going forward.  This gives you an after-tax EBIT of $840k.  Discount this at, say, 12.5% (high-ish... but maybe not high enough... I'd love to hear other people's opinions on this), and assume zero growth going forward.  This gives you a value for the operating assets of the business of $840k/12.5% = ~$6.7m.

 

Total value = Discounted value of cash + Value of operating assets = $4.3m + $6.7m = $11m.

 

Current market cap of the company (NOT including the pretty low % value preferred stocks) is $7.25m.  Implied upside using the above assumptions is ($11m / $7.25m) - 100% = 52%.

 

The above assumptions are very conservative (I think), however.  If you value the cash as is and assume a discount rate of 10% and zero growth (or assume a discount rate of 12.5% and 2.5% growth going forward... same thing...) you get a value of = $5.4m + $840k / 10% = $13.8m.  Or about 90% upside from today's price.

 

The filings are pretty quick to read and the business is pretty easy to understand.  I couldn't find conference call transcripts (but, for a $7.25m company, I'm not too terribly surprised).

 

Enjoy!

 

[matjone]

I own it.  I remember I thought the salaries for managment and the rent they were paying to them were too high.

[west]

I own it.  I remember I thought the salaries for managment and the rent they were paying to them were too high.

 

I can't remember what it is off hand (I actually invested in this a while ago).  But that being said, even after whatever they're paying themselves/renting to themselves, you're still getting $1.5m in pre-tax EBIT every year plus $5.4m in cash for $7.25m.  How cheap does a company have to be to justify a slightly inflated salary?

 

(Again, I haven't looked at the salary numbers for a while, but I remember I thought their salaries were low-ish when you consider the few top guys basically were the business and without them it wouldn't be anything...)

[matjone]

I looked at my notes on it yesterday after I posted.  I had down that Levy/Lubman made 760k and they were renting office space from Levy for 255k.    I have been struggling lately with whether it is better to buy things like this that are kind of average ideas, or to just hold cash and wait till better deals come around again.  I agree with you on the cheapness which is why I own it.

 

No offense meant calling this an average idea.  I don't mean to insult your idea,  I just mean the ideas today are average in attractiveness compared to the things that were available the last few years, which I'm sure you'd agree with.

[west]

I've given up trying to figure out if/when the market's going to turn myself.  There's too much opportunity cost.  Any more I find the cheapest stocks available and plan to rotate to whatever's cheapest when the market goes down.  That makes the most sense to me.

 

I only hold a 4% position in this guy so it is a basket bet.

 

Final fwiw, one of the biggest things I've ever missed out on was IBAL in 2010.  It was trading at less than cash with a decent business attached.  I didn't invest because it was too simple/small.  It was a mistake (but also a lesson...)

[oddballstocks]

I've given up trying to figure out if/when the market's going to turn myself.  There's too much opportunity cost.  Any more I find the cheapest stocks available and plan to rotate to whatever's cheapest when the market goes down.  That makes the most sense to me.

 

I only hold a 4% position in this guy so it is a basket bet.

 

Final fwiw, one of the biggest things I've ever missed out on was IBAL in 2010.  It was trading at less than cash with a decent business attached.  I didn't invest because it was too simple/small.  It was a mistake (but also a lesson...)

 

The easy path to profits :)  I missed IBAL as well, similar story.  I remember looking at it and thinking "how many balers can possibly be sold, and how many need to be replaced each year?" I couldn't get the numbers to work in my head, but I was clearly wrong.

 

There is no shame in buying smallish stakes in cheap companies that are simple.  This is the bread and butter of my investing philosophy!

[matjone]

I've missed so many investments it can send me into a depression thinking about it.  I think you need a philosophy like a cornerback - understand why you got beat and then forget about it.

[west]

The thing I don't understand is why people without a lot of money under management constantly try to look at bigger and harder ideas.  Take Sears, or big banks at their current valuation.  Sure, they might be cheap, but why not invest in something where the story is relatively stable (so you're not constantly glued to the news), where it doesn't take 500+ hours to really understand the business, its industry, and all the potential risks involved, and where there can be significantly more upside.

 

I can see where you might want to watch these companies from the sidelines to get more experience so if/when you do manage enough money that you're forced to work with those companies you have experience with them.  But, in my opinion at least, while there's more money to play at the table with the "palookas" (Munger's term), I'm going to play at the table with the palookas.

 

(Doing otherwise is irrational, in my not so humble opinion.)

[matjone]

I think some people are scared off by small businesses because they believe the earning power is less predictable which I believe is true.

 

I think that you can stay in small caps until you are plenty rich.  It's not likely I'll ever get rich enough to worry about anything else, but if I do I'll probably just buy some value funds or follow some other simple strategy and forget about investing.  Once you have enough money, spending your time trying to get more doesn't make any sense to me.

[cobafdek]

Description from the Financial Times:

 

Surge Components, Inc. 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. The products that the Company sells are utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that the Company sells are sold to both original equipment manufacturers, (OEMs), who incorporate them into their products, and to distributors of the lines of products the Company sells, who resell these products within their customer base.

 

Funny how you need to include the above to keep your post respectable.  My eyes mostly glazed over, and found it mostly incomprehensible.  It's the dumb numbers that excite me.  I suppose the window-dressing is necessary to keep you from getting kicked off the board.  I guess we palookas merely scan such verbiage to make sure it's not something like an RV manufacturer that sells only to meth cooks.

 

Your finds are much appreciated and enjoyed. 

 

Cordially from one palooka to another.

 

[writser]

The thing I don't understand is why people without a lot of money under management constantly try to look at bigger and harder ideas.  Take Sears, or big banks at their current valuation.  Sure, they might be cheap, but why not invest in something where the story is relatively stable (so you're not constantly glued to the news), where it doesn't take 500+ hours to really understand the business, its industry, and all the potential risks involved, and where there can be significantly more upside.

 

I can see where you might want to watch these companies from the sidelines to get more experience so if/when you do manage enough money that you're forced to work with those companies you have experience with them.  But, in my opinion at least, while there's more money to play at the table with the "palookas" (Munger's term), I'm going to play at the table with the palookas.

 

(Doing otherwise is irrational, in my not so humble opinion.)

 

This has always confused me as well. I think a lot people enjoy the intellectual aspect of investing and overestimate their ability to beat the market based on analytical insights, rather than on 'simple' figures. Why would you buy a boring company like SPRS at a cheap price when you can become a self-proclaimed expert on Chinese / Vietnamese cotton price spreads, the future of cloud computing, protective car films (just a few examples from this forum) and find stocks that can easily triple if your analysis is correct?

[west]

The thing I don't understand is why people without a lot of money under management constantly try to look at bigger and harder ideas.  Take Sears, or big banks at their current valuation.  Sure, they might be cheap, but why not invest in something where the story is relatively stable (so you're not constantly glued to the news), where it doesn't take 500+ hours to really understand the business, its industry, and all the potential risks involved, and where there can be significantly more upside.

 

I can see where you might want to watch these companies from the sidelines to get more experience so if/when you do manage enough money that you're forced to work with those companies you have experience with them.  But, in my opinion at least, while there's more money to play at the table with the "palookas" (Munger's term), I'm going to play at the table with the palookas.

 

(Doing otherwise is irrational, in my not so humble opinion.)

 

This has always confused me as well. I think a lot people enjoy the intellectual aspect of investing and overestimate their ability to beat the market based on analytical insights, rather than on 'simple' figures. Why would you buy a boring company like SPRS at a cheap price when you can become a self-proclaimed expert on Chinese / Vietnamese cotton price spreads, the future of cloud computing, protective car films (just a few examples from this forum) and find stocks that can easily triple if your analysis is correct?

 

I'm guessing doing so (investing in nano caps) requires too much inactivity?  [insert Pascal's quote about all of humanity's troubles here].

 

To be fair though, I started out thinking I could out smart the market in large caps in concentrated positions.  While I did OK, I now realize that most of my analysis was really simple and that I didn't understand things.  My good returns came from luckily picking the right ideas from people who did.

 

Now I think I know what it is to truly understand a company well, and not just think I understand it.  And generally really understanding a company takes time.  For a multi-billion dollar company, a lot of time.  Hundreds or thousands of hours.  For nano caps, the time is a lot less.  So... my logic is invest in the nano caps while "dumb" and learn the industries of the large caps while I wait for those nano caps to go up.  By the time I have to worry about investing in large caps, hopefully I'll have enough large cap industry knowledge under my belt to really now what's going on.

 

Buffett didn't pull the trigger on any large caps (outside of discount-to-liquidation value situations) for decades.  In the meantime, he kept on learning.  I bet he read Coke's 10-Ks in the fifties and each year all the way to the eighties, knowing the company very, very well, before he figured he knew the company and industry well enough to confidently pull the trigger.

 

Anyways, just talking out loud...

 

[west]

Description from the Financial Times:

 

Surge Components, Inc. 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. The products that the Company sells are utilized in the electronic circuitry of diverse products, including, but not limited to, automobiles, telecomm, audio, cellular telephones, computers, consumer electronics, garage door openers, household appliances, power supplies and security equipment. The products that the Company sells are sold to both original equipment manufacturers, (OEMs), who incorporate them into their products, and to distributors of the lines of products the Company sells, who resell these products within their customer base.

 

Funny how you need to include the above to keep your post respectable.  My eyes mostly glazed over, and found it mostly incomprehensible.  It's the dumb numbers that excite me.  I suppose the window-dressing is necessary to keep you from getting kicked off the board.  I guess we palookas merely scan such verbiage to make sure it's not something like an RV manufacturer that sells only to meth cooks.

 

Your finds are much appreciated and enjoyed. 

 

Cordially from one palooka to another.

 

On the description, I think it's good to know what the company does beyond just the numbers and seeing that they're not a "cook".  And Financial Time's summaries are very good versus what I could do myself.  I suppose I could've summarized the company up as an electronics parts (specifically capacitor and rectifier) manufacturer and distributor, but...  meh :)

 

For what it's worth, I wouldn't call us "palookas", just the people we play against :)

[writser]

I'm guessing doing so (investing in nano caps) requires too much inactivity?  [insert Pascal's quote about all of humanity's troubles here].

Besides that, my theory is that opportunities such as SPRS lack an opportunity for 'intellectual analysis'. SPRS is just a mediocre company with mediocre management in a mediocre field. Pretty much all you can do is read up on the company for an afternoon, decide it is cheap, buy it and pray. Very hard to outsmart other investors, almost impossible to find a hidden edge somewhere. It doesn't make you feel smart if you buy it and it goes up 30%. Such opportunities just do not appeal to a lot of people - even on this forum. See, for example, the very limited attention all your Japan picks get.

 

I think 99% of all people would rather be an investor like Buffett, having genius insights about the future of Coca Cola or other arbitrary companies rather than owning 100 boring stocks like Walter Schloss did. Even if that style would be detrimental to their results. It's just more, well, fun :) .

 

Same thing with poker. 99% of all players is more interested in their ego, outplaying other professionals, trying to hit it big and making the best moves rather than finding the most boring table ever, filled with palooka's and grinding out a decent wage. Even though that would probably be more lucrative for them.

 

Anyways, just talking out loud...

Which is appreciated!

[matjone]

I think there could be another drawback to the strategy which is that it is riskier.  I don't think it is risky enough to justify selling under NCAV or else I wouldn't own it, but what the hell do I know?  There was an interview with Phil Fisher someone posted recently where he explained how following his strategy would have preserved 80% of your purchasing power through the hyperinflation in germany.  I don't know how a basket of surge component type stocks would have done but I'm guessing not good.  Buffett laid out why pretty convincingly in his essay on inflation.  Also, even during normal times the Graham strategy relies on picking the proper buy and sell points to earn a return above the performance of the underlying business.  There has always been something about that that seemed less reliable in a way than Fisher/Buffett investing.

 

So I think graham stocks might have extra risk in certain scenarios.  I'm not sure of that though and I'd like to see a study of it if anyone knows of one.  Even if it is true, I am not sure that it matters for me because frankly I am probably too dumb and definitely too lazy for the Buffett/Fisher strategy.

[west]

I think there could be another drawback to the strategy which is that it is riskier.  I don't think it is risky enough to justify selling under NCAV or else I wouldn't own it, but what the hell do I know?  There was an interview with Phil Fisher someone posted recently where he explained how following his strategy would have preserved 80% of your purchasing power through the hyperinflation in germany.  I don't know how a basket of surge component type stocks would have done but I'm guessing not good.  Buffett laid out why pretty convincingly in his essay on inflation.  Also, even during normal times the Graham strategy relies on picking the proper buy and sell points to earn a return above the performance of the underlying business.  There has always been something about that that seemed less reliable in a way than Fisher/Buffett investing.

 

So I think graham stocks might have extra risk in certain scenarios.  I'm not sure of that though and I'd like to see a study of it if anyone knows of one.  Even if it is true, I am not sure that it matters for me because frankly I am probably too dumb and definitely too lazy for the Buffett/Fisher strategy.

 

On the inflation bit (as my stocks in Japan lose value due to currency exchange since I was lazy and never hedged...), my thought is if something is worth 100% more (or more) of its current price, inflation can eat away 50% of the value of the currency before you start to lose money in real terms.  If the USD loses 50% of its value (something I really, really hope is unlikely), we're going to be in a world of hurt.  I try not to worry about it too much :)

 

Since I think most of my Japan stocks are at least three bangers, the yen can lose 66.7% of its value before it starts to affect me.

 

This being said, I do agree with the Buffett/Fischer analysis.  And USD inflation does make me very nervous.  This is why I own a few companies like GCI (GNCMA), who is both based in an economy based on oil (which, in theory, will hedge potential USD inflation to a large degree) and who can also pass its cost increases on to its customers.

 

[west]

I think there could be another drawback to the strategy which is that it is riskier.  I don't think it is risky enough to justify selling under NCAV or else I wouldn't own it, but what the hell do I know?  There was an interview with Phil Fisher someone posted recently where he explained how following his strategy would have preserved 80% of your purchasing power through the hyperinflation in germany.  I don't know how a basket of surge component type stocks would have done but I'm guessing not good.  Buffett laid out why pretty convincingly in his essay on inflation.  Also, even during normal times the Graham strategy relies on picking the proper buy and sell points to earn a return above the performance of the underlying business.  There has always been something about that that seemed less reliable in a way than Fisher/Buffett investing.

 

So I think graham stocks might have extra risk in certain scenarios.  I'm not sure of that though and I'd like to see a study of it if anyone knows of one.  Even if it is true, I am not sure that it matters for me because frankly I am probably too dumb and definitely too lazy for the Buffett/Fisher strategy.

 

On the inflation bit (as my stocks in Japan lose value due to currency exchange since I was lazy and never hedged...), my thought is if something is worth 100% more (or more) of its current price, inflation can eat away 50% of the value of the currency before you start to lose money in real terms.  If the USD loses 50% of its value (something I really, really hope is unlikely), we're going to be in a world of hurt.  I try not to worry about it too much :)

 

Since I think most of my Japan stocks are at least three bangers, the yen can lose 66.7% of its value before it starts to affect me.

 

This being said, I do agree with the Buffett/Fischer analysis.  And USD inflation does make me very nervous.  This is why I own a few companies like GCI (GNCMA), who is both based in an economy based on oil (which, in theory, will hedge potential USD inflation to a large degree) and who can also pass its cost increases on to its customers.

 

Further ranting, I am insanely jealous of the rest of the US/Canada.  I'm obsessed with being mobile and living in big cities where I am forced to rent because I'm only a hundreds-of-thousands-aire.  If I didn't have this problem, I could potentially invest in the biggest inflation hedge out there - a US or Canadian house bought on a low rate fixed-rate mortgage, preferably in the suburbs of a big city area near public transit to a downtown area (this hedges future transportation/gas price increase issues).  If inflation kicks up to 10% or more for two years or so like it did in the late 1970s/early 1980s, this will bring your real purchase price down by 50% to 70%.  Just an outstanding inflation hedge for those who can take advantage of it.

 

EDIT: Oh, and don't forget the interest on the mortgage (and perhaps other things?) are tax deductible...

[cobafdek]

So I think graham stocks might have extra risk in certain scenarios.  I'm not sure of that though and I'd like to see a study of it if anyone knows of one.  Even if it is true, I am not sure that it matters for me because frankly I am probably too dumb and definitely too lazy for the Buffett/Fisher strategy.

 

Spoken like a true fellow palooka! 

 

It could be that it's a time-horizon thing, similar to Greenblatt's caution about drawdowns using MagicFormula in the shorter 3-5 year time periods.  But in the really long run (decades), all the studies show that the Graham-type dumb numbers strategies work, from Tweedy-Browne's research to Oppenheimer's to Carlisle's.  Not to mention the Buffett/Fisher strategies have short-term risks all of their own.  Witness Munger's experience circa 1973-1974, Pabrai's circa 2008, etc.

 

For what it's worth, I wouldn't call us "palookas", just the people we play against :)

 

All in all, it's better to be a palooka than a patsy.

 

 

[Saj]

I own this one as well. Wrote about it a while ago: http://www.barelkarsan.com/2012/12/surging-to-large-discount.html

 

I've both sold it and repurchased it since that post

[yadayada]

Besides that, my theory is that opportunities such as SPRS lack an opportunity for 'intellectual analysis'. SPRS is just a mediocre company with mediocre management in a mediocre field. Pretty much all you can do is read up on the company for an afternoon, decide it is cheap, buy it and pray. Very hard to outsmart other investors, almost impossible to find a hidden edge somewhere. It doesn't make you feel smart if you buy it and it goes up 30%. Such opportunities just do not appeal to a lot of people - even on this forum. See, for example, the very limited attention all your Japan picks get.

there is not much upside in an idea like this, I think that is why they don't get a lot of attention. And just read seeking alpha, I would say it is not hard to outsmart about 90% of them. Most retail investors do not have the slightest clue what they are doing, or they invest based in technicals. Most investors cannot even take the trouble to read like the first few fundamentals books.

 

with a net net strategy you get maybe 15% irr's in the long run. But it is more fun to try and get 25-35% irr's. If you expect a double on this, they will either have to change some things, or your hoping to sell it to some bigger idiot. For the inventors of net net investing, buffett and graham also did very little of it.

[west]

Besides that, my theory is that opportunities such as SPRS lack an opportunity for 'intellectual analysis'. SPRS is just a mediocre company with mediocre management in a mediocre field. Pretty much all you can do is read up on the company for an afternoon, decide it is cheap, buy it and pray. Very hard to outsmart other investors, almost impossible to find a hidden edge somewhere. It doesn't make you feel smart if you buy it and it goes up 30%. Such opportunities just do not appeal to a lot of people - even on this forum. See, for example, the very limited attention all your Japan picks get.

 

... there is not much upside in an idea like this...

 

50%-90%+ isn't much upside?  I'm not trying to sound on the attack, but I'd love to hear what ideas you're looking at.  Packer's Korean double-doubles?  Anything based in the US you know of (besides Packer's ideas) with that kind of upside, that you can quantify for us, in your portfolio?

 

With these nano-caps there's also the return on time invested.  Say this company doubles in three years (a likely scenario unless something catastrophic comes from out of nowhere).  That's a 26% per annum return.  I think I spent less than eight hours reading the filings for this company, but felt like I did a good enough job to establish a 4% position.  That's a great return on the time invested.

 

Meanwhile I've spent hundreds of hours reading about telecom to understand GCI.  Overkill?  Maybe.  But I think I now understand the dynamics of the industry and how telecom technology works well enough to put money into GCI.

 

Getting to the point, GCI probably has greater upside than Surge, but the return on my time invested (hundreds of hours versus less than eight with Surge) is probably much worse.  You know, opportunity costs and all...

 

 

[cobafdek]

with a net net strategy you get maybe 15% irr's in the long run.

 

What's wrong with 15%?  15% in the long run is legendary.

 

But it is more fun to try and get 25-35% irr's.

 

More than one way to happiness.  Sounds like you're looking for a quality stock to wed, with the goal of a long-term relationship, maybe even marriage.  We prefer multiple (up to hundreds in any given year) one-night stands with things that look good on the surface, but are safe and cheap.  Which do you think is more fun now?

 

N.B.  Relax - it's just an analogy, and all analogies have holes.  But you get the idea.

 

For the inventors of net net investing, buffett and graham also did very little of it.

 

Factually incorrect.  Moreover, Buffett still does it from time to time.  Certainly not with BRK's massive float, but with his own smaller private account (on the order of $1-2M perhaps), about which he does talk about occasionally.

[NeverLoseMoney]

Surge certainly looks cheap. I've never been able to get myself to buy it though.

 

This is a quote from the fisc. 2011 10-K:

 

Our Common Stock was listed on the Nasdaq SmallCap Market (now known as the Nasdaq Capital Market) until November 2001. Our Common Stock was delisted in connection with certain questionable payments in the aggregate amount of $3,000,000 made by the Company during the year ended November 30, 2000 and the quarter ended February 28, 2001. 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, they disclosed the transaction 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 as they were incurred. We duly issued a Form 1099 to the recipient of the payments, based upon the advice of our counsel. According to Steven Lubman (who served as our Vice President at that time), in mid-March 2001, he became aware of a document in a criminal proceeding unrelated to us in which the payments were described as kickbacks. This caused management to seek reconfirmation 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 19, 2001, we disclosed in a Form 10-QSB that the questionable payments had been made. 

 

In addition, after receipt of the March 22 letter, the Board determined to investigate the payments and ask for the return of the payments. The Company requested that the $3 million be repaid, and we received $1 million.

 

In May 2001, another law firm,  Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., was 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 "questionable payments".

 

By letters dated October 9, 2001 and January 17, 2002, we were contacted by the SEC regarding the potentially questionable payments, and 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.

   

In November 2001, NASDAQ  informed  us  that it had determined that the Company's securities would be delisted  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.

 

The legal counsel which advised the Company as to the legality of the questionable payments no longer has any relationship to the Company. Ira Levy and Steven Lubman were the sole officers and directors of the Company who were asked and refused, based on the advice of counsel, to submit to the NASDAQ interviews. They are currently officers and directors of the Company.

 

There is also a staggered board and a golden parachute for management. Insider ownership is 24%. There is one other large shareholder Michael Tofias (18.4%), but he doesn't seem like an activist.

 

The company has never paid a dividend to shareholders.

 

What is the strategy of the management here? Pay yourself a nice salary, do not return a cent to shareholders so the share price stays depressed and issue yourself options?

 

I think this deserves some type of discount, but I'm pretty bad at coming up with a reasonable number in situations like this. I agree that even a company like Surge can become simply too cheap to ignore despite the negatives. Surprising things can and do happen. Even Jemtec in Canada declared a huge special dividend recently. A strategy of buying a number of very cheap, cash-rich companies works pretty well IMO.

[west]

NeverLoseMoney,

 

Surge definitely has hairs, which is why I've got it as a basket bet (a 4% position).  In my limited experience, even the hairiest, smelliest companies who are trading for cheap tend to "pop" (whether justified or not) to the point where you can get a great return.  (See BUKS, one of the hairiest companies I've ever seen in the US... but the returns would have been great if I would have pulled the trigger back in January when I was looking at it).

 

This being said, I completely understand that this cigar butt strategy isn't for everyone.  Especially if you're working with a larger than small amount of money.

 

Thanks for your analysis.

[wachtwoord]

This has been on my watchlist for a while. Large dilution coming http://www.otcmarkets.com/edgar/GetFilingHtml?FilingID=11435564 . 15% dilution coming from stock options plan and it's being dumped on the market at market rate. This does not look good.