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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1998
Commission file number 0-14188
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 Identification No.)
incorporation or organization)
1016 Grand Boulevard, Deer Park, New York 11729
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (516) 595-1818
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Securities registered under Section 12(b) of
the Exchange Act: Common Shares, $.001 par value
Class A Common Share Purchase
Warrants
Securities registered under Section 12(g) of
the Exchange Act: Common Shares, $.001 par value
Class A Common Share 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 contained herein, and no disclosure will be
contained, to the best of the 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]
The issuer's net sales for its most recent fiscal year were $8,727,649.
The aggregate market value of the 4,319,460 shares of voting stock held
by non-affiliates of the Registrant, as of February 19, 1999 when the closing
sale price was $2.97 per share, was $12,828,796 (assuming solely for purposes
of this calculation that all directors, officers and greater than 5%
stockholders of the Registrant are "affiliates").
The number of shares outstanding of the issuer's common stock, par
value $.001 per share, as of February 19, 1999, was 4,858,958.
Documents Incorporated by Reference: Not Applicable.
Exhibit Index is located on page 32
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The Company 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 Company'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 smoke detectors. The Company's products are sold to both original equipment
manufacturers ("OEMs"), who incorporate them into their products, and to
distributors of Surge's product lines.
Surge's products are manufactured predominantly in Asia by
approximately 20 independent manufacturers. The Company does not have any
written long-term supply, distribution or franchise agreements with its
distributors. The Company acts as the exclusive sales agent through independent
sales representative organizations in North America for many of its
manufacturers pursuant to oral agreements. Through the Company's wholly-owned
subsidiary, Challenge/Surge, Inc., the Company also engages in the broker
distribution business. In such business, Challenge purchases name brand
electronic components and products, typically from domestic manufacturers and
authorized distributors, to fill specific customer orders. Challenge purchases
such components and products in the open market on the best available terms and
generally keeps small inventories in the range of $20,000 to $120,000.
Challenge's revenues are generally derived from the mark-up on the sale of
tangible products. Challenge operates as a separate entity and has certain sales
representatives of its own, but generally shares management and facilities with
the Company.
On December 29, 1998, the Company entered into a letter of intent to
acquire Orbit Network, Inc.("Orbit"). Orbit provides leisure and international
travel suppliers and resellers the ability to market and distribute their
products electronically to consumers, corporations and travel agents worldwide
through one distribution vendor.
The Company has been advised by Orbit that a selection of Orbit's
global clients include: Eurostar UK Ltd., Air Jamaica, Anheiser Busch Theme
Parks, Palace Resorts, Rocky Mountains Railtours, Orlando Convention & Visitor
Bureau, Las Vegas Convention & Visitor Bureau and Monaco Ministry of Tourism.
Orbit operates its own branded World Wide Web Sites (www.orbitnetwork.com and
www.travelfile.com), one of the first travel services on America Online, Inc.
(AOL) and sites for key travel marketing partners such as the American Society
of Travel Agents (ASTA) (www.astanet.com) and the Caribbean Tourism Organization
(CTO) (www.caribtourism.com).
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Under the letter of intent, the shareholders of Orbit would exchange
their shares of Orbit for 25 million shares (76% of the then outstanding shares
on a fully-diluted basis) of Common Stock of Surge, and Orbit would be merged
into Surge or a wholly owned subsidiary.
The acquisition of Orbit is subject to, among other things, execution
of a definitive merger agreement, obtaining a fairness opinion from an
independent investment banker, the completion of appropriate due diligence,
approval of the respective Boards of Directors and the approval of the Surge
shareholders. Therefore, there can be no assurance that the proposed transaction
will be completed.
The statements discussed in this Report include forward looking
statements that involve a number of risks and uncertainties. These include the
Company's lack of profitability, need to manage its growth, general economic
downturns, intense price cutting in the electronics industry, seasonality of
quarterly results, and other risks detailed herein and from time to time in the
Company's other periodic filings with the Securities and Exchange Commission.
The Company was incorporated under the laws of the State of New York on
November 24, 1981. The Company completed an initial public offering of its
securities in 1984 and a second offering (the "Public Offering") in August 1996
in which it received net proceeds of approximately $4,807,000. The Company's
principal executive offices are located at 1016 Grand Boulevard, Deer Park, New
York 11729; and its telephone number is (516) 595-1818.
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 and computer products. The Company focuses its
efforts on the distribution of capacitors and discrete components, a small
subset of the electronic component market.
The electronics industry has been characterized by intense price
cutting which could materially adversely affect the Company's 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 the Company's products, as well as all 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 the Company's products. Accordingly, any downturn in the
electronics industry in general, could adversely affect the Company's 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(1)", include electronic commerce, supply chain integration,
strategic alliances and globalization. The Company is finding itself needing to
address these dynamics as it plans its strategy for the next several years.
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(1) Published by Distribution Research and Education Foundation,
Washington, D.C.
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Products
The Company supplies a wide variety of electronic components bearing
the Company's private "Surge" label which can be broadly divided into two
categories -- capacitors and discrete components. For the fiscal years ended
November 30, 1997 ("Fiscal 1997") and November 30, 1998 ("Fiscal 1998"),
capacitors accounted for approximately 75% and 79%, respectively, of the
Company's sales while discrete components accounted for approximately 25% and
21%, respectively. Capacitors and discrete components can be categorized based
on various factors, including function, construction, fabrication and capacity.
The principal products sold by the Company under the Surge name or brokered 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, in coupling and bypass application, blockage of DC current,
as frequency determining and timing elements, as filters and delay-line
components, and in voltage transient suppression (circuit protection devices).
The Company's product line of capacitors includes:
Aluminum Electrolytic Capacitors. These capacitors, which are the
Company'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. The Company's supplier in Taiwan has one of the largest facilities for
these products in Taiwan. This facility is fully certified for the International
Quality Standard ISO 9002, which means that it meets certain stringent
requirements established in Europe 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
designed to ensure clear and thorough record keeping of all quality control and
testing information. Further, it is designed to ensure clear communication from
one department to another about the information (i.e., quality control,
production or engineering). This permits the Company to monitor its quality
control/manufacturing process information and to respond to any customer
questions.
Ceramic Disc Capacitors. These capacitors are the least expensive and
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 consumer products including appliances, games and toys.
Mylar Film Capacitors. These capacitors are frequently used for noise
suppression and filtering. They are commonly used in telecommunication and
computer products. The Company's supplier in Taiwan has a facility fully
certified for the International Quality Standard ISO 9002.
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Tantalum Capacitors. These capacitors are miniature in size and are
used predominately in timing circuits and applications which are critical in
response time, such as in smoke detectors and security equipment.
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 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.
The Company almost exclusively distributes discrete, low power semiconductor
components rather than integrated circuits.
Rectifiers. Low power semiconductor rectifiers are devices that convert
alternating current into one directional current by permitting current in one
direction only. They tend to be found in most electrical apparatuses, especially
those drawing power from an AC wall outlet. The Company sells a wide variety of
rectifiers, including Schottky barrier rectifiers (a high speed rectifier which
utilizes a metal to silicon barrier), 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 (utilize silicon
rectifying cells designed to withstand large currents and high voltages), soft
recovery/fast switching rectifiers, high voltage rectifiers, bridge rectifiers
(connect multiple circuits in parallel), flat pack surface mount rectifiers
(chip style used in miniaturization), self package surface mount rectifiers
(chip style without leads and used in miniaturization) and auto rectifiers. ISO
9002 and QS 9000 automotive certification is giving Surge an opportunity to
market its products in the automotive segment.
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. The Company sells many types of ISO 9002
transistors, including small signal transistors (designed for lower levels of
current), power transistors (designed for large currents to safely dissipate
large amounts of power), lead mounted transistors and surface mounted
transistors.
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.
Diodes sold by the Company include zener diodes (a silicon diode used as a
voltage regulator), high speed switching diodes and rectifiers, the most popular
type of diode.
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Other Products Available
Optoelectronic Devices. These devices are solid state products which
provide light displays, optical links, and fiber-optic signal coupling.
Applications vary from digital displays on consumer video equipment, to fiber
optic transmission of computer signals, to pattern sensing for regulation, such
as is found in automobile cruise controls. Optoelectronic devices sold by the
Company include a wide variety of light emitting diode products and numeric
display products.
Circuit Protection Devices. The Company's 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.
Audible Signaling Components. These include audible transducers and
Piezo buzzers which produce an audible sound for, and are used in back-up power
supplies for, computers, alarms, smoke detectors, automobiles, telephones and
other products which produce sounds. These products have been used much more
frequently in place of conventional speaker types. The Company has initiated
marketing relationships with certain Asian manufacturers of audible components
to sell these products worldwide.
New Products. The Company is in the process of introducing new discrete
semiconductor components and capacitors which are intended to complement the
Company's existing product lines. These products are ones that are commonly used
in the same circuit designs as certain of Surge's other 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. The Company is currently marketing surface
mount rectifiers which are used in miniature or compact products such as
cellular telephones and pagers. The Company is also marketing multilayer ceramic
capacitors widely used in computers and telecommunications applications for
filtering.
Inventory
The Company's products have been historically stable in price and have
not been very susceptible to obsolescence as are many other electronic
components. In 1998, the Company recorded an inventory reserve totaling
approximately $215,000 as a result of items being purchased for specific
customers with whom the Company no longer transacts business or products with
new versions at comparable prices. In order to obtain the best available price
from its suppliers, the Company will typically waive the right to obtain refunds
if prices are subsequently lowered prior to the Company's sale of the products,
as well as the right to return inventory to manufacturers. The Company will
generally pass these savings on to its customers. The Company intends to
implement a bar code system to improve the efficiency of its inventory control.
A bar code system will enable the Company to automatically record all inventory
received, reduce the open order status with the supplier by such amounts of
inventory received and create customer invoices based on shipments made to them.
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In order to adequately service its customers' needs, the Company
believes that it is necessary to maintain large inventories. The Company has
used the proceeds of its Public Offering to maintain its inventories. At any
given time, the Company attempts to maintain a three to four month inventory on
certain products in high demand for distributors and at least one month for
other products. The Company's inventory currently contains more than 25 million
component units consisting of more than 3,000 different part numbers. Although
the number of components and products will continue to increase as the Company
uses proceeds of the Public Offering to increase its inventories, it will still
generally maintain a two to four month inventory. The Company's 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. In 1998 and 1997, the average per
component sales price of the products sold by the Company was approximately
$.07. As of November 30, 1998 and November 30, 1997, the Company maintained an
inventory of $1,159,111 and $1,228,941, respectively.
Challenge is in the broker distribution business and fills orders from
customers which need electronic components and products that are not readily
available from their suppliers. As a result of the economic disturbances in Asia
and a general decrease in the electronics industry, there is an abundance of
electronics products in the United States markets. The abundance of electronic
products has resulted in decreased business among broker distributors as
customers choose to purchase the products from suppliers with direct factory
relationships due to the customer service provided, such as, technical support,
rescheduling of deliveries, returning of goods, the general ease of doing
business and better pricing. Also, there is a trend towards partnering between
large OEM customers and large franchise distributors which would further hinder
the efforts of the Company. The decrease in Challenge's broker distribution
business is reflected in the decrease in net sales from $5,179,393 in Fiscal
1997 to $2,922,643 in Fiscal 1998. Challenge currently maintains small
inventories. Challenge is seeking to obtain product rights to certain brand name
product lines and establish direct relationships with those manufacturers.
Although the Company 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 light of this belief, Challenge is
considering developing a product line or group of lines manufactured in Asia to
be sold under the name of Challenge, in addition to its broker distribution
business.
Manufacturing
Surge obtains substantially all of its products from manufacturers in
Asia while Challenge historically purchased its products domestically although
it has entered into certain foreign purchase agreements. Approximately 38% of
the total goods purchased by the Company in 1998 were manufactured in foreign
countries, with the majority purchased in Taiwan 83.6%, China 0.50%, South Korea
6.3%, India 6.7% and Hong Kong 2.9%. The Company purchases its products from
approximately 20 different global manufacturers, for many of which the Company
acts as exclusive sales agent in North America. While these manufacturers are
often the leading suppliers for OEMs, especially in the consumer market which is
extremely price sensitive, they are typically not the largest manufacturers for
these products. Management believes, however, that these manufacturers usually
offer lower prices and quicker response times than some of the largest
manufacturers. Most of the facilities which manufacture products for the Company
have obtained or have applied for the International Quality Standard ISO 9002
certification. The Company predominantly purchases its products in United States
currency in order to minimize the risk of currency fluctuations. The Company,
however, may be severely impacted by the recent and current economic conditions
in Southeast Asia, based upon the amount of business it transacts there.
Potential concerns may include drastic devaluations of currencies, loss of
suppliers and increased competition within the region. See "Foreign Trade
Regulation." In most cases, the Company utilizes two or more alternative sources
of supply for each of its products with one primary and one complementary
supplier for each product. The products are manufactured to the Company's order
with the "Surge" logo and label. The Company is continually building
relationships with suppliers and from time to time adds new suppliers when
needed. The Company's relationships with many of its suppliers date back to the
commencement of the Company's import operations in 1983.
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The Company does not have any written agreements with any of its
suppliers. Based upon the experience of the Company's Management and the
Company's excellent working relationship with its current manufacturers, the
Company does not believe that written agreements are, or shall be in the
foreseeable future, necessary to continue to obtain its products. The Company
has established payment terms with its manufacturers including letters of credit
and 60 day open account terms.
For Fiscal 1998 three suppliers each accounted for in excess of 10% of
the Company's net purchases. The three are Lifu Electronics, a Taiwanese
company, Master Instrument New York Company, Inc., a New York corporation and
Park One, Inc., a Taiwanese Company. Purchases from these suppliers in Fiscal
1998 were $1,264,215, $1,206,277, and $730,316, respectively, or 20.2%, 19.2%
and 11.6%, respectively. In Fiscal 1997 purchases from the foregoing three
suppliers were $1,034,783, $1,376,457 and $713,168, respectively, or 13.6%,
18.1% and 9.4%, respectively, of total purchases. However, the Company does not
regard any one supplier as essential to its operations, since equivalent
replacements for most of the products the Company markets are either available
from one or more of the Company's 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 or all of the Company's three major
suppliers would most likely have a material adverse effect on its business and
results of operations until a suitable replacement could be obtained.
Marketing And Sales
The Company's sales efforts are directed towards OEM customers in
numerous industries where the Company's products have wide application. The
Company currently employs nine sales and marketing personnel, including two of
its executive officers, who are responsible for certain key customer
relationships. The Company's executive officers also devote a significant amount
of time to developing and maintaining continuing relations with the Company's
key customers.
The Company uses independent sales representative organizations, which
often specialize in specific products and areas and, therefore, have specific
knowledge of and contacts in particular markets. Sales by the independent
organization Win-Cor Electronics Sales Corp. represented 21% of sales of the
Company for Fiscal 1998. These organizations normally employ between one and
twelve sales representatives. The individual sales representatives employed by
the sales organizations generally possess the expertise which enhances the scope
of the Company's marketing and sales efforts. This permits the Company to avoid
the significant costs associated with creating a direct marketing network. The
Company has maintained relationships with certain of its sales organizations
since 1988 and continues to engage new sales organizations as needed. The
Company believes that additional sales organizations and representatives are
available, if required.
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The Company engages independent sales representative organizations in
various regions throughout the United States for marketing to OEM customers and
distributors. In March 1998, the Company hired a West Coast Regional Sales
Manager and in April 1998, a Midwest Regional Sales Manager was hired. The
Company believes that such regional sales managers will ensure that the
Company's sales activities function properly. The Company has initiated a formal
national distribution program to attract more distributors to promote Surge
products. Surge has appointed a National District Manager to develop and manage
this program. The Company expects this market segment to contribute
significantly to the Company's sales growth over time. The Company is looking
forward to exciting things from these areas which now have Regional Sales
Managers.
Many OEMs require their suppliers to have a local presence and the
Company's network of independent sales representatives are responsive to these
needs. In that regard, in order to service the growing importance of the
electronics community, during 1998 the Company opened a quality
support/engineering location and a sales location in California. There are no
current plans to open additional locations.
Challenge will purchase any electronic products which a customer
requires. It, therefore, directly markets its services to the entire electronics
industry. However, Challenge's success has resulted primarily from its servicing
and purchasing capabilities and its reputation of being able to obtain "hard to
find" parts. Challenge's customers include several companies in
telecommunications, computers and power supply.
Effective January 1, 1996, Challenge entered into an agreement to
supply audible transducers for computer keyboards to Intel Corporation. The
agreement was for one year with a one year renewal option; however, it is
terminable at will by Intel Corporation. Although the contract was not renewed
in January 1999, Intel is honoring the current contract through March 1999, at
which time Intel will review its potential ongoing relationship with Challenge.
There can be no assurance Challenge will continue to have a relationship with
Intel.
As of November 30, 1998, the Company had arrangements with 18
sales representative organizations. Sales 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 agreements with independent sales representatives, such
representatives are permitted to represent other electronics manufacturers, but
are generally prohibited from carrying a line of products competitive with the
Company's products. They develop a territory by selling to both distributors and
OEMs. These agreements are terminable on written notice by either party or if
breached by either party.
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The Company utilizes the services of the Progressive Marketing Corp.,
Melville, New York, an unaffiliated marketing/public relations organization,
which publicizes the Company's achievements and helps the Company develop
greater name recognition and positioning in the electronics industry. On an
ongoing basis, this organization places announcements in trade journals
concerning new product introductions, the hiring of key personnel and/or of new
sales organizations or representatives by the Company.
Other Company marketing efforts include generation and distribution of
the Company's product catalogs and brochures and attendance at trade shows. The
Company has produced an exhibit for display at electronics trade shows
throughout the year. The Company's products were promoted at electronic
distribution shows in Las Vegas, Nevada in 1997 and 1998, and intends to exhibit
at the May 1999 show to continue its commitment and focus on the distribution
segment of the industry. The Company produces sales literature to advertise the
Company's products and to participate in additional trade shows.
Customers
The Company's products are sold to distributors and OEMs in such
diverse industries as the automotive, computer, communications, cellular
telephones, consumer electronics, garage door openers, smoke detectors, and
household appliances industries. The Company requests its distributors to
provide point of sales reporting which enables the Company to gain knowledge of
the breakdown of industries into which its products are sold. However, based on
its sales to OEMs, the Company believes that no one industry accounted for a
majority of the applications of the products it sold in Fiscal 1998 or Fiscal
1997. For Fiscal 1998, two customers accounted for 10.5% (First Alert) and 16.6%
(Leviton Manufacturing Co. ) of the Company's net sales. The Company's discrete
components are often sold to the same clients as its capacitors. These OEM
customers typically accept samples for evaluation and, if approved, the Company
works towards procuring the next orders for these items.
Typically, the Company does not maintain contracts with its customers
and generally sells products pursuant to customer purchase orders. The loss of
certain customers could have a material adverse effect on the Company, and in
fact, during Fiscal 1998 Challenge lost a customer that had accounted for over
10% of its sales as a result of the customer curtailing its business operations.
Because of the Company's contracts and good working relationships with its
distributors, the Company offers the OEMs, when purchasing through distributors,
extended payment terms, just-in-time deliveries and one-stop shopping for many
types of electronic products.
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Competition
The markets for the Company's products are highly competitive. The
Company competes with numerous well-established foreign and domestic importers,
and numerous local, regional and national distributors. The Company's principal
competitors in the sale of capacitors include Nichicon, Panasonic, Illinois
Capacitor and NIC. Its principal competitors in the sale of discrete components
include General Instrument Corp., Motorola, Inc., Microsemi Corp., Diodes, Inc.
and Samsung. Many of the Company's competitors are well established, with
substantial expertise, and possess substantially greater financial, marketing,
personnel and other resources than the Company. The Company believes it competes
effectively with such companies by providing equal or higher quality products at
lower prices, and with an additional emphasis on marketing and customer service.
The Company's motto is "never say no," as the Company offers same day
fulfillment without minimum purchase order requirements or other limitations and
generally maintains flexibility to ensure complete customer satisfaction.
Management believes that Challenge is able to compete effectively, in large
part, because of its sourcing and purchasing capabilities and its knowledge of
where "hard to find" parts are available.
Management Information Systems
The Company has made an investment in computer hardware and software.
The Company's management information systems ("MIS") consultants are responsible
for software and hardware upgrades, maintenance of current software and related
databases, and designing custom systems. The Company believes that its MIS
personnel are important to the Company's success and believes in continually
upgrading its hardware and software. As part of its MIS program, the Company
intends to commence individual bar coding on most products and intends to
implement a bar code system to improve the efficiency of its inventory control
system. All sales personnel of the Company are equipped with computer terminals
to assist in providing up-to-date reliable information to customers. The
Company's purchasing department manages the Company's 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 the Company's computer system. The Company
intends to continually evaluate and upgrade its IBM compatible computer system.
Some computers, software, and other equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean something other than the
year 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the "Year
2000 Problem."
The Year 2000 Problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
is reviewing its internal computer programs and systems to ensure that the
programs and systems will be Year 2000 compliant. The Company has been advised
by MIS Consultants, Friendly Software, that their own software has been designed
and developed with a resolution to the Year 2000 Issue and therefore, its
computer systems are Year 2000 compliant. The Company has spent approximately
$15,600 to become Year 2000 compliant and does not anticipate incurring any
additional costs.
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In addition to computers and related systems, the operation of office
and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, elevators, and other common devices may be affected
by the Year 2000 Problem. The Company is currently assessing the potential
effect of, and costs of remediating, the Year 2000 Problem on its office and
facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
The Company will commence a program to pursue compliance by those with
whom it electronically interconnects and will initiate communications with third
party suppliers and customers to identify and, to the extent possible, to
resolve issues involving the Year 2000 Problem. The Company's accounting system
is not linked to any outside software system. However, the Company has limited
or no control over the actions of these third party suppliers and customers.
Thus, while the Company expects that it will be able to resolve any significant
Year 2000 Problems with these systems, there can be no assurance that these
suppliers and customers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to resolve
Year 2000 Problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition, and results of
operation.
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, one cannot accurately predict how
many Year 2000 Problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management expects that the Company could likely suffer the following
consequences:
1. a significant number of operational inconveniences and
inefficiencies for the Company and its customers that may
divert management's time and attention and financial and human
resources from its ordinary business activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its customers to prevent
or alleviate material business disruptions.
The Company is currently developing contingency plans to be implemented
as part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. The Company expects to complete its contingency plans by mid
1999. Depending on the systems affected, these plans could include accelerated
replacement of affected equipment or software, short to medium-term use of
backup equipment and software, increased work hours for Company personnel or use
of contract personnel to correct on an accelerated schedule any Year 2000
Problems that arise or to provide manual workarounds for information systems,
and similar approaches. If the Company is required to implement any of these
contingency plans, it could have a material adverse effect on the Company's
financial condition and results of operations.
12
<PAGE>
Based on the activities described above, the Company does not believe
that the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, and unanticipated
problems identified in the ongoing compliance review.
Customer Service
The Company maintains two full-time customer service employee whose
time is dedicated largely to respond to inquiries such as price quote requests,
delivery status of new or existing purchase orders, changes of existing order
dates, quantities, dates, etc. The Company intends to increase its customer
service capabilities.
Proprietary Information
The Company holds no patents and has no trademarks or copyrights
registered in the United States Patent and Trademark Office or in any state.
While such protection is not currently considered essential to the success of
its business, it may become important to the Company in the future.
The Company relies on proprietary know-how and will employ various
methods to protect its processes, concepts, ideas and documentation associated
with its proprietary products. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop such processes, concepts, ideas and documentation.
Foreign Trade Regulation
Most products supplied by the Company are manufactured in Asia,
including such countries as Taiwan, South Korea, Hong Kong, India and Malaysia.
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, imposition of tariffs and
import and export controls, and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations. See "Item 6. Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources."
13
<PAGE>
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. The Company 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 its business, financial
condition or results of operations.
The 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. The Company's 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 the Company does not believe that any of these factors
adversely impact its business at present, there can be no assurance that these
factors will not materially adversely effect the Company in the future. Any
significant disruption in the delivery of merchandise from the Company's
suppliers, substantially all of whom are foreign, could have a material adverse
impact on the Company's 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 the Company.
The Company believes it is in substantial compliance with all material federal,
state and local laws and regulations regarding safe working conditions. The
Company believes that the cost of compliance with such governmental regulations
is not material.
Backlog
As of November 30, 1998, the Company's backlog was approximately
$2,417,086, as compared with approximately $2,033,918 at November 30, 1997.
Substantially all backlog is shipped by the Company in 90 to 180 days. Year to
year comparisons of backlog are not necessarily indicative of future operating
results.
Employees
As of November 30, 1998, the Company employed 22 persons, two of whom
are employed in executive capacities, seven are engaged in sales, one in
engineering, two in purchasing, three are engaged in administrative capacities,
two are in customer service, two are in bookkeeping and three are in
warehousing. Twenty-one (21) employees are employed full-time and one is
employed part-time by the Company. None of the Company's employees is covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its executive offices and warehouse facility,
located at 1016 Grand Boulevard, Deer Park, New York, 11729, at an annual rental
of $64,729 during 1997 and $72,176 during 1998. The lessor is Great American
Realty of Deer Park Co., an entity owned equally by the Company's President,
Vice President and Mark Siegel, a Director. Rent is scheduled to increase by 3%
per annum during the term of the lease, which expires on December 31, 2008. The
facility consists of approximately 4,500 square feet of office space and
approximately 3,000 square feet of warehouse space. The Company remodeled the
warehouse to provide for a more efficient flow in the warehouse. During 1998,
the Company renovated the office facilities to allow for expansion of the sales
department, clerical, finance and purchasing departments. The Company believes
the new working environment will lead to greater productivity. Any leasehold
improvements will be and will remain the property of the lessor.
14
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
The Company is not currently subject to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock and Class A Warrants are respectively traded in the
over-the-counter market and are quoted on the National Association of Securities
Dealers Automated Quotation System, Inc. SmallCap Market ("Nasdaq") under the
symbols "SRGE" and "SRGEW". In addition, the Common Shares and Warrants are
listed on the Boston Stock Exchange under the symbols "SRG" and "SRGW,"
respectively.
The following table sets forth for the periods indicated, the high and
low trade prices of the Company's Common Shares from December 1, 1996, through
February 19, 1999 as reported by the National Quotation Bureau, Inc. Such
quotations represent prices in dollars between dealers, do not include retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Security Trading Period High Low
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares
FISCAL YEAR ENDED NOVEMBER 30, 1997
FIRST QUARTER
(December 1, 1996 - February 28, 1997) 5 3/8 3 1/2
SECOND QUARTER
(March 1, 1997 - May 31, 1997) 5 5/8 2
THIRD QUARTER
June 1, 1997 - August 31, 1997) 2 3/16 1/2
FOURTH QUARTER
(September 1, 1997 - November 30, 1997) 2 3/8 5/8
FISCAL YEAR ENDED NOVEMBER 30, 1998
FIRST QUARTER
(December 1, 1997 - February 28, 1998) 2 13/16 1 15/32
SECOND QUARTER
(March 1, 1998 - May 31, 1998) 3 1/8 1 1/8
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
THIRD QUARTER
June 1, 1998 - August 31, 1998) 2 1/2 11/16
FOURTH QUARTER
(September 1, 1998 - November 30, 1998) 1 1/2
FISCAL YEAR ENDING NOVEMBER 30, 1999
FIRST QUARTER
(December 1, 1998 - February 19, 1999) 3 1/2 15/32
Warrants FISCAL YEAR ENDED NOVEMBER 30, 1997
FIRST QUARTER
(December 1, 1996 - February 28, 1997) 2 1/8 1/2
SECOND QUARTER
(March 1, 1997 - May 31, 1997) 13/16 7/32
THIRD QUARTER
(June 1, 1997 - August 31, 1997) 5/16 3/32
FOURTH QUARTER
(September 1, 1997 - November 30, 1997) 13/16 1/8
FISCAL YEAR ENDED NOVEMBER 30, 1998
FIRST QUARTER
(December 1, 1997 - February 28, 1998) 13/16 3/8
SECOND QUARTER
(March 1, 1998 - May 31, 1998) 1 1/2 31/32
THIRD QUARTER
(June 1, 1998 - August 31, 1998) 1 1/2 1/4
FOURTH QUARTER
(September 1, 1998 - November 30, 1998) 18/32 3/32
FISCAL YEAR ENDING NOVEMBER 30, 1999
FIRST QUARTER
(December 1, 1998 - February 19, 1999) 1 1/16
</TABLE>
17
<PAGE>
On February 19, 1999, the closing trade price of a Common Share and a
Warrant were $2.97 and $.688, respectively.
On February 19, 1999, the Company had 185 and 30 recordholders of its
Common Stock and Warrants, respectively, and reasonably believed it had in
excess of 300 beneficial holders of its Common Stock.
The Company has not paid any cash dividends on its Common Stock during
the last two years and does not anticipate paying any in the foreseeable future.
The Board of Directors intends to retain any earnings to support the growth of
the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information, the materials contained in this
Management's Discussion and Analysis or Plan of Operation is forward-looking
(within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act) and involve a number of risks and uncertainties. These include the
Company's losses, need to manage its growth, general economic downturns, intense
price cutting in the electronics industry, seasonality of quarterly results, and
other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Although forward-looking statements in this
Report reflect the good faith judgment of the Company's management, such
statements can only be based on facts and factors currently known by the
Company. Consequently, forward-looking statements are inherently subject to
risks and uncertainties, actual results and outcomes may differ materially from
the results and outcomes discussed in the forward-looking statements. Readers
are urged to carefully review and consider the various disclosures made by the
Company in this Report, as an attempt to advise interested parties of the risks
and factors that may affect the Company's business, financial condition and
results of operations and prospects.
Fiscal Year Ended November 30, 1998 as Compared to Fiscal Year Ended
November 30, 1997.
Net sales for Surge Components, Inc. and Subsidiary (the "Company") for
the fiscal year ended November 30, 1998 ("Fiscal 1998") decreased by $2,106,149,
or 19%, to $8,727,649, as compared to net sales of $10,833,798 for the fiscal
year ended November 30, 1997 ("Fiscal 1997"). This decrease was primarily
attributable to the economic effect of the over-abundance of electronic
components in the broker distributor market in which the Company's subsidiary,
Challenge Surge Inc. ("Challenge"), operates. This has resulted in the migration
of some of Challenge's customers to distributors who have established direct
factory relationships, in house offices and inventory in the customer's
facilities. This condition may continue into the latter part of 1999 if not
longer. The net sales for the Company without Challenge's sales remained about
the same when compared to Fiscal 1997. Although the Company expected more growth
in Fiscal 1998 its results were hindered by the lower demand of electronic
products in the broker market. The electronic components industry as a whole has
slowed down significantly. The Company is attempting to increase sales by
introducing new products, hiring more salespeople and sales representatives.
18
<PAGE>
The Company's gross profit for Fiscal 1998 decreased by $588,888, or
23%, as compared to Fiscal 1997. This decrease was due primarily to the market
conditions described above, which relate to the Company's products. Gross margin
as a percentage of net sales, however, decreased from 24.1% in Fiscal 1997 to
23.1% in Fiscal 1998. The lower margins were primarily a result of the net
effect of the Company writing down a portion of its inventories to its net
realizable value and offset by the Company making its operations more efficient
by reducing inventory acquisition costs. The inventory reserve was reflected as
a charge to income in the year ended November 30, 1998 totaling approximately
$215,000. The inventories reserved were items purchased for specific customers
with whom the Company no longer transacts business or products with new and
improved versions that are available at comparable pricing. These items are not
readily saleable to other customers. In Fiscal 1998, the Company in an effort to
improve efficiency of inventory management instituted a policy of increasing
direct shipments to its customers factories overseas. This has resulted in a
substantial reduction of import related fees.
General and administrative expenses for Fiscal 1998 as compared to
Fiscal 1997 have remained relatively unchanged. The Company's continued
investment in personnel is expected to increase overhead in the latter part of
1999.
Selling and shipping expenses for Fiscal 1998 decreased by $27,422, or
3%, compared to Fiscal 1997. These decreases were primarily a result of the
decrease in sales commissions due to the decrease in sales volume and the
decrease in the cost of printing the new catalogs offset by increased salesman
salaries. The Company is committed to increasing sales through authorized
distributors, global and domestic sales representatives, an Internet website,
literature and participation in trade shows.
Interest expense for Fiscal 1998 decreased by $21,076, or 38%, as
compared to Fiscal 1997. This decrease is primarily due to the Company's
decreased purchasing through letters of credit and bankers acceptances. The
Company intends to continue utilizing letters of credit and bankers acceptances
on an as needed basis based on its cash needs.
Interest income for Fiscal 1998 increased by $28,591, or 11%, as
compared to Fiscal 1997. The Company continues to aggressively pursue its
investment program by investing all excess funds.
As result of the foregoing, the Company had net loss from operations
and net loss of $(681,594) and $(274,166) for Fiscal 1998, as compared to loss
from operations and net income of $(120,056) and $75,350 for Fiscal 1997.
Liquidity and Capital Resources
At November 30, 1998 Compared to November 30, 1997
19
<PAGE>
Working capital decreased by $471,080 for Fiscal 1998 from $6,296,417
at November 30, 1997 to $5,825,337 at November 30, 1998. This decrease resulted
primarily from the decrease in accounts receivable, inventory and the use of
banker's acceptances and an increase in accounts payable offset by the increase
in marketable securities. The Company's Current Ratio (current assets to current
liabilities) increased to 5.12:1 at November 30, 1998, as compared to 4.6:1 at
November 30, 1997, as a result of funds provided by operations and decreased
borrowings. The average number of days to collect receivables increased from 41
days to 57 days. Inventory turned more in Fiscal 1998 as a result of the
Company's efficiency in managing inventory. Working capital levels are expected
to be adequate to meet the current operating requirements of the Company.
In April 1998, the Company renewed the letter of credit agreement with
its bank through May 31,1999 allowing the Company to obtain up to $800,000 in
outstanding letters of credit and $300,000 in direct borrowings with a maximum
borrowing limit of $1,000,000. The direct borrowings incur interest at the
bank's prime rate per annum. The agreement also provides for the creation of
banker's acceptances (drafts drawn on and accepted by a bank). Direct borrowings
are limited to advances based on 80% of eligible receivables and 25% of eligible
inventory capped at $100,000. The Company is charged one-half percent (1/2%)
upon opening of the letter of credit, one-half percent (1/2%) on negotiation and
two percent (2%) per annum over the banker's acceptance rate over the borrowed
term. The agreement requires the Company to be in compliance with certain
financial ratios including a debt to equity ratio and a minimum amount of
tangible net worth. The Company was in compliance with the required financial
ratios as of November 30, 1998. As of November 30, 1998, there were no
outstanding direct borrowings, outstanding banker's acceptances or letters of
credit. Borrowings are collateralized by the assets of the Company.
The Company intends to expand its facilities over the next several
years in order to achieve and maintain the growth expected primarily through the
increased penetration of the OEM and distribution market, the introduction of
new products and the upgrade of existing product lines. In order to effect this
expansion, the Company has allocated a portion of the net proceeds from its July
1996 public offering toward the significant up-front expenditures associated
with the expansion of office and warehouse space at its current facilities in
addition to potentially establishing additional sales/stocking facilities in
other strategic locations. The Company renovated its current facilities during
1998. The total cost of the renovation of its current facilities was
approximately $237,000. Additionally, the renovation provides additional space
for test labs, which allow the Company to provide customers with prompt
information regarding the specifications of its products and additional sales
staff expected to manage the Company's sales growth. In May 1998, the Company
leased an additional 2,500 square feet at its corporate headquarters to
facilitate the above changes and improvements, increase warehouse space, improve
efficiency and provide for the future expansion of staff needs.
In addition to the costs associated with the expansion of the Company's
facilities, the Company expects to continue to incur significant operating
costs. These costs consist principally of payroll and marketing related charges.
The future profitability of the Company will therefore depend on increased
future sales levels. In that regard the Company does not plan on opening new
facilities unless demand warrants such opening. Consequently, the Company's main
focus will be towards expanding the sales staff.
20
<PAGE>
Effective January 1, 1996, Challenge entered into an agreement to
supply audible transducers for computer keyboards to Intel Corporation. The
agreement was for one year with a one year renewal option; however, it is
terminable at will by Intel Corporation. Although the contract was not renewed
in January 1999, Intel is honoring the current contract through March 1999, at
which time Intel will review any potential ongoing relationship with Challenge.
There can be no assurance that Challenge will continue to have a relationship
with Intel.
The Company is in the process of updating its equipment, procedures and
personnel which it hopes will better enable itself to attract new customers as
well as increase the sales volume with its existing customers, expand sales to
its existing customer base by offering a broad range of complementary products.
In 1997, the Company established a Website, giving the engineering community
exposure and access to any and all information about the Company and its
products, which they would consider to include in their design.
The Company believes that many of its suppliers and customers have Year
2000 Issues ("Year 2000 Issue") which could affect the Company. Many older
computer software programs recognize only the last two digits of the year in any
date (e.g., "98" for "1998"). These programs were designed and developed without
considering the impact of the upcoming change in the century. If the software is
not reprogrammed or replaced, many computer applications could fail or create
erroneous results by or at the year 2000. The Company commenced a program to
pursue compliance by those with whom it electronically interconnects. It is not
possible, however, at present, to quantify the overall cost of resolving this
issue for the Company's suppliers and customers. The Company has been advised
that their own software has been recently designed and developed with a
resolution to the Year 2000 Issue and as such the Company presently believes
that the cost of fixing the Year 2000 Issue will not have a material effect on
the Company's current financial position, liquidity or results of operations.
Challenge was advised by its computer consultants that some of its software
needed to be updated to resolve the Year 2000 Issue. The cost to resolve this
problem was $5,600, which was incurred prior to November 30, 1998.
Approximately 38% and 49% of the total goods purchased by the Company
in 1998 and 1997 were manufactured in foreign countries and the majority of
Surge's purchases are made from manufacturers in Asia. Substantially all of
Challenge's products are purchased domestically. In addition, approximately 4%
and 5% of 1998 and 1997 sales, respectively, are exported to various countries.
The Company has minimized the risk of currency fluctuations by purchasing and
selling its products in United States currency. The Company, however, may be
severely impacted by the continuing economic conditions in Southeast Asia, based
upon the amount of business it transacts there. Potential concerns may include
loss of suppliers and increased competition within the region. The Company can
not estimate the potential impact of these conditions to its financial position,
liquidity or results of operations.
21
<PAGE>
On December 29, 1998, the Company entered into a letter of intent to
purchase all the issued and outstanding capital stock of Orbit Network, Inc. in
exchange for 25,000,000 shares (76% of the then outstanding shares on a
fully-diluted basis) of the Company's common stock. The acquisition is subject
to the execution of definitive documentation and the satisfaction of conditions
precedent.
During Fiscal 1998, the Company had net cash provided by operating
activities of $168,092, as compared to $533,610 used by operating activities in
Fiscal 1997. The increase in cash provided by operating activities resulted from
a decrease in accounts receivable and increase in accounts payable, as partially
offset by the Company's net loss.
The Company had net cash used in investing activities of $1,214,945 for
Fiscal 1998, as compared to $143,318 for Fiscal 1997. In April 1998, Challenge,
pursuant to its investment program, invested a portion of their operating funds
into marketable securities. Additionally, the Company incurred costs related to
the improvements of their current facilities.
The Company had net cash used in financing activities of $461,620 for
Fiscal 1998, as compared to $331,263 provided by financing activities for Fiscal
1997. This decrease in the cash used in financing activities was the result of
the repayment of net borrowings under the letter-of-credit agreement during
1998. As a result of the foregoing, the Company had a net decrease in cash of
$1,508,473 during Fiscal 1998, as compared to a net decrease of $345,665 for
Fiscal 1997.
The Company expects that its cash flow from operations, current
investment program and the Company's line of credit agreement will be sufficient
to meets its current financial requirements over at least the next twelve
months.
INFLATION
The effects of inflation have lessened in recent years as indicated by
the average consumer price index, which has been below 3% in each of the past
two years. The Company has generally been able to offset the impact of rising
costs through purchase price reductions. As a result, inflation has not had, nor
is it expected to have, a significant impact on the Company's business. However,
inflation and changing interest rates have had a significant effect on the
economy in general and, therefore, could affect the Company's future operating
results.
ITEM 7. FINANCIAL STATEMENTS
The financial statements to be provided pursuant to this Item 7 begin
on page F-1 of this Report, following Part III hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors and executive officers of the Company are as follows:
Name Age Positions
---- --- ---------
David Siegel(1) 73 Chairman of the Board
Ira Levy 42 President and Director
Steven J. Lubman 43 Vice President, Principal Financial
Officer, Secretary and Director
Mark Siegel(1) 44 Director
(1) Member of the Audit Committee and the Compensation Committee
DIRECTORS AND EXECUTIVE OFFICERS
David Siegel has served as Chairman of the Board of Directors of the
Company since 1983. Mr. Siegel also serves on the Boards of Directors of Kent
Electronics Corp. and Micronetics Corp., each of which is a publicly owned
company. David Siegel is the father-in-law of Ira Levy and the father of Mark
Siegel.
Ira Levy has served as President of the Company and a Director since
its inception on November 24, 1981. From 1976 to 1981, Mr. Levy was employed by
Capar Components Corp. ("Capar"), an importer and supplier of capacitor and
resistor products.
Steven J. Lubman has served as Vice President, Principal Financial
Officer, Secretary and a Director of the Company since its inception on November
24, 1981. From 1975 to 1981, Mr. Lubman was employed by Capar.
Mark Siegel was appointed to the Board of Directors in October 1996.
Since 1985, Mr. Siegel has been the President of Mark Siegel Inc., d/b/a Great
American Electronics Corp., an electronics parts distributor. Mark Siegel is the
son of David Siegel.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. The Company's Managing
Underwriter, Maidstone Financial, Inc. ("Maidstone") has the right during the
three-year period ending July 31, 1999, in its sole discretion, to designate one
person for election as a director, or alternatively to designate an individual
to serve as a non-voting advisor to the Company's Board of Directors. David
Siegel and Mark Siegel comprise the Company's Audit and Compensation Committees
with David Siegel serving as Chairman. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board.
23
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Pursuant to Section 16 of the Exchange Act, the Company's Directors and
executive officers and beneficial owners of more than 10% of the Company's
common stock, par value $.001 ("Common Stock"), are required to file certain
reports, within specified time periods, indicating their holdings of and
transactions in the Common Stock and derivative securities. Based solely on a
review of such reports provided to the Company and written representations from
such persons regarding the necessity to file such reports, the Company is not
aware of any failures to file reports or report transactions in a timely manner
during the Company's fiscal year ended November 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the fiscal year ended
November 30, 1998 ("Fiscal 1998"), the fiscal year ended November 30, 1997
("Fiscal 1997") and the fiscal year ended November 30, 1996 ("Fiscal 1996") by
those persons who served as Chief Executive Officer and any Named Executive
Officer who received compensation in excess of $100,000 during such years.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------
Name and Other Annual Shares
Principal Salary Bonus Compensation Underlying
Position Year ($) ($) ($)(1) Options(#)
- - -------- ---- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Ira Levy 1998 $200,000 $ 85,211(1) 0 0
President and CEO 1997 $197,500 $ 52,325(1) 0 75,000
1996 $137,116 $107,500(1) 0 0
Steven J. Lubman 1998 $200,000 $ 20,538(1) 0 0
Vice President 1997 $199,000 $ 53,565 0 75,000
1996 $128,742 $107,500(1) 0 0
</TABLE>
- - -----------
(1) The above compensation figures do not include rent paid to the Company's
landlord, an entity owned in part, by Messrs. Levy and Lubman; the cost to the
Company of the use of automobiles leased by the Company; the cost to the Company
of benefits, including premiums for life insurance and any other perquisites
provided by the Company to such persons in connection with the Company's
business all of which does not exceed the lesser of $50,000 or 10% of such
person's annual salary and bonus.
24
<PAGE>
Option Grants in Last Fiscal Year
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during Fiscal 1998
and exercise information.
<TABLE>
<CAPTION>
Individual Grants
------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted(#) Fiscal Year Price ($/sh) Date
- - ---- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
David Siegel 10,000 50% $2.0937 7/5/03
Mark Siegel 10,000 50% $2.0937 7/5/03
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and FY End Option Values
The table below includes information regarding the value realized on
option exercises and the market value of unexercised options held by the
executive officers named in the Summary Compensation Table during Fiscal 1998.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ira Levy 0 0 75,000/0 0 /0 (1)
Steven J. Lubman 0 0 75,000/0 0 /0 (1)
</TABLE>
- - ---------
(1) Based on the closing price per share of the Company's Common Stock on
November 30, 1998 or $.5625.
25
<PAGE>
Director Fees
Officer-directors currently receive no compensation for serving on the
Board of Directors other than reimbursement of reasonable expenses incurred in
attending meetings. David Siegel currently receives $750 per month in
recognition for his service to the Board of Directors as a member and President
of the Audit and Compensation Committees. Mark Siegel currently receives $500
per month for serving on the Audit and Compensation Committees. Each outside
director also receives reimbursement of expenses, as well as options from time
to time, at the discretion of the Board of Directors. On July 6, 1998, Mark
Siegel and David Siegel were each granted immediately exercisable options to
purchase 10,000 shares of Common Stock, exercisable at $2.0937 per share, in
recognition of their service on the Board of Directors.
Employment Agreements
The Company entered into Employment Agreements dated as of February 1,
1996 with Ira Levy, President, and Steven J. Lubman, Vice President. The
Agreements provide that Messrs. Levy and Lubman shall devote all of their
business time to the Company, each in consideration of an annual salary of
$200,000 for the five-year period commencing on July 31, 1996. Bonuses to
Messrs. Levy and Lubman are to be based upon the performance of the Company and
determined at the discretion of the Board of Directors. Their salaries may be
increased annually during the term of the employment agreements at the
discretion of the Board of Directors (or a Compensation Committee). Their
agreements provide that during the term of employment with the Company 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
the Company. In March 1998, the employment agreements were amended to extend the
term to July 30, 2003 and to provide that on July 30th of each successive year
of the agreements, the agreements shall renew for an additional year so that on
each July 30th, there will be five years remaining on the term of the
agreements, unless terminated in writing by either party. The agreements further
provide that in the event of a change of control, where Ira Levy or Steven J.
Lubman is not elected to the Board of Directors of the Company and/or is not
elected as an officer of the Company and/or there has been a change in the
ownership of at least 25% of the issued and outstanding stock of the Company,
and such issuance was not approved by either Ira Levy or Steven J. Lubman, then
the non-approving person(s) may elect to terminate his employment contract and
receive 2.99 times 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.
The Company has agreements with independent representatives who receive
commissions of 5% on the net amount of invoices rendered by the representative
after all trade discounts, freight, transportation allowances, sales taxes,
insurance and the like have been deducted. The representatives agree to not
represent any person or entity manufacturing or selling products which are
competitive with products and services sold by the Company throughout the term
of the agreement. The agreements continue unless terminated by written notice by
either party or the agreement is breached by either party.
26
<PAGE>
Stock Bonus Plan
In January 1996 the Company adopted and the shareholders ratified in
February 1996, the 1995 Employee Stock Option Plan (the "Option Plan"). The
Option Plan, as amended on July 6, 1998, provides for the grant of options to
qualified employees (including officers and directors) of the Company, employees
of the Company's subsidiary, independent contractors, consultants and other
individuals to purchase an aggregate of 850,000 Common Shares. The exercise
power of all options must be at least 85% of fair market value of the Common
Shares on the date of grant.
Stock Options
On February 19, 1996, the Company granted five-year incentive stock
options under the Option Plan to ten (10) employees to purchase an aggregate of
86,000 Common Shares, 68,000 of which were outstanding at November 30, 1998. The
options become effective on July 31, 1996 and were exercisable at $3.20 per
Common Share and vest in either 25% increments at the end of each of the first
four years from July 31, 1996, or in 50% increments at the end of each of the
first two years from July 31, 1996. On June 30, 1997, the Company re-granted
these options at an exercise price of $1.25 per share, with the same vesting
terms and a termination date of June 30, 2002. The Company also granted
five-year non-qualified stock options under the Option Plan to seven (7) persons
with whom the Company has a business relationship, to purchase an aggregate of
60,000 Common Shares. These options become effective on July 31, 1996 and are
exercisable at $3.20 per Common Share and vest in 25% increments at the end of
each of the first four years from July 31, 1996.
On January 8, 1997, the Company granted Tsung-Ming Chen, the Quality
Assurance Director of Marketing, and the then National Sales Manager,
respectively, each 20,000 options, or an aggregate of 40,000 options subject to
the vesting schedule specified in the agreements, at an exercise price of $3.50
per share. These options were re-granted on June 30, 1997 at an exercise price
of $1.25 per share and the same vesting schedule. On January 8, 1997, Mark
Siegel and David Siegel, non-officer directors, were each granted options to
purchase 10,000 shares of Common Stock exercisable at $3.50 per share in
recognition of their service on the Board of Directors, all of which vested
immediately. These options were re-granted on June 30, 1997 at an exercise price
of $1.25 per share. On July 6, 1998, Mark Siegel and David Siegel were each
granted options to purchase 10,000 shares at an exercise price of $2.0937 per
share. On June 30, 1997, Ira Levy and Steven J. Lubman, officers and directors,
were each granted 25,000 options at an exercise price of $1.25, and on October
28, 1997 each were granted 50,000 options at an exercise price of $1.53.
27
<PAGE>
On December 28, 1998, Ira Levy and Steven J. Lubman, officers and
directors, were granted 2,500,000 and 2,250,000 five year options, respectively,
and David Siegel and Mark Siegel, directors, were granted 400,000 and 150,000
options, respectively, each with an exercise price of $2.00 per share. The
options are not exercisable until the fourth anniversary date of the date of
grant, however, in the event the Company's proposed merger with Orbit is
approved by the shareholders, the options shall become immediately exercisable.
The Company also granted options to 12 employees to purchase an aggregate of
38,000 Common Shares at an exercise price of $2.00.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 19, 1999,
based on information obtained from the persons named below, with respect to the
beneficial ownership of Common Shares by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Shares, (ii)
each Director (iii) each person named in the Summary Compensation Table and (iv)
all executive officers and Directors as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percentage of
of Beneficial Owner Beneficial Ownership(1) Common Stock owned(2)
- - ------------------- ----------------------- ---------------------
<S> <C> <C>
Ira Levy 332,500(3)(4) 6.7%
Steven J. Lubman 330,000(5)(6) 6.7%
David Siegel 20,000(7) (9)
Mark Siegel 46,998(8) (9)
All directors and executive
officers as a group (4 persons) 729,498(10) 14.5%
</TABLE>
- - -------------
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all Common Shares
beneficially owned by them. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that are
held by such person (but not those held by any other person) and which are
exercisable within 60 days from the date hereof have been exercised.
(2) Based on 4,858,958 shares issued and outstanding as of February 19, 1999.
(3) Includes 75,000 shares issuable upon exercise of currently exercisable stock
options. Includes Common Shares held by Mr. Levy which are subject to certain
voting and transfer restrictions pursuant to a Stock Purchase Agreement made by
and between Mr. Lubman and Mr. Levy. See "Certain Relationships and Related
Transactions."
(4) Excludes 2,500,000 shares issuable upon exercise of stock options granted
on December 28, 1998, which are not currently exercisable.
(5) Excludes 2,250,000 shares issuable upon exercise of stock options granted
on December 28, 1998, which are not currently exercisable.
28
<PAGE>
(6) Includes 75,000 shares issuable upon exercise of currently exercisable stock
options. Includes Common Shares held by Mr. Lubman which are subject to certain
voting and transfer restrictions pursuant to a Stock Purchase Agreement made by
and between Mr. Levy and Mr. Lubman. See "Certain Relationships and Related
Transactions."
(7) Includes 20,000 shares issuable upon exercise of currently exercisable
options, but excludes 400,000 shares issuable upon exercise of stock options
granted on December 28, 1998, which are not currently exercisable.
(8) Includes 20,000 shares issuable upon exercise of currently exercisable
options, but excludes 150,000 shares issuable upon exercise of stock options
granted on December 28, 1998, which are not currently exercisable.
(9) Represents less than one percent ownership.
(10) Includes 190,000 shares issuable upon exercise of currently exercisable
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into five-year employment agreements which were
amended to automatically renew for an additional year on July 31st, with Ira
Levy, President, and Steven J. Lubman, Vice President, effective July 31, 1996
at a base annual salary of $200,000. These agreements contain non-competition
provisions and the payment of "golden parachutes" in the event of a change in
control of the Company, as defined. See Item 10. "Executive
Compensation-Employment Agreements."
The Company's executive offices and warehouse facility are leased from
Great American Realty of Deer Park Co., a company whose stock is owned 33 1/3 %
each by Ira Levy and Steven J. Lubman, officers of the Company and Mark Siegel,
a Director. The monthly rental was $6,690 and $5,078 during 1998 and 1997,
respectively, increasing at 3% per annum during the term of the lease which
expires on December 31, 2008. See Item 2. "Description of Property."
Ira Levy and Steven J. Lubman entered into a Stock Purchase Agreement
in March 1992 which relates to their respective share ownership in the Company.
Pursuant to the agreement, Messrs. Levy and Lubman each agreed to vote their
shares, for as long as the other party continues to own voting shares of the
Company, in such manner to elect each of them as a director of the Company.
Furthermore, in the event of the death of either Messrs. Levy or Lubman, the
survivor shall buy the decedent's shares of the Company. The purchase shall be
funded through the use of life insurance policies held by Messrs. Levy and
Lubman which name the other party as beneficiary. In addition, the agreement
grants Messrs. Levy and Lubman a right of first refusal to purchase each other's
shares in the event of disability, retirement or sales to third parties at an
agreed upon price.
On January 8, 1997, Mark Siegel and David Siegel , non-officer
directors, were each granted 10,000 shares of Common Stock exercisable at $3.50
per share in recognition of their service on the Board of Directors, all of
which vested immediately. These options were re-granted on June 30, 1997 at an
exercise price of $1.25 per share. On June 30, 1997, Ira Levy and Steven J.
Lubman, officers and directors, were each granted options to purchase 25,000
shares of common stock at an exercise price of $1.25, and on October 28, 1997
each were granted 50,000 options at an exercise price of $1.53.
29
<PAGE>
On July 6, 1998, Mark Siegel and David Siegel, were each granted
options to purchase 10,000 shares of Common Stock, immediately exercisable at
$2.0937 per share in recognition of their services on the Board of Directors.
On December 28, 1998, Ira Levy and Steven J. Lubman, officers and
directors, were granted 2,500,000 and 2,250,000 five year options, respectively,
and David Siegel and Mark Siegel, directors, were granted 400,000 and 150,000
options, respectively, each with an exercise price of $2.00 per share. The
options are not exercisable until the fourth anniversary date of the date of
grant, however, in the event the Company's proposed merger with Orbit is
approved by the shareholders, the options shall become immediately exercisable.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- - ----------- -----------
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 By-Laws of the Company. (1)
4.1 Form of Underwriter's Warrants. (1)
4.2 Form of Public Warrant Agreement. (1)
4.3 Specimen Common Share Certificate. (1)
4.4 Specimen Class A Warrant Certificate. (1)
10.1 The Company's 1995 Employee Stock Option Plan. (1)
10.2 Employment Agreement between the Company and Ira Levy. (1)
10.3 Employment Agreement between the Company and Steven J.
Lubman. (1)
10.4 Revolving Credit Line Agreement between European American Bank
and the Company. (1)
**10.5 Agreement with Great American Realty of Deer Park dated June 1,
1998.
10.6 Stock Purchase Agreement dated March 1992 by and between Ira H.
Levy and Steven J. Lubman. (1)
10.7 Form of sales representative agreement. (1)
*10.8 Intel Corporation Purchase Agreement dated January 1, 1998. (1)
**10.9 Amendment to Employment Agreement between the Company and Ira
Levy.
**10.10 Amendment to Employment Agreement between the Company and Steven
Lubman.
11. Computation of Earnings Per Share
21.1 Subsidiaries of the Company. (1)
**23.1 Consent of Seligson & Giannattasio, LLP.
**27. Financial Data Schedule.
- - ----------
* Confidential Treatment for a portion of the contract has been granted by
the Securities and Exchange Commission.
** Filed herewith.
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (No. 333-630 NY) declared effective by the Securities and
Exchange Commission on July 31, 1996.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SURGE COMPONENTS, INC.
By: /s/ Steven J. Lubman By: /s/ Ira Levy
---------------------- -----------------
Steven J. Lubman, Ira Levy,
Principal Financial and Accounting Officer President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
Signature Title Date
- - --------- ----- ----
/s/ David Siegel
- - ---------------------
David Siegel Chairman of the Board February 26, 1999
/s/ Ira Levy
- - ---------------------
Ira Levy President, CEO (Principal February 26, 1999
Executive officer and Director)
/s/ Steven J. Lubman
- - ---------------------
Steven J. Lubman Secretary and Director February 26, 1999
(Principal Financial Officer)
/s/ Mark Siegel
- - ---------------------
Mark Siegel Director February 26, 1999
31
<PAGE>
EXHIBIT INDEX
Exhibit No. Name
- - ----------- ----
10.5 Lease Agreement with Great American Realty of Deer Park dated
June 1, 1998
10.9 Amendment to Employment Agreement between the Company and
Ira Levy.
10.10 Amendment to Employment Agreement between the Company and
Steve Lubman
11 Computation of Earnings Per Common Share
23.1 Consent of Seligson & Giannattasio, LLP.
27 Financial Data Schedule
32
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Financial Statements
for the Year Ended November 30, 1998
Independent Auditors' Report F - 2
Consolidated Balance Sheet F - 3 - 4
Consolidated Statements of Income F - 5
Consolidated Statements of Stockholders' Equity F - 6
Consolidated Statements of Cash Flows F - 7 - 8
Notes to Consolidated Financial Statements F - 9 - 23
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Surge Components, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Surge Components,
Inc. and Subsidiary as of November 30, 1998 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the two years ended November 30, 1998. 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 generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surge Components, Inc. and
Subsidiary as of November 30, 1998 and the results of their operations and their
cash flows for the two years ended November 30, 1998 in conformity with
generally accepted accounting principles.
Seligson & Giannattasio, LLP
N. White Plains, New York
January 21, 1999
F - 2
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1998
ASSETS (Note 4)
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets:
Cash (Note 2) $1,387,222
Marketable securities (Note 2) 3,237,928
Accounts receivable (net of allowance for
doubtful accounts of $15,724) 1,189,966
Inventory 1,159,111
Prepaid expenses and taxes 209,213
Cash surrender value 55,157
----------
Total current assets $7,238,597
Fixed assets - net of accumulated depreciation of $134,036 (Note 3) 324,787
Other assets:
Security deposits 2,985
Deferred tax asset (Note 8) 88,031
----------
Total other assets 91,016
----------
Total assets $7,654,400
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current Liabilities:
Accounts payable $1,105,300
Accrued expenses and taxes 307,960
----------
Total current liabilities $1,413,260
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 9, 10, 11, 12 and 14)
Stockholders' equity (Note 6):
Preferred stock - $.001 par value stock,
1,000,000 shares authorized, none issued and outstanding --
Common stock - $.001 par value stock,
25,000,000 shares authorized, 4,852,958
shares issued and outstanding 4,853
Additional paid-in capital 6,369,708
Unrealized holding gain (Note 2) 135,463
Retained deficit (268,884)
----------
Total stockholders' equity 6,241,140
----------
Total liabilities and stockholders' equity $7,654,400
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended November 30,
1998 1997
----------- -------------
Sales $8,925,948 $10,887,608
Less returns and allowances 198,299 53,810
----------- -------------
Net sales 8,727,649 10,833,798
Cost of goods sold 6,492,116 8,224,670
Inventory reserve (Note 7) 215,293 --
----------- -------------
Gross profit 2,020,240 2,609,128
----------- -------------
Operating expenses:
General and administrative
expenses 1,759,685 1,750,010
Selling and shipping expenses 897,059 924,481
Depreciation 45,090 54,693
----------- -------------
Total operating expenses 2,701,834 2,729,184
----------- -------------
Loss from operations (681,594) (120,056)
----------- -------------
Other income (expenses):
Investment income 293,898 265,307
Interest expense (34,936) (56,012)
Loss on disposal of assets (7,936) --
----------- -------------
Total other income (expenses) 251,026 209,295
----------- -------------
(Loss) income before income taxes (430,568) 89,239
Income taxes (Note 8) (156,402) 13,889
----------- -------------
Net (loss) income $ (274,166) $ 75,350
=========== =============
Weighted average shares outstanding
Basic 4,836,835 4,823,958
Diluted 4,836,835 4,964,983
Earnings (loss) per share
Basic $ (.06) $ .02
Diluted $ (.06) $ .02
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Unrealized Retained Total
Preferred Stock Common Stock Paid-In Holding Earnings Stockholders'
Shares Amount Shares Amount Capital Gain (Deficit) Equity
------ --------- --------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 1, 1996 ..... -- $ -- 4,823,958 $4,824 $6,335,862 $35,751 $ (70,068) $6,306,369
Net unrealized gain in
marketable securities ........ -- -- -- -- -- 40,229 -- 40,229
Net income for the period ...... -- -- -- -- -- -- 75,350 75,350
----- -------- --------- ---------- ---------- -------- --------- ----------
Balance - November 30, 1997 .... -- -- 4,823,958 4,824 6,335,862 75,980 5,282 6,421,948
Proceeds of issuance of stock .. -- -- 18,000 18 13,614 -- -- 13,632
Proceeds of exercised options .. -- -- 11,000 11 20,232 -- -- 20,243
Net unrealized gain in
marketable securities ........ -- -- -- -- -- 59,483 -- 59,483
Net loss for the period ........ -- -- -- -- -- -- (274,166) (274,166)
----- -------- --------- --------- ---------- -------- --------- ----------
Balance - November 30, 1998 .... -- $ -- 4,852,958 $4,853 $6,369,708 $135,463 $(268,884) $6,241,140
===== ======== ========= ======== ========== ======== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
November 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income ................................... $ (274,166) $ 75,350
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation .................................. 45,090 54,693
Deferred income taxes ......................... (89,427) (3,092)
Provision for losses on accounts receivable ... -- 6,518
Loss on disposal of assets .................... 7,936 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ................................. 354,570 (651,203)
Inventory ........................................... 69,830 103,703
Prepaid expenses and taxes .......................... (78,369) (109,017)
Cash surrender value ................................ (25,368) (13,317)
Accounts payable .................................... 145,227 (9,881)
Accrued expenses and taxes .......................... 12,769 12,636
---------- ---------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES ............................ 168,092 (533,610)
---------- ---------
INVESTING ACTIVITIES
Purchase of marketable securities ................... (961,075) (134,460)
Acquisition of fixed assets ......................... (253,870) (8,858)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................. (1,214,945) (143,318)
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F - 7
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
November 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
FINANCING ACTIVITIES
Net borrowings under
letter-of-credit agreement ............... $ (495,495) $ 331,263
Proceeds from issuance of stock ........... 13,632 --
Proceeds from exercised options ........... 20,243 --
----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ...................... (461,620) 331,263
----------- ----------
NET CHANGE IN CASH ........................... (1,508,473) (345,665)
CASH AT BEGINNING OF PERIOD .................. 2,895,695 3,241,360
----------- ----------
CASH AT END OF PERIOD ........................ $ 1,387,222 $2,895,695
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ......................... $ 2,062 $ 150,908
=========== ==========
Interest paid ............................. $ 34,936 $ 56,012
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 1 - ORGANIZATION AND DESCRIPTION OF COMPANY'S BUSINESS
Surge Components, Inc. 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 1, 1988 the Company formed Challenge/Surge Inc., 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All material intercompany balances and transactions
have been eliminated in consolidation.
Marketable Securities
The Company accounts for marketable securities pursuant to Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) Number
115 "Accounting for Certain Investments in Debt, and Equity Securities". Under
this standard, certain investments in debt and equity securities will be
reported at fair value. The Company's marketable securities, which consist
primarily of mutual funds, are being reported as securities held for sale. The
market value of these securities at November 30, 1998 is as follows:
Aggregate cost $3,102,465
Gross unrealized gain 144,721
Gross unrealized loss (9,258)
----------
$3,237,928
==========
Cost of the securities used in the computation of realized gains and losses is
determined using the average cost method. During 1998 and 1997, there were no
sales of these securities.
F - 9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, which consist solely of goods held for resale, are stated at the
lower of cost (first-in, first-out method) or market. The Company measures
inventory and cost of goods sold for interim financial statements by use of a
historically developed gross profit percentage. Annually, the Company adjusts
the inventory to reflect the results of a physical count. No material
adjustments were made to adjust to the physical count for the years ended
November 30, 1998 and 1997.
Depreciation and Amortization
Fixed assets are recorded at cost. Depreciation is generally provided on an
accelerated method (double-declining balance) for personal property and on the
straight-line method for real property over the estimated useful lives of the
various assets as follows:
Furniture, fixtures and equipment 5 - 7 years
Transportation equipment 3 - 5 years
Leasehold Improvements 10 - 39 years
Maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized.
Allowance for Doubtful Accounts
The Company, due to its customer base has experienced an insignificant amount of
bad debts. As a result, the Company has not provided for a material change in
the allowance for doubtful accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
maintains substantially all its cash balances in two financial institutions. The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At November 30, 1998 and 1997, the Company's uninsured cash balances
totaled $145,998 and $1,190,696, respectively. The Company performs periodic
reviews of the relative credit rating of its bank to lower its risk. The Company
believes that concentration with regards to accounts receivable is limited due
to its large customer base.
F - 10
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accrued Vacation Pay
Employees are required to take vacation in the year of entitlement. Accrued
unpaid vacation entitlement has not been significant and, as a result, no
accrual has been provided for.
Income Taxes
The Company's deferred income taxes arise primarily from the differences in the
recording of inventory reserves and depreciation expense for financial reporting
and income tax purposes. Income taxes are reported based upon the Company's
adoption of the Statement of Financial Accounting Standards (SFAS) number 109
"Accounting for Income Taxes".
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F - 11
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value
The Company has a number of financial instruments, none of which are held for
trading purposes. The carrying value of cash, receivables and accounts payable
approximates fair value due to the short maturity of these instruments. The
carrying value of short-term debt approximate fair value based on discounting
the projected cash flows using market rates available for similar maturities.
Considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value, and accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
Earnings Per Share
Earnings per share for the years ended November 30, 1998 and 1997 were computed
by dividing net income by the weighted average number of common and common
equivalent shares outstanding and is adjusted for the assumed conversion of
shares issuable upon the exercise of options and warrants. The Company had a net
loss for the year ended November 30, 1998 and, accordingly, common stock
equivalents are excluded as the effect would be anti-dilutive.
Effective December 1997, the Company adopted Financial Accounting Standards
Board issued SFAS No. 128 - "Earnings Per Share". Under this standard, the
method for calculating earnings per share was changed and requires the
presentation of "basic" and "diluted" earnings per share. Prior period earnings
per share have been restated to conform with these provisions.
F - 12
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards Number 130 "Reporting Comprehensive Income" which is
effective for years beginning after December 15, 1997. This standard requires
disclosures regarding comprehensive income, the change in an entity's equity
during a period from transactions and events other than those resulting from
investments by and distributions to owners. The Company will adopt this standard
for the fiscal year ended November 30, 1999 and does not believe that adoption
would have reflected a material change in amounts reported for the current year.
The Financial Accounting Standards Board has also issued Statement of Financial
Standards Number 131 "Disclosures about Segments of an Enterprise, and Related
Information" which is effective for years beginning after December 15, 1997.
This standard requires disclosures regarding an entity's operating segments,
products and services, major customers and geographic areas in which they
operate. The Company intends to adopt this standard for the year ended November
30, 1999.
Year 2000 Computer Readiness
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1998, the Company developed and implemented a program for Y2K information
systems compliance at a cost of approximately $15,600. Accordingly, the Company
believes that its financial and information systems are now Y2K compliant. As to
third-party relationships, the Company believes that most of these parties
intend to be Y2K compliant by January 1, 2000. The costs incurred during fiscal
year ended November 30, 1998 were not material and the Company believes that any
further costs to be incurred will also not be material.
Reclassifications
Certain prior year information has been reclassified to conform to the current
year's reporting presentation.
F - 13
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following at November 30, 1998:
Furniture and fixtures $ 79,299
Leasehold improvements 241,754
Computer equipment 137,770
--------
458,823
Less - accumulated depreciation 134,036
--------
Total fixed assets $324,787
========
Depreciation expense for the years ended November 30, 1998 and 1997 was $45,090
and $54,693, respectively.
NOTE 4 - LETTERS OF CREDIT TO BANK
In May 1996, the Company entered into a letter of credit agreement with a bank
allowing the Company to obtain up to $800,000 in outstanding letters of credit
and $200,000 in direct borrowings. The fees on the letters of credit are one
half percent (1/2%) upon opening the letter of credit, one half percent (1/2%)
on negotiation and two percent (2%) per annum over the banker's acceptance rate
over the borrowed term. These borrowings are collateralized by the Company's
assets. The agreement also contains provisions for the creation of banker's
acceptances and covenants requiring the Company to maintain specified levels of
tangible net worth. The direct borrowings incur interest at a rate of prime plus
one percent per annum.
In April 1998, the Company renewed its letter of credit agreement. The terms and
conditions pursuant to this agreement remain unchanged except direct borrowings
incur interest at the prime rate. The bankers acceptances totaled $495,495 on
November 30, 1997. There were no bankers acceptances on November 30, 1998.
Outstanding letters of credit totaled $82,390 on November 30, 1997. There were
no outstanding letters of credit on November 30, 1998. At November 30, 1998 and
1997, there were no direct borrowings outstanding.
F - 14
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 5 - 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 a salary reduction mechanism.
The Company will make 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 in the plan as of November 30, 1998
totaled approximately $110,000. Pension expense for the years ended November 30,
1998 and 1997 was $2,254 and $2,931, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
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, with each series to have such designations, rights and preferences as
may be determined from time to time by the Board of Directors. At November 30,
1998, none of the shares has been designated.
Public Offering
On August 8, 1996, the Company completed a public offering (the "Public
Offering") under the Securities Act of 1933 as amended. 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
one Common Share for a period of five years commencing two years after the July
31, 1996 effective date of the Public Offering at a price of $5.00.
F - 15
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
1995 Employee Stock Option Plan
In January 1996, the Company adopted, and shareholders ratified in February
1996, the 1995 Employee Stock Option Plan ("Option Plan"). The plan provides for
the grant of options to qualified employees of the Company and its subsidiary,
independent contractors, consultants and other individuals to purchase an
aggregate of 350,000 common shares. In March 1998, the plan was amended to
increase the number of aggregate common shares available under the plan to
850,000.
Stock option incentive plan activity is summarized as follows:
Option Price
Shares Per Share
------- --------------
Options outstanding December 1, 1996 146,000 $3.20
Granted 336,000 $1.25 - $3.50
Canceled (178,000) $3.20 - $3.50
Exercised -- --
-------
Options outstanding November 30, 1997 304,000 $1.25 - $3.20
Granted 20,000 $2.09
Exercised (11,000) $1.25
-------
Options outstanding November 30, 1998 313,000 $1.25 - $3.20
=======
Options exercisable November 30, 1998 250,500
=======
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company currently accounts for its stock-based compensation
plans using the accounting prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees". Since the Company is not required
to adopt the fair value based recognition provisions prescribed under SFAS No.
123, it has elected only to comply with the disclosure requirements set forth in
the statement which includes disclosing pro forma net income and earnings per
share as if the fair value based method of accounting had been applied. The pro
forma net income and earnings per share for the year ended November 30, 1998 and
1997 would have been $(245,296) and $(94,091) and $(.05) and $(.02) had the new
method been applied.
F - 16
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
1995 Employee Stock Option Plan (Continued)
Compensation to nonemployees is accounted for based on the fair value of the
consideration received or the fair market value of the equity instruments
issued, whichever is more reliably measurable.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 136% for awards granted in 1998 and 154%,
118% and 37% for awards granted in 1997; risk free interest rate of 6.75%; and
expected lives of 4 to 5 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1997. Additionally, future amounts are likely to be affected by
the number of grants awarded since additional awards are generally expected to
be made at varying amounts.
Consulting Agreement
In August 1996, the Company retained the services of the underwriter for the
Public Offering pursuant to a consulting agreement. Under the agreement, the
underwriter performed certain financial advisory and investment banking services
for the Company in exchange for fees totaling $92,000, which were paid over a
one-year period.
Proposed Stock Repurchase
In June 1997, the Company offered to repurchase up to $500,000 worth of the
Company's issued and outstanding common shares and warrants on the open market
subject to the rules and regulations of the Securities and Exchange Commission.
As of the date of this report, no such purchases have been made.
F - 17
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
Shareholder Protection Rights Plan
The Company has adopted a Shareholder Protection Rights Plan (the "Rights Plan")
whereby each shareholder of record on June 30, 1997 receives two rights to
purchase common shares at $.01 a share for a five year period. The Rights Plan
provides that if a person acquires more than twenty percent (20%) of the issued
and outstanding common shares of the Company, all shareholders of record, except
someone who becomes a 20% shareholder, shall be entitled to exercise the rights.
Additional Shares Issued
On August 10, 1998, the Company issued 18,000 shares of the Company's $.001 par
value common stock to an officer of the Company. Compensation was reported based
upon the fair market value of the Company's common stock on the date of
issuance.
NOTE 7 - RESERVE FOR SLOW MOVING INVENTORY
During the fourth quarter of 1998, the Company and its subsidiary wrote down a
portion of their inventories to its net realizable value. The reserves were
reflected as a charge to income in the year ended November 30, 1998 totaling
$215,293. The inventories reserved were items purchased for specific customers
with whom the Company no longer transacts business or new versions of the same
product are available at comparable pricing. These items are not readily
saleable to other customers.
F - 18
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 8 - 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.
Deferred income tax assets and liabilities are comprised as follows at November
30, 1998:
Deferred tax asset:
Inventory reserves $88,082
Deferred tax liability:
Fixed assets 51
-------
Net deferred tax asset $88,031
=======
The Company's income tax expense consists of the following:
Year Ended
November 30,
1998 1997
--------- -------
Current:
Federal $ (70,934) $13,186
States 3,959 3,795
--------- -------
$ (66,975) $16,981
========= =======
Deferred:
Federal $ (64,515) $(1,715)
States (24,912) (1,377)
--------- -------
$ (89,427) $(3,092)
========= =======
Provision for income taxes $(156,402) $13,889
========= =======
At November 30, 1998, the Company has net operating losses totaling
approximately $173,000. The Company has reported refundable income taxes
totaling approximately $50,000 relating to the carry back of these losses.
Pursuant to New York State law, the Company is required to carry forward
approximately $216,000 in net operating losses which will expire in 2018.
F - 19
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 8 - INCOME TAXES (Continued)
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,
1998 1997
---- ----
U.S. Federal income tax statutory rate (34)% 34%
State income tax, net of Federal income tax benefit (6) 6
Nontaxable dividends (11) (18)
Benefit from lower tax brackets 19 (15)
Other (4) 9
-- --
Effective tax rate (36)% 16%
== ==
NOTE 9 - RELATED PARTY TRANSACTIONS
Lease
The Company leases office and warehouse space through December 31, 2008 from a
corporation which is controlled by officers of the Company. The following is a
schedule of future minimum rental payments required at November 30, 1998:
Year Ending November 30,
1999 $ 75,682
2000 77,332
2001 79,654
2002 82,048
2003 84,514
2004 and thereafter 571,440
--------
$970,670
========
Rental expense for the years ended November 30, 1998 and 1997, was $78,960 and
$64,729, respectively.
F - 20
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 9 - RELATED PARTY TRANSACTIONS
Employment Agreements
The Company has employment agreements with two officers of the Company. Among
other provisions, the agreement allows for a base salary of $200,000 plus
bonuses based on performance through July 30, 2001. 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, the current officers are not elected to the Board of
Directors of the Company and/or is not elected as an officer of the Company
and/or there has been a change in the ownership of at least 25% of the issued
and outstanding stock of the Company, and such issuance was not approved by
either officer, then the non-approving officer may elect to terminate his
employment contract and receive 2.99 times 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 March 1998, the employment agreements were amended to extend the term to July
30, 2003 and to provide that on July 30th of each successive year of the
agreements, the agreements shall renew for an additional year, so that on each
July 30th, there will be five years remaining on the term of the agreements,
unless terminated by written nature by either parties.
NOTE 10 - INDEPENDENT REPRESENTATIVES
The Company has agreements with independent representatives who receive
commissions of 5% on the net amount of invoices rendered by the representative
after all trade discounts, freight, transportation allowances, sales taxes,
insurance and the like have been deducted. The representatives agree to not
represent any person or entity manufacturing or selling products which are
competitive with products and services sold by the Company throughout the term
of the agreement. The agreements continue unless terminated by written notice by
either party or the agreement is breached by either party.
F - 21
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 11 - MAJOR CUSTOMERS
Revenues to single customers in excess of 10% of the Company's total sales
consists of the following:
Year Ended
November 30,
1998 1997
---------- ----------
Customer A $ -- $1,818,659
Customer B 1,446,555 1,419,976
Customer C 920,438 --
NOTE 12 - MAJOR SUPPLIERS
Inventory purchased from one supplier in excess of 10% of the Company's total
purchases consists of the following:
Year Ended
November 30,
1998 1997
---------- ----------
Supplier A $1,264,215 $1,034,783
Supplier B 1,206,277 1,376,457
Supplier C 730,316 --
NOTE 13 - EXPORT SALES
Export sales consist of the following:
Year Ended
November 30,
1998 1997
---------- ----------
Surge Components Inc.
Canada $ 13,847 $18,835
Europe 39,212 16,284
Asia 209,836 27,298
Challenge/Surge Inc.
Canada $12,845 $ 73,232
Europe -- 54,346
Asia 64,212 310,736
F - 22
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
NOTE 14 - SUBSEQUENT EVENTS
Pending Acquisition
On December 29, 1998, the Company entered into a letter of intent to purchase
all the issued and outstanding capital stock of Orbit Network, Inc. ("Orbit")
in exchange for 25,000,000 shares of the Company's common stock. The acquisition
is subject to the execution of definitive documentation and the satisfaction of
conditions precedent.
Employee Stock Options
In December 1998, the Board of Directors authorized the granting of options to
purchase 5,300,000 shares of common stock of the Company to certain officers and
directors subject to shareholder approval of an increase in the number of shares
of common stock included in the Option Plan. The options expire in five years
from the date of the grant and are exercisable at $2.00 per share. The options
are not exercisable until the fourth anniversary date of the date of grant,
however, in the event the Company's proposed merger with Orbit is approved by
the shareholders, the options shall become immediately exercisable. The options
are exercisable on a cashless basis whereby the Company advances the exercise
price to the officers and directors who in turn execute a promissory note, due
180 days from the date the options were exercised.
In December 1998, the Board of Directors authorized the granting of options to
purchase 38,000 shares of common stock of the Company at an exercise price of
$2.00 to certain employees, pursuant to the Option Plan. The options expire in
five years from the date of the grant and are exercisable immediately.
Common Stock
In December 1998, the Board of Directors proposed amending its Certificate of
Incorporation to increase the number of common shares authorized from
25,000,000. The proposed increase to the number of common shares is conditioned
upon shareholder approval.
F - 23
<PAGE>
EXHIBIT 10.5
THIS LEASE made the 1st day of June 1998, between GREAT AMERICAN REALTY OF DEER
PARK, 2131 Newbridge Road, Bellmore, NY 11710 hereinafter referred to as
LANDLORD, and SURGE COMPONENT, INC., 1016 Grand Boulevard, Deer Park, NY 11710
hereinafter jointly, severally and collectively referred to as TENANT.
WITNESSETH, that the Landlord hereby leases to the Tenant, and the
Tenant hereby hires and takes from the Landlord in the building known as The
Premises, 7,500 Square Feet to be used and occupied by the Tenant
As General Sales Office
and for no other purpose, for a term to commence on January 1, 1998, and to end
on December 31, 2008, unless sooner terminated as hereinafter provided, at the
ANNUAL RENT of
<PAGE>
all payable in equal monthly installments in advance on the first day of each
and every calendar month during said term, except the first installment, which
shall be paid upon the execution hereof.
THE TENANT JOINTLY AND SEVERALLY COVENANTS:
FIRST.-That the Tenant will pay the rent as above provided.
SECOND.-That, throughout said term the Tenant will take good care of
the demised premises, fixtures and appurtenances, and all alterations, additions
and improvements to either; make all repairs in and about the same necessary to
preserve them in good order and condition, which repairs shall be, in quality
and class, equal to the original work; promptly pay the expense of such repairs;
suffer no waste or injury; give prompt notice to the Landlord of any fire that
may occur; execute and comply with all laws, rules, orders, ordinances and
regulations at any time issued or in force (except those requiring structural
alterations), applicable to the demised premises or to the Tenant's occupation
thereof, of the Federal, State and Local Governments, and of each and every
department, bureau and official thereof, and of the New York Board of Fire
Underwriters; permit at all times during usual business hours, the Landlord and
representatives of the Landlord to enter the demised premises for the purpose of
inspection, and to exhibit them for purposes of sale or rental; suffer the
Landlord to make repairs and improvements to all parts of the building, and to
comply with all orders and requirements of governmental authority applicable to
said building or to any occupation thereof; suffer the Landlord to erect, use,
maintain, repair and replace pipes and conduits in the demised premises and to
the floors above and below; forever indemnify and save harmless the Landlord for
and against any and all liability, penalties, damages, expenses and judgments
arising from injury during said term to person or property of any nature,
occasioned wholly or in part by any act or acts, omission or omissions of the
Tenant, or of the employees, guests, agents, assigns or undertenants of the
Tenant and also for any matter or thing growing out of the occupation of the
demised premises or of the streets, sidewalks or vaults adjacent thereto;
permit, during the six months next prior to the expiration of the term the usual
notice "To Let" to be placed and to remain unmolested in a conspicuous place
upon the exterior of the demised premises; repair, at or before the end of the
term, all injury done by the installation or removal of furniture and property;
and at the end of the term, to quit and surrender the demised premises with all
alterations, additions and improvements in good order and condition.
THIRD.-That the Tenant will not disfigure or deface any part of the
building, or suffer the same to be done, except so far as may be necessary to
affix such trade fixtures as are herein consented to by the Landlord; the Tenant
will not obstruct, or permit the obstruction of the street or the sidewalk
adjacent thereto; will not do anything, or suffer anything to be done upon the
demised premises which will increase the rate of fire insurance upon the
building or any of its contents, or be liable to cause structural injury to said
building; will not permit the accumulation of waste or refuse matter, and will
not, without the written consent of the Landlord first obtained in each case,
either sell, assign, mortgage or transfer this lease, underlet the demised
premises or any part thereof, permit the same or any part thereof to be occupied
by anybody other than the Tenant and the Tenant's employees, make any
alterations in the demised premises, use the demised premises or any part
thereof for any purpose other than the one first above stipulated, or for any
purpose deemed extra hazardous on account of fire risk, nor in violation of any
law or ordinance. That the Tenant will not obstruct or permit the obstruction of
the light, halls, stairway or entrances to the building, and will not erect or
inscribe any sign, signals or advertisements unless and until the style and
location thereof have been approved by the Landlord; and if any be erected or
inscribed without such approval, the Landlord may remove the same. No water
cooler, air conditioning unit or system or other apparatus shall be installed or
used without the prior written consent of Landlord.
IT IS MUTUALLY COVENANTED AND AGREED, THAT
<PAGE>
FOURTH.-If the demised premises shall be partially damaged by fire or other
cause without the fault or neglect of Tenant, Tenant's servants, employees,
agents, visitors or licensees, the damages shall be repaired by and at the
expense of Landlord and the rent until such repairs shall be made shall be
apportioned according to the part of the demised premises which is usable by
Tenant. But if such partial damage is due to the fault or neglect of Tenant,
Tenant's servants, employees, agents, visitors or licensees, without prejudice
to any other rights and remedies of Landlord and without prejudice to the rights
of subrogation of Landlord's insurer, the damages shall be repaired by Landlord
but there shall be no apportionment or abatement of rent. No penalty shall
accrue for reasonable delay which may arise by reason of adjustment of insurance
on the part of Landlord and/or Tenant, and for reasonable delay on account of
"labor troubles", or any other cause beyond Landlord's control. If the demised
premises are totally damaged are totally damaged or are rendered wholly
untenantable by fire or other cause, and if Landlord shall decide not to restore
or not to rebuild the same, or if the building shall be so damaged that Landlord
shall decide to demolish it or to rebuild it, then or in any of such events
Landlord may, within ninety (90) days after such fire or other cause, give
Tenant a notice in writing of such decision, which notice shall be given as in
Paragraph Twelve hereof provided, and thereupon the term of this lease shall
expire by lapse of time upon the third day after such notice is given, and
Tenant shall vacate the demised premises and surrender the same to Landlord. If
Tenant shall not be in default under this lease then, upon the termination of
this lease under the conditions provided for in the sentence immediately
preceding, Tenant's liability for rent shall cease as of the day following the
casualty. Tenant hereby expressly waives the provisions of Section 227 of the
Real Property Law and agrees that the foregoing provisions of this Article shall
govern and control in lieu thereof. If the damage or destruction be due to the
fault or neglect of Tenant the debris shall be removed by, and at the expense
of, Tenant.
FIFTH.-If the whole or any part of the premises hereby demised shall be
taken or condemned by any competent authority for any public use or purpose then
the term hereby granted shall cease from the time when possession of the part so
taken shall be required for such public purpose and without apportionment of
award, the Tenant hereby assigning to the landlord all right and claim to any
such award, the current rent, however, in such case to be apportioned.
SIXTH.-If, before the commencement of the term, the Tenant be adjudicated
a bankrupt, or make a "general assignment," or take the benefit of any insolvent
act, or if a Receiver or Trustee be appointed for the Tenant's property, or if
this lease or the estate of the Tenant hereunder be transferred or pass to or
devolve upon any other person or corporation, or if the Tenant shall default in
the performance of any agreement by the Tenant contained in any other lease to
the Tenant by the Landlord or by any corporation of which an officer of the
Landlord is a Director, this lease shall thereby at the option of the Landlord,
be terminated and in that case, neither the Tenant nor anybody claiming under
the Tenant shall be entitled to go into possession of the demised premises. If
after the commencement of the term, any of the events mentioned above in this
subdivision shall occur, or if Tenant shall make default in fulfilling any of
the covenants of this lease, other than the covenants for the payment of rent or
"additional rent" or if the demised premises become vacant or deserted, the
Landlord may give to the Tenant ten days' notice of intention to end the term of
this lease, and thereupon at the expiration of said ten days' (if said condition
which was the basis of said notice shall continue to exist) the term under this
lease shall expire as fully and completely as if that day were the date herein
definitely fixed for the expiration of the term and the Tenant will then quit
and surrender the demised premises to the Landlord, but the Tenant Shall remain
liable as hereinafter provided.
2
<PAGE>
If the Tenant shall make default in the payment of the rent reserved
hereunder, or any item of "additional rent" herein mentioned, or any part of
either or, in making any other, payment herein provided for, or if the notice
last above provided for shall have been given and if the condition which was the
basis of said notice shall exist at the expiration of said ten days' period, the
Landlord may immediately, or at any time thereafter, re-enter the demised
premises and remove all persons and all or any property therefrom, either by
summary dispossess proceedings, or by any suitable action or proceeding at law,
or by force or otherwise, without being liable to indictment, prosecution or
damages therefor, and re-possess and enjoy said premises together with all
additions, alterations and improvements. In any such case or in the event that
this lease be "terminated" before the commencement of the term, as above
provided, the Landlord may either re-let the demised premises or any part or
parts thereof for the Landlord's own account, or may, at the Landlord's option,
re-let the demised premises or any part or parts thereof as the agent of the
Tenant, and receive the rents therefor, applying the same first to the payment
of such expenses as the Landlord may have incurred, and then to the fulfillment
of the covenants of the Tenant herein, and the balance, if any, at the
expiration of the term first above provided for, shall be paid to the Tenant.
Landlord may rent the premises for a term extending beyond the term hereby
granted without releasing Tenant from any liability. In the event that the term
of this lease shall expire as above in this subdivision "Sixth" provided, or
terminate by summary proceedings or otherwise, and if the Landlord shall not
re-let the demised premises for the Landlord's own account, then, whether or not
the premises be re-let, the Tenant shall remain liable for, and the Tenant
hereby agrees to pay to the Landlord, until the time when this lease would have
expired but for such termination or expiration, the equivalent of the amount of
all of the rent and "additional rent" reserved herein, less the avails of
reletting, if any, and the same shall be due and payable by the Tenant to the
Landlord on the several rent days above specified, that is, upon each of such
rent days the Tenant shall pay to the Landlord the amount of deficiency then
existing. The Tenant hereby expressly waives any and all right of redemption in
case the Tenant shall be dispossessed by judgment or warrant of any court or
judge, and the Tenant waives and will waive all right to trial by jury in any
summary proceedings hereafter instituted by the Landlord against the Tenant in
respect to the demised premises. The words "re-enter" and "re-entry" as used in
this lease are not restricted to their technical legal meaning.
In the event of a breach or threatened breach by the Tenant of any of the
covenants or provisions hereof, the Landlord shall have the right of injunction
and the right to invoke any remedy allowed at law or in equity, as if re-entry,
summary proceedings and other remedies were not herein provided for.
SEVENTH.-If the Tenant shall make default in the performance of any
covenant herein contained, the Landlord may immediately, or at any time
thereafter, without notice, perform the same for the account of the Tenant. If a
notice of mechanic's lien be filed against the demised premises or against
premises of which the demised premises are part, for, or purporting to be for,
labor or material alleged to have been furnished, or to be furnished to or for
the Tenant at the demised premises, and if the Tenant shall fail to take such
action as shall cause such lien to be discharged within fifteen days after the
filing of such notice, the Landlord may pay the amount of such lien or discharge
the same by deposit or by bonding proceedings, and in the event of such deposit
or bonding proceedings, the Landlord may require the lienor to prosecute an
appropriate action to enforce the lienor's claim. In such case, the Landlord may
pay any judgment recovered on such claim. Any amount paid or expense incurred by
the Landlord as in this subdivision of this lease provided, and any amount as to
which the Tenant shall at any time be in default for or in respect to the use of
water, electric current or sprinkler supervisory service, and any expense
incurred or sum of money paid by the Landlord by reason of the failure of the
Tenant to comply with any provision hereof, or in defending any such action,
shall be deemed to be "additional rent" for the demised premises, and shall be
due and payable by the Tenant to the Landlord on the first day of the next
following month, or, at the option of the Landlord, on the first day of any
succeeding month. The receipt by the Landlord of any installment of the regular
stipulated rent hereunder or any of said "additional rent" shall not be a waiver
of any other "additional rent" then due.
3
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EIGHTH.-The failure of the Landlord to insist, In any one or more
instances upon a strict performance of any of the covenants of this lease, or to
exercise any option herein contained, shall not be construed as a waiver or a
relinquishment for the future of such covenant or option, but the same shall
continue and remain in full force and effect. The receipt by the Landlord of
rent, with knowledge of the breach of any covenant hereof, shall not be deemed a
waiver of such breach and no waiver by the Landlord of any provision hereof
shall be deemed to have been made unless expressed in writing and signed by the
Landlord. Even though the Landlord shall consent to an assignment hereof no
further assignment shall be made without express consent in writing by the
Landlord.
NINTH.-If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than the Tenant the Landlord
may collect rent from the assignee, under-tenant or occupant, and apply the net
amount collected to the rent herein reserved, and no such collection shall be
deemed a waiver of the covenant herein against assignment and underletting, or
the acceptance of the assignee, under-tenant or occupant as tenant, or a release
of the Tenant from the further performance by the Tenant of the covenants herein
contained on the part of the Tenant.
TENTH.-This lease shall be subject and subordinate at all times, to the
lien of the mortgages now on the demised premises, and to all advances made or
hereafter to be made upon the security thereof, and subject and subordinate to
the lien of any mortgage or mortgages which at any time may be made a lien upon
the premises. The Tenant will execute and deliver such further instrument or
instruments subordinating this lease to the lien of any such mortgage or
mortgages as shall be desired by any mortgagee or proposed mortgagee. The Tenant
hereby appoints the Landlord the attorney-in-fact of the Tenant, irrevocable, to
execute and deliver any such instrument or instruments for the Tenant.
ELEVENTH.-All improvements made by the Tenant to or upon the demised
premises, except said trade fixtures, shall when made, at once be deemed to be
attached to the freehold, and become the property of the Landlord, and at the
end or other expiration of the term, shall be surrendered to the Landlord in as
good order and condition as they were when installed, reasonable wear and
damages by the elements excepted.
TWELFTH.-Any notice or demand which under the terms of this lease or under
any statute must or may be given or made by the parties hereto shall be in
writing and shall be given or made by mailing the same by certified or
registered mail addressed to the respective parties at the addresses set forth
in this lease.
4
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THIRTEENTH.-The Landlord shall not be liable for any failure of water
supply or electrical current, sprinkler damage, or failure of sprinkler service,
nor for injury or damage to person or property caused by the elements or by
other tenants or persons in said building, or resulting from steam, gas,
electricity, water, rain or snow, which may leak or flow from any part of said
buildings, or from the pipes, appliances or plumbing works of the same, or from
the street or sub-surface, or from any other place, nor for interference with
light or other incorporeal hereditaments by anybody other than the Landlord, or
caused by operations by or for a governmental authority in construction of any
public or quasi-public work, neither shall the Landlord be liable for any latent
defect in the building.
FOURTEENTH.-No diminution or abatement of rent, or other compensation
shall be claimed or allowed for inconvenience or discomfort arising from the
making of repairs or improvements to the building or to its appliances, nor for
any space taken to comply with any law, ordinance or order of a governmental
authority. In respect to the various "services," if any, herein expressly or
impliedly agreed to be furnished by the Landlord to the Tenant, it is agreed
that there shall be no diminution or abatement of the rent, or any other
compensation, for interruption or curtailment of such "service" when such
interruption or curtailment shall be due to accident, alterations or repairs
desirable or necessary to be made or to inability or difficulty in securing
supplies or labor for the maintenance of such "service" or to some other cause,
not gross negligence on the part of the Landlord. No such interruption or
curtailment of any such "service" shall be deemed a constructive eviction. The
Landlord shall not be required to furnish, and the Tenant shall not be entitled
to receive, any of such "services" during any period wherein the Tenant shall be
in default in respect to the payment of rent. Neither shall there be any
abatement or diminution of rent because of making of repairs, improvements or
decorations to the demised premises after the date above fixed for the
commencement of the term, it being understood that rent shall, in any event,
commence to run at such date so above fixed.
FIFTEENTH.-The Landlord may prescribe and regulate the placing of safes,
machinery, quantities of merchandise and other things. The Landlord may also
prescribe and regulate which elevator and entrances shall be used by the
Tenant's employees, and for the Tenant's shipping. The Landlord may make such
other and further rules and regulations as, in the Landlord's judgment, may from
time to time be needful for the safety, care or cleanliness of the building, and
for the preservation of good order therein. The Tenant and the employees and
agents of the Tenant will observe and conform to all such rules and regulations.
SIXTEENTH.-In the event that an excavation shall be made for building or
other purposes upon land adjacent to the demised premises or shall be
contemplated to be made, the Tenant shall afford to the person or persons
causing or to cause such excavation, license to enter upon the demised premises
for the purpose of doing such work as said person or persons shall deem to be
necessary to preserve the wall or walls, structure or structures upon the
demised premises from injury and to support the same by proper foundations.
SEVENTEENTH.-No vaults or space not within the property line of the
building are leased hereunder. Landlord makes no representation as to the
location of the property line of the building. Such vaults or space as Tenant
may be permitted to use or occupy are to be used or occupied under a revocable
license and if such license be revoked by the Landlord as to the use of part or
all of the vaults or space Landlord shall not be subject to any liability;
Tenant shall not be entitled to any compensation or reduction in rent nor shall
this be deemed constructive or actual eviction. Any tax, fee or charge of
municipal or other authorities for such vaults or space shall be paid by the
Tenant for the period of the Tenant's use or occupancy thereof.
5
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EIGHTEENTH.-That during seven months prior to the expiration of the term
hereby granted, applicants shall be admitted at all reasonable hours of the day
to view the premises until rented; and the Landlord and the Landlord's agents
shall be permitted at any time during the term to visit and examine them at any
reasonable hour of the day, and workmen may enter at any time, when authorized
by the Landlord or the Landlord's agents, to make or facilitate repairs in any
part of the building; and if the said Tenant shall not be personally present to
open and permit an entry into said premises, at any time, when for any reason an
entry therein shall be necessary or permissible hereunder, the Landlord or the
Landlord= s agents may forcibly enter the same without rendering the Landlord or
such agents liable to any claim or cause of action for damages by reason thereof
(if during such entry the Landlord shall accord reasonable care to the Tenant's
property) and without in any manner affecting the obligations and covenants of
this lease; it is, however, expressly understood that the right and authority
hereby reserved, does not impose, nor does the Landlord assume, by reason
thereof, any responsibility or liability whatsoever for the care or supervision
of said premises, or any of the pipes, fixtures, appliances or appurtenances
therein contained or therewith in any manner connected.
NINETEENTH.-The Landlord has made no representations or promises in
respect to said building or to the demised premises except those contained
herein, and those, if any, contained in some written communication to the
Tenant, signed by the Landlord. This instrument may not be changed, modified,
discharged or terminated orally.
TWENTIETH.-If the Tenant shall at any time be in default hereunder, and if
the Landlord shall institute an action or summary proceeding against the Tenant
based upon such default, then the Tenant will reimburse the Landlord for the
expense of attorneys' fees and disbursements thereby incurred by the Landlord,
so far as the same are reasonable in amount. Also so long as the Tenant shall be
a tenant hereunder the amount of such expenses shall be deemed to be "additional
rent" hereunder and shall be due from the Tenant to the Landlord on the first
day of the month following the incurring of such respective expenses.
TWENTY-FIRST.-Landlord shall not be liable for failure to give possession
of the premises upon commencement date by reason of the fact that premises are
not ready for occupancy, or due to a prior Tenant wrongfully holding over or any
other person wrongfully in possession or for any other reason: in such event the
rent shall not commence until possession is given or is available, but the term
herein shall not be extended.
THE TENANT FURTHER COVENANTS:
TWENTY-SECOND.-If the demised premises or any part thereof consist of a
store, or of a first floor, or of any part thereof, the Tenant will keep the
sidewalk and curb in front thereof clean at all times and free from snow and
ice, and will keep insured in favor of the Landlord, all plate glass therein and
furnish the Landlord with policies of insurance covering the same.
TWENTY-THIRD.-If by reason of the conduct upon the demised premises of a
business not herein permitted, or if by reason of the improper or careless
conduct of any business upon or use of the demised premises, the fire insurance
rate shall at any time be higher than it otherwise would be, then the Tenant
will reimburse the Landlord, as additional rent hereunder, for that part of all
fire insurance premiums hereafter paid out by the Landlord which shall have been
charged because of the conduct of such business not so permitted, or because of
the improper or careless conduct of any business upon or use of the demised
Premises, and will make such reimbursement upon the first day of the month
following such outlay by the Landlord; but this covenant shall not apply to a
premium for any period beyond the expiration date of this lease, first above
specified. In any action or proceeding wherein the Landlord and Tenant are
parties, a schedule or "make up" of rate for the building on the demised
premises, purporting to have been issued by New York Fire Insurance Exchange, or
other body making fire insurance rates for the demised premises, shall be prima
facie-evidence of the facts therein stated and of the several items and charges
included in the fire insurance rate then applicable to the demised premises.
6
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TWENTY-FOURTH.-If a separate water meter be installed for the demised
premises, or any part thereof, the Tenant will keep the same in repair and pay
the charges made by the municipality or water supply company for or in respect
to the consumption of water, as and when bills therefor are rendered. If the
demised premises or any part thereof, be supplied with water through a meter
which supplies other premises, the Tenant will pay to the Landlord, as and when
bills are rendered therefor, the Tenant's proportionate part of all charges
which the municipality or water supply company shall make for all water consumed
through said meter, as indicated by said meter. Such proportionate part shall be
fixed by apportioning the respective charge according to floor area against all
of the rentable floor area in the building (exclusive of the basement) which
shall have been occupied during the period of the respective charges, taking
into account the period that each part of such area, was occupied. Tenant agrees
to pay as additional rent the Tenant's proportionate part, determined as
aforesaid, of the sewer rent or charge imposed or assessed upon the building of
which the premises are a part.
TWENTY-FIFTH.-That the Tenant will purchase from the Landlord, if the
Landlord shall so desire, all electric current that the Tenant requires at the
demised premises, and will pay the Landlord for the same, as the amount of
consumption shall be indicated by the meter furnished therefor. The price for
said current shall be the same as that charged for consumption similar to that
of the Tenant by the company supplying electricity in the same community.
Payments shall be due as and when bills shall be rendered. The Tenant shall
comply with like rules, regulations and contract provisions as those prescribed
by said company for a consumption similar to that of the Tenant.
TWENTY-SIXTH.-If there now is or shall be installed in said building a
"sprinkler system" the Tenant agrees to keep the appliances thereto in the
demised premises in repair and good working condition, and if the New York Board
of Fire Underwriters or the New York Fire Insurance Exchange or any bureau,
department or official of the State or local government requires or recommends
that any changes, modifications, alterations or additional sprinkler heads or
other equipment be made or supplied by reason of the Tenant's business, or the
location of partitions, trade fixtures, or other contents of the demised
premises, or if such changes, modifications, alterations, additional sprinkler
heads or other equipment in the demised premises are necessary to prevent the
imposition of a penalty or charge against the full allowance for a sprinkler
system in the fire Insurance rate as fixed by said Exchange, or by any Fire
Insurance Company, the Tenant will at the Tenant's own expense, promptly make
and supply such changes, modifications, alterations, additional sprinkler heads
or other equipment. As additional rent hereunder the Tenant will pay to the
Landlord, annually in advance, throughout the term $..........................
toward the contract price for sprinkler supervisory service.
TWENTY-SEVENTH.-The sum of .................................................
............................ Dollars is deposited by the Tenant herein with the
Landlord herein as security for the faithful performance of all the covenants
and conditions of the lease by the said Tenant. If the Tenant faithfully
performs all the covenants and conditions on his part to be performed, then the
sum deposited shall be returned to said Tenant.
TWENTY-EIGHTH.-This lease is granted and accepted on the especially
understood and agreed condition that the Tenant will conduct his business in
such a manner, both as regards noise and kindred nuisances, as will in no wise
interfere with, annoy, or disturb any other tenants, in the conduct of their
several businesses, or the landlord in the management of the building; under
penalty of forfeiture of this lease and consequential damages.
7
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TWENTY-NINTH.-The Landlord hereby recognizes as the
broker who negotiated and consummated this lease with the Tenant herein, and
agrees that if, as, and when the Tenant exercises the option, if any, contained
herein to renew this lease, or fails to exercise the option, if any, contained
therein to cancel this lease, the Landlord will pay to said broker a further
commission in accordance with the rules and commission rates of the Real Estate
Board in the community. A sale, transfer, or other disposition of the Landlord's
interest in said lease shall not operate to defeat the Landlord's obligation to
pay the said commission to the said broker. The Tenant herein hereby represents
to the Landlord that the said broker is the sole and only broker who negotiated
and consummated this lease with the Tenant.
THIRTIETH.-The Tenant agrees that it will not require, permit, suffer nor
allow the cleaning of any window, or windows, in the demised premises from the
outside (within the meaning of Section 202 of the Labor Law) unless the
equipment and safety devices required by law, ordinance, regulation or rule,
including, without limitation, Section 202 of the New York Labor Law, are
provided and used, and unless the rules, or any supplemental rules of the
Industrial Board of the State of New York are fully complied with; and the
Tenant hereby agrees to indemnify the Landlord, Owner, Agent, Manager and/or
Superintendent, as a result of the Tenant's requiring, permitting, suffering, or
allowing any window, or windows In the demised premises to be cleaned from the
outside in violation of the requirements of the aforesaid laws, ordinances,
regulations and/or rules.
THIRTY-FIRST.-The invalidity or unenforceability of any provision of this
lease shall in no way affect the validity or enforceability of any other
provision hereof.
THIRTY-SECOND.-In order to avoid delay, this lease has been prepared and
submitted to the Tenant for signature with the understanding that it shall not
bind the Landlord unless and until it is executed and delivered by the Landlord.
THIRTY-THIRD.-The Tenant will keep clean and polished all metal, trim,
marble and stonework which are a part of the exterior of the premises, using
such materials and methods as the Landlord may direct, and if the Tenant shall
fail to comply with the provisions of this paragraph, the Landlord may cause
such work to be done at the expense of the Tenant.
THIRTY-FOURTH.-The Landlord shall replace at the expense of the Tenant any
and all broken glass in the skylights, doors and walls in and about the demised
premises. The Landlord may insure and keep insured all plate glass in the
skylights, doors and walls in the demised Premises, for and in the name of the
Landlord and bills for the premiums therefor shall be rendered by the Landlord
to the Tenant at such times as the Landlord may elect, and shall be due from and
payable by the Tenant when rendered, and the amount thereof shall be deemed to
be, and shall be paid as, additional rent.
THIRTY-FIFTH.-This lease and the obligation of Tenant to pay rent hereunder
and perform all of the other covenants and agreements hereunder on part of
Tenant to be performed shall in nowise be affected, impaired or excused because
Landlord is unable to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make, or is delayed in making any
repairs, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of governmental preemption in connection with a
National Emergency declared by the President of the United States or in
connection with any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions of supply and
demand which have been or are affected by war or other emergency.
8
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THE LANDLORD COVENANTS
FIRST.-That if and so long as the Tenant pays the rent and "additional rent"
reserved hereby, and performs and observes the covenants and provisions hereof,
the Tenant shall quietly enjoy the demised premises, subject, however, to the
terms of this lease, and to the mortgages above mentioned, provided however,
that this covenant shall be conditioned upon the retention of title to the
premises by Landlord.
SECOND.-Subject to the provisions of Paragraph "Fourteenth" above the
Landlord will furnish the following respective services: (a) Elevator service,
if the building shall contain an elevator or elevators, on all days except
Sundays and holidays, from A.M. to P.M. and on Saturdays from A.M.
to P.M.; (b) Heat, during the same hours on the same days in the cold season
in each year.
And it is mutually understood and agreed that the covenants and agreements
contained in the within lease shall be binding upon the parties hereto and upon
their respective successors, heirs executors and administrators.
IN WITNESS WHEREOF, the Landlord and Tenant have respectively signed and
sealed these presents the day and year first above written.
/s/ Mark Siegel [L.S.]
---------------------
Landlord
IN PRESENCE OF:
/s/ Ira Levy [L.S.]
---------------------
Tenant
<PAGE>
RIDER TO LEASE DATE THE 1ST. DAY OF JUNE, 1998, BETWEEN GREAT AMERICAN REALTY
OF DEER PARK, LANDLORD AND SURGE COMPONENTS, AS TENANT.
36TH. THAT THE TENANT SHALL PAY THE ANNUAL RENT OF:
A) $30,418.08 FOR THE FIRST YEAR OF THIS LEASE COMMENCING JANUARY 01,
1998 THROUGH APRIL 30, 1998 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 5,069.68
B) $31,330.62 FOR THE FIRST YEAR OF THIS LEASE COMMENCING MAY 01, 1998
THROUGH DECEMBER 31, 1998 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 6,689.68
C) $75,268.44 FOR THE SECOND YEAR OF THIS LEASE COMMENCING JANUARY 01,
1999 THROUGH DECEMBER 31, 1999 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ $6,272.37
D) $77,526.48 FOR THE THIRD YEAR OF THIS LEASE COMMENCING JANUARY 01,
2000 THROUGH DECEMBER 31, 2000 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ $6,460.54
E) $79,853.52 FOR THE FOURTH YEAR OF THIS LEASE COMMENCING JANUARY 01,
2001 THROUGH DECEMBER 31, 2001 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 6,654.46
F) $82,249.08 FOR THE FIFTH YEAR OF THIS LEASE COMMENCING JANUARY 01,
2002 THROUGH DECEMBER 31, 2002 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 6,854.09
G) $84,716.52 FOR THE SIXTH YEAR OF THIS LEASE COMMENCING JANUARY 01,
2003 THROUGH DECEMBER 31, 2003 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 7,059.71
<PAGE>
H) $87,258.00 FOR THE SEVENTH YEAR OF THIS LEASE COMMENCING JANUARY
01, 2004 THROUGH DECEMBER 31, 2004 SAID RENT TO BE PAID IN EQUAL MONTHLY
PAYMENTS IN ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF
$7,271.50
I) $89,875.80 FOR THE EIGHTH YEAR OF THIS LEASE COMMENCING JANUARY 01,
2005 THROUGH DECEMBER 31, 2005 SAID RENT TO BE PAID IN EQUAL MONTHLY PAYMENTS IN
ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF $ 7,489.65
J) $92,572.08 FOR THE NINTH YEAR OF THIS LEASE COMMENCING JANUARY
01, 2006 THROUGH DECEMBER 31, 2006 SAID RENT TO BE PAID IN EQUAL MONTHLY
PAYMENTS IN ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF
$7,714.34
K) $95,349.24 FOR THE TENTH YEAR OF THIS LEASE COMMENCING JANUARY
01, 2007 THROUGH DECEMBER 31, 2007 SAID RENT TO BE PAID IN EQUAL MONTHLY
PAYMENTS IN ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF
$7,945.77
L) $98,209.68 FOR THE ELEVENTH YEAR OF THIS LEASE COMMENCING JANUARY
01, 2008 THROUGH DECEMBER 31, 2008 SAID RENT TO BE PAID IN EQUAL MONTHLY
PAYMENTS IN ADVANCE ON THE FIRST DAY OF EACH AND EVERY MONTH IN THE SUM OF
$8,184.14
37TH. THE TENANT AGREES AT ITS OWN COST AND EXPENSE TO PAY FOR AND
PROVIDE ALL HEAT, AIR CONDITIONING, ELECTRICITY, GAS WATER, FUEL, ALL UTILITIES
AND SERVICES USED AND CONSUMED BY IT AND TO KEEP THE DEMISED PREMISES IN A NEAT
AND ORDERLY FASHION BEING THE UNDERSTANDING AND INTENTION OR THE PARTIES HERETO
THAT THE TENANT HIRES THE PREMISES AND THE LANDLORD RENTS THE PREMISES TO THE
TENANT WITHOUT ANY SERVICE OF ANY KIND WHATSOEVER. IN THE EVENT THAT THE
PREMISES HAS A SEPARATE SEPTIC TANK OR CESSPOOL THE TENANT SHALL MAINTAIN,
REPAIR OF REPLACE THE SAME AT TENANT'S OWN COST AND EXPENSE.
38TH. THE TENANT AT ITS OWN COST AND EXPENSE AGREES TO PROVIDE AND TO
KEEP IN FULL FORCE AND EFFECT DURING THE TERMS OF THIS LEASE FOR THE BENEFIT OF
THE LANDLORD, GENERAL LIABILITY INSURANCE IN STANDARD FROM PROTECTING THE
LANDLORD AGAINST AND LIABILITY WHATSOEVER OCCASIONED BY ACCIDENT IN OR ABOUT THE
DEMISED PREMISES. THE LANDLORD SHALL BE NAMED AS AN ADDITIONAL INSURED
THEREUNDER AND SHALL BE PROTECTED AGAINST ALL LIABILITY OCCASIONED BY ANY
OCCURRENCE INSURED AGAINST. SUCH POLICY OR POLICIES SHALL COVER THE LEASED
PREMISES AND SHALL PROVIDE FOR ALL LEASE THIRTY (30) DAYS NOTICE TO THE LANDLORD
BEFORE CANCELLATION OR NON-RENEWAL. A CERTIFICATION THEREOF SHALL BE DELIVERED
TO THE LANDLORD. SAID INSURANCE POLICY(S) SHALL PROVIDE FOR THE FOLLOWING
MINIMUM COVERAGES:$1,000,000.00 COMBINED SINGLE LIMITS (CSL) COVERAGE FOR ANY
ONE OCCURRENCE. IN THE EVENT THE TENANT FAILS TO EFFECT SUCH INSURANCE, OR FAILS
TO MAINTAIN THE SAME, THE LANDLORD MAY ELECT TO OBTAIN THE SAME AND ADD THE COST
THEREOF TO THE INSTALLMENT OF RENT FOR THE MONTH NEXT ENSURING AND THE AMOUNT
THEREOF SHALL BE DEEMED ADDITIONAL RENT.
<PAGE>
39TH. THE TENANT SHALL MAINTAIN INSURANCE COVERING DAMAGE TO ITS OWN
PERSONAL PROPERTY SITUATED UPON THE PREMISES, AS WELL AS DAMAGE TO THE PERSONAL
PROPERTY UPON THE PREMISES BELONGING TO THIRD PERSONS, AND WILL UNDER ANY
CIRCUMSTANCES, HOLD THE LANDLORD HARMLESS AND FREE FROM ANY CLAIM FOR DAMAGE TO
SUPPLIES, EQUIPMENT, OR OTHER GOODS UPON THE PREMISES.
40TH. TENANT SHALL, AT ITS OWN COST AND EXPENSE, PROMPTLY REPLACE ANY
BROKEN GLASS IN THE PREMISES.
41ST. ALL OF THE INSURANCE POLICIES PROVIDED FOR IN THIS LEASE SHALL BE
DELIVERED TO THE LANDLORD WITHIN FIFTEEN (15) DAY AFTER THE COMMENCEMENT OF THE
TERMS OF THIS AGREEMENT. UPON THE FAILURE OF THE TENANT TO DO SO DEPOSIT ANY OF
SAID POLICIES, THE LANDLORD SHALL HAVE THE PRIVILEGE TO PROCURE SAID INSURANCE
ON ITS OWN APPLICATION THEREFORE, AND THE AMOUNT OF THE PREMIUM, IF PAID BY THE
LANDLORD, SHALL BE DUE AND PAYABLE WITH THE RENT INSTALLMENT NEXT DUE AND SHALL
BE CONSIDERED AS ADDITIONAL RENT RESERVED HEREUNDER, COLLECTIBLE WITH THE SAME
REMEDIES AS IF ORIGINALLY RESERVED AS RENT HEREUNDER.
42ND. THE TENANT SHALL TAKE GOOD CARE OF THE DEMISED PREMISES AND SHALL
AT TENANT'S OWN COST AND EXPENSE MAKE ALL REPAIRS AND BE SOLELY RESPONSIBLE AT
ITS OWN COST AND EXPENSE FOR THE PROPER MAINTENANCE, REPAIR AND REPLACEMENT OF
THE FIXTURES, APPLIANCES, SERVICES AND UTILITIES IN THE DEMISED PREMISES
INCLUDING BUT NOT LIMITED TO THE PLUMBING, HEATING, ELECTRICAL, SPRINKLER, AIR
CONDITIONING AND THE GAS, WATER AND ELECTRIC METERS AND INSTALLATIONS PERTAINING
THERETO, AND VENT AND CHIMNEY EQUIPMENT AND INSTALLATIONS AND ALL STRUCTURAL
PARTS OF THE DEMISED PREMISES TO WHICH SUCH EQUIPMENT AND INSTALLATIONS ARE
ATTACHED THROUGH, IT RESPONSIBLE FOR EXTERIOR STRUCTURAL REPAIRS OF THE BUILDING
AND ROOF ONLY.
43RD. THE TENANT SHALL MAINTAIN THE DEMISED PREMISES IN A CLEAN AND
ORDERLY FASHION. IN THE EVENT OF THE TENANT'S FAILURE TO KEEP THE PREMISES IN A
CLEAN AND ORDERLY FASHION, BOTH INTERIOR AND EXTERIOR, THE LANDLORD SHALL HAVE
THE RIGHT, UPON TWENTY (20) DAYS WRITTEN NOTICE AND DEMAND TO THE TENANT, TO
MAKE ANY NECESSARY REPAIRS OR CAUSE THE PREMISES TO BE CLEANED AT THE EXPENSE OF
THE TENANT, AND THE AMOUNT SO EXPENDED BY THE LANDLORD SHALL CONSTITUTE
ADDITIONAL RENT TO BE PAID BY TENANT TO THE LANDLORD, TOGETHER WITH THE NEXT
ENSUING RENT PAYMENT.
44TH. THE TENANT SHALL HAVE THE RIGHT TO MAKE INTERIOR, NONSTRUCTURAL
CHANGES, BUT THE SAME SHALL BE MADE ONLY WITH THE CONSENT OF THE LANDLORD, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD. ONLY FIXTURES, EQUIPMENT AND
APPLIANCES WHICH ARE SERVICEABLE AND IN GOOD CONDITION SHALL BE INSTALLED BY OR
ON BEHALF OF TENANT AND SAME SHALL BE INSTALLED IN A GOOD WORKMANLIKE MANNER.
ANY PAINTING OR DECORATING NECESSARY OR REQUIRED AT ANY TIME TO BE DONE IN THE
DEMISED PREMISES SHALL BE DONE BY THE TENANT AT ITS COST AND EXPENSE. WHENEVER
REQUIRED TENANT SHALL PROVIDE LANDLORD WITH A CERTIFICATE OF ELECTRICAL
INSPECTION AND APPROVAL FROM THE NEW YORK BOARD OF FIRE UNDERWRITERS, OR SUCH
OTHER FIRE UNDERWRITERS AS MAY BE OPERATIVE IN THE COUNTY OF NASSAU. IF TENANT
MAKES ANY INTERIOR ALTERATIONS OR INSTALLATIONS, THE SAME SHALL BE DONE AT
TENANT'S SOLE COST AND EXPENSE IN ACCORDANCE WITH THE LAWS AND ORDINANCES
APPLYING TO THE SAME. ANY ALTERATIONS, INSTALLATIONS ADDITIONS AND IMPROVEMENTS
MADE AND INSTALLED BY TENANT IN THE DEMISED PREMISES, SHALL IMMEDIATELY BECOME
AND BE THE PROPERTY OF THE LANDLORD WITHOUT PAYMENT THEREFORE AND SHALL REMAIN
UPON AND BE SURRENDERED WITH THE DEMISED PREMISES IN GOOD WORKING ORDER
REASONABLE WEAR AND TEAR EXCEPTED. TENANT SHALL, AT ITS OWN COST AND EXPENSE,
OBTAIN THE NECESSARY PERMITS, CERTIFICATES OF OCCUPANCY AND/OR CERTIFICATES OF
COMPLETION FOR ANY AND ALL IMPROVEMENTS MADE TO THE SUBJECT PREMISES BY THE
TENANT, IN THE EVENT SUCH ARE REQUIRED BY THE APPROPRIATE MUNICIPAL AUTHORITIES.
THE LANDLORD SHALL NOT UNREASONABLY WITHHOLD CONSENT TO THE EXECUTION OF ANY
DOCUMENT NECESSARY THEREFORE. PRIOR TO THE COMMENCEMENT OF ANY SUCH IMPROVEMENT
THE TENANT SHALL FURNISH TO THE LANDLORD THE CONTRACTOR'S CERTIFICATES OF
WORKER'S COMPENSATION INSURANCE AND GENERAL LIABILITY INSURANCE IN AN AMOUNT OF
AT LEAST $1,000,000.00 NAMING THE LANDLORD AS AN ADDITIONAL INSURED. IN THE
EVENT THE TENANT FAILS TO COMPLY HEREWITH, THE LANDLORD SHALL DO SO AT THE
EXPENSE OF THE TENANT,. WHICH EXPENSE SHALL INCLUDE ANY AND ALL INSURANCE
PREMIUMS, COSTS TO LEGALIZE THE SAID ADDITIONAL(S) AND THE LANDLORD'S ATTORNEY'S
FEES, ALL OF THE FOREGOING BEING DEEMED AS ADDITIONAL RENT HEREUNDER. IF ANY
MECHANIC'S LIEN OR LIENS ARE FILED AGAINST THE SUBJECT PREMISES FOR WORK DONE BY
OR AT THE REQUEST OF THE TENANT OR FOR MATERIALS FURNISHED IN CONNECTION
THEREWITH, THE TENANT SHALL, WITHIN THIRTY (30) DAYS AFTER THE FILING OF THE
SAID LIEN, AND AT THE TENANT'S SOLE COST AND EXPENSE, CAUSE THE SAME TO BE
REMOVED AND DISCHARGED BY PAYMENT, COURT ORDER OR BOND AS IS PROVIDED FOR BY
LAW. IN THE EVENT THE TENANT FAILS TO SO CAUSE THE LIEN(S) TO BE DISCHARGED, THE
LANDLORD MAY ELECT TO CANCEL THIS LEASE AND/OR CAUSE THE SAID LIENS TO BE PAID
AND THE COSTS THEREOF, INCLUDING ALL REASONABLE ATTORNEYS FEES CONNECTED
THEREWITH, SHALL BE DEEMED AS ADDITIONAL RENT FOR WHICH THE TENANT SHALL
IMMEDIATELY BE RESPONSIBLE. TENANT WILL IN ALL RESPECTS INDEMNIFY AND HOLD THE
LANDLORD HARMLESS FROM ANY CLAIM BY ANY SUBCONTRACTOR, MATERIALMAN OR LABORERS
ENGAGED OR HIRED BY IT, AND FURTHER SPECIFICALLY AGREES THAT NO ALTERATIONS,
INTERIOR OR EXTERIOR SHALL BE UNDERTAKEN BY THE LANDLORD WHICH SHALL NOT BE
UNREASONABLY WITHHELD.
<PAGE>
45TH. ALL ANNEXATIONS TO THE FREEHOLD MADE OR INSTALLED IN SUCH A
MANNER THAT THEIR REMOVAL WOULD CAUSE INJURY TO THE FREEHOLD SHALL BE THE
PROPERTY OF THE LANDLORD, AT THE OPTION OF THE LANDLORD, AND MAY NOT BE REMOVED
WITHOUT THE CONSENT OF THE LANDLORD, TRADE FIXTURES EXCEPTED. TRADE FIXTURES
SHALL BE DEEMED THE PROPERTY OF THE TENANT AND MAY BE REMOVED BY THE TENANT
PROVIDED THAT ALL INJURY TO THE FREEHOLD RESULTING THEREFROM SHALL BE REPAIRED
AT THE EXPENSE OF THE TENANT. SHOULD THE TENANT VACATE THE SUBJECT PREMISES FOR
ANY REASON WHATSOEVER, ALL PROPERTY LEFT IN THE SUBJECT PREMISES SHALL, AT THE
POTION OF THE LANDLORD, BE DEEMED ABANDONED BY THE SAID TENANT AND SHALL BECOME
THE PROPERTY OF THE LANDLORD.
46TH. I THE TENANT SHALL AT ANY TIME BE IN DEFAULT HEREUNDER AND IF THE
LANDLORD SHALL INSTITUTE ANY ACTION OR SUMMARY PROCEEDING OR SHALL OTHERWISE
INCUR EXPENSE FOR LEGAL FEES AS A CONSEQUENCE OF TENANT'S DEFAULT OR DELAY IN
MAKING PAYMENT OR IN COMPLYING WITH ANY TERM OR CONDITION OF THIS LEASE, THEN
THE TENANT WILL BE LIABLE TO AND WILL REIMBURSE THE LANDLORD FOR SUCH REASONABLE
EXPENSE OF ATTORNEY'S FEES AND DISBURSEMENTS THUS INCURRED BY LANDLORD. THE
AMOUNT OF SUCH EXPENSES SHALL BE DEEMED TO BE "ADDITIONAL RENT" HEREUNDER AND
SHALL BE DUE FROM THE TENANT TO THE LANDLORD ON THE FIRST DAY OF THE MONTH
FOLLOWING THE INCURRING OF SUCH RESPECTIVE EXPENSES OR FOLLOWING DEMAND
THEREFORE BY THE LANDLORD. IF THE TENANT SHALL ALLEGE OR CLAIM ANY DAMAGES
RESULTING FROM ANY BREACH OR ALLEGED BREACH BY THE LANDLORD UNDER THE TERMS OF
THIS LEASE OR ANY CLAIM OR ANY KIND WHATSOEVER ARISING IN FAVOR IF THE TENANT
AGAINST THE LANDLORD, THE TENANT AGREES THAT SUCH CLAIM SHALL NOT BE ASSERTED
AND MAY NOT BE ASSERTED AGAINST THE LANDLORD EITHER AS A COUNTERCLAIM, SET OFF
OR DEFENSE IN ANY ACTION OR PROCEEDING BROUGHT BY THE LANDLORD AGAINST THE
TENANT FOR THE NON-PAYMENT OF RENT OR RECOVERY OF POSSESSION OF THE DEMISED
PREMISES. SUCH CLAIM BY THE TENANT AGAINST THE LANDLORD SHALL ONLY BE ENFORCED,
PROSECUTED OR MAINTAINED BY A SEPARATED ACTION OR PROCEEDING INSTITUTED BY THE
TENANT AGAINST THE LANDLORD, AND NOT TO BE CONSOLIDATED WITH ANY ACTION OR
PROCEEDING BROUGHT BY LANDLORD TO RECOVER RENT OR TO RECOVER POSSESSION OR THE
DEMISED PREMISES.
47TH. ANY NOTICE BY EITHER PARTY TO THE OTHER SHALL BE DEEMED DULY
GIVEN ONLY IF IN WRITING AND IF DELIVERED EITHER PERSONALLY OR IF SUCH NOTICE BE
POSTED BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED (A)
IF TO THE TENANT AT THE DEMISED PREMISES, AND (B) IF TO THE LANDLORD AT ITS
ADDRESS HEREIN ABOVE STATED. IF EITHER PARTY ADMITS RECEIPT OF SUCH SHALL BE
PRIVILEGED TO DESIGNATE A SUBSTITUTE ADDRESS FOR THE GIVING OF NOTICE TO IT
HEREUNDER, BY GIVING NOTICE OF SUCH SUBSTITUTION IN ACCORDANCE WITH THE
PROVISIONS OF THIS PARAGRAPH.
48TH. IT IS MUTUALLY COVENANTED THAT IF THE LANDLORD SHALL REASONABLY
PAY OR BE COMPELLED TO PAY ANY SUM OF MONEY OR SHALL REASONABLY PERFORM ANY ACT
OR BE COMPELLED TO PERFORM ANY ACT, WHICH ACT SHALL REQUIRE THE PAYMENT OF ANY
SUM OF MONEY, BY REASON OR THE FAILURE OF THE TENANT TO PERFORM ANY ONE OR MORE
OF THE COVENANTS HEREIN CONTAINED, THE SUM OF SUMS SO PAID BY THE LANDLORD
TOGETHER WITH ALL INTEREST, COSTS AND DAMAGES, SHALL BE ADDED TO RENT
INSTALLMENTS NEXT DUE AND/SHALL BE COLLECTIBLE IN THE SAME MANNER AND WITH THE
SAME REMEDIES AS IF ORIGINALLY RESERVED AS RENT HEREUNDER.
49TH. THE LANDLORD HAS MADE NO REPRESENTATIONS OR WARRANTIES ANY KIND
OR NATURE EXCEPT ARE SPECIFICALLY SET FORTH HEREIN AND THE PARTIES AGREE THAT
THIS LEASE CONSTITUTES THE FULL AGREEMENT BY AND BETWEEN THEM. ANY HOLDING OVER
BY THE TENANT AFTER THE TERM OF THIS LEASE SHALL BE UNLAWFUL AND IN NO MANNER
CONSTITUTE A RENEWAL OR EXTENSION OF THIS LEASE AGREEMENT. TENANT HAS INSPECTED
THE SUBJECT PREMISES, KNOWS THE CONDITION THEREOF AND TAKES THE SAME "AS IS".
50TH. THE SECURITY POSTED HEREUNDER (PARAGRAPH 27) SHALL BEAR NO
INTEREST AND SHALL CONSIST OF AND BE EQUIVALENT TO TWO (2) MONTHS RENT AT ALL
TIMES. NOT POSTED.
51ST. IN THE EVENT THAT THE TENANT SHALL NOT HAVE PAID THE RENT ON OR
BEFORE THE 10TH DAY OF THE MONTH DURING WHICH SAME IS DUE, THERE SHALL BE ADDED
TO SUCH RENT, AS ADDITIONAL RENT, A LATE CHARGE OF TEN (10%) PERCENT OF THE RENT
DUE AND UNPAID. THE LANDLORD SHALL HAVE ALL RIGHTS WITH RESPECT TO THIS
ADDITIONAL RENT AS FOR THE NON-PAYMENT OF ANY AND ALL OTHER RENTS DUE UNDER THE
TERMS OF THIS LEASE. THE DEMAND FOR AND COLLECTION OF THE AFORESAID LATE CHARGE
SHALL IN NO WAY BE DEEMED A WAIVER OF ANY REMEDIES THAT THE LANDLORD MAY HAVE
UNDER THE TERMS OF THIS LEASE BY SUMMARY PROCEEDINGS OR OTHERWISE.
52ND. THE LANDLORD SHALL NOT BE LIABLE IN ANY WAY, OR TO ANY EXTENT, OR
AT ALL, FOR OR ON ACCOUNT OR ANY INJURY TO ANY PROPERTY AT ANY TIME IN SAID
BUILDINGS, OR FOR OR ON ACCOUNT OF THE DESTRUCTION OF ANY PROPERTY AT ANY TIME
IN SAID BUILDINGS. LANDLORD SHALL NOT BE LIABLE FOR ANY DAMAGE DONE OR
OCCASIONED BY OR FROM PLUMBING, GAS, WATER, SPRINKLER, STEAM OR OTHER PIPES, OR
SEWERAGE OR THE BURSTING, LEAKING OR RUNNING OR ANY PIPES, TANK OR PLUMBING
FIXTURES IN, ABOVE, UPON OR ABOUT SAID BUILDING OR PREMISES, NOR FOR ANY DAMAGE
OCCASIONED BY WATER, SNOW OR ICE BEING UPON OR COMING THROUGH THE ROOF,
SKYLIGHTS, TRAP DOOR OR OTHERWISE, NOR FOR ANY DAMAGES ARISING FROM ACTS, OR
NEGLECT OF CO-TENANTS, OR OTHER OCCUPANTS OF THE SAME BUILDING OR OF ANY OWNERS,
OR OCCUPANTS, OR ADJACENT OR CONTIGUOUS PROPERTY, EXCEPT IF SUCH DAMAGE OR
INJURY IS CAUSED BY LANDLORD'S NEGLIGENCE.
<PAGE>
53RD. TENANT AGREES TO INDEMNIFY AND SAVE HARMLESS THE LANDLORD FROM
ANY CLAIM OR LOSS BY REASON OF THE TENANT'S USE OR MISUSE OF THE DEMISED
PREMISES AND FROM ANY CLAIM OR LOSS BY REASON OF ANY ACCIDENT OR DAMAGE TO ANY
PERSONS HAPPENING ON SAID PREMISES.
54TH. THE TENANT SHALL ON THE LAST DAY OF THE TERM, OR UPON THE SOONER
TERMINATION OR THE TERM, PEACEABLY AND QUIETLY SURRENDER THE LEASED PROPERTY TO
THE LANDLORD, BROOM CLEAN INCLUDING ALL BUILDING, ALTERATION, REBUILDING,
REPLACEMENTS, CHARGES OR ADDITIONS PLACED BY THE TENANT THEREON, IN AS GOOD
CONDITION AND REPAIRS AS AT THE COMMENCEMENT OF THE TERM, AND AS ANY BUILDINGS,
STRUCTURES, REPLACEMENTS, ADDITIONS OR IMPROVEMENTS CONSTRUCTED, ERECTED, ADDED,
OR PLACED THEREON BY THE TENANT ARE WHEN COMPLETED, WITH THE NATURAL WEAR AND
TEAR THEREOF EXCEPTED.
55TH. IT IS UNDERSTOOD AND AGREED THAT THE TENANT OCCUPIES (49%)
PERCENT OF THE TOTAL PREMISES AND IN ADDITION TO THE RENT HEREIN REQUIRED TO BE
PAID BY THE TENANT, TENANT WILL PAY TO THE LANDLORD AS ADDITIONAL RENT THE
FOLLOWING:
A) PERCENT (49%) OF ALL REAL ESTATE TAXES AND ASSESSMENTS CHARGED
TO THE PROPERTY, OF WHICH THE DEMISED PREMISES ARE A PART.
B) ANY AND ALL INCREASE IN INSURANCE PREMIUMS CHARGED THE
LANDLORD BECAUSE OF THE OCCUPANCY OF THE TENANT OF THE DEMISED
PREMISES.
C) PERCENT (49%) OF ANY GENERAL RATE INCREASE IN INSURANCE
PREMIUMS NOW OR HEREAFTER CARRIED BY THE LANDLORD COVERING THE
AFORESAID PROPERTY OVER THAT IN EFFORT ON.
D) PERCENT (49%) OF THE COST OF MAINTAINING AND CLEANING OF THE
DRIVEWAYS, SIDEWALKS AND PARKING LOT GARDENING, LINE PAINTING,
RESURFACING, REMOVAL OF SNOW, ICE, TRASH AND DEBRIS AND
GARBAGE REMOVAL.
56TH. THE TENANT SHALL PERMIT THE LANDLORD, ITS AGENTS, AT ALL
REASONABLE TIMES AND AFTER REASONABLE NOTICE TO ERECT, ERECT, USE, REPAIR AND
MAINTAIN ANY PIPES AND CONDUITS IN AND THROUGH THE DEMISED PREMISES, AND THE
LANDLORD SHALL HAVE THE RIGHT TO ENTER THE DEMISED PREMISED AT ALL TIMES TO
EXAMINE THE SAME AND TO SHOW THEM TO PROSPECTIVE PURCHASERS OR LESSEES OF THE
BUILDING AND TO MAKE ANY IMPROVEMENTS, ADDITIONS OR ALTERATIONS AS THE LANDLORD
MAY DEEM NECESSARY OR DESIRABLE. ALL OF THE AFORESAID MAY BE DONE WITHOUT
CONSTITUTING AND EVICTION OF THE TENANT AND THE RENT RESERVED SHALL IN NO WAY
ABATE DURING THE PERFORMANCE THEREOF. NOTHING HEREIN CONTAINED SHALL BE DEEMED
OR CONSTRUED TO IMPOSE UPON THE LANDLORD ANY OBLIGATION, RESPONSIBILITY OR
LIABILITY WHATSOEVER FOR REPAIRS, CARE OR SUPERVISION OF THE BUILDING ON ANY
PART THEREOF OTHER THAN AS HEREIN OTHERWISE PROVIDED IN THIS LEASE. ANY SUCH
ENTRY ONTO THE DEMISED PREMISES SHALL BE DURING NORMAL BUSINESS HOURS AND SHALL
NOT INTERFERE WITH TENANT'S BUSINESS NOR IMPAIR TENANT'S USE OF THE DEMISED
PREMISES.
57TH. IF THE DEMISED PREMISES BE OR BECOME INFESTED WITH VERMIN, THE
TENANT SHALL AT THE TENANT'S EXPENSE, CAUSE THE SAME TO BE EXTERMINATED FOR TIME
TO TIME TO THE REASONABLE SATISFACTIONS OF THE LANDLORD.
58TH. ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE PREMISES
HEREIN MENTIONED ARE DEMISED FOR THE WHOLE TERM WITH THE WHOLE AMOUNT OF RENT
RESERVED DUE AND PAYABLE AT THE TIME OF THE MAKING OF THIS LEASE, AND THE
PAYMENT OF RENT IN INSTALLMENTS AS ABOVE PROVIDED IS FOR THE CONVENIENCE OF
TENANT ONLY AND UPON DEFAULT IN THE MAKING OF ANY INSTALLMENT PAYMENT OF RENT,
OR UPON BREACH OF ANY OF THE TERMS, COVENANTS OF CONDITIONS OF THIS AGREEMENT;
THEN THE WHOLE OF THE RENT RESERVED FOR THE WHOLE OF THE PERIOD THEN REMAINING
UNPAID SHALL, AT LANDLORD'S OPTIONS, AT ONCE BECOME DUE AND PAYABLE WITHOUT ANY
NOTICE OR DEMAND.
59TH. IN THE EVENT THAT THIS LEASE IS CANCELED BY THE LANDLORD FOR
DEFAULT BY THE TENANT IN THE PERFORMANCE OF ANY OF THE TERMS HEREOF, THE
LANDLORD SHALL APPLY AND RETAIN THE ENTIRE SECURITY THEN ON DEPOSIT TO AND IN
REDUCTION OF THE TOTAL DAMAGES WHICH LANDLORD MAY SUSTAIN OR INCUR AS A RESULT
OF THE TENANT'S DEFAULTS.
60TH. IN THE EVENT OF ANY CLAIM BY THE TENANT TO THE EFFECT THAT
ANOTHER TENANT IN ANY WAY ENCROACHES UPON OR VIOLATES ANY OF ITS RIGHTS UNDER
THIS LEASE, THE TENANT'S SOLE RECOURSE SHALL BE AGAINST SUCH OTHER TENANT AND IN
NO EVENT WILL THE LANDLORD BE REQUIRED TO INSTITUTE ANY LEGAL PROCEEDING OR TO
TAKE OTHER STEPS AGAINST THE TENANT ALLEGED TO BE IN VIOLATION. THIS SHALL IN NO
WAY, HOWEVER, LIMIT THE RIGHTS OF THE TENANT AS AGAINST SUCH OTHER TENANT OR
VIOLATING PARTY, NOR SHALL SUCH ENCROACHMENT CONSTITUTE A DEFAULT UNDER OR
BREACH OF THIS LEASE BY THE LANDLORD.
<PAGE>
61ST. THE TENANT AGREES THAT THE RENT PROVIDED FOR HEREIN SHALL BE PAID
TO THE LANDLORD WITHOUT DEMAND AND WITHOUT OFFSET OR DEFENSE AT THE ADDRESS SET
FORTH HEREIN, OR AT SUCH OTHER ADDRESS AS THE LANDLORD MAY AT ANY TIME DESIGNATE
IN WRITING.
62ND. THE SIDEWALK, DRIVEWAY, PARKING LOT AREAS AND ENTRANCES OF THE
DEMISED PREMISES SHALL NOT BE OBSTRUCTED BY THE TENANT AND THE TENANT SHALL
MAINTAIN AND CLEAN SAME AND SHALL KEEP SAME FREE OF ICE, SNOW, DEBRIS AND REFUSE
AND IN ADDITION, MAKE ALL REPAIRS AND REPLACEMENTS THERETO WHICH MAY BECOME
NECESSARY AS A CONSEQUENCE OF THE FAULT OR NEGLIGENCE ON THE PART OF THE TENANT.
63RD. IF THERE SHALL BE FILED BY OR AGAINST THE TENANT A PETITION IN
BANKRUPTCY OR INSOLVENCY OR FOR REORGANIZATION OR FOR THE APPOINTMENT OF A
RECEIVER OR TRUSTEE OF ALL OR A PORTION OF THE TENANT PROPERTY, OR IF THE TENANT
MAKES AN ASSIGNMENT FOR THE BENEFIT OF CREDITORS, THIS LEASE SHALL IPSO FACTO BE
CANCELED AND TERMINATED. IN SUCH EVENT NEITHER TENANT NOR ANY PERSON CLAIMING
THROUGH OR UNDER TENANT OR BY VIRTUE OF ANY STATUTE OR AN ORDER OF ANY COURT
SHALL BE ENTITLED TO POSSESSION OF THE DEMISED PREMISES. THE LANDLORD, IN
ADDITION TO OTHER RIGHTS AND REMEDIES CONTAINED IN THIS LEASE OR BY VIRTUE OF
ANY STATUTE OR RULE OF LAW MAY RETAIN AS LIQUIDATED DAMAGES ANY AND ALL RENTS,
SECURITY, DEPOSIT OR MONEYS RECEIVED BY LANDLORD FROM TENANT.
64TH. LANDLORD MAKES NO REPRESENTATION AS TO THE PERMITTED USE OF THE
SUBJECT PREMISES AND THIS LEASE IS EXPRESSLY MADE SUBJECT TO THE ZONING
ORDINANCES OF THE APPROPRIATE MUNICIPAL AUTHORITY HAVING JURISDICTION OVER THE
PREMISES AND ANY AGENCY OR SUBDIVISION THEREOF. ALL PERMITS WHICH MAY BE
NECESSARY FOR THE MAINTENANCE AND OPERATION OF THE TENANT'S BUSINESS SHALL BE
OBTAINED AND MAINTAINED BY THE TENANT AT THE TENANT OWN COST EXPENSE.
65TH.THE TENANT AGREES AT ANYTIME AND FROM TIME TO TIME, UPON NOT LESS
THAT FIVE (5) DAYS PRIOR WRITTEN REQUEST BY THE LANDLORD, TO EXECUTE,
ACKNOWLEDGE AND DELIVER TO THE LANDLORD A STATEMENT IN WRITING CERTIFYING THAT
THIS LEASE IS UNMODIFIED AND IN FULL FORCE AND EFFECT, OR IF THERE HAVE BEEN
MODIFICATIONS THAT THE SAME ARE IN FULL FORCE AND EFFECT AS MODIFIED, AND
STATING THE MODIFICATION AND DATES TO WHICH RENT AND OTHER CHARGES HAVE BEEN
PAID IN ADVANCE, IF ANY. IT IS INTENDED THAT ANY SUCH STATEMENT DELIVERED
PURSUANT TO THIS PARAGRAPH MAY BE RELIED UPON BY ANY PROSPECTIVE PURCHASER OF
THE FEE OR ANY MORTGAGEE OR ASSIGNED OF ANY MORTGAGE UPON THE FEE OF THE DEMISED
PREMISES.
66TH. THE RECEIPT BY LANDLORD FOR RENT WITH KNOWLEDGE OF A BREACH OF
ANY COVENANT OF THIS LEASE SHALL NOT BE DEEMED A WAIVER OF SUCH BREACH. NO
PAYMENT BY TENANT OR RECEIPT BY LANDLORD OF A LESSER AMOUNT THAT THE MONTHLY
RENT HEREIN STIPULATED SHALL BE DEEMED TO BE OTHER THAN ON ACCOUNT OF THE
EARLIEST STIPULATED RENT. NO ENDORSEMENT OR STATEMENT ON ANY CHECK OR ANY LETTER
ACCOMPANYING ANY CHECK OR PAYMENT WITHOUT PREJUDICE TO LANDLORD'S ACCOMPANYING
ANY CHECK OR PAYMENT WITHOUT PREJUDICE TO LANDLORD'S RIGHT TO RECOVER THE
BALANCE OF SUCH RENT OR PURSUE ANY OTHER REMEDY IN THIS LEASE PROVIDED.
67TH. NOTWITHSTANDING ANYTHING HEREIN CONTAINED TO THE CONTRARY THE
LANDLORD'S CONSENT TO THE TENANT EITHER ASSIGNING OR SUBLETTING THE DEMISED
PREMISES SHALL NOT BE UNREASONABLE WITHHELD; HOWEVER, THE FOLLOWING CONDITIONS
FOR ANY REQUESTED CONSENT SHALL APPLY IN ADDITION TO WHATEVER OTHER REASONABLE
REQUESTS MAY BE MADE BY THE LANDLORD:
A) EACH ASSIGNMENT OR SUB-LEASE SHALL BE IN WRITING AND SHALL
CONTAIN AN AGREEMENT WHEREBY THE ASSIGNEE OR SUB-TENANT SHALL
ASSUME ALL OR THE OBLIGATIONS OF THE TENANT TO THE LANDLORD;
B) NO ASSIGNMENT OR SUB-LEASE SHALL BE VALID UNLESS AT THE TIME
OF THE MAKING THEREOF ALL OF THE TENANT'S OBLIGATIONS TO THE
LANDLORD ARE CURRENT;
C) SAID AGREEMENT, EXECUTED BY THE ASSIGNOR OR TENANT-LESSEE,
WITH THE ASSUMPTION OF THE ASSIGNEE OR UNDER-TENANT SHALL BE
DEPOSITED WITH THE LANDLORD WITHIN FIVE (5) DAYS OF THE MAKING
OF SUCH ASSIGNMENT OR SUB-LEASE;
D) ANY SUCH ASSIGNMENT OR SUB-LEASE SHALL SPECIFICALLY SET FORTH
WHAT PORTION, IF ANY, OF THE SECURITY DEPOSIT MADE BY THE
TENANT IS ASSIGNED TO THE CREDIT OF THE ASSIGNEE OR
SUB-TENANT;
E) ANY ASSIGNMENT OF SUBLEASE SHALL IN NO PART RELEASE THE
ORIGINAL TENANT OR ANY SUBSEQUENT ASSIGNEE OR UNDER-TENANT
FROM ANY OBLIGATION TO THE LANDLORD;
F) TWO MONTHS ADDITIONAL SECURITY SHALL BE DEPOSITED WITH THE
LANDLORD UPON THE MAKING OF EACH ASSIGNMENT OR SUB-LEASE
HEREUNDER AND SUCH SECURITY SHALL BE HELD BY THE LANDLORD
PURSUANT TO THE TERMS OF PARAGRAPH 27TH. HEREOF;
G) ALL ASSIGNMENTS OR SUB-LEASE AGREEMENTS SHALL BE MADE IN
ACCORDANCE WITH THE TERMS OF PARAGRAPH 27TH. HEREOF;
<PAGE>
68TH. ANY TRANSFER OF A MAJORITY OF THE ISSUED AND OUTSTANDING CAPITAL
STOCK OF ANY CORPORATE TENANT, HOWEVER ACCOMPLISHED, AND WHETHER IN A SINGLE
TRANSACTION OR IN A SERIES OF RELATED OR UNRELATED TRANSACTIONS, SHALL BE DEEMED
TO BE AN ASSIGNMENT OF THIS LEASE. LIKEWISE, AN INCREASE IN THE NUMBER OF ISSUED
AND/OR OUTSTANDING SHARES OF CAPITAL STOCK OF ANY CORPORATE TENANT AND/OR THE
CREATION OF ONE OR MORE ADDITIONAL CLASSES OF CAPITAL STOCK OF ANY CORPORATE
TENANT, HOWEVER ACCOMPLISHED AND WHETHER IN A SINGLE TRANSACTION OR A SERIES OF
RELATED OR UNRELATED TRANSACTION, WITH THE RESULT THAT AT LEAST FIFTY-ONE (51%)
PERCENT OF THE BENEFICIAL INTEREST AND RECORD OWNERSHIPS IN AND TO SUCH TENANT
SHALL NO LONGER BE HELD BY THE BENEFICIAL AND RECORD OWNERS OF THE CAPITAL STOCK
OF SUCH CORPORATE TENANT AS OF THE DATE OF THE EXECUTION OF THIS LEASE, OR THE
DATE SUCH CORPORATION SHALL BECOME THE TENANT HEREUNDER (WHICHEVER IS LATER,
SHALL BE DEEMED TO BE AN ASSIGNMENT OF THIS LEASE. SUCH ASSIGNMENT OF LEASE
HEREUNDER SHALL BE GOVERNED BY THE OTHER PROVISIONS OF THIS LEASE.
69TH. NOT WITHSTANDING ANYTHING CONTAINED HEREIN, IT IS AGREED THAT THE
TENANT SHALL NOT BE REQUIRED TO PAY ANY ADDITIONAL RENT FOR THE ITEMS SET FORTH
IN PARAGRAPH 55TH. FOR ITS OCCUPANCY OF THE SUBJECT PREMISES FOR THE PERIOD
AUGUST 01 1994 TO JULY 31 2004 IT BEING THE INTENTION OF THE PARTIES THAT THE
TENANT SHALL PAY THE SET AMOUNT SET FORTH IN PARAGRAPH 55TH. OF THIS LEASE TO
THE ANNUAL RENT.
D) THERE SHALL BE NO FURTHER OPTION TO RENEW THIS LEASE.
GREAT AMERICAN REALTY OF DEER PARK, INC.
BY:/s/Mark Siegel
------------------
MARK SIEGEL
BY:/s/Ira Levy
------------------
IRA LEVY
9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended
November 30,
1998 1997
------ ------
Basic earnings:
Net income (loss) $ (274,166) $ 75,350
---------- ----------
Shares:
Weighted common shares outstanding 4,836,835 4,823,958
Employee's stock options -- --
---------- ----------
Total weighted shares outstanding 4,836,835 4,823,958
---------- ----------
Basic earnings per common share $ (.06) $ .02
========== ==========
Diluted earnings:
Net income (loss) $ (274,166) $ 75,350
---------- ----------
Shares:
Weighted common shares outstanding 4,836,835 4,823,958
Employee stock options -- 141,025
---------- ----------
Total weighted shares outstanding 4,836,835 4,964,983
---------- ----------
Diluted earnings per common share $ (.06) $ .02
========== ==========
<PAGE>
AMENDMENT TO
EMPLOYMENT AGREEMENT
AMENDMENT TO EMPLOYMENT AGREEMENT dated February 1, 1996, by and
between Surge Components, Inc., a New York corporation, with its principal place
of business at 1016 Grand Boulevard, Deer Park, New York 11729 (the "Company")
and Ira Levy residing at 2441 Riverside Dr., Wantagh, New York 11793 (the
"Executive").
W I T N E S S E T H :
--------------------
WHEREAS, the Company and the Executive entered into an
employment agreement dated February 1, 1996 with an initial term of five
years, and
WHEREAS, the Company and the Executive wish to extend
the term of the agreement.
NOW, THEREFORE, in consideration of the mutual premises
and agreements contained herein and for other good and valuable consideration by
each of the parties, the parties hereby agree as follows:
Section 2 is replace in its entirety with the following:
2. Term. The term of this Agreement shall continue until July 30,
2003; provided however, that on July 30th of each successive year of the
Agreement, the Agreement shall renew for one additional year so that on each
July 30th, there will be five years remaining on the term of the Agreement,
unless the Executive is terminated pursuant to Section 11 hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of
the 4th day of March 1998.
"EXECUTIVE" "COMPANY"
SURGE COMPONENTS, INC.
/s/ Ira Levy By: /s/ Steven Lubman
- - ----------------------------- -----------------------------
Ira Levy Steven Lubman, Vice President
<PAGE>
AMENDMENT TO
EMPLOYMENT AGREEMENT
AMENDMENT TO EMPLOYMENT AGREEMENT dated February 1, 1996, by and
between Surge Components, Inc., a New York corporation, with its principal place
of business at 1016 Grand Boulevard, Deer Park, New York 11729 (the "Company")
and Steven Lubman residing at 12 Cather Ave., Dix Hills, New York 11746 (the
"Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Company and the Executive entered into an
employment agreement dated February 1, 1996 with an initial term of five
years, and
WHEREAS, the Company and the Executive wish to extend
the term of the agreement.
NOW, THEREFORE, in consideration of the mutual premises
and agreements contained herein and for other good and valuable consideration by
each of the parties, the parties hereby agree as follows:
Section 2 is replace in its entirety with the following:
2. Term. The term of this Agreement shall continue until July 30,
2003; provided however, that on July 30th of each successive year of the
Agreement, the Agreement shall renew for one additional year so that on each
July 30th, there will be five years remaining on the term of the Agreement,
unless the Executive is terminated pursuant to Section 11 hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of
the 4th day of March 1998.
"EXECUTIVE" "COMPANY"
SURGE COMPONENTS, INC.
/s/ Steven Lubman By: /s/ Ira Levy
- - --------------------------- ------------------------
Steven Lubman Ira Levy, President
<PAGE>
Exhibit 23.1
Independent Auditor's Consent
Board of Directors
Surge Components, Inc.
We consent to the incorporation by reference in Registration Statement
No. 333-60787 on Form S-8 and Registration Statement No. 333-63371 on Form S-3
of Surge Components, Inc. of our report dated January 21, 1999, appearing in
this Annual Report on Form 10-KSB of Surge Components, Inc. for the year ended
November 30, 1998.
SELIGSON & GIANNATTASIO, LLP
N. White Plains, New York
February 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of income filed as part of the report
on form 10KSB for the year ended November 30, 1998 and is qualified in its
entirety by reference to such report on form 10KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 1,387,222
<SECURITIES> 3,237,928
<RECEIVABLES> 1,205,690
<ALLOWANCES> 15,724
<INVENTORY> 1,159,111
<CURRENT-ASSETS> 7,238,597
<PP&E> 458,823
<DEPRECIATION> 134,036
<TOTAL-ASSETS> 7,654,400
<CURRENT-LIABILITIES> 1,413,260
<BONDS> 0
0
0
<COMMON> 4,853
<OTHER-SE> 6,236,287
<TOTAL-LIABILITY-AND-EQUITY> 7,654,400
<SALES> 8,727,649
<TOTAL-REVENUES> 9,021,547
<CGS> 6,707,409
<TOTAL-COSTS> 2,701,834
<OTHER-EXPENSES> 7,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,936
<INCOME-PRETAX> (430,568)
<INCOME-TAX> (156,402)
<INCOME-CONTINUING> (274,166)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (274,166)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
