<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SURGE COMPONENTS, INC.
(Name of Registrant as Specified In Its Charter)
None
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:(1)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
- ------------
(1) Set forth the amount on which the filing fee is calculated and state
how it was determined.
<PAGE>
As filed with the Securities and Exchange Commission on March 17, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SURGE COMPONENTS, INC.*
(Exact name of registrant as specified in its charter)
NEW YORK 5065 11-2602030
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1016 Grand Boulevard
Deer Park, New York 11729
(631) 595-1818
(Address, including ZIP code, and telephone number, including area code, of
registrant's principal executive offices)
Ira Levy
President
Surge Components, Inc.
1016 Grand Boulevard
Deer Park, New York 11729
(631) 595-1818
(Name, Address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Tel: (212) 687-3860
Fax: (212) 949-7052
- --------
*Upon approval of its shareholders, Surge Components, Inc. will be renamed
Superus Holdings, Inc.
<PAGE>
-----------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
- ---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered be Registered Per Share Offering Price Registration Fee
--------------------------- ------------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.001 par value (1) N/A (2) N/A (2) N/A (2) N/A (2)
Class B Common Stock,
$.001 par value N/A (3) N/A (3) N/A (3) N/A (3)
Class B Common Stock
Purchase Warrants (4) N/A (5) N/A (5) N/A (5) N/A (5)
Class B Common Stock,
$.001 par value 23,900,000 (6) $4.00 (7) $95,600,000.00 $25,238.40
Class B Common Stock,
$.001 par value 1,821,400 (8) $0.016 (9) $29,142.40 $7.69
Class B Common Stock,
$.001 par value 1,100,000 (10) $9.375 (11) $10,312,500.00 $2,722.50
Class B Common Stock,
$.001 par value 2,333,334 (12) $9.375 (11) $21,875,000.00 $5,775.00
-------------- ----------
Total ............................................................... $127,816,642.40 $33,743.59
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-ii-
<PAGE>
(1) If the Recapitalization proposal described herein is approved by the
stockholders, Surge Components, Inc . ("Surge") (d/b/a Superus
Holdings) will transfer all of its assets, subject to its liabilities,
to a wholly-owned Delaware subsidiary recently formed by Surge solely
for this purpose. Surge will then merge (the "Superus Merger") with and
into Superus Holdings, Inc. ("Superus") which will become the parent
holding company registrant. Each share of the Surge's common stock, par
value $.001 per share (the "existing Common Stock"), outstanding on the
effective date of the Merger (the "Effective Date") will be converted
into Class A Common Stock, par value $.001 per share ("Class A Common
Stock").
(2) The number of shares of Class A Common Stock being registered is equal
to the shares of existing Common Stock issued and expected to be
outstanding immediately before the Effective Date giving effect to the
exercise of outstanding options and warrants of Surge prior to the
Effective Date. In accordance with Rule 457(o) under the Securities Act
of 1933, as amended (the "Act"), the number of shares being registered
is not included in the table.
(3) The Class A Common Stock shall be exchangeable for one-half share of
Class B Common Stock, par value $.001 per share ("Class B Common
Stock") solely on the basis of one whole share of Class B Common Stock
for every two shares of Class A Common Stock (the "Ratio") for a
six-month period following the Effective Date. The number of shares of
Class B Common Stock being registered is equal to one-half of the
number of shares of existing common stock outstanding immediately
before the Effective Date. In accordance with Rule 457(o) under the
Act, the number of shares being registered is not included in the
table.
(4) If the Recapitalization Proposal described herein is approved, each
existing Class A Common Share Purchase Warrant ("Class A Warrant") of
the Company will be converted into one Class B Common Stock Purchase
Warrant ("Class B Warrant").
(5) If the Recapitalization Proposal described herein is approved, each
Class B Warrant issued upon conversion of Class A Warrants will be
exercisable at $5.00 per share until July 31, 2003 for one share of
Class B Common Stock. The number of shares of Class B Common Stock
being registered is equal to one (1) times the number of existing Class
A Warrants outstanding at the Effective Date. In accordance with Rule
457(o) under the Act, the number of shares being registered is not
included in the table.
(6) If the acquisition of Global DataTel Inc.'s ("Global") assets is
approved under Proposal 2, each share of the Company's existing Class A
Redeemable Convertible Preferred Stock ("Class A Preferred Stock") held
in escrow for the benefit of Global's shareholders shall be converted
automatically into 100 shares of Class B Common Stock which are being
registered in this Registration Statement for original issuance and for
resale by Global Shareholders. The number of shares of Class B Common
Stock being registered is equal to 100 times the number of shares of
Class A Preferred Stock outstanding at the Effective Date.
iii
<PAGE>
(7) Such amounts have been estimated solely for the purpose of calculating
the registration fee pursuant to Rule 457(f)(1) under the Securities
Act based on a price of $4.00 per share of the Global common stock,
calculated on the basis of the average high and low prices of shares of
Global common stock on the National Quotation Bureau "Pink Sheets" on
March 6, 2000, as reported in published financial sources.
(8) Issuable to the shareholders of MailEncrypt.com, Inc. upon stockholder
approval of Proposal 3 and being registered in this Registration
Statement for resale.
(9) Such amounts have been estimated solely for the purpose of calculating
the registration fee pursuant to Rule 457(f)(2) under the Securities
Act based upon one-third of the stated value of such securities as of
December 31, 1999.
(10) Of this amount, 1,000,000 shares are issuable to Equilink, LLC as
Surge's financial advisor upon approval of Proposals 1 and 2 herein;
and 100,000 shares are issuable to Morgan Stanley Dean Witter upon
approval of proposals 1 and 3 herein.
(11) Such amounts have been estimated solely for the purpose of calculating
the registration fee pursuant to Rule 457(c) under the Securities Act
based on a closing price of $9 3/8 per share of Surge Common Stock on
the Nasdaq SmallCap Market on March 10, 2000, as the existing common
stock is the only common stock publicly traded.
(12) If the Recapitalization Proposal and Proposal 2 described herein are
approved, these shares of Class B Common Stock will be issuable upon
conversion, at the rate of $3.00 per share, to the holders of
approximately $7.0 million 12% convertible Promissory Notes issued in a
private placement by Surge between December 1999 and March 2000.
------------------
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this proxy statement and prospectus is not complete
and may be changed. We may not distribute the securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
proxy statement and prospectus is not an offer to sell the securities and it is
not soliciting an offer to buy these securities in any state where an offer or
sale is not permitted.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
-iv-
<PAGE>
Subject to completion, dated March 17, 2000
Proxy Statement of SURGE
COMPONENTS, INC.
Special Meeting of Stockholders to be
Held at 10:00 A.M., Eastern Time, on ___________, 2000
------------------------
Prospectus of
SURGE COMPONENTS, INC.
(d/b/a Superus Holdings)
Class A Common Stock Class B Common Stock
------------------------
Dear Stockholders:
You are invited to attend a special meeting of our stockholders (the
"special meeting"), to be held at ___________, located at
______________________________, New York ______.
At the special meeting, we will ask you to consider and adopt a
recapitalization (the "Recapitalization") proposal recommended by our board of
directors. The Recapitalization Proposal involves the adoption of an agreement
and plan of merger, attached hereto as Annex A, under which: Surge Components,
Inc. ("Surge") will transfer all of its assets, subject to its liabilities, to a
wholly-owned Delaware subsidiary which we recently formed solely for this
purpose. Surge will then merge with and into Superus Holdings, Inc. ("Superus")
which will become the public parent holding company. Your rights as a
shareholder will cease to be governed by New York law and you will be governed
by Delaware law. The changes discussed herein are set forth in the certificate
of incorporation of Superus attached hereto as Annex B and in new Delaware
By-Laws filed with the SEC, both of which you should carefully read.
Superus, a Delaware corporation, has two new classes of common stock
called Class A Common Stock and Class B Common Stock. The Class A Common Stock
is intended to reflect separately the performance of our existing electronic
components business (a wholly-owned subsidiary of Superus) which will continue
to be called Surge Components and the Class B Common Stock is intended to
reflect separately the operating results of our Internet related businesses
("Internet Operations") if the acquisition proposals contained herein for Global
DataTel, Inc. ("Global") and MailEncrypt.com, Inc. ("MailEncrypt") are approved.
Surge has demonstrated revenue and earnings growth while the Internet Operations
are expected to incur significant losses during the near term until they are
able to reach a point of substantial growth or positive cash flow.
If the Recapitalization is implemented, your existing common stock
certificates will represent Class A Common Stock and will be convertible at your
option for a six month period following stockholder approval into Class B Common
Stock at a rate of two shares of Class A Common Stock for each share of Class B
Common Stock. Your existing common stock will initially represent approximately
17% of the combined voting securities of Superus. We will seek to list both the
Class A Common Stock and Class B Common Stock on the Nasdaq National Market
System under the symbols SPRSA and SPRSB, respectively, and our Class B Common
Stock Purchase Warrants under the symbol SPRSW.
At the special meeting, we will also ask you to consider and ratify, on
a non-binding basis, Superus' adoption of a stock incentive plan. You are also
being asked to ratify on a binding basis the acceleration of the exercisability
of Superus stock options issued to Surge management in consideration of their
forfeiture of certain outstanding options.
The recapitalization proposal and the stock incentive plan proposal
described above are conditioned upon the stockholders approving the acquisition
of the assets of Global. At the special meeting you will also be asked to elect
a new Board of Directors initially consisting of three members.
At the special meeting you will also be asked to ratify the appointment
of Seligson & Giannattasio, LLP, as Surge's independent auditors for the fiscal
years ended November 30, 1998 and November 30, 1999.
Our board of directors unanimously recommends that you vote in favor of
the Recapitalization and all of the presented proposals. This proxy statement
and prospectus provides you with detailed information about the Recapitalization
and related proposals. We encourage you to read this entire document carefully.
-1-
<PAGE>
Ira Levy, President
THE RECAPITALIZATION AND RELATED PROPOSALS INVOLVE CERTAIN RISKS.
PLEASE READ THE "RISK FACTORS" BEGINNING ON PAGE 31.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement and prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
This proxy statement and prospectus is dated __________, 2000 and is
first being mailed to stockholders on ____________, 2000.
SHAREHOLDERS OF SURGE ARE ENTITLED TO DISSENTERS' RIGHTS IN CONNECTION
WITH THE RECAPITALIZATION IF THEY COMPLY IN ALL RESPECTS WITH SECTION 623 OF THE
NEW YORK BUSINESS CORPORATION LAW. SEE "PROPOSAL 1- THE RECAPITALIZATION
PROPOSAL" BELOW.
HOW YOU CAN OBTAIN MORE INFORMATION
This proxy statement and prospectus incorporates important business and
financial information that is not included in or delivered with this document.
You may request a copy of this information at no cost, by writing or telephoning
us at the following address:
Surge Components, Inc.
1016 Grand Boulevard
Deer Park, New York 11729
Attention: Secretary
Telephone: (631) 595-1818
To obtain timely delivery, you must make this request no later than
five business days before _________, 2000, the date of the special meeting.
-2-
<PAGE>
SURGE COMPONENTS, INC.
1016 Grand Boulevard
Deer Park, NY 11729
(631) 595-1818
Notice of Special Meeting of Shareholders
to be held
_______ __, 2000
_______________, 2000
To the Shareholders of Surge Components, Inc.:
You are cordially invited to attend the Special Meeting of the
Shareholders (the "special meeting") of Surge Components, Inc. ("Surge"), which
will also serve as our annual meetings of shareholders for the fiscal years
ended November 30, 1999 and November 30, 1998 be held at
_________________________________, New York _____ at 10:00 a.m., Eastern
Standard Time, on ________, 2000, to consider and act upon the following
matters:
(1) To approve a Recapitalization proposal which involves the
adoption of an agreement and plan of merger attached hereto as
Annex A under which:
o we will transfer all of our assets, subject to our
liabilities, to a wholly-owned Delaware subsidiary
which we recently formed solely for this purpose. We
will then merge Surge (the "Superus Merger") with and
into Superus Holdings, Inc. ("Superus") , a Delaware
corporation which will become the public parent
holding company. Your rights as a shareholder will
cease to be governed by New York law and you will be
governed by Delaware law. The changes discussed in
the proposals herein are set forth in the certificate
of incorporation of Superus attached hereto as Annex
B and in new Delaware By-Laws filed with the SEC,
both of which you should carefully read.
o each outstanding share of existing common stock will
be converted into one share of Class A Common Stock
of Superus to track the performance of our existing
electronic components business which will continue to
be called Surge Components.
o Upon your approval of Proposals 2 and 3 below, you
will authorize the issuance of Class B Common Stock
of Superus to the shareholders of Global DataTel,
Inc. and MailEncrypt.com, Inc., which will track the
performance of our Internet Operations.
(2) To approve the Asset Purchase Agreement dated December 8,
1999, by and among Surge, Global DataTel, Inc. and GDIS
Acquisition Corp., a wholly-owned subsidiary of Surge,
attached hereto as Annex C, and as Class A Common Stockholders
of Superus following the Superus Merger, authorize the shares
of Class B Common Stock to be issued thereunder.
-3-
<PAGE>
(3) To approve the Merger Agreement and Plan of Reorganization By
and Among MailEncrypt.com, Inc., the shareholders of
MailEncrypt.com, Inc., Mail Acquisition Corporation, a
wholly-owned subsidiary of Surge, and Surge, dated February
16, 2000, attached hereto as Annex D, and as Class A Common
Stockholders of Superus following the Superus Merger,
authorize the shares of Class B Common Stock to be issued
thereunder.
(4) To ratify, on a non-binding basis, the adoption of Superus
2000 Stock Incentive Plan, attached hereto as Annex E, to
provide for the granting of stock options and/or awards in
Class A Common Stock and Class B Common Stock.
(5) To ratify the acceleration of exercisability of Superus
options issued to Surge management under the Superus 2000
Stock Incentive Plan.
(6) To elect the initial three (3) members to the Board of
Directors to hold office for a one-year term or until their
successors are duly elected and qualified. The persons
nominated by the Board of Directors (Messrs. Adam J. Epstein,
Ira Levy, and Mario Habib) are described in the accompanying
Proxy Statement.
(7) To ratify the appointment of Seligson & Giannattasio, LLP, as
Surge's auditors for the fiscal years ended November 30, 1999
and November 30, 1998.
(8) To transact such other business as may properly come before
the Annual Meeting or any adjournments thereof.
The attached proxy statement and prospectus contains information
relating to the first seven (7) proposals.
Only shareholders of record at the close of business on ______, 2000,
will be entitled to notice of, and to vote at, the special meeting or any
adjournments thereof.
A list of shareholders entitled to vote at the special meeting will be
open to examination by any shareholder, for any purpose germane to the meeting,
at the offices of Surge, 1016 Grand Boulevard, Deer Park, New York 11729, during
ordinary business hours for ten days prior to the Annual Meeting. Such list
shall also be available during the special meeting.
Dated: Deer Park, New York
________ __, 2000
By order of the Board of Directors,
Steven J. Lubman, Secretary
Whether or not you expect to attend the special meeting in person,
please complete, date and sign the accompanying proxy card and return it without
delay in the enclosed postage prepaid envelope. Your proxy will not be used if
you are present and prefer to vote in person or if you revoke the proxy.
-4-
<PAGE>
Subject to completion, dated March 17, 2000
Proxy Statement of
GLOBAL DATATEL, INC.
Special Meeting of Stockholders to be
Held at 10:00 A.M., Eastern Time, on ___________, 2000
------------------------
Prospectus of
SURGE COMPONENTS, INC.
Class A Common Stock Class B Common Stock
------------------------
Dear Stockholders:
You are invited to attend a special meeting of Global DataTel, Inc.
("Global") stockholders (the "special meeting"), to be held at ___________,
located at __________________________, _____________.
At the special meeting, we will ask you to consider and adopt a
proposal recommended by our board of directors. We propose to sell all of our
assets and certain liabilities to a wholly-owned subsidiary (the "GDIS
Acquisition") of Surge Components, Inc. ("Surge"). In full consideration for the
sale, we have received 239,000 preferred shares which are being held in escrow
and are issuable on a 100 for 1 basis to our stockholders and convertible into
23,900,000 shares of Class B Common Stock of Superus Holdings, Inc. ("Superus").
Surge will merge with and into Superus, a Delaware corporation recently formed
solely for this purpose. Your rights as a shareholder will cease to be governed
by Nevada law and you will be governed by Delaware law. The changes discussed
herein are set forth in the Certificate of Incorporation of Superus attached
hereto as Annex B and in Delaware By-Laws filed with the SEC, both of which you
should carefully read.
The Class B Common Stock is intended to reflect separately the
performance of Superus' proposed Internet related businesses, through Surge's
acquisition proposals contained herein for Global DataTel, Inc. and
MailEncrypt.com, Inc. ("MailEncrypt"). The Class A Common Stock is intended to
reflect separately the performance of Surge's existing electronic components
business. The recapitalization proposal of Surge (the "Recapitalization") will
permit separate market valuations of the Class A Common Stock and the Class B
Common Stock based on the separate operating results of Surge and Internet
Operations. Surge has demonstrated revenue and earnings growth while the
Internet Operations are expected to incur significant losses during the near
term until they are able to reach a point of substantial growth or positive cash
flow.
If you approve the GDIS Acquisition which we will ask you to consider
at the special meeting, each share of your existing common stock will be
converted into one share of Class B Common Stock of Superus. Your existing
shares of common stock will initially represent approximately 77% of the
combined voting stock of Superus prior to exercise or conversion of any
convertible securities. See Proposal 2 - Approval of GDIS Asset Purchase
Agreement - Appraisal Rights and Annex G if you do not wish to vote in favor of
Proposal 2. The exchange of stock should be tax-free to you and us. Superus will
seek to list both the Class A Common Stock and Class B Common Stock on the
Nasdaq National Market System under the symbols SPRSA and SPRSB, respectively,
and its Class B Common Stock Purchase Warrants under the symbol SRPSW. The GDIS
Acquisition is also subject to the approval of Surge shareholders.
Our board of directors unanimously recommends that you vote in favor of
the GDIS Acquisition.
THIS JOINT PROXY STATEMENT AND PROSPECTUS WITH SURGE PROVIDES YOU WITH
DETAILED INFORMATION ABOUT THE RECAPITALIZATION AND RELATED PROPOSALS OF SURGE,
HOWEVER, YOU ARE ONLY BEING ASKED TO VOTE ON PROPOSAL 2 - THE GDIS ACQUISITION.
WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY.
Richard Baker
President
-1-
<PAGE>
The Recapitalization and related proposals involve certain risks.
Please read the "Risk Factors" beginning on page 31.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement and prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
This proxy statement and prospectus is dated __________, 2000 and is
first being mailed to stockholders on ____________, 2000.
HOW YOU CAN OBTAIN MORE INFORMATION
This proxy statement and prospectus incorporates important business and
financial information that is not included in or delivered with this document.
You may request a copy of this information at no cost, by writing or telephoning
us at the following address:
Global DataTel, Inc.
3333 Congress Avenue, Suite 404
Delray Beach, FL 33445
Attention: Secretary
Telephone: (561-276-8260)
To obtain timely delivery, you must make this request no later than
five business days before _________, 2000, the date of the special meeting.
-2-
<PAGE>
GLOBAL DATATEL, INC.
3333 Congress Avenue, Suite 404
Delray Beach, Florida 33445
Notice of Special Meeting of Shareholders
to be held
_______ __, 2000
_______________, 2000
To the Shareholders of Global DataTel, Inc.:
You are cordially invited to attend the Special Meeting of the
Shareholders (the "special meeting") of Global DataTel, Inc. ("Global"), which
will also serve as our annual meeting of shareholders for the fiscal year ended
December 31, 1999 to be held at _____________________________________________,
New York _____ at 10:00 a.m., Eastern Standard Time, on ________, 2000, to
consider and act upon the following matters:
(1) To approve the Asset Purchase Agreement dated December 8,
1999, by and among Surge Components, Inc. ("Surge"), Global
DataTel, Inc. and GDIS Acquisition Corp., a wholly-owned
subsidiary of Surge, attached hereto as Annex C, and the
exchange of Global common stock for shares of Class B
Common Stock of Superus.
(2) To transact such other business as may properly come before
the special meeting or any adjournments thereof.
The attached proxy statement and prospectus contains information
relating to seven proposals. You are only asked to vote on Proposal 2 in the
proxy statement even though you are being provided with detailed information on
the related proposals of Surge as part of the prospectus you are receiving.
Only shareholders of record at the close of business on ______, 2000,
will be entitled to notice of, and to vote at, the special meeting or any
adjournments thereof.
A list of shareholders of Global entitled to vote at the special
meeting will be open to examination by any shareholder, for any purpose germane
to the meeting, at the offices of Global, 3333 Congress Avenue, Suite 404,
Delray Beach, Florida 33445, during ordinary business hours for ten days prior
to the Annual Meeting. Such list shall also be available during the special
meeting.
Dated: Delray Beach, Florida
________ __, 2000
By order of the Board of Directors,
Antonio Serrato, Secretary
Whether or not you expect to attend the special meeting in person,
please complete, date and sign the accompanying proxy card and return it without
delay in the enclosed postage prepaid envelope. Your proxy will not be used if
you are present and prefer to vote in person or if you revoke the proxy.
-3-
<PAGE>
TABLE OF CONTENTS
Page No.
--------
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS ..................... 10
QUESTIONS AND ANSWERS ABOUT PROPOSAL 1 -- THE RECAPITALIZATON PROPOSAL 11
JOINT PROXY STATEMENT AND PROSPECTUS SUMMARY........................... 14
SURGE SELECTED FINANCIAL DATA.......................................... 24
GLOBAL SELECTED FINANCIAL DATA......................................... 25
MAILENCRYPT SELECTED FINANCIAL DATA.................................... 26
PRO FORMA FINANCIAL INFORMATON ........................................ 27
RISK FACTORS........................................................... 31
CAPITALIZATION......................................................... 53
WHERE YOU CAN FIND MORE INFORMATION.................................... 55
INFORMATION ABOUT THE SURGE SPECIAL MEETING AND VOTING................. 56
Date, Time And Place Of Meeting............................... 56
Record Date................................................... 56
Proposal To Be Considered At The Meeting...................... 56
Vote Required To Approve The Proposals........................ 56
Quorum ..................................................... 57
Procedure For Voting By Proxy................................. 57
INFORMATION ABOUT THE GLOBAL SPECIAL MEETING AND VOTING................ 58
Date, Time And Place Of Meeting............................... 58
Record Date................................................... 58
Proposal To Be Considered At The Meeting...................... 58
Vote Required To Approve The Proposals........................ 58
Quorum ..................................................... 58
Procedure For Voting By Proxy................................. 58
PROPOSAL 1--THE RECAPITALIZATION PROPOSAL.............................. 60
General ..................................................... 60
Background and Reasons for the Recapitalization Proposal...... 62
Recommendation of the Board of Directors...................... 66
Management and Allocation Policies of New Surge............... 66
Financing Activities.......................................... 67
-5-
<PAGE>
DESCRIPTION OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK........... 72
General ..................................................... 72
Dividends..................................................... 72
Right of First Refusal and Preferences to Surge management.... 73
Conversion of Class B Common Stock or Class A Common Stock
Upon an Adverse Tax Event............................ 74
General Dividend, Exchange and Redemption Provisions of our
Certificate of Incorporation......................... 75
Voting Rights................................................. 75
Liquidation Rights............................................ 76
Issuances of Class B Common Stock as Distributions
on Class A Common Stock.............................. 76
Repurchases of Class B Common Stock........................... 76
Preemptive Rights............................................. 77
Special Meetings.............................................. 77
Superus Certificate of Incorporation and By-Laws.............. 77
Future Audited Financial Information.......................... 77
Nasdaq Listings of Superus Securities......................... 78
Exchange Procedures........................................... 78
Stock Transfer Agent and Registrar............................ 78
Financial Advisor............................................. 78
Finder's Fee.................................................. 79
Effect on Existing Options.................................... 79
No Regulatory Approvals....................................... 79
Material Federal Income Tax Consequences...................... 79
Comparison of Certain Rights of Surge Shareholders
Under New York And Delaware Law And of Global
Shareholders Under Nevada and Delaware Law........... 81
SURGE--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 101
SURGE -- DESCRIPTION OF BUSINESS.............................. 107
SURGE -- APPRAISAL RIGHTS..................................... 117
PROPOSAL 2-- APPROVAL OF GDIS ASSET PURCHASE AGREEMENT................. 120
GLOBAL--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 127
GLOBAL - DESCRIPTION OF BUSINESS.............................. 133
GLOBAL - APPRAISAL RIGHTS..................................... 138
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PROPOSAL 3--APPROVAL OF MAILENCRYPT MERGER AGREEMENT................... 141
MAILENCRYPT--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS................. 146
MAILENCRYPT -- DESCRIPTION OF BUSINESS........................ 148
PROPOSAL 4-RATIFICATION, ON A NON-BINDING BASIS, OF ADOPTION
OF SUPERUS 2000 STOCK INCENTIVE PLAN.......................... 154
PROPOSAL 5-RATIFICATION OF ACCELERATION OF EXERCISABILITY OF SUPERUS
OPTIONS ISSUED TO SURGE MANAGEMENT............................ 166
PROPOSAL 6. ELECTION OF DIRECTORS OF SUPERUS.......................... 168
PROPOSAL 7. RATIFICATION OF APPOINTMENT OF AUDITORS................... 176
MANAGEMENT AFTER THE RECAPITALIZATION.................................. 177
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS........................... 177
PRICE RANGE OF EXISTING COMMON STOCK AND
DIVIDEND POLICY............................................... 179
PLAN OF DISTRIBUTION................................................... 181
OTHER MATTERS.......................................................... 183
EXPENSES OF SOLICITATION............................................... 183
INFORMATION ABOUT STOCKHOLDER PROPOSALS................................ 184
EXPERTS................................................................ 184
LEGAL OPINIONS......................................................... 185
FINANCIAL STATEMENTS................................................... F-1
Surge Components, Inc. and Subsidiary............................. F-2
Global DataTel, Inc............................................... F-21
Mailencrypt.com, Inc. and Subsidiaries............................ F-45
ANNEX A -- Agreement and Plan of Merger
ANNEX B -- Certificate of Incorporation of Superus Holdings, Inc.
ANNEX C -- Asset Purchase Agreement dated December 8, 1999, By and Among Surge
Components, Inc., GDIS Acquisition Corp. and Global DataTel, Inc.
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<TABLE>
<S> <C>
ANNEX D -- Merger Agreement and Plan of Reorganization dated February 16, 2000 By and Among
MailEncrypt.com, Inc., the Shareholders of MailEncrypt.com, Inc., Mail Acquisition Corporation and Surge
Components, Inc.
ANNEX E -- 2000 Stock Incentive Plan of Superus Holdings, Inc.
ANNEX F -- New York Business Corporation Law Dissenter's Rights
ANNEX G -- Nevada General Corporation Law Dissenter's Rights
</TABLE>
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Introductory Comment - Forward-Looking Statements.
Statements contained in this proxy statement and prospectus include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause the actual results of Superus, Surge and/or its wholly owned
subsidiary, Challenge/Surge, Inc., Global and its subsidiaries, and MailEncrypt
("we," "us" or the "Company"), performance (financial or operating) or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. Such forward-looking statements generally are based upon
the Company's best estimates of future results, performance or achievement,
based upon current conditions and the most recent results of operations and the
industry as a whole. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "project," "expect,"
"believe," "estimate," "anticipate," "intends," "continue", "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:
o our historical losses,
o our business strategies and future plans of operations,
o our ability to complete the merger and acquisition,
o the combined entities' abilities to work together and grow the Company,
o the market acceptance and amount of sales of our products and services,
o the extent that our distribution network and marketing programs achieve
satisfactory response rates,
o the efficiency of our development and manufacturing operations,
o the competitive environment within the electronic components industry,
o our ability to raise additional capital if and as needed,
o the cost-effectiveness of our product development activities,
o the extent to which we are successful in developing, manufacturing,
distributing and licensing products which are accepted by the market,
o the success post-closing of the acquisitions of Global and MailEncrypt,
and the entrance of Surge into the Internet business, and
o the other factors and information disclosed in other sections of this
Registration Statement on Form S-4.
Shareholders and all other persons reading this Registration Statement
should carefully consider such risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements identifying
important factors that could cause actual results to differ materially from
those provided in the forward-looking statements.
All forward-looking statements are inherently uncertain as they are
based on our current expectations and assumptions concerning future events and
they are subject to numerous known and unknown risks and uncertainties. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements.
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In order to comply with the terms of the safe harbor, we note that a
variety of the risks and uncertainties that we discuss in detail under "Risk
Factors" could cause our actual results and experience to differ materially from
those expected. Readers are cautioned not to place undue reliance on forward-
looking statements in this proxy statement and prospectus, which speak only as
of the date of this proxy statement and prospectus.
QUESTIONS AND ANSWERS
ABOUT PROPOSAL 1 -- THE RECAPITALIZATION PROPOSAL
Why am I receiving this proxy statement?
We are sending this proxy statement and prospectus to you in connection
with a recapitalization proposal to reincorporate in Delaware as a wholly-owned
subsidiary of Superus. You will be governed by Delaware law and a certificate of
incorporation (Annex B) which would replace our existing common stock with two
new classes of common stock -- Class A Common Stock and Class B Common Stock.
The board of directors is seeking your proxy to vote in favor of the
recapitalization proposal at a special meeting of stockholders. At the meeting,
you will also be asked to vote on related proposals to adopt the GDIS Asset
Purchase Agreement and the MailEncrypt Merger Agreement as well as ratify, on a
non-binding basis, the adoption of the Superus stock incentive plan which
provides for the issuance of Class A Common Stock and Class B Common Stock
options and/or awards and to ratify the acceleration of exercisability of stock
options issued to Surge management under the Superus Plan.
Are each of the proposals related to each other?
The Recapitalization (proposal 1) will not be implemented unless the
GDIS Acquisition is approved (proposal 2). The proposals to ratify the adoption
of the Superus stock incentive plan, ratify acceleration of exercisability of
Surge management options under such plan and elect a new Board of Directors
(proposals 4, 5 and 6) will not be adopted unless the Recapitalization, and the
GDIS Acquisition are adopted and implemented.
Finally, the acquisition of MailEncrypt (Proposal 3) is dependent on
the approval of both Proposals 1 and 2.
What are the new classes of common stock?
The new classes of common stock consist of the Class A Common Stock and
the Class B Common Stock. We refer to the New Surge stock and the Internet
Operations stock together as the "common stock."
o The Class A Common Stock is intended to reflect the separate
performance of our electronic components business -- which we
call herein "New Surge," however, will be renamed Surge
Components, Inc.
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o The Class B Common Stock is intended to reflect the separate
performance of our proposed acquisitions of GDIS and
MailEncrypt -- which we call our "Internet Operations".
What will my existing common stock and Class A Warrants represent if the
Recapitalization and GDIS acquisition proposals are implemented?
Each share of our existing common stock will be automatically converted
into one share of Class A Common Stock. Your existing common stock certificates
will automatically represent Class A Common Stock and, if the GDIS Acquisition
is approved, will be convertible at a rate of two shares of Class A Common Stock
for one share of Class B Common Stock for six months following stockholder
approval.
Each Redeemable Class A Common Share Purchase Warrant will be
automatically converted into a Redeemable Class B Common Stock Purchase Warrant
only after stockholder approval, and will be exercisable for Class B Common
Stock at $5.00 per share, and will expire on July 31, 2003.
What are the tax consequences to me?
In the opinion of our counsel, you should not recognize any gain or
loss for federal income tax purposes as a result of the Recapitalization, except
with respect to any cash you receive in lieu of fractional shares.
Will the Recapitalization proposal result in a change of control of Surge?
No. The Recapitalization on its own will not result in a change of
control, but the GDIS Acquisition and MailEncrypt Merger will. Assuming that
both of the GDIS Acquisition (proposal 1) and MailEncrypt Merger (proposal 3)
are approved, your existing shares of common stock will initially represent only
approximately 17% of the combined voting stock and 34% on a fully diluted basis
giving effect to all outstanding options and warrants, but not the convertible
notes. While there will not be a change in control over the daily operations of
New Surge, your existing company will be part of a larger holding company and
matters not in the ordinary course of business will be made with the approval of
Superus's Board of Directors subject to certain contractual obligations to Surge
Management.
What kind of financial information will I receive in the future?
You will continue to receive consolidated financial information for
Superus as a whole. In addition, you will receive separate operating results and
other business and financial information for both New Surge and Internet
Operations.
Will the Recapitalization proposal result in a spin-off?
No.
The recapitalization proposal will not result in a distribution or
spin-off of our assets or liabilities and will not affect ownership of our
assets or responsibility for our liabilities. Holders of New Surge stock (which
is the Class A Common Stock) and Internet Operations stock (which is the Class B
Common Stock) will continue to be stockholders of a single company (Superus) and
subject to all risks associated with an investment in Superus and all of our
businesses, assets and liabilities.
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Will operations of the subsidiaries be affected by the Recapitalization?
No.
The Management and Boards of Directors of the three operating
subsidiaries, New Surge, GDIS and MailEncrypt will remain the same following the
Recapitalization. The Board of Directors of Superus will initially consist of
one representative of each of the three operating subsidiaries until independent
directors are added, some of whom are expected prior to the Effective Date.
Superus will also hire other senior officers to run the public holding company,
including a chief financial officer, chief technology officer and chief
marketing and sales officer. The officers and directors of Surge will continue
as officers and directors of New Surge for a three year period following the
merger.
What do I do if I have additional questions?
If you have any questions prior to the special meeting, please call
________ solicitation agent. __________ may be reached at ________.
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JOINT PROXY STATEMENT AND PROSPECTUS SUMMARY
This summary, together with the "Questions and Answers About Proposal
1" on the preceding pages, highlights important selected information from this
document. To understand the Recapitalization and related proposals fully and for
a more complete description of the legal terms of the proposals, you should read
carefully this entire document. We have included page references parenthetically
to direct you to a more complete description of the topics presented in this
summary.
Superus Holdings, Inc.
Following the Recapitalization and the adoption of Proposals 2 and 3,
Superus' business will consist of the operations of our three wholly-owned
subsidiaries. New Surge will consist of the assets and the operations of the
electronic components business of Surge as it exists today. GDIS will consist of
the assets and operations of Global and its subsidiaries, including Global
DataTel de Colombia, S.A., a leader in Latin American medium to large system
integration projects and eHOLA, a multilingual Internet service/content provider
specializing in the Latin American marketplace. MailEncrypt, our third
subsidiary, will consist of the assets and operations of MailEncrypt.com Inc., a
business-to-business provider of web-based encrypted e-mail solutions.
Our corporate headquarters are currently located at 1016 Grand
Boulevard, Deer Park, New York 11729, and our telephone number is (631)
595-1818; however, Superus is expected to relocate its corporate headquarters to
the San Francisco, California area.
The Special Meetings
Proposals to be considered at the Surge meeting:
Surge stockholders are being asked to consider and vote upon the
following proposals at the special meeting:
- Proposal 1 -- The Recapitalization Proposal (page 60).
- Proposal 2 -- Approval of GDIS Asset Purchase Agreement (page 120).
- Proposal 3 -- Approval of MailEncrypt Merger Agreement (page 141).
- Proposal 4 -- Ratification on a Non-binding basis of Adoption of
Superus 2000 Stock Incentive Plan (page 154).
- Proposal 5 - Ratification of Acceleration of Exercisability of
Superus Options Issued to Surge Management (page 166).
- Proposal 6 -- Election of Directors of Superus (page 168).
- Proposal 7 -- Ratification of Appointment of Auditors (page 176).
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Our board of directors considers the Recapitalization proposal and the
second proposal to be part of an integrated plan and approval of each proposal
to be necessary in order to implement the plan as a whole. The Board of
directors also considers the third proposal to play an important role, but the
Recapitalization and GDIS Acquisition are not dependent on the MailEncrypt
merger. Accordingly, even though we are presenting these proposals separately,
we will not implement any of proposals 4, 5 and 6 unless both of proposals 1 and
2 are approved. While proposals 1 and 2, relating to the Recapitalization and
the GDIS Acquisition are not dependent on approval of any other proposals
herein, proposal 3 relating to the acquisition of MailEncrypt is dependent on
approval of both the Recapitalization and GDIS Acquisition.
Vote required to approve the proposals (pages 56 and 58)
The following stockholder votes are required for approval of the proposals:
- Proposal 1: The favorable vote of the holders of a majority of the
outstanding shares of our existing common stock.
- Proposals 2, 3, 5 and 7: The favorable vote of the holders of a
majority of the votes cast at the special meeting.
- Proposal 6: The favorable vote of a plurality of the votes cast at
the special meeting.
- Proposal 4: This is a non-binding vote and the plan has already been
adopted by Surge, the sole stockholder of Superus.
Our directors and executive officers beneficially owned approximately
10.5% of the outstanding shares of our existing common stock as of February 16,
2000, not including shares underlying their options. The holders of an
additional __% of the outstanding common stock have agreed to give Management
their proxies. They have collectively advised us that they intend to cause all
shares that they beneficially own to be voted in favor of each of the proposals
being considered at the special meeting.
Comparison of Existing Surge Common Stock with Class A Common Stock and Class B
Common Stock (page 81)
We have described below the significant differences between our
existing common stock under New York law and the Class A Common Stock and Class
B Common Stock of Superus under Delaware law. You should keep in mind that you
will remain stockholders of a single company, Superus. You will not own stock of
New Surge or the Internet Operations, but rather , stock that will track their
respective operations. As a result, you will continue to be subject to all of
the risks associated with an investment in Superus and all of our businesses,
assets and liabilities. In this proxy statement and prospectus, each of New
Surge and Internet Operations is sometimes called a "group." Financial effects
from one group that affect our consolidated results of operations or financial
condition could, if significant, affect the results of operations or financial
condition of the other group.
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Voting Rights (page 71)
Existing Common Stock. Holders of our existing common stock have one
vote per share on all matters submitted to stockholders.
Class A Common Stock and Class B Common Stock. On all matters both
classes of stock will have one vote per share.
The holders of each class of common stock will vote together as a
single class except as required by law.
Rights on Sale of All or Substantially All Assets of a Group (page 76)
Existing Common Stock. Holders of existing common stock have no special
rights triggered by a sale of all or substantially all of the assets of a group.
Class A Common Stock and Class B Common Stock . Holders of Class B
stock will have no special rights triggered by a sale of all or substantially
all of the assets of the Internet Operations. However, if we seek to sell all or
substantially all of the assets attributed to New Surge, Ira Levy and Steven J.
Lubman, the founders and executive officers of New Surge, shall have a right of
First Refusal to purchase New Surge. In addition, if New Surge receives a firm
commitment to effect a public offering, Messrs. Levy and Lubman shall each
receive a warrant exercisable at nominal value, to acquire 9.5% of New Surge's
equity securities, or an aggregate of 19%.
Conversion of classes of stock into the stock of the other group (page 74)
Each two shares of Class A Common Stock may be converted into one share
of Class B Common Stock for a period of six months following stockholder
approval.
Each existing Redeemable Class A Common Share Purchase Warrant shall be
converted into one Class B Common Stock Purchase Warrant upon the Effective Date
if a majority of the warrantholders approve such change. Each warrant will
become exercisable for one share of Class B Common Stock. The terms and
conditions of exercise at $5.00 per share and redeemable when the common stock
trades above $7.50 per share remain unchanged.
The existing Series A Redeemable Convertible Preferred Stock of Surge
held in escrow for Global shareholders shall be converted automatically into
Class B Common Stock of Superus on a 100 for 1 basis upon the Effective Date.
Each Surge employee stock option shall be exercisable for one share of
Class A Common Stock. Surge management will forfeit all rights and entitlement
to 5,300,000 Surge options granted in December 1998 for 2,650,000 options to
purchase Class B Common Stock of Superus, at the same rate as each two shares of
Class A Common Stock may be converted into one share of Class B Common Stock.
Other Superus options granted to our recently hired Chairman of the Board and
the President of New Surge shall be exercisable for one share of Class B Common
Stock.
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Each existing Surge 12% convertible promissory note due December 31,
2000 shall be convertible into shares of Class B Common Stock at the rate of
$3.00 per share.
Redemption
Existing Common Stock. We do not have the option of redeeming existing
common stock or Class A Common Stock and Class B Common Stock.
Liquidation Rights (page 76)
Existing Common Stock. Holders of existing common stock share assets
remaining for distribution to holders of common stock in equal amounts per share
of existing common stock.
Class A Common Stock and Class B Common Stock. Holders of Class A
Common Stock and Class B Common Stock will share assets remaining for
distribution to holders of common stock on a pro rata basis in equal amounts per
share of the two classes of stock.
Nasdaq Listings
Existing Securities. Our existing common stock and warrants are listed
on the Nasdaq Small Cap Market under the symbols "SPRS" and SPRSW,"
respectively.
Class A Common Stock and Class B Common Stock. We will seek approval to
list the Class A Common Stock and Class B Common Stock on the Nasdaq National
Market System under the symbols "SPRSA" and "SRPSB," respectively, and our
warrants under the symbol SPRSW.
New Surge Management and Allocation Policies (page 66)
We have established policies designed to accomplish the fundamental
objective of the Recapitalization proposal, which is to highlight the separate
performance of New Surge apart from our Internet Operations. These policies
establish guidelines to allocate debt, corporate overhead, interest, taxes and
other shared activities between the two groups on an objective basis and to
ensure that a process of fair dealing governs the relationship between the
groups.
Risk Factors (page 31)
When evaluating the Recapitalization proposal and Proposals 2 and 3
concerning the acquisition of Global and MailEncrypt, you should be aware that
there are many risks. These risks are set forth under "Risk Factors" starting on
page 32.
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Material Federal Income Tax Consequences (page 79)
We have received an opinion from our counsel, Snow Becker Krauss PC,
that, for Federal income tax purposes, subject to the qualifications described
below, neither our issuance nor your receipt of Class A Common Stock and Class B
Common Stock pursuant to the Recapitalization proposal should be treated as
taxable events to you or us, except with respect to any cash you receive in lieu
of fractional shares. However, the Internal Revenue Service could disagree.
There are no court decisions or other authorities bearing directly on
transactions similar to the Recapitalization proposal. In addition, the Internal
Revenue Service has announced that it will not issue rulings on the
characterization of stock with characteristics similar to the Class A Common
Stock and the Class B Common Stock . Therefore, the tax consequences of the
Recapitalization are not free from doubt.
Clinton Administration Proposal
A recent legislative proposal by the Clinton Administration would
impose a corporate level tax on the issuance of stock similar to the Class A
Common Stock or the Class B Common Stock. If this proposal is enacted, we could
be subject to tax on an issuance of Class A Common Stock or Class B Common Stock
on or after the date of enactment. If our stockholders approve the
Recapitalization proposal, our board of directors currently intends to implement
the Recapitalization, subject to further legislative developments relating to
the Clinton Administration tax proposal.
The Recapitalization -Proposal 1 (page 60)
If the Recapitalization is approved, as the first step under the
agreement and plan of merger we will transfer all assets, subject to the
liabilities of Surge, a New York corporation and its existing subsidiary,
Challenge/Surge, Inc., to a wholly-owned Delaware subsidiary which we recently
formed solely for this purpose. Surge will then merge (the "Superus Merger")
with and into Superus Holdings, Inc. ("Superus"), also a Delaware corporation.
Superus will become the publicly traded parent holding company to New Surge
which will be named Surge Components, Inc. and whose assets and liabilities and
operations will be those of our existing company before the Superus Merger. Your
vote approving the Recapitalization will first constitute adoption of the
Superus Merger and the other terms and conditions of the agreement and plan of
merger. Therefore, you should carefully read the agreement and plan of merger,
which is attached to this proxy statement and prospectus as Annex A.
If the Recapitalization is approved, your rights as shareholders will
cease to be governed by New York law and you will be governed by Delaware law.
The changes described herein are set forth in the certificate of incorporation
of Superus attached hereto as Annex B and in new Delaware By-Laws filed with the
SEC, both of which you should carefully read.
If the Recapitalization is approved, we will file certificates of
merger with the Secretaries of State of New York and Delaware as soon as
possible (which shall be deemed the Effective Date) after the special meeting.
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If the Recapitalization proposal and the GDIS Acquisition are both not
approved, the Recapitalization will not be completed and our existing common
stock will not be converted into Class A Common Stock of Superus.
The Superus Certificate of Incorporation provides for Class A Common
Stock and Class B Common Stock. Upon the Effective Date, each outstanding share
of our existing common stock will be converted into one share of Class A Common
Stock. The shares of Class A Common Stock that our existing stockholders receive
in the Recapitalization will initially represent 100% of the total voting shares
of Superus immediately on the Effective Date prior to giving effect to the
issuance of Class B Common Stock to the shareholders of Global and MailEncrypt.
As the sole shareholders of Superus you will also authorize the initial
issuances of shares of Class B Common Stock. Upon the completion of the GDIS
Acquisition and Mail Merger you will own approximately 17% of the total voting
stock of Superus prior to the exercise of options and warrants or the conversion
of Notes to purchase Class B Common Stock. The Class A Common Stock shall be
convertible at your option into Class B Common Stock at a rate of two shares of
Class A Common Stock for each share of Class B Common Stock for a six-month
period following the Effective Date. The Recapitalization should be tax-free to
you and us, except with respect to any cash you receive in lieu of fractional
shares.
Our board of directors approved the Recapitalization proposal following
its review of various alternatives for enhancing the overall return to our
stockholders, advancing our financial and strategic objectives and giving us the
flexibility needed for our future growth. Our principal reason for the
Recapitalization is to increase shareholder value of our separate businesses and
to separate our Internet Operations from our electronic components business. We
believe that the Recapitalization will improve our ability to separately manage
and monitor the performance of our separate businesses and to create additional
incentives for the managers of those businesses to maximize the financial
performance of their companies. We are asking you to ratify on a non-binding
basis the adoption of the Superus stock incentive plan to provide for the grant
of stock options to purchase and/or awards of both Class A Common Stock and
Class B Common Stock. You are also being asked to ratify the acceleration of
exercisability of stock options granted to Surge management under the Superus
plan.
The Class A Common Stock and the Class B Common Stock are what are
commonly referred to as "tracking stocks" because each is intended to reflect or
"track" the separate performance of the businesses of the subsidiaries. Tracking
stock is an equity interest in a corporation with rights determined by reference
to the performance of specific assets of the corporation. The Class A Common
Stock will track the performance of the electronic components business of New
Surge. The Class B Common Stock will track the performance of the Internet
Operations of both GDIS and MailEncrypt. We will provide separate operating
results and other business and financial information with respect to New Surge
and our Internet Operations. In addition, we have established policies to assist
us in allocating costs and charges between the groups on an objective basis. We
believe this will enable our stockholders to gain a better understanding of the
inherent value in each group. However, holders of Class A Common Stock and Class
B Common Stock will be stockholders of a single company, Superus. As a result,
stockholders will continue to be subject to all of the risks of an investment in
Superus, a holding company for New Surge and Internet Operations. Additionally,
with limited exception, all stockholders will vote together on all matters and
will share equally in all assets in the event of liquidation or dissolution of
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Superus. See "Risk Factors" and Proposal 1 - "The Recapitalization Proposal -
Description of Class A Common Stock and Class B Common Stock".
Our existing common stock and warrants are traded on Nasdaq SmallCap
Market under the symbols SPRS and SPRSW, respectively, and until February 23,
2000, traded under the symbols SRGE and SRGEW. We intend to seek a listing for
both our Class A Common Stock and Class B Common Stock on the Nasdaq National
Market to trade under the symbols SPRSA and SPRSB, respectively, and for our re-
designated Class B Warrants to trade under the symbol SPRSW after the
Recapitalization is approved.
The Class B Common Stock is intended to separately reflect the
performance of both GDIS and MailEncrypt. As used in this proxy statement and
prospectus, the term Class B Common Stock does not represent a separately
incorporated entity, but rather refers to those businesses, assets and
liabilities intended to represent our Internet Operations. The Internet
Operations may hold the assets and liabilities of other Internet businesses in
the future.
Current holders of Surge common stock will have certain dissenter's and
appraisal rights under New York corporate law in connection with the
Recapitalization.
Proposal 2 (page 120) - GDIS Acquisition
Global is a leader in Latin America in medium to large Web and system
integration projects. Global, through its wholly owned subsidiaries, is a first
tier IBM Business Partner, Microsoft Solution Provider, Lotus Premier Team
Provider and distributor for JBA International ERP Company. Global also
distributes hardware for Compaq, Dell, Hewlett-Packard and Cisco Systems.
Certain publicly available information regarding Global is retrievable from the
SEC's Web site at "www.sec.gov."
eHOLA, a wholly owned subsidiary of GDIS, is a multilingual (English,
Spanish and Portuguese) Internet Service/Content Provider in over 350 cities in
Latin America and e-commerce business solutions provider, specializing in the
Latin American marketplace. eHOLA signed a collaboration agreement with IBM
whereby eHOLA dial-up software, effective October 1, 1999, is pre-loaded in all
of IBM's Aptiva computers shipped to Latin America. In the business-to-business
realm, eHOLA provides e-commerce solutions to small, medium and large businesses
through relationships like that which was recently announced with Broadvision
and through its ground-breaking Internet Centers like that which recently opened
in Bogota, Colombia.
Current holders of Global common shares will have certain dissenters
and appraisal rights under Nevada corporate law in connection with the GDIS
Acquisition.
Reasons for the GDIS Acquisition (page 118)
We believe that the GDIS Acquisition will result in a combined company
with an enhanced financial position, stronger product pipeline and deeper
resources. The specific reasons for the GDIS Acquisition include:
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The companies have complementary programs in various product areas. The
GDIS Acquisition brings with it, advantageous distribution mechanisms throughout
Latin America with Global's Web and system integration relationships and the
ability to utilize those channels to provide Latin American businesses access to
eHOLA's e-commerce business solutions and Internet access.
Both companies believe the GDIS Acquisition will strengthen the
companies' product pipeline in the proprietary and generic areas. By combining
resources of the two companies, the combined companies may, in the long-term, be
able to achieve diversification of income sources.
New Surge will offer a sourcing advantage for high quality, low cost
Internet appliances such as set- top boxes and personal computers. The
consolidated cash position of Superus after the GDIS Acquisition should allow
Superus to develop certain products, to invest in new technologies or products
and to acquire other companies. The GDIS Acquisition will expand the combined
companies' manufacturing and distribution capacity and capabilities.
The GDIS Acquisition will create a combined entity which, through
diverse business interests including the Internet, may be more receptive to
market support thereby creating value for Superus shareholders. The Boards of
Directors of Global and Surge believe the combined companies will have a strong,
talented management team combining key managers at GDIS and MailEncrypt with key
Surge managers. Global's management team is expected to continue with the
combined companies. Messrs. Levy and Lubman will continue as the executive
officers of New Surge and Adam J. Epstein will continue as Chairman of the Board
of Directors and Chief Executive Officer of Superus. See "Management After the
Recapitalization" below.
Proposal 3 (page 141) - The MailEncrypt Merger
MailEncrypt seeks to become a leading business-to-business provider of
web-based encrypted e-mail solutions despite not yet having recorded any
revenues. Due to the rapid world-wide proliferation of e-mail and commensurate
privacy concerns associated with e-mail, it is management's belief that
encrypted e-mail will become commonplace for, among others, government agencies,
financial institutions, health care organizations, insurance/law/accounting
firms, e-commerce and individuals alike.
Reasons for the Mail Merger
The Mail Merger is intended to provide MailEncrypt with the resources
needed to enhance and market its services while providing Superus with a broader
product offering. MailEncrypt solutions shall, among other things, be offered to
all of Global's and eHOLA's customers, a large untapped market. Upon
implementation, eHOLA would be the first, or among the first, Internet Service
Providers in the world to offer secure e-mail. Furthermore, MailEncrypt will
attempt to become a leading provider of encryption technology in Latin America
and other emerging Internet economies, as well as in the United States. The
combined companies are expected to generate income from joint ventures, royalty
arrangements and marketing of the combined products. MailEncrypt is expected to
have immediate access to greater financial resources, including access to public
markets, following completion of the Mail Merger. The Global and New Surge
organization is well established with either developed Internet operations in
the case of Global and sales and marketing channels in the case of Surge, which
will facilitate MailEncrypt's
-20-
<PAGE>
sales and marketing and product development activities. The Boards of Directors
of Surge and MailEncrypt believe the combined companies will have a strong,
talented management team combining key managers at MailEncrypt with key Surge
managers. Pursuant to the terms of the Merger Agreement, Adam J. Epstein,
MailEncrypt's President and CEO, resigned from those positions and became
Chairman of the Board and Acting CEO of Surge on February 16, 2000. Upon the
Effective Date, Mr. Epstein will become Chairman of the Board and CEO of
Superus.
Proposal 4-Non-Binding Ratification of Adoption of Superus 2000 Stock Incentive
Plan (page 154)
Upon the formation of Superus, Surge, as the sole shareholder of
Superus, adopted the Superus 2000 Stock Incentive Plan (the "Superus Plan") and
we are now seeking your ratification of such adoption and, pursuant to Proposal
5 certain grants thereunder. This is a non-binding proposal and the plan
will remain in place even if the Surge shareholders do not ratify same. The
Superus Plan provides for the granting of stock awards and options in Class A
Common Stock and Class B Common Stock. The terms of the new plan are the same in
all material respects as our existing stock incentive plan except:
o both classes of common stock may be issued under the Superus plan; and
o the total number of shares available for issuance under the
plan has been increased from 850,000 shares of existing common
stock, to an aggregate of 15 million shares of Class A Common
Stock or Class B Common Stock. To date, an aggregate of
4,350,000 options under the Superus Plan have been granted.
We believe the new plan will promote the interests of Superus, each
group and our stockholders by helping to attract and retain exceptional
employees, officers and directors. The Superus 2000 stock incentive plan will
motivate participants by means of stock options, stock appreciation rights and
restricted shares to achieve long-term performance goals, and enable our
employees, officers, directors and consultants to participate in our long-term
growth and financial success. In addition, a principal benefit of the
Recapitalization proposal is that it allows us to retain the advantages of doing
business as a single company and allows each group to capitalize on
relationships with the other group. To motivate the employees of each group to
cross-sell services and to provide the maximum incentives regarding the overall
success of Superus, it may be appropriate to grant awards consisting of shares
of both classes of common stock to employees performing services for one group.
Proposal 5 - Ratification of Acceleration of Exercisability of Superus Options
to Surge Management (page 166)
This proposal relates to the ratification by stockholders of
acceleration of the exercisability of 2,650,000 options which were granted under
the Superus 2000 Stock Incentive Plan (see Proposal 4) to the officers and
directors of Surge ("Management Options"). These options will accelerate and
become immediately exercisable upon stockholder approval of this proposal, as
well as proposals 1and 2. At such time, Surge management will forfeit all rights
and entitlement to 5,300,000 options granted in December 1998 in connection with
the then pending merger with Orbit Network Inc. (the "Orbit Options") in
settlement of such persons' contractual rights to the earlier options. The
exchange ratio on the Superus
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<PAGE>
Options for the Orbit Options is the same two for one ratio as all other Surge
employee options and Surge's existing Common Stock will be converted into Class
A Common Stock and subsequently be exchangable for Class B Common Stock of
Superus for six months after the approval of the GDIS Acquisition.
Upon the formation of Superus, Surge management was granted 2,650,000
Superus options under the Superus Plan exercisable at an exercise price of $2.69
per share of Class B Common Stock, the closing market price of Surge's existing
common stock on December 7, 1999, the day prior to the execution of the GDIS
Purchase Agreement. This was deemed to be equal to the fair market value of
Superus Class B Common Stock when Superus was formed and the options were
actually issued. These 2,650,000 options are not exercisable before December 28,
2002 years from the date of grant. However, upon shareholder approval of this
Proposal 5, as well as Proposals 1 and 2 all of the Management Options will be
immediately exercisable. In view of the historical market prices of Surge's
existing Common Stock and the increase in shareholder value as a result of
Management's seeking out and negotiating the GDIS Acquisition and the Mail
Merger, Surge is seeking ratification of acceleration of the exercisability of
the Superus options to Surge management which issue will be covered by the
fairness opinion to the Surge shareholders.
Proposal 6 - Election of Superus Board of Directors (page 168)
The proposal relates to the election of the initial Board of Directors
of Superus. The By-Laws of Superus provide for a seven (7) person Board of
Directors. The initial Board shall consist of the following three (3) persons:
Adam J. Epstein (Chairman), Ira Levy and Mario Habib, representing MailEncrypt,
New Surge and GDIS, respectively. Each of the subsidiaries shall continue to
operate independently on day to day operations and elect their own separate
Boards of Directors (page 164)
Pursuant to the GDIS Acquisition, the directors of New Surge for a
period of three years after the Effective Date will be Ira Levy, Steven J.
Lubman, Mark Siegel and David Siegel.
Proposal 7 - Ratification of Appointment of Independent Auditors (page 176).
The proposal relates to the ratification of the appointment of Seligson
& Giannattasio, LLP, independent auditors of Surge since 1990, to audit Surge's
financial statements for the fiscal years ended November 30, 1998 and 1999.
Recommendation of the Board of Directors
Our board of directors has carefully considered each of these proposals
and believes that the approval of these proposals by the stockholders is
advisable and in the best interests of our company and our stockholders. Our
board of directors unanimously recommends that you approve each of these
proposals.
-22-
<PAGE>
SURGE SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following table summarizes certain historical selected financial
data with respect to Surge Components, Inc. and subsidiary and is qualified in
its entirety by reference to, and should be read in conjunction with, the Surge
historical financial statements and related notes included elsewhere in this
proxy statement and prospectus. The historical financial data for the years
ended November 30, 1999, 1998, 1997, 1996 and 1995 have been derived from the
audited consolidated financial statements of Surge and subsidiary which have
been audited by Seligson & Giannattasio, LLP, independent certified public
accountants. Historical financial information may not be indicative of Surge's
future performance. See also Proposal 1 - The Recapitalization Proposal -
"Surge--Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Surge--Business."
<TABLE>
<CAPTION>
For the Years Ended November 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Revenues $12,147 $8,728 $10,834 $8,470 $8,765
Income (loss) from
continuing operations 73 (681) (120) 134 84
Net income (loss) 85 (274) 75 229 50
Basic earnings (Loss) per share .02 (.06) .02 .04 .02
As of November 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Total assets 7,846 7,654 8,174 7,728 2,624
Long-term debt -- -- 1 4 5
</TABLE>
-23-
<PAGE>
GLOBAL SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following table summarizes certain historical selected financial
data with respect to Global DataTel, Inc. with its subsidiaries and is qualified
in its entirety by reference to, and should be read in conjunction with,
Global's historical financial statements and related notes included elsewhere in
this proxy statement and prospectus. The selected financial data presented below
for and as of the end of the nine- month periods ended September 30, 1999 and
1998 are derived from the unaudited consolidated financial statements of Global
included in this proxy statement and prospectus. In the opinion of the
management, the unaudited consolidated financial statements for the interim
periods include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the result for such periods. The results of
operations for the nine-month period ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year.
Historical financial information may not be indicative of GDIS's future
performance. See also Proposal 2 - Approval of GDIS Asset Purchase Agreement -
"Global-- Management's Discussion and Analysis of Financial Condition and Plan
of Operations" and "Global -- Business."
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, For the Years Ended December 31,
------------- --------------------------------
1999 1998 1998 1997
---- ---- ---- ----
(unaudited)
Income Statement Data:
<S> <C> <C> <C> <C>
Net Revenues $9,583 $ - $1,862 $ 15
Loss from continuing
operations (2,627) - (1,172) (2,082)
Net Loss (2,627) (435) (3,708) (2,082)
Basic Loss per share ( .12) ( .08) ( .54) ( 329.17)
As of September 30, 1999, As of December 31,
------------------------- ------------------
Balance Sheet Data:
1998 1997
---- ----
Total assets $8,608 $8,157 $2,423
Long-term debt 73 97 105
- -----------
</TABLE>
-24-
<PAGE>
MAILENCRYPT
SELECTED FINANCIAL DATA
The following table summarizes certain historical financial data with
respect to MailEncrypt.com, Inc. and is qualified in its entirety by reference
to, and should be read in conjunction with, the MailEncrypt historical financial
statements and related notes included elsewhere in this proxy statement and
prospectus. The historical financial data for the period from March 17, 1999
(Inception) to December 31, 1999 have been derived from the audited combined
financial statements of MailEncrypt. There were no operations of MailEncrypt
prior to 1999. Historical financial information may not be indicative of
MailEncrypt's future performance. See also Proposal 3 - Approval of MailEncrypt
Merger Agreement ; MailEncrypt--Management's Discussion and Analysis of
Financial Condition and Plan of Operations" and "Business."
Statements of Operations Data:
Period from
March 17, 1999 to
December 31, 1999
------------------
Net revenues - $ ---
Costs and expenses -
General and administrative 111,031
------------------
Operating loss (111,031)
Other income (expense) ---
------------------
Loss before income taxes (111,031)
Income taxes ---
------------------
Net loss $ (111,031)
==================
Basic and diluted loss per share $ (0.06)
==================
Weighted average shares-
1,952,000
As of
Balance Sheet Data: December 31, 1999
------------------
==================
Cash and cash equivalents 40,182
Total current assets 40,182
Total assets 48,302
Total current liabilities 56,658
Total stockholders' equity (8,356)
-25-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma financial statements have been prepared based
upon certain pro forma adjustments to the historical financial statements of
Surge Components, Inc. and Subsidiary ("Surge"), Global DataTel, Inc and
Subsidiaries ("Global") and Mail Encrypt.com, Inc ("Mail") (collectively called
the "Company"). The pro forma financial statements should be read in conjunction
with the notes thereto and the historical financial statements of the Company.
The accompanying pro forma balance sheet has been presented as if the
acquisitions described below occurred at the Company's current year-end balance
sheet date, November 30, 1999. The accompanying pro forma statement of
operations has been prepared as if the acquisitions occurred at the beginning of
the year ended November 30, 1999. These pro forma financial statements do not
purport to be indicative of the results which would actually have been obtained
had the pro forma transactions been completed as of the beginning of the year
ended November 30, 1999. The pro forma transactions (see Notes to Pro forma
financial statements) are as follows:
The purchase of the assets of Global Datatel, Inc. ("Global") and its
subsidiaries in exchange for 239,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Preferred"). Following
approval of the acquisition by the shareholders of Surge Components,
Inc. and Global, each share of the Series A Preferred will
automatically convert into 100 shares of Surge's Class B Common
Stock.
The purchase of MailEncrypt.com Inc. in exchange for 1,821,400 shares
of the Class B Common Stock.
The issuance of 1,000,000 shares of Class B Common Stock to Surge's
financial advisor and 100,000 shares of Class B Common Stock to a
finder upon completion of the Global and Mail transactions.
-26-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
NOVEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro forma
Surge MailEncrypt Global Pro forma Adjustments Consolidated
----------- ----------- -------- ---------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Current assets:
Cash $ 159,612 $ 40,182 $1,050,638 $ 1,250,432
Notes receivable 1,000,000 -- -- 1,000,000 (8) --
Marketable securities 2,232,294 -- -- 2,232,294
Accounts receivable 2,251,640 -- 2,898,273 5,149,913
Inventory 1,442,067 -- 1,012,152 2,454,219
Prepaid expense 201,153 -- 1,984,496 2,185,649
Cash surrender value 82,187 -- -- 82,187
---------- ---------- --------- - -----------
Total current assets 7,368,953 40,182 6,945,559 13,354,694
Fixed assets 321,406 8,120 549,279 878,805
Goodwill -- -- 2,082,052 4,463,687 (4) 10,265 (1) 6,312,290
223,184 (5)
Deferred acquisition costs 63,687 -- -- 4,000,000 (2) 4,463,687 (4) --
400,000 (3)
Security deposits 2,985 -- 30,691 33,676
Deferred taxes 89,223 -- -- 89,223
---------- -------- ---------- -----------
Total assets $7,846,254 $ 48,302 $9,607,581 $20,668,688
========== ======== ========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
-27-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
NOVEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro forma
Surge MailEncrypt Global Pro forma Adjustments Consolidated
----------- ----------- -------- ---------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders' equity
- -------------------------------------
Current liabilities:
Notes payable $ -- $ -- $2,102,326 1,000,000 (8) $ 1,102,326
Accounts payable 1,283,067 13,500 3,774,950 5,071,517
Accrued expenses & taxes 408,941 -- 2,853,806 700,000 (10) 3,962,747
Due to officers -- 43,158 661,667 704,825
---------- --------- ---------- -----------
Total current liabilities 1,692,008 56,658 9,392,749 10,841,415
---------- --------- ---------- ===========
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 4,859 102,675 22,280 22,280 (6) --
102,675 (7)
4,859 (9)
Common stock - class A -- -- -- 4,859 (9) 4,859
Common stock - class B -- -- -- 23,900 (6) 25,721
1,821 (7)
Additional paid-in-capital 6,386,063 -- 9,954,939 9,954,939 (6) 4,000,000 (2) 20,840,236
400,000 (3)
9,953,319 (6)
100,854 (7)
Other comprehensive income (52,856) -- 240,947 188,091
Retained earnings (183,820) (111,031) (10,003,334) 933,449 (11,231,634)
---------- -------- ----------- ------------
Total stockholders' equity 6,154,246 (8,356) 214,832 9,827,273
---------- ---------- ----------- ------------
Total liabilities and
stockholders' equity $7,846,254 $ 48,302 $ 9,607,581 $20,668,688
========== ======== =========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
-28-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
-------------------------------------- Pro forma
Surge MailEncrypt Global Pro forma Adjustments Consolidated
----------- ----------- -------- ---------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $12,147,025 $ -- $14,896,227 $27,043,252
Cost of goods sold 9,068,308 -- 11,280,170 20,348,478
General and
administrative expense 2,071,834 111,031 6,033,040 8,215,905
Selling expense 1,030,844 -- -- 1,030,844
Depreciation 49,254 -- 112,421 161,675
Amortization -- -- 98,137 10,265 (1) 331,586
223,184 (5)
Interest expense -- -- 575,493 700,000 (10) 1,275,493
Investment income 179,017 -- 42,163 221,180
Income taxes 20,738 -- 320,533 341,271
------------ ---------- ------------ -----------
Net income $ 85,064 $(111,031) $(3,481,404) $(4,440,820)
============ ========= =========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
-29-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 1999
(UNAUDITED)
NOTE 1 - To reflect amortization of goodwill on three of Global's
subsidiaries for the period covered by the pro forma financial
statements prior to their acquisition.
NOTE 2 - Reflects the issuance of 1,000,000 shares of the Class B Common
Stock as a financial advisory fee in the Global acquisition.
NOTE 3 - Reflects the issuance of 100,000 shares of the Class B Common
Stock as a finder's fee in the acquisition of Mail.
NOTE 4 - To reflect costs, aggregating $4,463,687, associated with the
acquisitions of Global and Mail which have been reclassified from other
intangibles to goodwill since they are considered to be additional
purchase price.
NOTE 5 - To reflect the amortization arising from the acquisitions, over
a twenty year period.
NOTE 6 - Reflects the acquisition of the net assets of Global in
exchange for 239,000 Series A Preferred. Upon shareholder approval the
239,000 Series A Preferred will be converted into 23,900,000 shares of
Class B Common Stock.
NOTE 7 - Reflects the acquisition of Mail in exchange for 1,821,400
shares of Class B Common Stock.
NOTE 8 - Reflects the cancellation of the note payable by Global to
Surge pursuant to the asset purchase agreement.
NOTE 9 - Reflects the conversion of Surge's existing common stock into
Class A Common Stock.
NOTE 10 - To reflect the accrual of interest on Surge's subordinated
debenture as if the transaction had occurred at the beginning of the
fiscal year ended November 30, 1999.
-30-
<PAGE>
RISK FACTORS
In deciding whether to vote for the Recapitalization proposal, you
should take into account the following risk factors, as well as other risks
included under "Special Note Regarding Forward-Looking Statements" and elsewhere
in this proxy statement and prospectus.
The following is a summary of the material risks in connection with the
Recapitalization proposal and ownership of Class A Common Stock and Class B
Common Stock. Beginning on page 33, we discuss risks which are common to both
groups. Beginning on page 36, we discuss risks which are specific to Internet
Operations and page 40 begins with a discussion relating to doing business in
Latin America. Beginning on page 40, we discuss risks relating to New Surge.
Risk Factors Relating to Recapitalization
You will remain stockholders of one company and, therefore, financial effects on
one group could adversely affect the other.
Holders of Class A Common Stock and Class B Common Stock will be
stockholders of a single Delaware company, Superus. Class A Common Stock and
Class B Common Stock will not represent ownership in separate legal entities,
but rather parts of Superus. As a result, stockholders will continue to be
subject to all of the risks of an investment in Superus and all of our
businesses, assets and liabilities. The issuance of the Class A Common Stock and
Class B Common Stock and the allocation of assets, liabilities and stockholders'
equity between New Surge and Internet Operations will not result in a
distribution or spin-off to stockholders of any of our assets or liabilities. It
also will not affect ownership of our assets or responsibility for our
liabilities or those of our subsidiaries, as allocations of our assets and
liabilities between New Surge and Internet Operations are only for financial
reporting purposes. Superus will continue to own all assets and be responsible
for all liabilities attributed to each group.
Because of the connection to Superus, each group's financial condition
may be affected by the other group's financial condition. In turn, this may
affect the market price of the common stock relating to the groups. In addition,
net losses of either group and dividends and distributions on, or repurchases
of, either class of common stock or repurchases of any outstanding preferred
stock at a price per share greater than par value will reduce the funds we can
pay on each class of common stock under Delaware law. For these reasons, you
should read our consolidated financial information along with the financial
information we provide for each group. The assets of each group will not,
however, be available to satisfy the liabilities of the other group.
Holders of each class of common stock will have limited rights related to their
group.
Holders of Class A Common Stock or Class B Common Stock generally will
not have stockholder rights specific to their corresponding groups. Instead,
holders will have customary stockholder rights relating to Class A Common Stock
and Class B Common Stock as a whole. For example, holders of Class A Common
Stock and Class B Common Stock would vote as a single class to approve any
merger, business combination or disposition of all or substantially all of the
assets of Superus. Holders of either class of common stock will only have the
following rights with respect to their particular group:
-31-
<PAGE>
o an opportunity to receive dividends declared by our board of
directors based on the available dividend amount for their
group; and
o in the case solely of Class B Common Stock, requirements for a
dividend, redemption or conversion upon the disposition of all
or substantially all of the assets of their group.
o in limited cases provided by Delaware law, either class may
have an opportunity to vote separately as a class, where their
class of Common Stock is adversely affected.
Limits exist on voting power of group stock
In circumstances where the two classes of common stock vote together as
a single class, Class A Common Stock may not initially have any influence on the
outcome of stockholder voting. We expect that the Class B Common Stock will have
enough votes to approve any stockholder action where the Class B Common Stock
and the Class A Common Stock vote together as a single class. This includes the
election of directors of Superus, which requires the approval of the holders of
shares having a plurality of the outstanding voting rights, and mergers, which
require the approval of the holders of shares having a majority of the
outstanding voting rights. This is because the relative voting power of the two
classes will be affected by number of outstanding shares. There will initially
be approximately six times the number of shares of Class B Common Stock
outstanding as there will be shares of Class A Common Stock outstanding. Two
shares of Class A Common Stock are convertible into one share of Class B Common
Stock for the six month period following stockholder approval. Therefore, the
percentage of Class A Common Stock to Class B Common Stock is expected to
further decrease.
The market price of Class B Common Stock is likely to be volatile as
the market for Internet-related and technology companies has experienced extreme
price and volume fluctuations in recent months. Accordingly, except in limited
circumstances requiring separate class voting, the shares of Class B Common
Stock could control the outcome of any vote--even if the matter involves a
divergence or conflict of the interests of the holders of the Class B Common
Stock and the Class A Common Stock . These matters may include mergers and other
extraordinary transactions.
In circumstances where a separate class vote is required, the class of
common stock with less than majority voting power can block action.
If Delaware law, Nasdaq rules or our board of directors requires a
separate vote on a matter by the holders of either the Class B Common Stock or
the Class A Common Stock , those holders could prevent approval of the matter -
even if the holders of a majority of the total number of votes cast or entitled
to be cast, voting together as a class, were to vote in favor of it.
In circumstances where the two classes of common stock vote together,
holders of only one class of common stock cannot ensure that their voting power
will be sufficient to protect their interests.
-32-
<PAGE>
If the Recapitalization is completed, our directors and officers will
be required to manage the business and affairs of Superus, including both New
Surge and Internet Operations, in the best interests of the corporation and its
stockholders as a whole. Our directors and officers will not be obligated to
prefer the interests of holders of Class A Common Stock over those of holders of
Class B Common Stock, or vice versa.
Under Delaware law, our directors and officers will have fiduciary
duties to both New Surge stockholders and Internet Operations stockholders and,
in general, will be considered to have satisfied those duties if they have no
conflicting personal interest in the matter on which they act and act in good
faith in a prudent manner in what they reasonably believe to be the best
interests of the corporation and its stockholders as a whole. Absent a disabling
conflict of interest, directors will be presumed to have acted in accordance
with this standard. Consequently, on any matter where the interests of the Class
A Common Stockholders diverge from, or conflict with, the interests of Class B
Common Stockholders, our directors and officers may balance the interests of the
two classes of common stockholders and act differently than they would if they
were directors or officers of New Surge or Internet Operations.
Stockholders may not have the legal recourse against our directors and
officers which they would normally have in the case of a company having only one
class of common stock, where our directors and officers take action that is not
favorable to, or adverse to, the interests of one class of common stockholders
but that they reasonably believe to be in the best interests of Superus and the
holders of both classes of common stock as a whole.
Our directors and officers may own more of the stock that tracks one group than
another
We expect that our directors and officers will initially own shares of
Class B Common Stock that will have a significantly greater market value than
the shares of Class A Common Stock that they will own, as we expect that, upon
the Recapitalization, the outstanding shares of Class B Common Stock will have a
significantly greater market value than the outstanding shares of Class A Common
Stock. There is no assurance that any director or officer of Superus will not
have a greater ownership interest in one class than in another and that the
difference will not be material to that individual. In these circumstances, the
individual may have a greater personal interest in the consequences of corporate
actions for one class than another. The ownership of different amounts of the
two classes of stock by a director or officer will not relieve him of his
fiduciary duty to act in the best interests of Superus and our common
stockholders as a whole.
Our board of directors anticipates overseeing policies and practices
for the conduct of Superus' business and affairs reasonably designed to assure
that any material difference in ownership of stock does not improperly affect
corporate decision-making on matters where the interests of the holders of Class
A Common Stock and the holders of Class B Common Stock diverge or conflict.
-33-
<PAGE>
Numerous matters may arise in the conduct of the business and affairs of Superus
where the interests of New Surge stockholders may conflict with the interests of
Internet Operations stockholders
The Superus certificate of incorporation and by-laws do not contain any
provision governing how consideration to be received by common stockholders in
connection with a merger or consolidation involving Superus is to be allocated
between holders of Class A Common Stock and holders of Class B Common Stock,
except where the merger or consolidation involves the disposition by Superus all
or substantially all of the assets of New Surge. In the event the Company
receives an offer to buy all or substantially all of the assets of New Surge,
Ira Levy and Steven J. Lubman, the founders and executive officers of New Surge,
shall have a right of first refusal to purchase New Surge. In the event of a
merger or consolidation which provides for common stockholders to receive a cash
payment in consideration for their shares, the consideration shall be shared
ratably between holders of Class A Common Stock and holders of Class B Common
Stock, based on a percentage of each class to the total market value and market
capitalization of both classes. The holders of Class A Common Stock and the
holders of Class B Common Stock will be entitled to also vote as a separate
class with respect to any merger or consolidation in which Superus participates
only if it adversely affects the rights, powers or privileges of a particular
class of stock.
Our board of directors may allocate the consideration to be received by
common stockholders in a merger or consolidation as it determines in its
business judgement, as long as it acts in accordance with the fiduciary duties
of the directors to our company and our stockholders. The different ways in
which our board of directors may divide the consideration to be received by
common stockholders in connection with a merger or consolidation may have
materially different effects on the holders of Class A Common Stock and the
holders of Class B Common Stock and could be materially less valuable than the
consideration they would have received if they had a class vote on the merger or
consolidation.
Allocation of corporate opportunities could favor one group over the other
Our board of directors may be required to allocate corporate
opportunities between the groups. In some cases, our directors could determine
that a corporate opportunity, such as a business that we are acquiring, should
be shared by the groups. These decisions could favor one group at the expense of
the other.
Groups may compete with each other to the detriment of their businesses
The creation of two separate classes of common stock will not prevent
the groups from competing with each other. Any competition between the groups
could be detrimental to the businesses of either or both of the groups. As a
matter of board policy, neither New Surge nor our Internet Operations will
engage in the principal businesses of the other, except for joint transactions
with each other and third parties. However, our board of directors will permit
indirect competition between the groups based on its good faith business
judgment that competition is in the best interests of our company and all of our
stockholders as a whole. In addition, the groups may compete in a business that
is not a principal business of the other group.
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Our board of directors may change our management and allocation policies without
stockholder approval to the detriment of either group
Our board of directors may modify or rescind our policies with respect
to the allocation of corporate overhead, taxes, debt, interest and other
matters, or may adopt additional policies, in the exercise of its business
judgment in accordance with the directors' fiduciary duties to our company and
our stockholders, with Board approval of our subsidiaries, but without
stockholder approval. A decision to modify or rescind these policies, or adopt
additional policies, could have different effects on holders of Class A Common
Stock and holders of Class B Common Stock or could adversely affect one class of
stockholders as compared to the other class. For example, our board of directors
could modify the policy regarding competition between the groups to prohibit
indirect competition altogether or to prohibit the provision of services between
the groups. Our board of directors will make any decision relating to these
matters in their good faith business judgment that the decision is in the best
interests of our company and all of our stockholders as a whole. We cannot
assure you that the policies determined by our board of directors are as
favorable or more favorable to the holders of Class A Common Stock and holders
of Class B Common Stock than policies that would be set by either group if it
were a separate company.
Either group may finance the other group on terms unfavorable to one of the
groups
We anticipate that we will transfer cash and other property between
groups to finance their business activities. The group providing the financing
will be subject to the risks relating to the group receiving the financing. We
will account for those transfers in one of the following ways:
o as a short-term or long-term loan between groups or as a repayment
of a previous borrowing; or
o as a sale of assets between groups.
These determinations, including the terms of any transactions accounted
for as a loan, could be unfavorable to either group. For example, we cannot
assure you that any terms that we fix for debt will approximate those that could
have been obtained by the borrowing group if it were a stand-alone corporation.
Holders of Class A Common Stock may receive less consideration upon a sale of
assets than if New Surge were a separate company owned by its shareholders
rather than Superus
Pursuant to contractual obligations to Surge management, if we dispose
of all or substantially all of the assets allocated to New Surge, we must offer
Ira Levy and Steven Lubman, the founders of Surge, and current executive
officers of New Surge, a right of first refusal to purchase New Surge. In
addition, if New Surge receives a firm commitment to effect a public offering,
Messrs. Levy and Lubman shall each receive a warrant exercisable at nominal
value, to acquire 9.5% of New Surge's equity securities, or an aggregate of 19%.
If New Surge was a separate, independent company and its shares were
acquired by another person, certain costs of that disposition, including
corporate level taxes, might not be payable in connection with
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that acquisition. As a result, stockholders of the separate, independent company
might receive a greater amount of the net proceeds that would be received by
holders of Class A Common Stock . In addition, we can not assure you that the
net proceeds per share of Class A Common Stock will be equal to or more than the
market value per share of the Class A Common Stock prior to or after
announcement of a disposition.
It might be possible for an acquiror to obtain control of Superus by purchasing
shares of only one of the classes of common stock
A potential acquiror could acquire control of Superus by acquiring
shares of common stock having a majority of the voting power of all shares of
common stock outstanding. A majority could be obtained by acquiring a sufficient
number of shares of both classes of common stock or, if one class of common
stock has a majority of the voting power, only shares of that class. Initially
the Class B Common Stock will have approximately 83% of the combined outstanding
voting power of Superus. As a result, it might be possible for an acquiror to
obtain control of Superus by purchasing only shares of Class B Common Stock.
Market value of the stock received in the Recapitalization may be less than the
market value of existing common stock
When we entered into merger discussions with Global in the Summer of
1999, the market value of a share of Global stock was approximately double the
market value of a share of our existing common stock, hence the conversion rate
of two shares of existing Surge common stock for Class B Common Stock. Global
subsequently ceased trading on the OTC Bulletin Board and then the transaction
changed from a merger to a sale of substantially all of Global's assets to
Superus. We subsequently announced our purchase of MailEncrypt, whose assets and
business, along with those of Global will make up the Internet Operations,
tracked by our Class B Common Stock. The market may value the individual
Internet Operations differently than on a 2 for 1 conversion rate of Class A
Common Stock into Class B Common Stock, to wit, the price of Class B Common
Stock may be more than double the price of Class A Common Stock.
Provisions governing common stock could discourage a change of control and the
payment of a premium for shares
The existence of two classes of common stock could present complexities
and could pose obstacles, financial and otherwise, to an acquiring person. For
example, if New Surge and Internet Operations were stand-alone companies, a
person interested in acquiring either company without negotiation with
management could seek control of the outstanding stock of that company by means
of a tender offer or proxy contest. A person interested in acquiring control of
only one of the groups without negotiation with Superus' management would still
be required to seek control of the voting power represented by all of the
outstanding capital stock of Superus entitled to vote on the acquisition,
including, possibly, the class of common stock of the other group.
In addition, provisions of Delaware law, our Certificate of
Incorporation and our by-laws may also deter hostile takeover attempts. Delaware
law limits the ability of a holder of more than 15% of the outstanding voting
stock of a company from effecting various business combinations within three
years of the person becoming a 15% holder. Under Delaware law, stockholders are
not permitted to call a special
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meeting of stockholders unless the company's certificate of incorporation or
by-laws provide otherwise. The Superus by-laws permit stockholders to call a
special meeting upon the request of at least 50% of the outstanding voting stock
of Superus.
Additionally, the Superus Certificate of Incorporation provides that we
may issue shares of preferred stock and additional shares of either class of
common stock. This could enable our board of directors to issue shares to
persons friendly to current management in order to discourage an attempt to gain
control of our company. It could also be used to dilute the stock ownership of
persons seeking to obtain control of our company.
The IRS could assert that the implementation of the Recapitalization proposal
is taxable to you and us
The tax status of stock which tracks the value of specific subsidiary
corporations of a parent corporation (Superus in our case) is uncertain and that
uncertainty creates the risk that the transaction may be taxable to Global and
MailEncrypt and their shareholders who receive Class B Common Stock and to Surge
shareholders who receive Class A Common Stock upon Surge's Recapitalization. The
Internal Revenue Service has not provided guidance and currently will not issue
rulings as to whether tracking stock will be considered stock of the parent
(Superus) or of the subsidiary whose performance is tracked (see the discussion
under Proposal 1 "The Recapitalization Proposal -Material Federal Income Tax
Consequences"). We have received the opinion of counsel that both of the
tracking stocks should be considered the stock of Superus and, therefore, that
no income, gain or loss should be recognized by you or Global or Superus, as a
result of the use of tracking stock either in the Recapitalization, the
MailEncrypt Merger, or the GDIS Acquisition. However, in reaching its
conclusion, counsel has called attention to the absence of court decisions IRS
rulings, or other authorities bearing on this issue. Moreover, counsel has noted
that a recent legislative proposal of the Clinton Administration would amend the
Internal Revenue Code to treat tracking stock as stock of the subsidiary whose
value is tracked. However, as proposed, that tax law change would only be
effective after the date of its enactment.
We are paying both our financial advisor and a finder a fee only if certain
proposals are approved. This may create a conflict of interest
We are paying our financial advisor, Equilink LLC, a fee of 1 million shares
Class B Common Stock, if the Recapitalization proposal, Proposal 2 - Adoption
of GDIS Asset Purchase Agreement and Proposal 3 - Adoption of MailEncrypt Merger
Agreement are approved. This may create conflicts of interests regarding their
advice. In addition, we are paying Morgan Stanley Dean Witter, a finder's fee of
100,000 shares of Class B Common Stock, only if Proposal 3 - Adoption of
MailEncrypt Merger Agreement is approved.
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Risk Factors Relating to Both Groups
The continued growth of New Surge and our Internet Operations may further strain
our resources, which could adversely affect the business and results of
operations of either group
Global's rapid growth has strained its managerial and operational
resources and contributed to its sale of assets to Surge. Our continued planned
growth is a key component of increasing the value of both the Class A Common
Stock and the Class B Common Stock . In the past two years Surge's business has
grown significantly, and we anticipate continued internal growth. We are also
anticipating growth this year and next from Global and MailEncrypt.
We cannot assure you that our management will be able to manage our
growth effectively. In order to do so, we must implement and improve our
operational systems, procedures and controls. If our systems, procedures and
controls are not adequate to support our operations, the expansion of the
businesses of either group could be adversely affected. Any inability to expand
effectively could have a material adverse effect on the business, financial
condition and results of operations of either group.
Our growth could also be adversely affected by many other factors,
including economic downturns, as clients could reduce or delay their
expenditures for the services we offer. As a result of these concerns, we cannot
be sure that either or both groups will continue to grow, or, if they do grow,
that they will be able to maintain their respective current growth rates.
Fluctuations in the quarterly revenues and operating results of either group may
impact the valuation of the stock of that group
Both Surge and Global have historically experienced significant
variation in their respective quarterly revenues and operating results. We
expect that future results of operations will continue this trend. These
fluctuations may result from a variety of factors, including:
o the timing of their respective clients' purchases;
o the implementation of new products or services;
o changes in the revenue mix among their various service offerings
and geographic locations.
Due to these factors, quarterly revenues and operating results are
difficult to forecast. As a result, we believe that period-to-period comparisons
of the operating results of either group will not necessarily be meaningful with
respect to that group, and you should not rely on these comparisons as any
indication of future performance. The future quarterly operating results of
either group may not consistently meet the expectations of securities analysts
or investors, which in turn may have an adverse effect on the market price of
the stock of that group.
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Either group may be adversely affected by a downturn in their industry
The subsidiaries industries are cyclical and as a result are subject to
downturns in general economic conditions and changes in client business and
marketing budgets. A downturn in general economic conditions in one or more
markets or changes in client business and marketing budgets could have a
material adverse affect on the business, financial condition and results of
operations of either group.
Both New Surge and Internet Operations may have difficulty competing in their
respective markets
Surge conducts business in the highly competitive electronic components
industry. We expect this industry to remain competitive.
Global competes in the Internet market which is characterized by
increasing competition from "brand-named" entities and the rapid adoption of new
technologies. Though Global is primarily focused upon the business-to-business
e-commerce segment of the Latin American market where it presently faces minimal
competition, GDIS might in the future face competition from a wide range of
companies including, but not limited to, Star Media/Gratis 1, El Sitio, Terra
Networks, UOL Brasil and Impsat Corporation. In addition, GDIS could find
competition from new sources as the Internet market continues to evolve.
MailEncrypt faces competition from many companies with disparate
product/service claims, technologies, and funding, vying to compete in secure
messaging. The companies include, but are not limited to, Incrypt.com,
Pop3now.com, Interbuz.com, Zixmail.com, Ziplip.com, Hushmail.com,
Certifiedmail.com, Docspace.com, Postx.com, Interosa.com, and Tumbleweed
Software, Inc.
A number of Internet Operations' competitors have capabilities and
resources equal to or greater than we do. In addition, there are relatively few
barriers preventing competitors from entering the Internet industries in which
we compete. As a result, new companies may enter into the market at any time and
threaten the business of our Internet Operations. Existing or future competitors
may develop or offer comparable or superior services at a lower price, which
could have a material adverse effect on the business, financial condition and
results of operations of Internet Operations.
If either group fails to attract and retain employees, its growth could be
limited and its business may be adversely affected
Our future success will depend in large part upon the abilities and
continued services of Adam J. Epstein, our Chairman of the Board of Directors,
acting Chief Executive Officer and, upon approval of the Recapitalization, Chief
Executive Officer; Ira Levy, a director of Superus and Chief Executive Officer
of New Surge, and Mario Habib, a nominee-director of Superus and President of
eHOLA, S.A. and of eHOLA, Inc., subsidiaries of Global, as well as Richard
Baker, President of Global. We cannot assure you that we will be able to retain
the services of each of the foregoing executives. In addition, we must be able
to attract, train and retain additional highly skilled executive-level
management and creative, technical, consulting and sales personnel. The
competition in our industries for skilled personnel is intense, and we cannot be
sure that we will be successful in attracting, training and retaining such
personnel. An inability to hire and retain employees would increase our
recruiting and training costs and decrease operating efficiencies and
productivity. This could have a material adverse effect on our business.
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Regulatory and legal uncertainties could harm our business
Several industries in which our clients operate are subject to varying
degrees of governmental regulation. Generally, compliance with these regulations
is the responsibility of our clients. However, we could be subject to a variety
of enforcement or private actions for our failure or the failure of our clients
to comply with these regulations. These actions could have a material adverse
affect on our business.
From time to time state and federal legislation is proposed with regard
to the use of proprietary databases of consumer groups. The fact that we
generate and receive data from many sources increases the uncertainty of the
regulatory environment. As a result, there are many ways both domestic and
foreign governments might attempt to regulate our use of our data. Any such
restrictions could have a material adverse affect on our business.
The services we offer outside the United States may be subject to
foreign regulations including:
o advertising content;
o promotions of financial products;
o activities requiring customers to send money with mail orders; and
o the maintenance and use of customer data held on databases.
Shares Eligible for Future Sale
As of February 16, 2000, Surge had 4,928,958 existing Common Stock
outstanding, all of which shall be reclassified as Class A Common Stock and
registered as part of this registration statement. Following the
Recapitalization, approximately 23,900,000 additional shares of Class B Common
Stock shall be issued to the former holders of Global common stock and 1,821,400
shares of Class B Common Stock shall be issued to the former holders of
MailEncrypt shares and options. The shares to be outstanding exclude all shares
underlying options, warrants and notes. Shares acquired by an "affiliate" of
Superus within the meaning of Rule 144 under the Securities Act of 1933, as
amended, shall need to be sold pursuant to a resale prospectus which will be
part of this registration statement. All other shares of issued common stock may
be freely sold without restriction. See "Plan of Distribution."
Blank Check Preferred Stock and Control of Superus
The Superus Certificate of Incorporation authorizes the issuance of 10
million shares of "Blank Check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered without further
shareholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of the common stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of
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discouraging, delaying or preventing a change in control of Superus. Although we
have no current intention to issue any shares of our preferred stock, there can
be no assurance that we will not do so in the future.
RISK FACTORS RELATING TO INTERNET OPERATIONS
Global financial statements are qualified and based on obtaining financing and
attaining successful operations
Global has incurred operating losses and negative cash flow from its
operations since 1983 and had an accumulated deficit of approximately
$10,003,000 million at September 30, 1999. Global's operating losses and
negative cash flow are expected to continue until such time, if ever, that it
begins to produce sufficient revenues to cover its expenses. Global's
accountants issued a qualified report on Global's financial statements as at and
for the year ended December 31, 1998. This report states that if we do not:
o obtain additional long-term financing arrangements and raise
additional funds; and
o increase revenues and/or decrease expenses,
we may be unable to continue as a going concern for a reasonable period of time.
Internet Operations' limited history of operations may not be a reliable basis
for evaluating our prospects
Because the Internet Operations are developing companies, we have
limited operating and financial data to give to you to evaluate our future
performance and prospects concerning these entities. Our prospects must be
considered in light of the risks, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business in the Internet
industry, which is an evolving industry characterized by intense competition.
You must consider the risks, expenses and uncertainties that an early stage
business like ours faces. These risks include our ability to:
o establish awareness of our services to businesses in emerging
Internet economies;
o expand business-to-business services;
o attract a larger audience to our network;
o respond effectively to competitive pressures; and
o continue to develop and upgrade our technology and distribute our
partners' technology.
If we are unsuccessful in addressing these risks, our business,
financial condition and results of operations will be materially and adversely
affected.
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Significant competition in providing Internet services could reduce the demand
for and profitability of our services
Though our focus is predominately upon business-to-business e-commerce
in emerging Internet economies, wherein there presently is little competition,
the Internet Service Provider ("ISP") component of our Internet Operations -
utilized primarily to better inform our business customers of our e-business
solutions - is very competitive. For example, we compete with a number of
international, national and local ISPs. In addition, a number of multinational
corporations, including giant communications carriers such as AT&T,
MCI/Worldcom, Sprint and some of the regional Bell operating companies, are
offering, or have announced plans to offer, Internet access or on-line services.
We also face significant competition from Internet access consolidators and from
on-line service firms such as America Online ("AOL") launched in Brazil in
November 1999, CompuServe, and Prodigy.
Our competitors in the ISP arena, as opposed to the
business-to-business e-commerce realm, also include Star Media Networks-Gratis1,
the largest portal in Latin America, as well as Yupi.com, El Sitio, Terra
Networks, UOL Brasil, Impsat Corporation and certain local providers such as
Telemex in Mexico and Telecom in Colombia. We believe that new competitors,
which may include computer software and services, telephone, media, publishing,
cable television and other companies, are likely to enter the on-line services
market. There are many companies that provide Internet services targeted to
Latin Americans and Spanish and Portuguese speaking people in general.
Competition for visitors, advertisers and electronic commerce partners is
intense and is expected to increase significantly in the future because there
are no substantial barriers to entry in our market.
In addition, we believe that the Internet service and on-line service
businesses will further consolidate in the future. We believe this could result
in increased price and other competition in the industry and adversely impact
us. In the last year, a number of on-line services have lowered their monthly
service fees. This may cause us to lower our fees in order to compete.
Many of our Internet service competitors possess financial resources
significantly greater than what we might expect to have and, accordingly, could
initiate and support prolonged price competition to gain market share. Many
competitive products and services are marketed by companies which:
o are well established;
o have reputations for success in the development and sale of product
and services; and
o have significantly greater financial, marketing, distribution,
personnel and other resources, thereby permitting them to implement
extensive advertising and promotional campaigns, both general and in
response to efforts by additional competitors to enter into new
markets and introduce new products and services.
We believe we will be able to compete favorably in these areas. However
increased competition in any one of these areas could materially adversely
affect our business, financial condition and results of operations. Other
factors that will affect our success in these markets include our continued
ability to attract additional experienced marketing, sales and management
talent, and the expansion of support, training and field service capabilities.
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The Internet industry is characterized by frequent introduction of new
products and services, and is subject to changing consumer preferences and
industry trends, which may adversely affect our ability to plan for future
design, development and marketing of our products and services. The markets for
Internet products and services are also characterized by rapidly changing
technology and evolving industry standards, often resulting in product
obsolescence or short product life cycles.
We are uncertain of our products being accepted by the market
Achieving market acceptance for our products and services requires
substantial marketing efforts and the expenditure of significant funds, which we
don't currently have, to create both awareness and demand.
Because demand by our customers may be interrelated, any lack or
lessening of demand by any one of these parties could have a negative affect on
our products and services overall market acceptance. We can not assure you that
markets will develop for our Internet Operations, nor can we assure you that we
will be able to meet our current marketing objectives or succeed in positioning
ourselves as a key player in the Internet industry.
If we do not effectively implement our marketing strategy and effectively manage
our operations, our business could suffer
Implementation of our business plan will depend on, among other things, the
following:
o our ability to establish contractual arrangements targeting several
market segments for our Internet Operations; and
o hire and retain skilled management, financial, marketing, sales and
other personnel.
Our marketing strategy and plans are subject to change as a result of a number
of factors, including, but not limited to, progress or delays in:
o our marketing efforts;
o changes in market conditions, including the emergence of significant
supplementary markets;
o the nature of possible strategic alliances which may become
available to us in the future; and
o competitive factors.
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We cannot assure you that we will be able to implement successfully our business
plan for our Internet Operations or otherwise continue our operations
In order to implement our business plan for our Internet Operations, we
will be required to:
o improve our operating systems;
o attract and retain skilled executive, management and technical
personnel; and
o successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality, and service
controls.
We may derive a portion of our revenues from reciprocal advertising agreements,
which do not generate cash revenue
We may derive a portion of our revenues from reciprocal advertising
arrangements under which we will exchange advertising space on our network
predominantly for advertising space on television and radio stations, rather
than cash payments. In the event that revenues from reciprocal advertising
arrangements account for a portion of our revenues in the foreseeable future, we
will be giving up cash revenues.
Joint ventures, acquisitions or strategic alliances may not be available
We do not know if we will be able to identify any future joint
ventures, acquisitions or strategic alliances or that we will be able to
successfully finance these transactions. A failure to identify or finance future
transactions may impair our growth. In addition, to finance these transactions,
it may be necessary for us to raise additional funds through public or private
financings. Any equity or debt financings, if available at all, may impact our
operations and, in the case of equity financings, may result in substantial
dilution to existing stockholders.
In the future we will depend on the developing market of the Internet
Our ability to derive revenues by providing online commerce and
Internet services will depend, in part, upon a developed and robust industry and
the infrastructure for providing Internet access and carrying Internet traffic.
We cannot assure you that the necessary infrastructure, such as a reliable
network backbone, or complementary products, such as lower cost high speed cable
modems, will be developed or that the Internet will become a viable commercial
marketplace in those segments we target. Critical issues concerning the
commercial use of the Internet, including:
o security
o ease of use and access
o reliability
o quality of service
o cost
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remain unresolved and may impact the growth of Internet use. In the event that
the necessary infrastructure or complementary products are not developed or the
Internet does not become a viable commercial marketplace, our future business,
operating results and financial condition could be negatively affected if we
were to expend significant proceeds for the development of Internet services.
LATIN AMERICAN RISKS
Our operating results may also fluctuate due to seasonal factors
If we are successful in initially marketing our services in Latin
America, the level of use on our network and nature of our Web/system
integration engagements may be seasonal. This may cause fluctuations in our
revenues and operating results.
Social and political conditions in Latin America may cause volatility in our
operations and adversely affect our business
Global currently obtains substantially all of its revenues from the
Latin American market. Therefore, we will be subject to special risks not
usually associated with companies operating in North America and Western Europe.
Social and political conditions in Latin America are volatile and may cause our
operations to fluctuate. This volatility could make it difficult for us to
effect our business plan, which could have an adverse effect on our business.
Historically, volatility has been caused by:
o significant governmental influence over many aspects of local
economies and changes in government policies;
o political instability; unexpected changes in regulatory requirements
including, but not limited to, recent Treasury Department Sanctions
concerning drug trafficking in Colombia;
o social unrest;
o slow or negative growth;
o changes in rates and methods for taxation;
o imposition of trade barriers; and
o wage and price controls and other anti-inflationary measures,
currency conversion and remittance abroad.
We have no control over these matters. Volatility resulting from these
matters may decrease Internet availability, create uncertainty regarding our
operating climate and adversely affect our customers' budgets, all of which may
adversely impact our business.
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Currency fluctuations and general economic conditions in Latin America may
adversely affect our business
The currencies of many countries in Latin America, including Brazil and
Argentina, have experienced substantial depreciation and volatility. The
currency fluctuations, as well as high interest rates, inflation and high
unemployment, have materially and adversely affected the economies of these
countries.
Poor general economic conditions in Latin American countries may cause our
customers to reduce their spending on Internet services , which could adversely
impact our business.
We may suffer currency exchange losses if local Latin American currencies
depreciate relative to the U.S. dollar
Our reporting currency is the U.S. dollar. In a number of cases,
however, customers in Latin America may be billed in local currencies. Our
accounts receivable from these customers will decline in value if the local
currencies depreciate relative to the U.S. dollar. Although we may enter into
hedging transactions in the future, we may not be able to do so successfully. In
addition, our currency exchange losses may be magnified if we become subject to
exchange control regulations restricting our ability to convert local currencies
into U.S. dollars.
If Internet use in Latin America does not grow, our business will suffer
The Latin American Internet market is in an early stage of development.
Our near term prospects depends on the continued growth of the Internet in Latin
America. Our business, financial condition and results of operations will be
materially and adversely affected if Internet usage in Latin America does not
continue to grow or grows more slowly than we anticipate. Internet usage in
Latin America may be inhibited for a number of reasons, including:
o the cost of Internet access;
o concerns about security, reliability, and privacy;
o limited amount of content in Spanish or Portuguese;
o ease of use; and
o quality of service.
Underdeveloped telecommunications infrastructure may limit the growth of the
Internet in Latin America and adversely affect our business
Access to the Internet requires a relatively advanced
telecommunications infrastructure for which we will be relying on a satellite
communications network. The telecommunications infrastructure in many parts of
Latin America is not as well-developed as in the United States. The quality and
continued development of the telecommunications infrastructure in Latin America
may have a substantial impact on our ability to deliver our services and on the
market acceptance of the Internet in Latin America in general. If further
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improvements to the Latin American telecommunications infrastructure are not
made, the Internet will not gain broad market acceptance in Latin America. If
access to the Internet in Latin America does not continue to grow or grows more
slowly than we anticipate, our business, financial condition and results of
operations will be materially and adversely affected.
High cost of Internet access may limit the growth of the Internet in Latin
America and impede our growth
Each country in Latin America has its own telephone rate structure
which, if too expensive, may cause consumers to be less likely to access and
transact business over the Internet. Although rates charged by ISPs and local
telephone companies have been reduced recently in some countries, we do not know
whether this trend will continue. Unfavorable rate developments could decrease
our visitor traffic and our ability to derive revenues from transactions over
the Internet. This could have a material adverse effect on our business,
financial condition and results of operations.
OTHER BUSINESS RISKS
Concerns about security of electronic commerce transactions and confidentiality
of information on the Internet may reduce the overall Internet use and impede
our growth
A significant barrier to electronic commerce and confidential
communications over the Internet has been the need for security. Internet usage
could decline if any well-publicized compromise of security occurred. We may
incur significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches. Unauthorized persons could attempt
to penetrate our network security. If successful, they could misappropriate
proprietary information or cause interruptions in our services. As a result, we
may be required to expend capital and resources to protect against or to
alleviate these problems. Security breaches could have a material adverse effect
on our business, financial condition and results of operations.
Computer viruses may cause our systems to incur delays or interruptions and may
adversely affect our business
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet which could adversely affect our business
To date, governmental regulations have not materially restricted use of
the Internet in our markets. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. The growth of the
Internet may also be significantly slowed. This could delay growth in demand for
our network and limit the growth of our revenues.
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<PAGE>
In addition to new laws and regulations being adopted, existing laws
may be applied to the Internet. New and existing laws may cover issues which
include:
o sales and other taxes;
o user privacy;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o cross-border commerce;
o libel and defamation;
o copyright, trademark and patent infringement;
o pornography; and
o other claims based on the nature and content of Internet materials.
We may become subject to claims regarding foreign laws and regulations which may
be expensive, time consuming and distracting
Because we have employees, property and business operations in the
United States and Latin America, we are subject to the laws and the court
systems of many jurisdictions. We may become subject to claims based on foreign
jurisdictions for violations of their laws. In addition, these laws may be
changed or new laws may be enacted in the future. International litigation is
often expensive, time consuming and distracting. Accordingly, any of the
foregoing could have a material adverse effect on our business, financial
condition and results of operations.
Unauthorized use of our intellectual property by third parties may adversely
affect our business
We regard our copyrights, service marks, trademarks, trade secrets and
other intellectual property as important to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and our
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States.
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<PAGE>
We may be subject to claims based on the content we provide over our network
The laws in the United States and in Latin American countries relating
to the liability of companies which provide online services, like ours, for
activities of their visitors are currently unsettled. Claims have been made
against online service providers and networks in the past for defamation,
negligence, copyright or trademark infringement, obscenity, personal injury or
other theories based on the nature and content of information that was posted
online by their visitors. We could be subject to similar claims and incur
significant costs in their defense.
RISKS RELATING TO NEW SURGE
Surge has limited historical profitability and future operating results of the
combined entities could be weak.
Surge has achieved increasing levels of sales during the last several
years from $10,834,000 in the fiscal year ended November 30, 1997 ("Fiscal
1997"), decreasing to $8,728,000 in the fiscal year ended November 30, 1998
("Fiscal 1998") before increasing to $12,147,000 in the fiscal year ended
November 30, 1999 ("Fiscal 1999"). However, net income for Fiscal 1999 was only
$85,000 after we incurred a net loss of $274,000 for Fiscal 1998.
The electronics and semiconductor industries have been characterized by
intense price cutting which could materially adversely affect our future
operating results. Given our limited financial resources, anticipated expenses
and the highly competitive environment in which we operate, there can be no
assurance that our current rate of revenue growth will continue in the future or
that New Surge's future operations will remain profitable.
Surge lacks written long-term supply contracts with manufacturers and depends on
limited number of suppliers
Surge does not have any written long-term supply, distribution or
franchise agreements with any of its manufacturers. We act as the exclusive
sales agent in North America for many of our manufacturers, pursuant to oral
agreements. While we believe that we have established close working
relationships with our principal manufacturers, our success depends, in large
part, on maintaining these relationships and developing new supplier
relationships for our existing and future product lines. Because of the lack of
long- term contracts, we may not be able to maintain these relationships. For
Fiscal 1999, two suppliers and for Fiscal 1998, three suppliers, respectively,
each accounted for in excess of 10% of our net purchases. Purchases from these
two suppliers in Fiscal 1999 were approximately $1,761,000 and $1,288,000,
respectively. During Fiscal 1998 purchases from these three suppliers were
$1,264,000, $1,206,000 and $730,000, each in excess of 10% of our total
purchases. While we believe that there are alternative semiconductor and
capacitor manufacturers whose replacement products may be acceptable to our
customers, the loss of, or a significant disruption in the relationship with,
one or more of our major suppliers would most likely have a material adverse
effect on our business and results of operations.
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<PAGE>
Surge needs to maintain large inventories in order to succeed; price
fluctuations could harm us
In order to adequately service its customers, we believe that it is
necessary to maintain a large inventory of our products. Accordingly, we attempt
to maintain a three to four month inventory of those products we offer which are
in high demand. As a result of our strategic inventory purchasing policies,
under which we in order to obtain preferential pricing, waive the rights to
manufacturers' inventory protection agreements (including price protection and
inventory return rights), we bear the risk of increases in the prices charged by
our manufacturers and decreases in the prices of products held in our inventory
or covered by purchase commitments. If prices of components which we hold in
inventory decline or if new technology is developed that displaces products
which we sell, our business could be materially adversely affected.
We depend on certain customers
For Fiscal 1999 approximately 40% of our net sales were derived from
sales to three customers which accounted for in excess of 10% of our revenues.
During Fiscal 1998, two customers accounted for approximately 16% and 11% of our
net sales. Although our customer base has increased, the loss of our largest
customers as well as, to a lesser extent, the loss of any other principal
customer, would be expected to have a materially adverse effect on our
operations during the short-term until we are able to generate replacement
business, although we may not be able to obtain such replacement business.
We may not be able to compete against large competitors who have better
resources
We face intense competition, in both our selling efforts and purchasing
efforts, from the many companies that manufacture or distribute electronic
components and semiconductors. Our principal competitors in the sale of
capacitors include Nichicon, Panasonic, Illinois Capacitor and NIC. Our
principal competitors in the sale of discrete components include General
Instrument Corp., Motorola, Inc., Microsemi Corp., Diodes, Inc. and Samsung.
Many of these companies are well established with substantial expertise, and
have much greater assets and greater financial, marketing, personnel, and other
resources than we do. Many larger competing suppliers also carry product lines
which we do not carry. Generally, large semiconductor manufacturers and
distributors do not focus their direct selling efforts on small to medium sized
OEMs and distributors, which constitute most of our customers. As our customers
become larger, however, our competitors may find it beneficial to focus direct
selling efforts on those customers, which could result in our facing increased
competition, the loss of customers or pressure on our profit margins. There can
be no assurance that we will be able to continue to compete effectively with
existing or potential competitors.
We will suffer if there is a shortage of components
The component business has, from time to time, experienced periods of
extreme shortages in product supply, generally as the result of demand exceeding
available supply. When these shortages occur, suppliers tend to either increase
prices or reduce the number of units sold to customers. While we believe that
because of our large inventory and our relationships with our manufacturers, we
have not been adversely affected by shortages in certain discrete semiconductor
components. However, in the future shortages may have an adverse effect upon our
business.
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<PAGE>
We will have to manage growth efficiently in order to succeed
We recently expanded our operations through the opening of additional
sales/stocking offices, the expansion of our headquarters office and warehouse
facility and increased our inventories. We believe that we have sufficient funds
to carry out our plans for expansion. In order for us to continue to grow,
however, we will depend on, among other things, the continued growth of the
electronics and semiconductor industries, our ability to withstand intense price
competition, our ability to obtain new clients, retain sales and other personnel
in order to expand our marketing capabilities, secure adequate sources of
products which are then in demand on commercially reasonable terms, successfully
manage growth (including monitoring an expanded level of operations and
controlling costs) and the availability of adequate financing.
We may also seek to expand our operations through potential
acquisitions. New Surge may acquire all or a portion of existing companies in
businesses which we believe are compatible with the electronics components
business including, but not limited to, our competitors. Any decision to make an
acquisition will be based upon a variety of factors, including, among others,
the purchase price and other financial terms of the transaction, the business
prospects and the extent to which any acquisition would enhance our prospects.
To the extent that we may finance an acquisition with a combination of cash and
equity securities of Superus, any such issuance of equity securities could
result in dilution to the interests of Superus' shareholders. Additionally, to
the extent that we, or the acquisition or merger candidate itself, issue debt
securities in connection with an acquisition, we may be subject to risks
associated with incurring indebtedness, including the risks of interest rate
fluctuations and insufficiency of cash flow to pay principal and interest. New
Surge is not currently engaged in identifying any potential acquisition and we
have no plans, agreements, understandings or arrangements for any acquisitions.
There can be no assurance that we will be able to successfully consummate any
acquisition or successfully integrate into its business any acquired business or
portion thereof.
New Surge may need additional financing to operate profitably
We have recently expanded our facilities to achieve growth primarily
through the increased penetration of the OEM and distribution market, the
introduction of new products and the upgrade of existing product lines. We
expect to continue to incur significant operating costs. These costs consist
principally of payroll, marketing and facilities related charges. Our future
profitability depends on increased future sales. In the event that future sales
levels do not increase or in the event that we are unable to obtain such
additional financing as it becomes necessary, we will not be able to achieve all
of our business plans.
Adverse effects of trade regulation and foreign economic conditions
Approximately 64% of the total goods which we purchased in 1999 were
manufactured in foreign countries, with the majority purchased in Taiwan (54%),
China (23%), South Korea (9%), India (4%), Hong Kong (4%), Japan (3%) and Europe
(3%). These purchases subject us 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 materially adverse effect on
our business and results of operations. In addition, the current economic
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<PAGE>
conditions in Southeast Asia may severely impact our business. Potential
concerns may include drastic devaluation of currencies, loss of supplies and
increased competition within the region.
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. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on our business.
Our ability to remain competitive could also be affected by other governmental
actions related to, among other things, anti-dumping legislation and
international currency fluctuations. While we do not believe that any of these
factors have adversely impacted our business in the past, there can be no
assurance that these factors will not materially adversely affect us in the
future.
Electronics industry cyclicality may adversely affect our operations
The electronics industry has been affected historically by general
economic downturns, which have had an adverse economic effect upon manufacturers
and end-users of capacitors and semiconductors. In addition, the life-cycle of
existing electronic products and the timing of new product developments and
introductions can affect demand for semiconductor components. Any downturns in
the electronics distribution industry could adversely affect our business and
results of operations.
Absence of patents, trademarks and proprietary information
We have been assigned the trademark "Superus" which was applied for by
a third party and is still pending. We have no other patents, trademarks or
copyrights registered in the United States Patent and Trademark Office or in any
state. We rely on the know-how, experience and capabilities of our management
personnel. Therefore, without trademark and copyright protection, we have no
protection from other parties attempting to offer similar services.
Although we believe that our products do not and will not infringe
patents or trademarks, or violate proprietary rights of others, it is possible
that infringement of existing or future patents, trademarks or proprietary
rights of others may occur. In the event our products infringe proprietary
rights of others, we may be required to modify the design of our products,
change the name of our products and/or obtain a license. There can be no
assurance that we will be able to do any of these things in a timely manner,
upon acceptable terms and conditions or at all. Our failure to do any of the
foregoing could have a material adverse effect upon our operations. In addition,
there can be no assurance that we will have the financial or other resources
necessary to enforce or defend a patent infringement or proprietary rights
violation action. Moreover, if our products infringe patents, trademarks or
proprietary rights of others, we could, under certain circumstances, become
liable for damages, which also could have a material adverse effect on our
business.
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<PAGE>
CAPITALIZATION
The tables below set forth the capitalization of Surge, Global and
MailEncrypt as of November 30, 1999, and as adjusted to give effect to the
recapitalization of existing Surge common stock into Class A Common Stock and
Class B Common Stock of Superus. These tables should be read in conjunction with
the historical financial statements and related notes and pro forma financial
information included elsewhere in this proxy statement and prospectus.
Surge Components, Inc.
<TABLE>
<CAPTION>
As of November 30, 1999
------------------------------
Actual Pro Forma
--------- ----------
(in thousands)
<S> <C> <C>
Long-term debt:
Other debt........................................................... $ 73 $ 73
Equity:
Surge Preferred Stock, $.001 par value,
1,000,000 authorized, none issued and
outstanding at November 30, 1999(1) none pro forma................ -0- -0-
Surge Common Stock, $.001 par value, 25,000,000
shares authorized, 4,858,958 shares issued and
outstanding, none pro forma....................................... 5 -0-
Global Common Stock, $.001 par value, 50,000,000 shares authorized,
22,280,124 shares issued and outstanding,
none pro forma.................................................... 22 -0-
MailEncrypt Common Stock, no par value,
5,000,000 shares authorized, 2,132,000 shares issued
and outstanding, none pro forma................................... 103 -0-
Superus Preferred Stock, $.001 par value, 10,000,000
shares authorized, none issued and outstanding, none
pro forma.........................................................
Superus Class A Common Stock, $.001 par value, 15,000,000 shares
authorized, none issued and
outstanding and 4,858,958 shares pro forma (2).................... -0- 5
Superus Class B Common Stock, $.001 par value,
125,000,000 shares authorized, none issued
and outstanding and 26,821,000 shares pro forma (3)............... -0- 27
Additional paid-in capital........................................... 16,342 16,440
Accumulated other comprehensive income . . . ........................ 188 188
Retained earnings.................................................... (10,298) (10,298)
------- -------
Total equity......................................................... 6,362 6,362
======= =======
Total capitalization........................................... 6,435 6,435
======= =======
</TABLE>
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<PAGE>
- ------------------------
(1) An aggregate of 239,000 shares of Surge Series A Redeemable Convertible
Preferred Stock, $.001 par value, were issued following the execution of
the GDIS Purchase Agreement in December 1999 and are being held in escrow
for the benefit of Global shareholders. Upon the approval of the GDIS
Acquisition by Surge and Global shareholders, these preferred shares shall
be automatically converted into 23,900,000 shares of Class B Common Stock
of Superus.
(2) See Proposal 1 - "The Recapitalization Proposal" for information concerning
the issuance of Class A Common Stock upon shareholder approval of the
Recapitalization.
(3) See Proposals 2 and 3 for information concerning the issuance of Class B
Common Stock upon shareholder approval of the GDIS Acquisition and the
MailEncrypt Merger.
Global
As of September 30, 1999
------------------------
Actual Pro Forma
---------- ---------
(in thousands)
Long-term debt:
Total long-term debt............................. $ 73 $ 73
Equity:
Other............................................ 9,977 9,977
Retained earnings................................ (10,003) (10,003)
Other comprehensive income (loss)................ 240 240
-------- --------
Total equity..................................... 214 214
-------- --------
Total capitalization........................... 287 287
======== ========
MailEncrypt
As of December 31, 1999
-----------------------
Actual
------
(In thousands)
Long-term debt......................................... $ -0-
Equity:
Common Stock........................................ 103
Deficit accumulated during the development stage.... (111)
Total shareholders' deficit......................... (8)
-----
Total capitalization.............................. (8)
=====
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires us to file information with the
Securities and Exchange Commission concerning our business and operations.
Accordingly, we file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms located at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can also do so by sending correspondence directly to the
following regional offices of the Commission:
o Seven World Trade Center, Suite 1300, New York, New York 10048.
o Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511.
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's web site at: http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-4 under
the Securities Act, with respect to the common stock that we may distribute
under this proxy statement and prospectus. This proxy statement and prospectus,
which is a part of the registration statement, does not include all the
information contained in the registration statement and its exhibits. For
further information with respect to Superus and its common stock, you should
consult the registration statement and its exhibits. Statements contained in
this proxy statement and prospectus concerning the provisions of any documents
are summaries of those documents, and we refer you to the documents filed with
the SEC for more information. The registration statement and any of its
amendments, including exhibits filed as a part of the registration statement or
an amendment to the registration statement, are available for inspection and
copying as described above.
If you have any questions about the special meeting, please call
_______________________, our solicitation agent, at (212) _________________.
You should rely only on the information provided in this proxy
statement and prospectus. We have not authorized anyone else to provide you with
additional or different information. The common stock is not being offered in
any state where the offer is not permitted. You should not assume that the
information in this proxy statement and prospectus is accurate as of any date
other than the date on the front of the proxy statement and prospectus.
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<PAGE>
INFORMATION ABOUT THE SURGE SPECIAL MEETING AND VOTING
Date, Time And Place Of Meeting
We are providing this proxy statement and prospectus to you in
connection with the solicitation of proxies by our board of directors for use at
the special meeting. The special meeting will be held on ___________, 2000, at
10:00 a.m., Eastern time, at ________________________
_______________________________________New York, New York. This proxy statement
and prospectus is first being mailed to our stockholders on or about ______ __,
2000.
Record Date
We have established ______ __, 2000 as the record date for the special
meeting. Only holders of record of our existing Common Stock at the close of
business on this date will be eligible to vote at the special meeting.
Proposals To Be Considered At The Meeting
You will be asked to consider and vote on the seven (7) proposals
described in this proxy statement and prospectus.
We will only implement Proposals 4, 5 and 6 if each of the first two
proposals are approved. If either of the first two proposals is not approved by
Surge shareholders, we will not implement any of the first six (6) proposals
herein.
We do not expect that any other matter will be brought before the
special meeting. If, however, other matters are properly presented, the
individuals named on your proxy card will vote in accordance with their judgment
with respect to those matters.
Vote Required To Approve The Proposals
Proposal 1 requires the favorable vote of a majority of the outstanding
existing Common Stock.
Each of the proposals 2, 3, 5 and 7 will require the favorable vote of
a majority of the votes cast at the special meeting. As a result, abstentions
and broker non-votes will not be considered a vote either for or against these
proposals. A plurality of the votes cast at the special meeting is required for
election to the Board of Directors in proposal 6. Proposal 4 is a non-binding
proposal and requires a majority of the votes cast at the special meeting,
however, the Superus Plan was duly adopted and will remain in effect if the
proposal is not approved by shareholders.
Each outstanding share of existing common stock is entitled to one vote
on each proposal. As of February 16, 2000, the most recent practicable date
prior to the date of this proxy statement and prospectus, Surge had issued and
outstanding 4,928,958 shares of existing common stock.
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<PAGE>
Our directors and executive officers beneficially owned approximately
11% and affiliates of Surge. MailEncrypt did not have any direct or indirect
beneficial ownership of Global Common Stock as of March 6, 2000, assuming no
exercise of their currently exercisable options. Ira Levy, Steven Lubman and
affiliates of Surge representing an aggregate of approximately __% of the
outstanding common stock of Surge intend to vote all shares that they
beneficially own in favor of each of the proposals being considered at the
special meeting.
Quorum
In order to carry on the business of the special meeting, we must have
a quorum. This means a majority of the outstanding shares of our existing common
stock must be represented in person or by proxy at the special meeting.
Abstentions and broker non-votes will count for quorum purposes.
Procedure For Voting By Proxy
If you properly fill in your proxy card and send it to us in time to
vote, your shares will be voted as you have directed. If you sign the proxy card
but do not make specific choices, the individuals named on your proxy card will
vote your shares in favor of approval and adoption of each proposal. If you mark
"abstain" on your proxy card, your shares will be counted as present for
purposes of determining the presence of a quorum. If necessary, unless you have
indicated on your proxy card that you wish to vote against one or more of the
proposals, the individuals named on your proxy card may vote in favor of a
proposal to adjourn the special meeting to a later date in order to solicit and
obtain sufficient votes for any of the proposals.
A proxy card is enclosed for your use. To vote without attending the
special meeting in person, you should complete, sign, date and return the proxy
card in the accompanying envelope, which is postage-paid if mailed in the United
States.
If you have completed and returned a proxy card, you can still vote in
person at the special meeting. You may revoke your proxy before it is voted by:
o submitting a new proxy card with a later date;
o by voting in person at the special meeting; or
o by filing with the Secretary of our company a written revocation of
proxy.
Attendance at the special meeting will not of itself constitute
revocation of a proxy.
If you hold shares through a broker, you should contact your broker to
determine the procedures through which you can vote.
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<PAGE>
INFORMATION ABOUT THE GLOBAL SPECIAL MEETING AND VOTING
Date, Time And Place Of Meeting
We are providing this proxy statement and prospectus to you in
connection with the solicitation of proxies by our board of directors for use at
the special meeting. The special meeting will be held on ___________, 2000, at
10:00 a.m., Eastern time, at ___________________________________________________
_______________________________________. This proxy statement and prospectus is
first being mailed to our stockholders on or about ______ __, 2000.
Record Date
We have established ______ __, 2000 as the record date for the special
meeting. Only holders of record of shares of our existing common stock at the
close of business on this date will be eligible to vote at the special meeting.
Proposal To Be Considered At The Meeting
You will be asked to consider and vote solely on Proposal 2 - The
Adoption of GDIS Asset Purchase Agreement, described in this proxy statement and
prospectus. This joint proxy statement and prospectus with Surge provides you
with detailed information about the Recapitalization and related proposals of
Surge, however, you are only being asked to vote on Proposal 2.
Upon your approval, we will only implement Proposal 2 if each of the
first two proposals are approved by Surge shareholders. If either of the first
two proposals is not approved by Surge shareholders, we will not implement
Proposal 2 herein.
We do not expect that any other matter will be brought before the
special meeting. If, however, other matters are properly presented, the
individuals named on your proxy card will vote in accordance with their judgment
with respect to those matters.
Vote Required To Approve The Proposals
Proposal 2 will require the favorable vote of a majority of the votes
of Global shareholders cast at the special meeting. As a result, abstentions and
broker non-votes will not be considered a vote either for or against these
proposals.
Each outstanding share of existing Global common stock is entitled to
one vote on each proposal. As of ________, 2000, the most recent practicable
date prior to the date of this proxy statement and prospectus, Global had issued
and outstanding _______________ shares of common stock.
Our directors and executive officers beneficially owned approximately
_____% and of Global common stock as of March 6, 2000, assuming no exercise of
their exercisable options. Each of such persons intend to vote all shares that
they beneficially own to be voted in favor of the proposal being
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<PAGE>
considered at the special meeting. Affiliates of Surge and MailEncrypt did not
have any direct or indirect beneficial ownership of shares of Global.
Quorum
In order to carry on the business of the special meeting, we must have
a quorum. This means a majority of the outstanding shares of our existing common
stock must be represented in person or by proxy at the special meeting.
Abstentions and broker non-votes will count for quorum purposes.
Procedure For Voting By Proxy
If you properly fill in your proxy card and send it to us in time to
vote, your shares will be voted as you have directed. If you sign the proxy card
but do not make specific choices, the individuals named on your proxy card will
vote your shares in favor of approval and adoption of each proposal. If you mark
"abstain" on your proxy card, your shares will be counted as present for
purposes of determining the presence of a quorum. If necessary, unless you have
indicated on your proxy card that you wish to vote against the proposal, the
individuals named on your proxy card may vote in favor of a proposal to adjourn
the special meeting to a later date in order to solicit and obtain sufficient
votes for any of the proposals.
A proxy card is enclosed for your use. To vote without attending the
special meeting in person, you should complete, sign, date and return the proxy
card in the accompanying envelope, which is postage-paid if mailed in the United
States.
If you have completed and returned a proxy card, you can still vote in
person at the special meeting. You may revoke your proxy before it is voted by:
o submitting a new proxy card with a later date;
o by voting in person at the special meeting; or
o by filing with the Secretary of our company a written revocation
of proxy.
Attendance at the special meeting will not of itself constitute
revocation of a proxy.
If you hold shares through a broker, you should contact your broker to
determine the procedures through which you can vote on the proposal.
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<PAGE>
PROPOSAL 1--THE RECAPITALIZATION PROPOSAL
General
You are being asked to consider and approve the Recapitalization. If
the Recapitalization is approved, as the first step under the agreement and plan
of merger we will transfer all assets, subject to liabilities of Surge, a New
York corporation and its existing subsidiary, Challenge/Surge, Inc., to a
wholly- owned Delaware subsidiary which we recently formed solely for this
purpose. Surge will then merger (the "Superus Merger") with and into Superus
Holdings, Inc. ("Superus"), also a Delaware corporation. Superus will become the
public parent holding company to New Surge which will be named Surge Components
Inc. and whose assets and liabilities and operations will be those of our
existing company before the Superus Merger. Your vote approving the
Recapitalization will first constitute adoption of the Superus Merger and the
other terms and conditions of the agreement and plan of merger. Therefore, you
should carefully read the agreement and plan of merger, which is attached to
this proxy statement and prospectus as Annex A.
If the Recapitalization is approved, your rights as shareholders will
cease to be governed by New York law and you will be governed by Delaware law.
The changes described herein are set forth in the certificate of incorporation
of Superus attached hereto as Annex B and in new Delaware By-Laws filed with the
SEC, both of which you should carefully read.
If the Recapitalization is approved, we will file certificates of
merger with the Secretaries of State of New York and Delaware as soon as
possible (which shall be deemed the Effective Date) after the special meeting.
If the Recapitalization proposal and the GDIS Acquisition are both not
approved, the Recapitalization will not be completed and our existing common
stock will not be converted into Class A Common Stock of Superus.
The Superus Certificate of Incorporation provides for Class A Common
Stock and Class B Common Stock. Upon the Effective Date, each outstanding share
of our existing common stock will be converted into one share of Class A Common
Stock. The shares of Class A Common Stock that our existing stockholders receive
in the Recapitalization will initially represent 100% of the total voting shares
of Superus immediately on the Effective Date prior to giving effect to the
issuance of Class B Common Stock to the shareholders of Global and MailEncrypt.
As the sole shareholders of Superus you will also authorize the initial
issuances of shares of Class B Common Stock. Upon the completion of the GDIS
Acquisition and Mail Merger you will own approximately 17% of the total voting
stock of Superus prior to the exercise of options and warrants or the conversion
of Notes to purchase Class B Common Stock.
You will not be required to send in your existing common stock
certificates. If the Recapitalization is implemented, your existing common stock
certificates will represent Class A Common Stock and for a six-month period
following the Effective Date will be convertible at a rate of two shares of
Class A Common Stock for each share of Class B Common Stock . If you have any
Class A Warrants, the same will automatically convert into Class B Warrants to
purchase Class B Common Stock on the same terms and conditions as the current
Class A Warrants. We expect to effect the Recapitalization immediately following
the special meeting. The Recapitalization should be tax-free to you and us,
except with respect to any cash you receive in lieu of fractional shares.
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Our principal reason for the Recapitalization is to enhance the value
of our separate businesses and to separate our Internet Operations from our
electronics operations. We believe that the Recapitalization will improve our
ability to separately manage and monitor the performance of our separate
businesses and to create additional incentives for the managers of those
businesses to maximize the financial performance of their companies. The
creation of separate tracking stocks will also create a vehicle for providing
stock options and stock ownership in Internet Operations to attract and retain
key management.
The Class A Common Stock and the Class B Common Stock are what are
commonly referred to as "tracking stocks" because each is intended to reflect or
"track" the separate performance of the businesses of the subsidiaries. Tracking
stock is an equity interest in a corporation with rights determined by reference
to the performance of specific assets of the corporation. The Class A Common
Stock will track the performance of our electronic components business which we
refer to as New Surge. The Class B Common Stock will track the performance of
both GDIS and MailEncrypt which we call our Internet Operations. We will provide
separate operating results and other business and financial information with
respect to New Surge and our Internet Operations. We believe this will enable
our stockholders to gain a better understanding of the inherent value in each
group. However, holders of Class A Common Stock and Class B Common Stock will be
stockholders of a single company, Superus. As a result, stockholders will
continue to be subject to all of the risks of an investment in Superus, a
holding company for both New Surge and Internet Operations.
Our existing common stock is traded on Nasdaq SmallCap Market under the
symbol SPRS and our warrants under the symbol SPRSW. We intend to seek listings
for our Class A Common Stock and Class B Common Stock and Class B Warrants on
the Nasdaq National Market to start trading under the symbols SPRSA, SPRSB and
SPRSW, respectively, after the Recapitalization is completed. Our securities
also trade on the Boston Stock Exchange under the symbol SRD for our common
stock and SRDW for our warrants. If we are approved for a National Market
listing we expect to cease trading on the Boston Stock Exchange.
The Class B Common Stock is intended to separately reflect the
performance of both GDIS and also, if Proposal 3 is approved, MailEncrypt. As
used in this proxy statement and prospectus, the term Class B Common Stock does
not represent a separately incorporated entity, but rather refers to those
businesses, assets and liabilities intended to represent our Internet Operations
as segregated by the board of directors. The Internet Operations may hold the
assets and liabilities of other Internet businesses in the future.
By providing separate securities for each business, investors will be
able to invest in either or both securities depending upon their investment
objectives. When our Board of Directors was first approached by Global about a
possible merger, our existing common stock was then trading at a market value of
less than one-half of Global Common Stock hence the conversion rate of two
shares of Surge for Class B Common Stock. We determined that a premium factor
for an Internet company was appropriate, notwithstanding our Company being a
seasoned issuer. Therefore, although GDIS determined to stop trading its common
stock on the OTC Bulletin Board after the announcement of our acquisition, we
believe that based on comparable valuations for companies similar to Global the
ratio of two shares of Class A Common Stock for one share of Class B Common
Stock is fair. The Board of Directors' belief is conditioned upon our receipt of
fairness opinions to both the Surge shareholders and the Global
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stockholders prior to the mailing of this proxy statement and prospectus. No
state or federal regulatory approvals are required for the completion of the
Recapitalization proposal.
The Superus certificate of incorporation, among other things,
authorizes one hundred fifty million (150,000,000) shares of capital stock, and
establish the rights, limitations and preferences of those shares. The
authorized shares of capital stock include ten (10) million shares of preferred
stock and one hundred forty million (140,000,000) shares of common stock,
consisting of:
o fifteen (15) million shares of Class A Common Stock; and
o one hundred twenty-five (125,000,000) million shares of Class B
Common Stock.
Our board of directors may decide not to implement the Recapitalization
proposal for any reason at any time prior to the filing of the Agreement and
Plan of Merger with the respective Secretaries of State, either before or after
stockholder approval.
Following the implementation of the Recapitalization proposal, we may
from time to time, by action of our board of directors:
o offer either or both classes of common stock for cash in one or
more public or private offerings subject to certain contractual
obligations to Surge management described under Proposal 6 -
"Election of Directors-Employment Agreements,"
o issue shares or options and warrants to purchase shares, of either
or both classes of common stock to our employees pursuant to
employee benefit plans,
o issue shares or options and warrants to purchase shares, of either
or both classes of common stock as consideration for acquisitions
or investments, or
o issue shares of either or both classes of common stock for any
other proper corporate purpose.
So long as sufficient authorized shares are available, the timing,
size, sequence and terms of any of these transactions would be determined by our
board of directors, without your further approval, unless obtaining your
approval is considered advisable by the board of directors or required by
applicable law, regulation or Nasdaq requirements.
The affirmative vote of a majority of our existing common stock issued
and outstanding on the record date is required for approval of the
Recapitalization proposal.
Background and Reasons for the Recapitalization Proposal
Our board of directors approved the Recapitalization proposal following
its review of various alternatives for enhancing the overall return to our
stockholders, advancing our financial and strategic objectives and giving us
flexibility needed for our future growth. Our board of directors believed that
the
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historical price performance of our existing common stock failed to reflect
adequately the value of our electronic components business. As a result, we
believed our shareholders had been unable to realize the full value of their
shares. Prior to our announced agreements to merge with Orbit Network Inc.
("Orbit"), and then with Global, both Internet companies, demand for our
existing Common Stock was limited. For example, during the months of September
through December 1998 our stock traded at approximately between $.375 and $1.50
per share, while following our announcement on December 29, 1998, that we would
merge with Orbit, through August 13, 1999 when the Orbit transaction was
publicly terminated, the market price per share also rose to a trading range
between from $.875 to $5.85. However, on August 19, 1999, Surge's Common Stock
had already dropped to $.91 per share. It was $1.75 per share on October 7,
1999, the day prior to the signing of the original Merger Agreement with Global.
On December 7, 1999, the day prior to the execution of the GDIS Acquisition
Agreement, our existing Common Stock closed at $2.69 per share. Following the
announcement of the GDIS Acquisition the Common Stock increased in price to
$6 3/16 per share at January 21, 2000 prior to the announcement of the Mail
Merger before reaching $10.00 per share in March 2000.
The Recapitalization proposal is designed to separate the performance
of our electronics components business from our Internet Operations. Holders of
Class A Common Stock are expected to benefit from the earnings growth and cash
flow provided by New Surge (while being somewhat isolated from volatility
commonly associated with Internet stocks. Holders of Class B Common Stock are
expected to benefit from the much larger growth potential provided by our
Internet Operations, and will still have the resources and synergies relating to
New Surge.
Our principal reason for the Recapitalization is to enhance the value
of our separate businesses. We believe that the Recapitalization will improve
our ability to separately manage and monitor the performance of our businesses
because we will provide separate operating results and other business and
financial information with respect to both our electronic components business
and our Internet business. We believe this will enable our separate management
teams to focus greater attention on their respective businesses. However, we are
assembling an experienced management team to run Superus as a public holding
company. Further, we believe that by creating separate classes of stock that may
be used for stock options and stock ownership in the separate businesses, we
will be able to provide more focused incentives for the individual management
teams. Because of these factors, we believe we will be better able to accelerate
the growth and development of our Internet Operations while still being part of
a public company. In addition, by providing our stockholders with separate
securities for our New Surge and Internet Operations businesses and financial
statements that reflect the performance of each business, investors will be able
to invest in either or both securities depending upon their investment
objectives and, we believe, will be able to gain a better understanding of the
value inherent in these businesses.
Our board determined in its business judgment that retaining the New
Surge business and the Internet Operations within Superus would be the best
means of enhancing stockholder value, accomplishing our financial and strategic
objectives and creating flexibility for future growth. This Recapitalization
will enable the combined entity to take advantage of the relatively greater
capital resources and financing capacity of Superus until either group is in a
position to access all necessary capital on its own. In addition, our Internet
Operations will benefit from continued access to the established facilities and
administrative, managerial and other business resources of New Surge which has
been a public company for the last four years and in existence for more than 18
years. In turn, Superus will be permitted to offset for income tax purposes
against New Surge's net income the net losses likely to be generated by Internet
Operations during
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the period of the latter's anticipated accelerated growth and development. These
advantages would not be present if either business remained independent or were
spun-off into a separate corporate entity.
Our board concluded that the potential advantages of the GDIS
Acquisition, the Mail Merger and the Recapitalization outweighed the advantages
of preserving our current equity and operating structure remaining solely in the
electronic components business. Preserving our current equity and operating
structure would provide to both groups the benefits of shared access to
resources and consolidated financing. However, our board determined that the
Recapitalization would enhance the value of our separate businesses. The board
considered the potential disadvantages of the Recapitalization proposal that
would not be present if our current equity and operating structure were
retained, especially the complexity of the capital structure, the costs of
implementing the structure and the potential difficulties associated with
resolving conflicts between the groups. The board concluded that the potential
advantages of the Recapitalization proposal over retaining the current structure
outweighed these potential disadvantages.
Our board of directors determined that creating dual tracking stocks
for New Surge and Internet Operations in the Recapitalization would permit
Superus to realize many of the same advantages of operating through separate
entities while retaining the synergies of preserving both groups within Superus.
Our board of directors identified the following potential advantages of the
Recapitalization proposal:
o the creation of two classes of common stock intended to reflect
separately the performance of New Surge and Internet Operations
allows us to appeal to different investor groups with different
expectations with regards to earnings, cash flow and revenue
growth and should result in increased stock coverage by securities
analysts. The Class A Common stock should continue to be valued in
the market based on growth in earnings and cash flows.
Stockholders of businesses operating in Internet industries, such
as GDIS and MailEncrypt, have different expectations of financial
performance. As a result, holders of Class A Common Stock and
Class B Common Stock may be distinct investor groups;
o the creation of two classes of common stock should enhance the
autonomy of the groups by allowing each group and its management
to focus on that group's own identity, business strategy,
financial performance and culture and to structure employee
incentives which are tied directly to the share performance of
that group;
o the Recapitalization proposal, will allow us to retain the
advantages of doing business as a single company and allow each
group to capitalize on relationships with the other group. As part
of one company, we retain the ability to offer a wider range of
services to the customers of New Surge and Internet Operations
than would be possible if they were doing business as separate
companies;
o the Recapitalization proposal preserves our ability to undertake
future capital restructurings and business segmentation; and
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o the implementation of the Recapitalization proposal should not be
taxable to us or you, except for cash you receive in lieu of
fractional shares of Class B Common Stock.
Our board of directors also considered the following potential
disadvantages of the Recapitalization proposal:
o the Recapitalization proposal requires a complex capital structure
that may not be well understood by investors and thus could
inhibit the efficient valuation of either or both classes of
common stock. The board of directors determined that this
disadvantage has been mitigated (although not eliminated) because
of the number of companies recently adopting or proposing similar
capital structures although most, if not all of which companies
are substantially larger and whose securities are traded on the
New York Stock Exchange;
o the potential diverging or conflicting interests of the two groups
and the issues that could arise in resolving any conflicts. The
board of directors has established policies for the operation of
the combined businesses following the Recapitalization to address
instances of conflict and to give fair consideration to all
relevant interests in making determinations in the best interests
of Superus and all of its stockholders as a whole;
o investors in Class A Common Stock and Class B Common Stock will be
exposed to the risks of our consolidated businesses and
liabilities because both groups remain legally a part of Superus.
The board of directors had concluded for the reasons described
above that retaining both New Surge and Internet Operations within
Superus would be preferable to having separate public entities. In
considering the advantages and disadvantages of retaining both
Class A Common Stock and Class Common Stock within Superus, the
board recognized that each group would be exposed to the risks of
the consolidated businesses;
o the market values of Common A Common Stock and Class B Common
Stock could be affected by market reaction to decisions by our
board of directors and management that investors perceive as
affecting differently one class of common stock compared to the
other, such as decisions regarding the allocation of assets,
expenses, liabilities and corporate opportunities and financial
resources between the groups. The board of directors has
established management and allocation policies for Superus
following the Recapitalization to ensure that a process of fair
dealing governs the relationship between the groups and the means
by which the terms of any material transactions between them shall
be determined; and
o a recent legislative proposal by the Clinton Administration would
impose a corporate level tax on the issuance of stock similar to
the Class A Common Stock and the Class B Common Stock. The board
of directors considered the possible impact of such legislation.
Under the terms of the Recapitalization proposal, we may
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convert the Class A Common Stock or the Class B Common Stock into
shares of the other class without any premium if there is an
adverse tax event (as described in detail on page __), such as
enactment of the Clinton Administration proposal, notwithstanding
that, by its terms, the proposal would apply only to issuances on
or after the date of enactment.
Our board of directors determined, for the reasons summarized above,
that on balance the potential advantages of the Recapitalization proposal
outweigh the potential disadvantages and concluded that the Recapitalization
proposal is in the best interests of our company and our stockholders.
On _________, 2000, our Board of Directors confirmed its prior
conclusions and unanimously approved the Recapitalization and the calling of the
special meeting.
Recommendation of the Board of Directors
Our board of directors has unanimously approved the Recapitalization
proposal and believes its adoption to be in our best interests and the best
interests of our stockholders. Accordingly, our board of directors unanimously
recommends that you vote "for" the Recapitalization proposal.
Proposal 1 is conditioned upon approval by the stockholders of both
Surge and Global of the GDIS Acquisition set forth in Proposal 2. If the
acquisition of Global is not approved by shareholders and implemented by the
Board, Proposal 1 will not be implemented.
Management and Allocation Policies
Surge is the existing public company and New Surge, the electronic
components subsidiary, will become a wholly-owned subsidiary of Superus which
Class A Common Stockholders would not directly control. From December 1999
through March 2000, Surge was able to raise approximately $7 million, all but
approximately $1 million of which was used to fund the Internet Operations.
These funds were raised in order to preserve the existing business of Surge and
not cause a drain on its future assets and operations. In view of the
substantial cash needs of the Internet Operations, we have carefully considered
a number of issues with respect to the financing activities of Superus,
inter-company business transactions, access to technology and know-how,
corporate opportunities and the allocation of debt, corporate overhead,
interest, taxes and other charges between New Surge and Superus. Our board of
directors and management have established policies to accomplish the fundamental
objective of the Recapitalization proposal, which is to highlight the separate
financial performance of Internet Operations. This would allow New Surge to
focus on its own business strategy and financial performance. These policies
establish guidelines to help us allocate costs and charges between New Surge and
Superus on an objective basis and to ensure that a process of fair dealing
governs the relationship between New Surge and Superus.
Policies Subject to Change Without Stockholder Approval
We have summarized our management and allocation policies as we expect
them to be effective upon the Recapitalization. We are not requesting
stockholder approval of these policies. Our board of directors may modify or
rescind these policies, or may adopt additional policies, with the approval of
the
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board of directors of New Surge, but without stockholder approval. Our board of
directors has no present plans to do so. A board of directors' decision to
modify or rescind such policies or adopt additional policies could have
different effects upon holders of Class A Common Stock and holders of Class B
Common Stock or could result in a benefit or detriment to one class of
stockholders compared to the other class. Our board of directors would make any
decision in accordance with its good faith business judgment that the decision
is in the best interests of Superus and all of our stockholders as a whole.
Fiduciary and Management Responsibilities
Under Delaware law, directors and officers are fiduciaries for the
corporation and its stockholders and, as such, have duties of loyalty and of
care. In general, directors and officers are considered to have satisfied these
duties when acting for the corporation if they do not have a conflicting
personal interest in the matter on which they act and act in good faith in a
prudent manner in what they reasonably believe to be the best interests of the
corporation and its stockholders. Absent a disabling conflict of interest,
directors are presumed to have acted in accordance with this standard. If the
Recapitalization is consummated, our directors and officers will owe these same
duties to both the holders of Class A Common Stock and the holders of Class B
Common Stock, as they currently do to holders of our existing common stock.
Neither class of common stockholder will be entitled to any higher degree of
care or loyalty on the part of a director or officer than the other class of
common stockholder nor will the interests of either such class be entitled to
greater weight than the interests of the other in the decision-making of the
directors and officers. Market values of the separate classes may be a relevant
consideration in the exercise of our board's business judgment.
The application of the fiduciary duties of directors and officers when
acting on matters as to which the interests of one class of common stockholders
may diverge from, or conflict with, the interests of another class of common
stockholders have not been definitively established. In connection with any
matters where the interests of holders of Class A Common Stock may diverge from,
or conflict with, the interests of Class B Common Stockholders, our directors
and officers intend to act in accordance with their fiduciary duties under
Delaware law and, based on current law, intend to act in what they reasonably
believe to be the best interests of Superus and its common stockholders (of both
classes) as a whole, giving fair consideration to the interests of each class.
We have established the policies relating to financing activities and
allocation matters, transfers of assets between the groups, and competition and
corporate opportunities to address the manner in which potentially divergent
interests of the groups relating to these matters will be resolved. Any matters
not addressed by these policies and any modification to these policies would be
considered by our board in light of the board's fiduciary duties to the
stockholders of both groups. Our board of directors has no present intention to
modify or rescind these policies or adopt any additional policies, whether or
not our board believes the value of Class A Common Stock and Class B Common
Stock is accurately reflected in their market prices.
Financing Activities
We manage most financial activities on a centralized, consolidated
basis. These activities include the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and
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the issuance and repurchase of common stock and preferred stock. We have set
forth below the policies established by our board of directors relating to the
incurrence of debt and stock issuances, the allocation of related costs and
funds transfers between the groups.
After the date on which Class B Common Stock is first issued:
(1) Superus will attribute each future incurrence or issuance of
external debt and the proceeds of that incurrence or issuance to New Surge, to
the extent the proceeds are used for the benefit of New Surge, and to Internet
Operations, to the extent the proceeds are used for the benefit of Internet
Operations.
(2) Superus will attribute each future issuance of Class A Common
Stock, and the proceeds of that issuance to New Surge. Superus will attribute
any future issuances of Class B Common Stock and the proceeds of that issuance
to Internet Operations.
(3) Dividends on and repurchases of Class A Common Stock will be
charged against New Surge and dividends on and repurchases of Class B Common
Stock will be charged against Internet Operations.
(4) Our Internet Operations' liquidity needs may be funded in the
ordinary course of business from:
o cash generated by our Internet Operations;
o additional issuances of Class B Common stock;
o the proceeds from the exercise of Class B Common Stock Purchase
Warrants; or
o the proceeds of external debt incurred or issued for the benefit of
Internet Operations.
Significant expenditures will be funded on a case by case basis as
determined by our Board of Directors.
(5) Superus will account for all cash transfers from one group to or
for the account of the other group as inter-group revolving credit advances
unless our board of directors determines that a given transfer or type of
transfer should be accounted for as a long-term loan.
(6) Any cash transfer accounted for as an inter-group revolving credit
advance will bear interest at the rate at which Superus determines that it could
borrow those funds on a revolving credit basis. Any cash transfer accounted for
as a long-term loan will have interest rate, amortization, maturity, redemption
and other terms that generally reflect the then prevailing terms on which
Superus determines that it could borrow those funds.
Competition Between Groups
New Surge's principal business is supplying high quality electronic
components. Our Internet Operations will initially consist of GDIS's Web and
system integration projects, e-HOLA's integrated
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Internet access and e-commerce business solutions primarily in Latin America and
MailEncrypt's providing web-based encrypted e-mail solutions. As a matter of
Board policy, neither New Surge nor our Internet Operations will engage in each
other's principal businesses, except for joint transactions with each other.
Joint transactions may include joint ventures or other collaborative
arrangements to develop, market, sell and support new products and services.
Third parties may also participate in those joint transactions. The terms of any
joint transactions will be determined by our chief executive officer or, in
appropriate circumstances, our Board of Directors.
Transfers of Assets Between New Surge and Internet Operations
Any transfer of assets between New Surge and Internet Operations will
be made at fair value, as determined by our board of directors. The
consideration for these asset transfers may be paid by one group to the other in
cash or other consideration, as determined by the respective board of directors.
Sales of Products and Services Between Groups. A group will sell
products or services to the other group on terms that would be available from
third parties in commercial transactions. If terms for these transactions are
not available from a third party, the purchasing group will:
(1) pay for the products at fair value as determined by our board of
directors; and
(2) pay for the services at fair value, as determined by our board of
directors, or at the cost, including overhead, of the selling group.
Joint Transactions. The groups may from time to time engage in
transactions jointly, including any with third parties. Research and development
and other services performed by one group for a joint venture or other
collaborative arrangement will be charged at fair value, as determined by our
board of directors.
It is anticipated that in order to provide the maximum incentive to
employees regarding the overall success of Superus, it may be appropriate to
grant awards consisting of shares of both classes of common stock to employees
performing services for one group. This should allow us to maintain a cohesive
corporate identity and culture and allow employees of both groups to participate
in the long-term growth and financial success of Superus taken as a whole.
Access to Technology and Know-How
Each group will have free access to all of our technology and know-how,
excluding products and services of the other group, that may be useful in that
group's business, subject to obligations and limitations applicable to Superus
and to those exceptions that our board of directors may determine. The groups
will consult with each other on a regular basis concerning technology issues
that affect both groups.
Review of Corporate Opportunities
Our board of directors will review any matter which involves the
allocation of a corporate opportunity in whole to either New Surge or Internet
Operations or in part to one group and the other. In accordance with Delaware
law, our board of directors will make the determination with regard to the
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allocation of any of these opportunities and the benefit of these opportunities
in accordance with their good faith business judgment of the best interests of
Superus and all of our stockholders taken as a whole. Among the factors that
they may consider in making this allocation is:
o whether a particular corporate opportunity is principally related
to the business of New Surge or Internet Operations.
o whether one group, because of its managerial or operational
expertise, will be better positioned to undertake the corporate
opportunity; and
o existing contractual agreements and restrictions.
Financial Statements; Allocation Matters
We will prepare financial statements in accordance with generally
accepted accounting principles, consistently applied, for New Surge, GDIS and
MailEncrypt, and these financial statements, taken together, will comprise all
of the accounts included in our corresponding consolidated financial statements.
The financial statements of each of New Surge, GDIS and MailEncrypt will reflect
the financial condition, results of operations and cash flows of the businesses
of each subsidiary.
Subsidiary financial statements will also include allocated portions of
our debt, interest, corporate overhead and costs of administrative shared
services and taxes. We will make these allocations for the purpose of preparing
each group's financial statements. However, holders of Class A Common Stock and
Class B Common Stock will continue to be subject to all of the risks associated
with an investment in Superus and all of our businesses, assets and liabilities.
See the historical financial statements for Surge, Global and MailEncrypt
included in this proxy statement and prospectus.
In addition to allocating debt and interest as described above under
"-- Financing Activities" and assets as described above under "--Transfers of
Assets Between New Surge and Internet Operations," our board of directors has
adopted the following accounting and allocation policies, each of which will be
reflected in the financial statements of each subsidiary:
o Specifically Identifiable Operating Expenses. Costs which relate
entirely to the operations of one of our three operating
subsidiaries are attributed entirely to the respective business.
These expenses consist of costs of personnel who are 100%
dedicated to the operations of one subsidiary, all costs
associated with company locations which conduct only the business
of one subsidiary and amounts paid to third parties for work which
is specifically identifiable to the operations of one subsidiary.
All overhead costs which are incurred at locations which conduct
only the business of one subsidiary are also attributed entirely
to the respective business. In addition, any costs incurred at
corporate headquarters or a location or by a person(s) which
conducts the business of more than one subsidiary and which are
specifically identifiable to the operations of one subsidiary are
attributed to the respective business.
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o Shared Operating Expenses. Certain company locations and personnel
may become involved in conducting the business of both New Surge
and Internet Operations. In the case of employees which are
involved in both businesses, the employee costs are allocated to
the respective business based on estimated time spent by the
employees in the respective businesses. Facility costs fall into
two categories: (1) facility costs for space in which the actual
operations of New Surge and Internet Operations are conducted; and
(2) facility costs for space in which the overhead activities of
executive management, human resources, legal, information
technology, accounting and auditing, tax, treasury, strategic
planning functions and any other overhead functions occur. In the
case of facility costs for space in which the actual operations of
the respective subsidiary are conducted, the cost of the space
shall be allocated to the respective subsidiary based on square
footage used by each respective business. In the case of facility
costs for space in which overhead activities occur, the cost of
the space is allocated to the respective subsidiary based on time
spent by the overhead employees on matters relating to the
respective subsidiary. Similarly, the other costs associated with
the overhead employees, such as depreciation of computer and
office equipment, employee travel and entertainment and other
costs, shall be allocated to the respective subsidiary based on
time spent by the overhead employees relating to matters of the
respective subsidiary. As discussed above, overhead costs at
shared locations which are specifically identifiable to the
operations of a particular subsidiary are attributed entirely to
the respective business.
o Taxes. The federal income taxes of Superus and our subsidiaries
which own assets allocated between the groups are determined on a
consolidated basis. We will allocate consolidated federal income
tax provisions and related tax payments or refunds between the
groups based principally on the taxable income and tax credits
directly attributable to each subsidiary. These allocations will
reflect each subsidiary's contribution, whether positive or
negative, to Superus' consolidated federal taxable income and the
consolidated federal tax liability and tax credit position. We
will credit tax benefits that can not be used by a subsidiary
generating those benefits, but can be used on a consolidated basis
to the group that generated those benefits. Inter-group
transactions will be treated as taxed as if each group was a
stand-alone company. Depending on the tax laws of the respective
jurisdictions, we will calculate state and local income taxes on
either a consolidated or combined basis or on a separate
corporation basis. We will allocate state income tax provisions
and related payments or refunds determined on a consolidated or
combined basis among the subsidiaries based on their respective
contributions to the consolidated or combined state taxable
incomes. We will allocate state and local income tax provisions
and related tax payments which we determine on a separate
corporation basis among the subsidiaries in a manner designed to
reflect the respective contributions of the subsidiaries to
Superus' separate state or local taxable income.
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Description of Class A Common Stock and Class B Common Stock
We have summarized below the material terms of the Class A Common Stock
and the Class B Common Stock. The summary is not complete. We encourage you to
read the Superus certificate of incorporation that is attached as Annex B. Any
future amendments to our certificate of incorporation will require stockholder
approval. See "--Voting Rights--General Voting Rights."
General
The Superus certificate of incorporation authorizes us to issue 150
million shares of stock, consisting of 140 million shares of common stock, par
value $0.001 per share, and 10 million shares of preferred stock, par value
$0.001 per share. As of the Effective Date there will be 15 million shares of
Class A Common Stock authorized, 125 million shares of Class B Common Stock,
authorized and 10 million shares of "blank check" preferred stock authorized.
All outstanding shares of Surge's preferred stock shall be exchanged for Class B
Common Stock and no shares of preferred stock will be issued and outstanding on
the Effective Date. We will be able to issue shares of preferred stock in
series, without stockholder approval.
Upon implementation of the Recapitalization there are expected to be
4,928,958 shares of Class A Common Stock issued and outstanding, plus any shares
issued upon exercise of options and warrants. There will be approximately
25,721,400 shares of Class B Common Stock issued and outstanding, plus any
shares issued upon possible conversion of Class A Common Stock into Class B
Common Stock.
Our board of directors will have the authority in its sole discretion
to issue authorized but unissued shares of common stock from time to time for
any proper corporate purpose. Our board of directors will have this authority
subject to limitations provided by Delaware law or the rules and regulations of
any securities exchange on which any series of outstanding common stock may then
be listed.
Dividends
We currently intend to retain future earnings to finance our growth and
development. Accordingly, we do not anticipate paying any cash dividends on
either class of common stock in the foreseeable future. We expect that
determinations to pay dividends on Class A Common Stock or Class B Common Stock
would be based primarily upon the financial condition, results of operations and
capital requirements of the respective group and any restrictions contained in
financing or other agreements binding upon Superus of either group, and any
other factors our board considers relevant.
The Superus certificate of incorporation will permit us to pay
dividends on the Class A Common Stock and Class B Common Stock out of assets of
Superus legally available for the payment of dividends under Delaware law, but
the total amount paid as dividends cannot exceed the available dividend amount
for Class A Common Stock or Class B Common Stock. Additionally, the Superus
Certificates of Incorporation reserves the right to pay dividends on one class
but not the other, and the right to pay dividends of Class A Common Stock on
Class B Common Stock, and vice versa, to the extent that such shares or funds
are available for grant, and otherwise in accordance with Delaware law.
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The amount legally available for the payment of dividends on common
stock of a corporation under Delaware law is generally limited to:
o the total assets of the corporation less its total liabilities;
less
o the aggregate par value of the outstanding shares of its common
and preferred stock.
If that amount is not greater than zero, a corporation may also pay
dividends out of the net profits for the corporation for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. These
restrictions form the basis for calculating the available dividend amounts for
Class A Common Stock and Class B Common Stock. They will also form the basis for
calculating the aggregate amount of dividends that Superus as a whole can pay on
its common stock (regardless of series). Accordingly, net losses of either
group, and any dividends and distributions on, or repurchases of, either series
of common stock, will reduce the assets legally available for the payment of
dividends on both series of common stock.
The Superus certificate of incorporation provides that the available
dividend amount for Class A Common Stock at any time is the amount that would
then be legally available for the payment of dividends on Class A Common Stock
under Delaware law as if Class A Common Stock were a separate Delaware
corporation, which New Surge, in fact, will be.
The Superus certificate of incorporation provides that the available
dividend amount for Class B Common Stock at any time is the amount that would
then be legally available for the payment of dividends on Class B Common Stock
under Delaware law as if Class B Common Stock were a separate Delaware
corporation, which GDIS and MailEncrypt will not be.
Subject to the above limitations (and to any other limitations set
forth in any future series of preferred stock or in any agreements binding on
Superus from time to time), the Superus certificate of incorporation provides
that we have the right to pay dividends on both, one or neither series of common
stock in equal or unequal amounts, notwithstanding the performance of either
group, the amount of assets available for dividends on either series, the amount
of prior dividends paid on either series, the respective voting rights of each
series, or any other factor.
Right of First Refusal and Preferences to Surge management
If we dispose of all or substantially all of the fair value of the
assets attributed to New Surge we will be required to provide Ira Levy and
Steven J. Lubman, the founders and current executive officers of New Surge,
under their amended employment agreements, a right of first refusal to purchase
all outstanding equity securities of New Surge. In addition, in the event that
Superus proposes to effect, or New Surge otherwise receives a firm commitment to
effect a public offering of New Surge equity securities, Ira Levy and Steven J.
Lubman shall each receive a warrant, exercisable at nominal value, to acquire
9.5% of New Surge's equity securities, or an aggregate of 19%. See Proposal 6 -
"Election of Directors - Employment Agreements."
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Conversion of Class B Common Stock or Class A Common Stock Upon an Adverse Tax
Event
The Superus certificate of incorporation provides that we will have the
right upon the occurrence of an adverse tax event to declare that each
outstanding share of Class B Common Stock shall be exchanged, as of the
applicable exchange date, subject to amendment of the certificate of
incorporation, for a number of fully paid and nonassessable shares of Class A
Common Stock at a conversion ratio equal to the ratio of:
(1) the average market price of a share of Class B Common Stock over a
20-trading day period; to
(2) the average market price of a share of Class B Common Stock over
the same period.
Similarly, we will have the right upon the occurrence of an adverse tax
event to declare that each outstanding share of Class A Common Stock shall be
exchanged, as of the applicable exchange date, for a number of fully paid and
nonassessable share(s) of Class B Common Stock at a conversion ratio equal to
the ratio of:
(1) the average market price of a share of Class A Common Stock over a
20-trading day period; to
(2) the average market price of a share of Class B Common Stock over
the same period.
We will calculate the ratio of average market values as of the fifth
trading day prior to the date we mail the conversion notice to holders.
An adverse tax event shall mean our receipt of an opinion of tax
counsel to the effect that, as a result of any amendment to, or change in the
laws or regulations of the United States or any of its political subdivisions or
taxing authorities (including any announced proposed change by an administrative
agency), or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
it is more likely than not that for United States federal income tax purposes:
(1) we, our subsidiaries or affiliates, or any of our successors or
stockholders are or, at any time in the future, will be subject to tax upon the
issuance of shares of either Class A Common Stock or Class B Common Stock, or
(2) either Class A Common Stock or Class B Common Stock is not or, at
any time in the future, will not be treated solely as stock of our company.
For purposes of rendering such tax opinion, tax counsel shall assume
that any administrative (as opposed to legislative) proposals will be adopted as
proposed. However, in the event a change in law is proposed, such as the Clinton
Administration's legislative proposal, tax counsel shall render an opinion only
in the event of enactment.
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General Dividend, Exchange and Redemption Provisions of our Certificate of
Incorporation
Selection of Shares for Redemption. If less than all of the outstanding
shares of a class of common stock are to be redeemed, we will redeem those
shares proportionately from among the holders of outstanding shares of the
common stock to be redeemed or by any method as may be determined by our board
of directors to be equitable.
Fractional Interests; Transfer Taxes. We will not be required to issue
or deliver fractional shares to any holder of common stock upon any redemption,
dividend or other distribution described above. If there are fractional shares
to be issued or distributed to any holder, we will issue the fractional shares
or securities to the holder or pay cash in respect of the fractional shares or
securities. The amount of cash will equal the fair value of the securities on
the fifth trading day prior to the date the payment is to be made, without
interest.
We will pay all documentary, stamp or similar issue or transfer taxes
that may be payable in respect of the issue or delivery of any shares of capital
stock and/or other securities on conversion or redemption of shares. We will
not, however, be required to pay any tax that might be payable in respect of any
transfer involved in the issue or delivery of any shares of capital stock and/or
other securities in a name other than that in which the shares so redeemed were
registered. We will not issue or deliver shares as described in the previous
sentence unless and until the person requesting the issue pays to Superus the
amount of any tax or establishes to our satisfaction that the tax has been paid.
We may, subject to applicable law, establish other rules, requirements
and procedures to facilitate any dividend or redemption contemplated as
described above as the board may determine to be appropriate under the
circumstances.
Voting Rights
Currently, holders of our existing common stock have one vote per share
on all matters submitted to Shareholders.
The Superus certificate of incorporation provides that the holders of
Class A Common Stock and Class B Common Stock will vote together as a single
class on all matters as to which common stockholders are generally entitled to
vote, except as required under Delaware law. On all matters as to which both
classes of common stock would be proportionally affected, they would vote
together as a single class, each outstanding share of Class A Common Stock and
Class B Common Stock will have one vote per share.
General Voting Rights. The holders of Class A Common Stock and Class B
Common Stock will not have any rights to vote separately as a class on any
matter coming before our stockholders, except for the limited class voting
rights provided under Delaware law, as described below, or as determined by our
board of directors.
The holders of Class A Common Stock or Class B Common Stock, voting as
a separate class, shall be entitled to approve by the affirmative vote of the
holders of a majority of the outstanding shares of such class affected, any
amendment, alteration or repeal of any provision of our certificate of
incorporation which adversely affects the rights, powers or privileges of the
Class A Common Stock or Class B Common Stock.
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To the extent permitted under Delaware law, the Superus certificate of
incorporation provides that any increase in the number of authorized shares of
Class A Common Stock or Class B Common Stock shall be subject to approval by an
affirmative vote of the holders of a majority of the affected class.
Liquidation Rights
Under the Superus certificate of incorporation, in the event of our
liquidation, dissolution or winding up, after payment or provision for payment
of the debts and other liabilities and full preferential amounts to which the
holders of any preferred stock are entitled, regardless of the group to which
the shares of preferred stock were attributed, the holders of Class A Common
Stock and Class B Common Stock will be entitled to receive our assets remaining
for distribution to holders of common stock on a pro rata basis. Holders of
Class A and Class B Common Stock will not be entitled to receive any proceeds
from any particular assets reflected by their respective classes of stock.
In the event of a sale of any assets relating to the Internet
Operations, the holders of Class B Common Stock will have the right to receive
all assets related to the Internet Operations. The holders of Class A Common
Stock will have the right to receive all assets related to New Surge and its
related business.
In the event of a merger of Superus or sale of all or substantially all
of Superus's assets, the holders of both classes will share ratably, based on a
percentage of each class of the total market value and market capitalization of
both classes of common stock. For example, if 75% of the market capitalization
of Superus is represented by a particular class, then the shareholders of said
class will receive 75% of the consideration exchanged in the merger to all
shareholders generally.
In the event that Superus merges or sells the assets of only the
Internet Operations, then only the holders of Class B Common Stock will receive
the consideration therefore. If Superus seeks to sell all or substantially all
of the assets attributed to New Surge, Ira Levy and Steven J. Lubman, the
founders and executive officers of New Surge, shall have a right of first
refusal to purchase New Surge.
Neither a merger nor consolidation of Superus into or with any other
corporation, nor any sale, transfer or lease of all or any part of our assets,
will, alone, be deemed a liquidation or winding up of Superus, or cause the
dissolution of Superus for purposes of these liquidation provisions.
Issuances of Class B Common Stock as Distributions on Class A Common Stock and
Visa-Versa
The Board of directors may issue shares of Class B Common Stock as a
distribution on Class A Common Stock, and/or vice versa although it does not
currently intend to do so.
Repurchases of Class B Common Stock
If we decide to repurchase shares of Class B Common Stock, we will
attribute that repurchase, including its cost, to Class B Common Stock, in a
manner analogous to an issuer repurchase. The Superus certificate of
incorporation provides that we may, however, in the future determine, in our
sole discretion,
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to attribute that repurchase, including its cost, to Internet Operations, in a
manner analogous to a purchase of common stock of a subsidiary by a corporate
parent.
Preemptive Rights
Under Delaware law, stockholders do not have preemptive rights unless
specifically granted in the certificate of incorporation. The Superus
certificate of incorporation does not grant the holders of the Class A Common
Stock or the holders of the Class B Common Stock any preemptive rights or any
rights to convert their shares into any other securities of Superus, other than
the voluntary conversion of Class A Common Stock into Class B Common Stock for a
six month period following the Effective Date.
Special Meetings
Under Delaware law, unless the certificate of incorporation or the
by-laws provide otherwise, stockholders are not permitted to call a special
meeting of the stockholders. The Superus by-laws permit stockholders to call a
special meeting upon written request by holders of 15% of either Class of Common
Stock outstanding.
Additional Share Issuances
The Superus certificate of incorporation provides that we may from time
to time issue shares of preferred stock in one or more series, the terms of
which will be determined by our board of directors, and common stock of either
class. We will not solicit approval of our stockholders unless our board of
directors believes that approval is advisable or is required by stock exchange,
Nasdaq regulations or Delaware law. This could enable our board of directors to
issue shares to persons friendly to current management which would render more
difficult or discourage an attempt to obtain control of Superus by means of a
merger, tender offer, proxy contest or otherwise and protect the continuity of
our management. These additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of our company.
Future Audited Financial Information
If the Recapitalization proposal is implemented, we will include in our
filings with the Commission the same audited financial information about Superus
that we currently include in our Surge filings. This includes audited
consolidated balance sheets, statements of income, statements of equity and
comprehensive income and statements of cash flows. We also will include audited
combined balance sheets, statements of income, statements of equity and
statements of cash flows for each of New Surge and Internet Operations. In
addition, we will include Management's Discussion and Analysis of Financial
Condition and Results of Operations for each of Superus, New Surge and Internet
Operations.
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Nasdaq Listing of Superus Securities
We have applied to Nasdaq, subject to stockholder approval of the
Recapitalization proposal, to have the Class A Common Stock and the Warrants,
currently listed on the Nasdaq SmallCap System under the symbols "SPRS," and
"SPRSW," respectively, become listed on the National Market System under the
symbols "SPRSA" and "SPRSW." We have also applied, subject to stockholder
approval of the Recapitalization proposal, to have the Class B Common Stock
listed on the National Market System under the symbol "SPRSB." It is expected
that if any of securities become listed on the Nasdaq National Market System,
such securities will no longer trade on the Boston Stock Exchange.
Exchange Procedures
Upon completion of the Recapitalization, your certificates representing
existing common stock will represent shares of Class A Common Stock, and any
Class B Warrants you may own will represent Class B Warrants.
In the event you wish to exchange your existing common stock for Class
A Common Stock Certificates you will receive a letter of transmittal providing
for same, as soon as practicable after the Recapitalization. However, if you
wish to convert your Class A Common Stock into shares of Class B Common Stock at
the ratio of one share of Class B Common Stock for every two shares of Class A
Common Stock so converted, you should contact the stock transfer agent below for
the exchange form within six months of the Effective Date at which time such
conversion shall expire.
In the event that you are entitled to a fractional share of Class B
Common Stock, upon exchange we will pay you, in lieu of issuing to you
fractional shares, a cash amount equal to the closing price of that fractional
share on the first date the Class B Common Stock trades following the date the
Recapitalization is implemented.
Stock Transfer Agent and Registrar
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004; (212) 509-4000, will continue to act as transfer agent and registrar
for the redesignated Class A Common Stock and Class B Warrants and will act as
transfer agent and registrar for the Class B Common Stock upon the issuance of
the Class B Common Stock.
Financial Advisor
Equilink, LLC is acting as our financial advisor in connection with the
Recapitalization proposals, as well as Proposals 2 and 3. Our financial advisor
is being paid one million shares of Class B Common Stock contingent upon
shareholder approval of Proposals 1 and 2. We have agreed to reimburse the
financial advisor for certain of its reasonable out-of-pocket expenses and have
agreed to indemnify the financial advisor against certain liabilities, including
liabilities under the Securities Act.
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Finder's Fee
Morgan Stanley Dean Witter is being paid a finder's fee of 100,000
shares of Class B Common Stock upon shareholder approval of Proposal 1 - "The
Recapitalization Proposal" and Proposal 3 - "Approval of MailEncrypt Merger
Agreement.
Effect on Existing Options
If the Recapitalization Proposal is approved and implemented,
outstanding awards previously granted under the Surge stock incentive plan based
upon shares of existing common stock will be adjusted so that each holder of an
outstanding award will receive a corresponding award on a one-for-one basis for
shares of Class A Common Stock. If the Recapitalization is approved and Proposal
5 - "Ratification of Acceleration of Exercisability of Superus Options to Surge
Management" is approved, existing Surge Management Options will be forfeited and
the Superus options exercisable for one-half the number of shares of Class B
Common Stock will accelerate and be fully vested upon the completion of the GDIS
Acquisition, at the same rate as each two shares of Class A Common Stock may be
converted into one share of Class B Common Stock.
No Regulatory Approvals
No state of federal regulatory approvals are required for the
Recapitalization proposal.
Material Federal Income Tax Consequences
The following is a discussion of the material federal income tax
consequences of the Recapitalization of Surge into Superus and the issuance of
Class A Common Stock to the holders of Surge's existing common stock and the
issuance of Class B Common Stock to the Global and MailEncrypt shareholders.
This discussion is based on currently existing provisions of the Code, existing
regulations thereunder (including final, temporary or proposed), and current
administrative rulings and court decisions, all of which are subject to changes.
Any such change, which may, or may not be, retroactive, could alter these tax
consequences. The following discussion is intended only as a summary of the
material federal income tax consequences of the transaction and does not purport
to be a complete analysis or listing of all of the potential tax effects
relevant to a decision on whether to vote in favor of approval of the Agreement.
For example, there has been a recent proposal by the Clinton Administration to
treat the issuance of tracking stock as stock of the company whose value is
tracked. If such a proposal were enacted, the transactions would be taxable .
Surge cannot predict, however, whether any such proposal will be enacted by
Congress and, if enacted, whether it will be in the form proposed by the
Administration or what the effective date of any such legislation will be.
The following discussion assumes that the sole consideration for
Global's assets will be Class B Common Stock of Superus. Although Surge has
deposited in escrow 239,000 shares of Surge Redeemable Convertible Series A
Preferred Stock, such shares will not remain outstanding if the final conditions
for closing the transaction are not met (they will be redeemed for their nominal
par value). If the transaction closes, only the Superus Class B Common Stock
will then be issued. The discussion also assumes that the Class B Common Stock,
which tracks the performance of the assets of GDIS and MailEncrypt, will be
considered stock of Superus rather than of the subsidiaries which will own the
respective assets.
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If either the Class A Common Stock or the Class B Common Stock were
considered stock of the respective subsidiaries whose value is tracked, each
transaction would be a taxable exchange rather than a tax-free reorganization
under the Internal Revenue Code. Despite the issuance of so-called "tracking
stock" by a growing number of companies, the Internal Revenue Service has not
provided any guidance on the issue of whether those shares are shares of the
parent company or the subsidiary whose value is tracked. The IRS current
position is that it will not rule on this issue. However, in the opinion of our
counsel, Snow Becker Krauss P.C., although our counsel recognizes that this
matter cannot be viewed as free from doubt because there is no conclusive
authority dealing with the facts presented by the Recapitalization of Surge,
both the Class A and the Class B Common Stock should be considered stock of
Superus for federal income tax purposes, and thus each transaction should be
treated as a tax free reorganization, because (1) both classes of Superus Common
Stock vote as one class together; (2) neither tracking stock can affect the
determination of the Board of a subsidiary company; (3) cause any subsidiary to
be liquidated or merged; (4) vote as a shareholder with respect to any
subsidiary or (5) receive distributions directly from any subsidiary. Also, the
liquidation rights of the two classes are the same and the shareholder
investment of each class is subject to the risk of the business of Superus as a
whole.
In order to obtain the benefit of Delaware corporate law, Surge,
currently a New York corporation, will merge into Superus, a Delaware
corporation. Counsel has opined that this transaction will be tax free to both
the company and its shareholders.
Also, as part of this transaction, Surge's existing common stock will
be recapitalized into Superus Class A Common Stock, a stock which will track the
performance of the assets of New Surge. New Surge is a subsidiary that will
contain the operating assets currently owned by Surge. As noted, it is our
counsel's opinion that this "tracking stock" will also be considered stock of
Superus rather than stock of New Surge. Counsel notes that this issue is similar
to that discussed with respect to the Superus Class B Common Stock above. In
addition to the reasons noted above for concluding that the Class A and B Common
Stock should be considered stock of Superus, in the case of the Class B Common
Stock, counsel also relies on the fact that, at the time the Class A Common
Stock is issued to existing shareholders of Surge, it will be the only common
stock of Superus. Therefore, our counsel's opinion is that no income, gain or
loss should be recognized by you or us for federal income tax purposes as a
result of the recapitalization of Surge Common Stock into Superus Class A Common
Stock.
We have received the opinion of our counsel that the GDIS Acquisition
should qualify as a reorganization under Section 368(a) of the Code (namely as a
transaction described in Section 368(a)(2)(D). As parties to a reorganization,
neither Surge nor Global will recognize gain or loss upon such exchange. Since
the transaction will be a tax-free reorganization, your receipt of Superus Class
B Common Stock should not be treated as taxable to you, except with respect to
any cash you receive in lieu of a fractional share. The tax basis of the Superus
shares you receive will be equal to the tax basis of the Global shares you
surrender (excluding any portion of basis which is allocable to any fractional
shares you receive). Your holding period for the Superus Class B Common Stock
you receive will include the holding period of the Global shares you surrender
in the transaction. If you receive cash in lieu of fractional shares for the
Global stock you surrender, you will be treated as if you sold the fractional
shares after you received them. Any gain or loss attributable to fractional
shares will be capital gain or loss.
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The amount of your gain or loss will be equal to the difference between
the ratable amount of the tax basis of your Global stock surrendered in the
transaction that is allocated to the fractional shares and the cash received
with respect to those fractional shares. The amount of your capital gain or loss
will be long-term capital gain or loss if the Global stock has been held by you
for more than one year at the time the transaction closes.
The conversion of the existing common stock of Surge into Superus Class
A Common Stock should, as noted in the opinion of counsel, also constitute a
tax-free exchange to the existing shareholders with the basis and holding period
in their newly received common stock measured by reference to the basis and
holding period of the stock they previously held.
The foregoing discussion is a general summary of all of the material
federal income tax consequences of the transaction to Global shareholders, as
well as Surge and MailEncrypt shareholders, where noted, and does not reflect
the particular facts and circumstances of each shareholder's tax situation and
status. Moreover, neither Global or Surge has requested or will request a ruling
from the IRS regarding the federal income tax consequences of the transaction.
Since your tax consequences may vary depending upon your particular
circumstance, you should consult your own tax advisor about your specific
situation, including the effect of state, local, and foreign law which may be
applicable to you and the possible effect of changes on federal and other tax
laws.
Under the Superus certificate of incorporation, we may convert the
Class A Common Stock or the Class B Common Stock into shares of the other class
without any premium if there is an adverse tax event. See "Description of Class
A Common Stock and Class B Common Stock." The proposal of the Clinton
Administration would be such an adverse development if it is implemented.
Comparison of Certain Rights of Surge Shareholders Under New York and Delaware
Law and of Global Shareholders Under Nevada and Delaware Law
Upon consummation of the Recapitalization, the shareholders of Surge
will become Class A Common Stockholders of Superus and their rights will be
governed by the Superus Certificate of Incorporation and By-Laws, which differ
in certain material respects from the Surge Certificate of Incorporation and
By-Laws. As stockholders of Superus, the rights of our shareholders will also be
governed by the Delaware General Corporation Law (the "DGCL") instead of the New
York Business Corporation Law (the "NYBCL"). Delaware is the jurisdiction of
incorporation of Superus and New York is the jurisdiction of incorporation of
Surge.
Global is a Nevada corporation and the rights of its stockholders are
governed by the Nevada Revised Statutes (the "NRS") and the Articles of
Incorporation and By-Laws of Global (the "Global Articles" and "Global By-Laws,"
respectively). Upon completion of the GDIS Acquisition, the stockholders of
Global will become shareholders of Superus and their rights will be governed by
the Superus Certificate of Incorporation and By-Laws. As stockholders of
Superus, the rights of Global shareholders will be governed by the DGCL instead
of the NRS.
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The following comparison of the NYBCL, the Surge Charter and By-Laws,
on the one hand; the DGCL, the Superus Charter and By-Laws, on the other hand;
and the NRS, the Global Charter and By-Laws, summarizes the material
differences, but is not intended to list all differences.
Business Combinations
Generally, under the DGCL and the NRS, the approval by the affirmative
vote of the holders of a majority of the outstanding stock (or, if the
certificate of incorporation provides for more or less than one vote per share,
a majority of the votes of the outstanding stock) of a corporation entitled to
vote on the matter is required for a merger or consolidation or sale, lease or
exchange of all or substantially all the corporation's assets to be consummated.
The Superus Certificate of Incorporation requires, subject to the rights, if
any, of any class or series of Superus Preferred Stock, the affirmative vote of
66 2/3% of the total voting power of then-outstanding Superus voting securities,
voting together as a single class, to approve (a) a merger or consolidation of
Superus with, or into, another corporation, other than a merger or consolidation
that does not require the consent of shareholders under the DGCL or (b) the
sale, lease or exchange of all or substantially all of the property and assets
of Superus.
Under the NYBCL, a plan of merger or consolidation, a plan of share
exchange or a sale, lease, exchange or other disposition of all or substantially
all of the assets of a corporation is required to be approved (a) in the case of
corporations like Surge that were in existence on February 22, 1998 and that do
not expressly provide in their certificates of incorporation for majority
approval of such transactions, by two-thirds of the votes of all outstanding
shares entitled to vote thereon, and (b) in the case of all other corporations,
by a majority of the votes of all outstanding shares entitled to vote thereon.
The Surge Certificate of Incorporation does not contain a provision expressly
providing for majority approval of such transactions.
The NYBCL also provides that the holders of shares of a class, or
series of a class, of capital stock of a corporation shall be entitled to vote
together and to vote as a separate class on any merger or consolidation in which
(a) such shares will remain outstanding after the merger or consolidation or
will be converted into the right to receive shares of stock of the surviving or
consolidated corporation or another corporation and (b) the charter of the
surviving or consolidated corporation or such other corporation immediately
after the effectiveness of the merger or consolidation would contain any
provision that is not contained in the charter of the pre-merger corporation and
that, if contained in an amendment thereto, would entitle the holders of shares
of such class or series of a class to vote as a separate class pursuant to the
procedures under the NYBCL for class voting on charter amendments discussed
under "--Amendments to Charters."
State Takeover Legislation
Delaware Business Combination Law
DGCL Section 203 (the "Delaware Business Combination Law"), in general,
prohibits a business combination between a corporation and an interested
shareholder within three years of the time such shareholder became an interested
shareholder, unless:
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o prior to such time the board of directors of the corporation
approved either the business combination or the transaction
that resulted in the shareholder becoming an interested
shareholder;
o upon consummation of the transaction that resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
exclusive of shares owned by directors who are also officers
and by certain employee stock plans; or
o at or subsequent to such time, the business combination is
approved by the board of directors and authorized by the
affirmative vote at a shareholders' meeting of at least 66
2/3% of the outstanding voting stock that is not owned by the
interested shareholder.
The term "business combination" is defined to include, among other
transactions between an interested shareholder and a corporation or any direct
or indirect majority owned subsidiary thereof, a merger or consolidation; a
sale, pledge, transfer or other disposition (including as part of a dissolution)
of assets having an aggregate market value equal to 10% or more of either the
aggregate market value of all assets of the corporation on a consolidated basis
or the aggregate market value of all the outstanding stock of the corporation;
certain transactions that would increase the interested shareholder's
proportionate share ownership of the stock of any class or series of the
corporation or such subsidiary; and any receipt by the interested shareholder of
the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or any such subsidiary. In
general, and subject to certain exceptions, an "interested shareholder" is any
person who is the owner of 15% or more of the outstanding voting stock (or, in
the case of a corporation with classes of voting stock with disparate voting
power, 15% or more of the voting power of the outstanding voting stock) of the
corporation, and the affiliates and associates of such person. The term "owner"
is broadly defined to include any person that individually or with or through
such person's affiliates or associates, among other things, beneficially owns
such stock, or has the right to acquire such stock (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement or understanding or upon the exercise of warrants or options or
otherwise or has the right to vote such stock pursuant to any agreement or
understanding, or has an agreement or understanding with the beneficial owner of
such stock for the purpose of acquiring, holding, voting or disposing of such
stock.
The restrictions of the Delaware Business Combination Law do not apply
to corporations that have elected, in the manner provided therein, not to be
subject to the Delaware Business Combination Law or, with certain exceptions,
which do not have a class of voting stock that is listed on a national
securities exchange or authorized for quotation on Nasdaq National Market or
held of record by more than 2,000 shareholders. The Superus Certificate of
Incorporation and the By-Laws do not opt out of the Delaware Business
Combination Law.
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New York Business Combination Law
Section 912 of the NYBCL (the "New York Business Combination Law")
prohibits any "business combination" (defined to include a variety of
transactions, including mergers, sales or dispositions of assets, issuances of
stock, liquidations, reclassifications and benefits from the corporation,
including loans or guarantees) with, involving or proposed by any "interested
shareholder" for a period of five years after the date on which the interested
shareholder became an interested shareholder. An "interested stockholder" is
defined generally as any person who, directly or indirectly, beneficially owns
20% or more of the outstanding voting stock of a New York corporation. After
such five-year period, a business combination between a New York corporation and
such interested shareholder is prohibited unless either certain "fair price"
provisions are complied with or the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by such
interested shareholder or its affiliates. The restrictions of the New York
Business Combination Law do not apply, however, to any business combination with
an interested shareholder if such business combination, or the purchase of stock
by the interested shareholder that caused such shareholder to become such, is
approved by the board of directors of the New York corporation prior to the date
on which the interested shareholder becomes such.
A New York corporation may adopt an amendment to its by-laws, approved
by the affirmative vote of a majority of votes of the outstanding voting stock,
excluding the voting stock of interested shareholders and their affiliates and
associates, expressly electing not to be governed by the New York Business
Combination Law. Such amendment will not, however, be effective until 18 months
after such shareholder vote and will not apply to any business combination with
an interested shareholder who was such on or prior to the effective date of such
amendment. Surge does not have a clause in its By-Laws to elect not to be
governed by the New York Business Combination Law.
Nevada Business Combination Law
Nevada law prevents an "interested stockholder" and a Nevada
corporation from entering into a "combination", unless certain conditions are
met. A combination means any merger or consolidation with an "interested
stockholder," or any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions with an "interested
stockholder" having: (i) an aggregate market value equal to 5% or more of the
aggregate market value of the assets of a corporation; (ii) an aggregate market
value equal to 5% or more of the aggregate market value of all outstanding
shares of a corporation; or (iii) representing 10% or more of the earning power
or net income of the corporation. An "interested stockholder" means a person or
entity holding the beneficial ownership of 10% or more of the voting shares of a
corporation, or an affiliate or associate thereof. A corporation may not engage
in a "combination" within three years after the interested stockholder acquires
his shares unless the combination or purchase is approved by the board of
directors before the interested stockholder acquired such shares. If approval is
not obtained, after the expiration of the three-year period, the business
combination may be consummated with the approval of the board of directors or a
majority of the voting power held by disinterested stockholders, or if the
consideration to be paid by the interested stockholder is at least equal to the
greater of (i) the highest price per share paid by the interested stockholder
within the three years immediately preceding the date of the announcement of the
combination or in the transaction in which he became an interested stockholder,
whichever is higher, (ii) the market value per common share on the date of
announcement of the combination or the date the interested stockholder acquired
the shares, whichever
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is higher, or (iii) if higher for the holders of preferred stock, the highest
liquidation value of the preferred stock. Nevada law does not require a tender
offer or to file a registration statement or information statement with the
state of Nevada.
Appraisal Rights
Delaware. Under the DGCL, except as otherwise provided by the DGCL,
shareholders of a constituent corporation in a merger or consolidation have the
right to demand and receive payment of the fair value of their stock in a merger
or consolidation. However, except as otherwise provided by the DGCL,
shareholders do not have appraisal rights in a merger or consolidation if, among
other things, their shares are:
o listed on a national securities exchange or designated as a
national market system security on an inter-dealer quotation
system by the National Association of Securities Dealers, Inc.
(the "NASD"); or
o held of record by more than 2,000 shareholders;
and, in each case, the consideration such shareholders receive for their shares
in a merger or consolidation consists solely of:
o shares of stock of the corporation surviving or resulting from
such merger or consolidation;
o shares of stock of any other corporation that at the effective
date of the merger or consolidation will be either listed on a
national securities exchange, or designated as a national
market system security on an inter-dealer quotation system by
the NASD, which is expected to be true in the case of both
Class A Common Stock and Class B Common Stock to be issued
pursuant to the merger, or held of record by more than 2,000
shareholders;
o cash in lieu of fractional shares of the corporations
described in the two immediately preceding bullet points; or
o any combination of shares of stock and cash in lieu of
fractional shares described in the three immediately preceding
bullet points.
New York. Shareholders of a New York corporation have the right to
dissent and receive payment of the fair value of their shares, except as
otherwise provided by the NYBCL, in the event of certain amendments or changes
to the certificate of incorporation adversely affecting their shares, certain
mergers or consolidations, certain sales, leases, exchanges or other
dispositions of all or substantially all the corporation's assets and certain
share exchanges.
Nevada. A stockholder of a Nevada corporation, with certain exceptions,
has the right to dissent from, and to obtain payment of the fair value of his
shares in the event of:
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o consummation of a plan of merger to which the corporation is a
party and to which such shareholder would have had a right to
vote,
o consummation of a plan of exchange to which the corporation is
a party as the corporation whose shares will be acquired, if
the stockholder is entitled to vote on the plan, and
o any corporate action taken pursuant to a vote of the
stockholders to the extent that the articles of incorporation,
bylaws or a resolution of the board of directors provides that
voting or non-voting stockholders are entitled to dissent and
obtain payment for their shares.
The NRS provides that unless a corporation's articles of incorporation
provide otherwise, which Global Articles do not, a stockholder does not have
dissenters' rights with respect to a plan of merger or share exchange if the
shares held by the stockholder are either listed on a national securities
exchange, designated as a national market system security on an interdealer
quotation system by the NASD, or held of record by 2,000 or more stockholders. A
stockholder of record of a Nevada corporation may assert dissenter's rights as
to less than all of the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenter's rights. In such event, the stockholder's rights shall be
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
See "Proposal 2 - Adoption of the GDIS Asset Purchase Agreement--Appraisal
Rights."
Amendments To Charters
Under the DGCL, unless the certificate of incorporation requires a
greater vote, a proposed amendment to the certificate of incorporation requires
an affirmative vote of a majority of the voting power of the outstanding stock
entitled to vote thereon and a majority of the voting power of the outstanding
stock of each class entitled to vote thereon. The Superus Certificate of
Incorporation requires the affirmative vote of 66 2/3% of the total voting power
of then-outstanding Superus voting securities, voting together as a single
class, to approve any amendment, alteration or repeal of any provision of the
Superus Certificate of Incorporation or the addition or insertion of other
provisions therein. The approval of the holders of a majority of the outstanding
shares of any class of capital stock of a corporation, voting separately as a
class, is required under the DGCL to approve a proposed amendment to a
corporation's certificate of incorporation, whether or not entitled to vote on
such amendment by the certificate of incorporation, if the amendment would
increase or decrease the aggregate number of authorized shares of such class
(except as provided in the last sentence of this paragraph), increase or
decrease the par value of the shares of such class, or alter or change the
powers, preferences or special rights of the shares of such class so as to
affect them adversely. For this purpose, if a proposed amendment would alter or
change the powers, preferences or special rights of one or more series of any
class so as to affect them adversely, but would not so affect the entire class,
then only the shares of the series so affected by the amendment would be
entitled to vote as a separate class on the amendment. Accordingly, a proposed
amendment the adverse
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effect of which on the powers, preferences or special rights of any series of
common stock does not differ from its adverse effect on the powers, preferences
or special rights of any other series of common stock would not entitle such
series to vote as a class separately from the other series of common stock. The
authorized number of shares of any class of stock may be increased or decreased
(but not below the number of shares of such class outstanding) by the requisite
vote described above if so provided in the original certificate of incorporation
or in any amendment thereto that created such class of stock or that was adopted
prior to the issuance of any shares of such class, or in an amendment authorized
by a majority vote of the holders of shares of such class.
Under the NYBCL, amendments to a certificate of incorporation generally
must be approved by vote of a majority of all outstanding shares entitled to
vote thereon at a meeting of shareholders. The approval of a majority of the
votes of all outstanding shares of any class of capital stock of a corporation,
voting separately as a class, is required to approve a proposed amendment to a
corporation's certificate of incorporation, whether or not such holders are
otherwise entitled to vote on such amendment by the certificate of
incorporation, that:
o would decrease the par value of the shares of such class,
change any shares of such class into a different number of
shares of the same class or into the same or a different
number of shares of a different class, alter or change the
designation, relative rights, preferences or limitations of
the shares of such class,
o including the provision of new conversion rights or the
alteration of any existing conversion rights, so as to affect
them adversely;
o would exclude or limit the voting rights of such shares,
except as such rights may be limited by voting rights given to
new shares then being authorized of any existing or new class
or series of shares; or
o would subordinate their rights by authorizing shares having
preferences superior to the rights of such existing shares.
For this purpose, if a proposed amendment would have any of the effects
listed in the immediately preceding sentence on one or more series of any class
so as to affect them adversely, but would not so affect the entire class, then
only the shares of the series so affected by the amendment would be entitled to
vote as a separate class on the amendment.
An amendment to a Nevada corporation's articles of incorporation must
be approved by the corporation's stockholders. Under the NRS, unless a Nevada
corporation's articles of incorporation or its board of directors require a
greater vote, an amendment to a Nevada corporation's articles of incorporation
must generally be approved by a majority of the votes entitled to be cast on the
amendment. If such amendments would increase or decrease the number of
authorized shares of any class or series or the par value of such shares or
would adversely the shares of such class or series, a majority of the
outstanding stock of such class or series would also have to approve the
amendment. The Global Articles do not include any provision requiring greater
than a majority of votes to amend.
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Amendments To By-Laws
Under the DGCL, the power to adopt, alter and repeal by-laws is vested
in the shareholders, except to the extent that a corporation's certificate of
incorporation vests concurrent power in the board of directors or the By-Laws
state otherwise. The Superus Certificate of Incorporation provides that, subject
to the rights of the holders of any class of Superus preferred stock, the
affirmative vote of 66 2/3% of the total voting power of then-outstanding
Superus voting securities, voting together as a single class, is required to
approve the adoption, amendment or repeal of any provision of the Superus
By-Laws. The Superus By-Laws may be amended by the shareholders of Superus at
any meeting, or by the Superus Board at any meeting by a majority vote of the
full Superus Board.
Under the NYBCL, except as otherwise provided in the certificate of
incorporation, by-laws may be amended, repealed or adopted by a majority of the
votes cast by the shares at the time entitled to vote in the election of any
directors. When so provided in the certificate of incorporation or a by-law
adopted by the shareholders, by-laws also may be amended, repealed or adopted by
the board of directors by such vote as may be therein specified, which vote may
be greater than the vote otherwise prescribed by the NYBCL, but any by-law
adopted by the board of directors may be amended or repealed by the shareholders
entitled to vote thereon as provided by the NYBCL.
Under the NRS, except as otherwise provided in the certificate of
incorporation, by-laws may be amended, repealed or adopted by the Board of
Directors.
No Preemptive Rights
Under the DGCL, a shareholder does not possess preemptive rights unless
such rights are specifically granted in the certificate of incorporation. The
Superus Certificate of Incorporation does not provide for preemptive rights to
shareholders to subscribe for any additional shares of capital stock or other
obligations convertible into or exercisable for shares of capital stock that may
be issued by Superus.
Under the NYBCL, except as otherwise provided in the NYBCL or in the
certificate of incorporation, the holders of equity shares are granted certain
preemptive rights. The Surge Certificate of Incorporation provides that no
holder of Surge existing common stock has any preemptive rights to purchase any
shares or other securities of Surge.
Under the NRS, unless otherwise provided in the certificate of
incorporation, shareholders do not have preemptive rights. Global's certificate
of incorporation does not allow for preemptive rights.
Duration of Proxies
Under the DGCL, no proxy is valid more than three years after its date
unless otherwise provided in the proxy. A proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally.
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Under the NYBCL, no proxy is valid more than 11 months after its date
unless otherwise provided in the proxy. Irrevocable proxies may be created for:
o a pledgee;
o a person who has purchased or agreed to purchase the shares;
o a creditor of the corporation who extends credit in
consideration of the proxy;
o a person who has contracted to perform services as an officer
of the corporation if a proxy is required by the employment
contract; and
o a person designated under a voting agreement.
Under the NRS, no proxy will be valid for more than six months after
its creation unless the stockholder specifies in the proxy the length of time
that it will be valid, which may not exceed seven years from the date of its
creation.
Shareholder Action
Under both the DGCL and the NRS, unless otherwise provided in the
certificate of incorporation, any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting, without prior notice and
without a vote, if a written consent or consents setting forth the action taken
is signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote upon such action were present and
voted. The Superus Certificate of Incorporation provides that, action required
to be taken or that may be taken at any annual or special meeting of the
shareholders may be taken without a meeting, by written consent of the
shareholders having not less than the minimum number of votes required.
The NYBCL provides that shareholder action may be taken without a
meeting upon the written consent of the holders of all outstanding shares
entitled to vote, and also allows, if the certificate of incorporation so
provides, shareholder action without a meeting upon the written consent of
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize such action at a meeting at which all
shares entitled to vote thereon were present and voted. The Surge Certificate of
Incorporation does contain such a provision.
Under both the NRS and DGCL, directors are generally elected by a
plurality of the votes cast by the stockholders entitled to vote at a
stockholders' meeting at which a quorum is present. With respect to matters
other than the election of directors, unless a greater number of affirmative
votes is required by the statute or the corporation's articles or certificate of
incorporation, if a quorum exists, action on any matter is generally approved by
the stockholders if the votes cast by the holders of the shares represented at
the meeting and entitled to vote on the matter favoring the action exceed the
votes cast opposing the action. In the case of a merger of a Nevada corporation,
the affirmative vote of the holders of a majority of the issued and outstanding
shares entitled to vote is required under the NRS.
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Neither the Global Articles or Global By-Laws nor Surge's Certificate
of Incorporation or By-Laws include a provision requiring a greater vote on any
matter than required by the NRS.
The Global Articles and Global By-Laws both provide that any action
required or permitted to be taken by the Board of Directors or the
"stockholders" at a meeting may be taken without a meeting if consent in writing
setting forth the action so taken, shall be signed by all directors or
"stockholders", as the case may be.
Under each of the DGCL, the NRS and the NYBCL, unless otherwise
provided in a corporation's articles or certificate of incorporation or bylaws,
a majority of shares entitled to vote on a matter constitutes a quorum at a
meeting of stockholders. The NRS and the NYBCL provide that the articles of
incorporation or bylaws may provide for a greater or lesser quorum requirement,
except that in New York, the quorum may not be less than one-third of the shares
entitled to vote. The Global Articles provide that the presence in person or by
proxy of 30% of the shares entitled to vote shall constitute a quorum. Global's
By-Laws, however provides that presence in person or by proxy of one third (33
1/3%) of the shares entitled to vote shall constitute a quorum.
Nomination Procedures and Shareholder Proposals
Subject to the rights of any class or series of Superus Preferred
Stock, the Superus By-Laws require that written notice of the intent to make a
nomination for the election of directors at a meeting of shareholders and that
contains certain other specified information must be received by Superus not
later than (a) 90 days in advance of such meeting, with respect to an election
of directors to be held at an annual meeting of shareholders, and (b) the close
of business on the seventh day following the day on which notice of such meeting
is first given to shareholders, with respect to an election of directors to be
held at a special meeting of shareholders. In addition, in order to cause
Superus to include a proposal regarding matters other than the election of
directors, a shareholder must comply with the requirements of SEC Rule 14a-8.
Surge's By-Laws provide that shareholder meetings may only be called
upon written request by holders of 50% of the outstanding common stock upon
request to the Secretary of Surge. Additionally, Surge's By-Laws provide that
notice of any such meeting must be given not less than ten and not more than 50
days prior to such meeting. The notice must state the date, place, time and
purpose of such meeting. Surge's By-Laws do not provide for procedures for
calling and conduct of meetings by Shareholders even though the NYBCL permits
such.
Nevada law does not provide procedures for the nomination for election
of directors by stockholders or the submission of other stockholder proposals at
an annual or special meeting of stockholders. Global's By-Laws and Articles do
not provide for Stockholder proposals. Global's By-Laws also provide that a
special meeting of stockholders may be called by stockholders holding shares
which are entitled to cast not less than ten percent of the votes at a meeting.
Nevada law requires that a notice of stockholders meeting be delivered to
stockholders not less than ten days nor more than 60 days before the meeting and
the Global's Bylaws further limit this to require notice not less than ten nor
more than 30 days before the meeting. The notice must state the place, day, hour
and purpose of the meeting.
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Special Shareholder Meetings
The DGCL provides that a special meeting of shareholders may be called
by the board of directors or by such person or persons as may be authorized by
the certificate of incorporation or by the by-laws. The Superus By-Laws provide
that a special meeting of shareholders will be held at any time, subject to the
rights of the holders of any class or series of Superus Preferred Stock, upon
the call of the Secretary of Superus upon (a) the written request of the holders
of not less than 50% of the total voting power of the outstanding Superus voting
securities or (b) the request of at least 75% of the members of the Superus
Board of Directors then in office.
The NYBCL provides that, if, for a period of one month after the date
fixed by or under the by-laws for the annual meeting of shareholders or, if no
date has been so fixed, for a period of 13 months after the last annual meeting,
there is a failure to elect a sufficient number of directors to conduct the
business of the corporation, the board of directors shall call a special meeting
for the election of directors. If such special meeting is not called by the
board of directors within two weeks after the expiration of such period or if it
is called but there is a failure to elect such directors for a period of two
months after the expiration of such period, holders of 10% of the votes of the
shares entitled to vote in an election of directors may, in writing, demand the
call of a special meeting for the election of directors.
The NYBCL provides that special meetings of shareholders may be called
by the board of directors and by such persons as may be authorized in the
certificate of incorporation or the by-laws. The Surge By-Laws provide that
special meetings of the shareholders may be called at any time by the Chairman
of the Surge Board if one has been elected, by the Surge Board or by the
President and shall be called by the Secretary, upon a request signed by
shareholders representing at least fifty percent (50%) of the outstanding Surge
shares entitled to vote at such meeting.
Stockholder Inspection of Books and Records.
Pursuant to Section 78.105 of the NRS, a stockholder of record for at
least six months immediately preceding his demand, or any person holding at
least 5% of all outstanding shares, or authorized in writing by at least 5% of
all outstanding shares, is entitled to inspect a list of the names of the
corporation's stockholders during usual business hours, if the stockholder gives
at least five business days' prior written notice to the corporation. The
stockholders may, unless denied for cause as stated below, also copy such
records. Section 78.257 of the NRS also permits stockholders of record,
(combined or individually) of 15% or more of the outstanding stock, upon 5 days
written demand, the right to inspect during normal business hours, the books and
financial records of the corporation, to make extracts therefrom and to conduct
an audit of such records. This right may be limited by a corporation's bylaws or
articles of incorporation. The NRS also provides that a corporation may deny any
demand for inspection if the stockholder refuses to furnish the corporation with
an affidavit that such inspection is not desired for a purpose which is in the
interest of a business or object other than the business of the corporation and
that such stockholder has not previously sold or offered for sale any list of
stockholders of the corporation or any other corporation. The NRS also provides
that the corporation may charge to recover costs of copying of providing any
such records.
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Under both the DGCL and the NYBCL, any shareholder may, upon five days
written demand, inspect, in person or by agent or attorney, the stockholder
ledger or other record of shareholders during usual business hours. The written
demand under the DGCL must be under oath and state the purpose of such an
inspection. The shareholder may, unless denied for cause as stated below, copy
such records. The DGCL also allows shareholders, by the same written demand, to
inspect the corporation's other books and records. Under the NYBCL, a
corporation may deny a demand for inspection if the shareholder refuses to
furnish the corporation with an affidavit that such inspection is not desired
for a purpose which is in the interest of a business or object other than the
business of the corporation and that such shareholder has not within five years
sold or offered for sale any list of shareholders of any corporation of any type
or kind.
Cumulative Voting
Under both the DGCL and the NRS, the certificate of incorporation may
provide that at all elections of directors, or at elections held under specified
circumstances, each shareholder is entitled to cumulate such shareholder's
votes. The Superus Certificate of Incorporation does not provide for cumulative
voting for the election of directors.
Under the NYBCL, the certificate of incorporation may provide that in
all elections of directors each shareholder is entitled to cumulate such
shareholder's votes. The Surge Certificate of Incorporation does not contain
such a provision.
Size of the Board of Directors and Classification of the Superus Board
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. The DGCL permits the certificate of incorporation
of a corporation or a by-law adopted by the shareholders to provide that
directors be divided into one, two or three classes, with the term of office of
one class of directors to expire each year. The DGCL also permits the
certificate of incorporation to confer upon holders of any class or series of
stock the right to elect one or more directors to serve for such terms and have
such voting powers as are stated in the certificate of incorporation. The terms
of office and voting powers of directors so elected may be greater or less than
those of any other director or class of directors.
The Superus By-Laws provide for a Superus board of not less than three
members, to be elected for a one-year term. The exact number of directors may be
fixed from time to time, by the Superus Board by resolution.
Subject to certain limitations, the NYBCL permits the number of
directors of a corporation to be fixed by its by-laws, by action of the
shareholders or by action of the board of directors under the specific provision
of a by-law adopted by the shareholders. At each annual meeting of the
shareholders, directors are to be elected to hold office until the next annual
meeting, except as described below for corporations with classified boards. In
addition, the NYBCL permits the certificate of incorporation or the specific
provisions of a by-law adopted by the shareholders to provide that directors be
divided into either two,
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three or four classes. All classes must be as nearly equal in number as
possible. The term of office of one class of directors shall expire each year,
with the terms of office of no two classes expiring the same year.
The Surge Certificate of Incorporation provides that the number of
directors shall be as provided for in the Surge By-Laws. The Surge By-Laws
provide that the number of directors shall be not less than three (unless there
are fewer than three shareholders) and the number of directors may be fixed from
time to time and determined by the vote of a majority of the entire Surge Board
or by the shareholders. Surge does not have a classified board of directors.
The NRS provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. The Global Articles and
Global By-Laws do not provide for a classified board.
Removal of Directors and Filling Vacancies
Both the NRS and the DGCL generally provide that all vacancies on the
board of directors, including vacancies caused by an increase in the number of
authorized directors, may be filled by a majority of the remaining directors,
even if they are less than a quorum.
The DGCL provides that a director or directors may be removed with or
without cause by the holders of a majority in voting power of the shares then
entitled to vote at an election of directors, except that (a) members of a
classified board of directors may be removed only for cause, unless the
certificate of incorporation provides otherwise, and (b) in the case of a
corporation having cumulative voting, if less than the entire board of directors
is to be removed, no director may be removed without cause if the votes cast
against such director's removal would be sufficient to elect such director if
then cumulatively voted at an election of the entire board of directors or of
the class of directors of which such director is a part.
The Superus By-Laws provide that directors may be removed only for
cause (as defined) upon the affirmative vote of 66 2/3% of the total voting
power of then-outstanding shares of Class A Common Stock, Class B Common Stock
and any class or series of Superus Preferred Stock entitled to vote in an
election of directors, voting together as a single class.
The NYBCL provides that any or all of the directors may be removed for
cause by vote of the shareholders, and, if the certificate of incorporation or
the specific provisions of a by-law adopted by the shareholders so provides,
directors may be removed by action of the board of directors. If the certificate
of incorporation or the by-laws so provide, any or all of the directors may be
removed without cause by vote of the shareholders. The removal of directors,
with or without cause, is subject to the following: (a) in the case of a
corporation having cumulative voting, no director may be removed when the votes
cast against such director's removal would be sufficient to elect the director
if voted cumulatively and (b) if a director is elected by the holders of shares
of any class or series, such director may be removed only by the applicable vote
of the holders of the shares of that class or series voting as a class. An
action to procure a judgment removing a director for cause may be brought by the
attorney general or by the holders of 10% of the outstanding shares, whether or
not entitled to vote.
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The Surge By-Laws provide that directors may be removed without cause
at any time by action of the majority of the shareholders at a special meeting,
or that directors may be removed by a majority of the Surge Board at a special
meeting.
The NRS provides that any director may be removed from office by the
vote of stockholders holding not less than two-thirds of the issued and
outstanding stock entitled to vote. Stockholders may remove one or more
directors with or without cause unless articles of incorporation provide that
directors may be removed only for cause. The Global Articles include a provision
allowing the removal of directors only for cause by stockholders or by the
board, and permitting removal of directors without cause only by the
stockholders.
Vacancies
Under the DGCL, unless otherwise provided in the certificate of
incorporation or the by-laws, vacancies on a board of directors and newly
created directorships resulting from an increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by the sole remaining director, provided that, in the
case of a classified board of directors, such vacancies and newly created
directorships may be filled by a majority of the directors elected by such class
or by the sole remaining director so elected. In the case of a classified board
of directors, directors elected to fill vacancies or newly created directorships
shall hold office until the next election of the class for which such directors
have been chosen, and until their successors have been duly elected and
qualified. In addition, if, at the time of the filling of any such vacancy or
newly created directorship, the directors in office constitute less than a
majority of the whole board of directors (as constituted immediately prior to
any such increase), the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the total number of
outstanding shares entitled to vote for such directors, summarily order an
election to fill any such vacancy or newly created directorship, or replace the
directors chosen by the directors then in office.
The Superus By-Laws provide that, subject to the rights of the holders
of any class or series of Superus Preferred Stock, any vacancies on the Superus
Board caused by death, resignation, removal or otherwise and newly created
directorships resulting from an increase in the number of directors, shall be
filled by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum, or by the sole remaining director. The
Superus By-Laws also provide that any directors chosen to fill a vacancy on the
Superus Board or newly created directorship will serve for the remainder of the
full term of the class for which such director was chosen and until his
successor shall be duly elected and shall have qualified. Under the NYBCL, newly
created directorships resulting from an increase in the number of directors and
vacancies occurring on the board of directors for any reason, except the removal
of directors without cause, may be filled by vote of the board of directors.
Unless the certificate of incorporation or by- laws provide otherwise, a vacancy
in a directorship elected by holders of a particular class of shares shall be
filled by a vote of the other directors elected by holders of the same class of
shares. However, the certificate of incorporation or by-laws may provide that
such newly created directorships or vacancies are to be filled by vote of the
shareholders. Unless the certificate of incorporation or the specific provisions
of a by-law adopted by the shareholders provide that the board of directors may
fill vacancies occurring on the board of directors by reason of the removal of
directors without cause, such vacancies may be filled only by vote of the
shareholders. A director elected to fill a vacancy, unless elected by the
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shareholders, will hold office until the next meeting of shareholders at which
the election of directors is in the regular order of business and until his or
her successor has been elected and qualified. The Surge By- Laws provide for the
removal of directors without cause upon a majority vote of shareholders or upon
a majority vote of the remaining Board of Directors. The Surge By-Laws provide
that any vacancy on the Surge Board may be filled by a majority vote of the
remaining directors, though less than a quorum.
The NRS provides that a vacancy on the board of directors may generally
be filled by the affirmative vote of a majority of the remaining directors,
though constituting less than a quorum of the board of directors, unless the
articles of incorporation provide otherwise. The Global Articles do not alter
this provision, but the Global By-Laws provide that vacancies created by reason
of removal of directors without cause shall be filled by vote of the
stockholders only and permit removal of directors by the stockholders for cause
or otherwise.
Indemnification of Directors and Officers
Delaware law generally permits a corporation to indemnify its directors
and officers against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with a third-party action, other
than a derivative action, and against expenses actually and reasonably incurred
in the defense or settlement of a derivative action, provided that there is a
determination that the individual acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation. Such
determination shall be made, in the case of an individual who is a director or
officer at the time of such determination:
o by a majority of the disinterested directors, even though less
than a quorum;
o by a committee of such directors designated by a majority vote
of such directors, even though less than a quorum;
o by independent legal counsel, regardless of whether a quorum
of disinterested directors exists; or
o by a majority vote of the shareholders, at a meeting at which
a quorum is present.
Without court approval, however, no indemnification may be made in
respect of any derivative action in which such individual is adjudged liable to
the corporation.
Delaware law requires indemnification of directors and officers for
expenses relating to a successful defense on the merits or otherwise of a
derivative or third-party action.
Delaware law permits a corporation to advance expenses relating to the
defense of any proceeding to directors and officers contingent upon such
individuals' commitment to repay any advances unless it is determined ultimately
that such individuals are entitled to be indemnified.
Under Delaware law, the rights to indemnification and advancement of
expenses provided in the law are non-exclusive, in that, subject to public
policy issues, indemnification and advancement of
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expenses beyond that provided by statute may be provided by By-law, agreement,
vote of shareholders, disinterested directors or otherwise.
The Superus Certificate of Incorporation provides that Superus officers
and directors shall be indemnified to the fullest extent permitted by applicable
law, and that Superus shall pay the expenses incurred in defending any
proceeding in advance of its final disposition; provided, however, that the
payment of expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon the receipt of an
undertaking by the director or officer to repay all amounts advanced if it
should be ultimately determined that the director or officer is not entitled to
be indemnified. Superus intends to enter into indemnification agreements with
each of its directors.
Under the NYBCL, a corporation may indemnify its directors and officers
made, or threatened to be made, a party to any action or proceeding, except for
shareholder derivative suits, if such director or officer acted in good faith,
for a purpose that he or she reasonably believed to be in or, in the case of
service to another corporation or enterprise, not opposed to the best interests
of the corporation, and, in criminal proceedings, in addition, had no reasonable
cause to believe his or her conduct was unlawful. In the case of shareholder
derivative suits, the corporation may indemnify a director or officer if he or
she acted in good faith for a purpose that he or she reasonably believed to be
in or, in the case of service to another corporation or enterprise, not opposed
to the best interests of the corporation, except that no indemnification may be
made in respect of (a) a threatened action, or a pending action that is settled
or otherwise disposed of, or (b) any claim, issue or matter as to which such
individual has been adjudged to be liable to the corporation, unless and only to
the extent that the court in which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines, upon application,
that, in view of all the circumstances of the case, the individual is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
Any individual who has been successful on the merits or otherwise in
the defense of a civil or criminal action or proceeding will be entitled to
indemnification. Except as provided in the preceding sentence, unless ordered by
a court pursuant to the NYBCL, any indemnification under the NYBCL pursuant to
the above paragraph may be made only if authorized in the specific case and
after a finding that the director or officer met the requisite standard of
conduct by the disinterested directors if a quorum is available, or, if such a
quorum so directs or is unavailable, (a) the board of directors upon the written
opinion of independent legal counsel or (b) the shareholders.
The indemnification described above under the NYBCL is not exclusive of
other indemnification rights to which a director or officer may be entitled,
whether contained in the certificate of incorporation or by-laws, or, when
authorized by such certificate of incorporation or by-laws, (a) a resolution of
shareholders, (b) a resolution of directors or (c) an agreement providing for
indemnification, provided that no indemnification may be made to or on behalf of
any director or officer if a judgment or other final adjudication adverse to the
director or officer establishes that his or her acts were committed in bad faith
or were the result of active and deliberate dishonesty and were material to the
cause of action so adjudicated, or that he or she personally gained in fact a
financial profit or other advantage to which he or she was not legally entitled.
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The Surge By-Laws provide that Surge is authorized to the fullest
extent permitted by applicable law, to provide indemnification and to advance
expenses to its directors and officers in respect of claims, actions, suits or
proceedings based upon, arising from, relating to or by reason of the fact that
any such director or officer serves or served in such capacity with the
corporation or at the request of Surge in any capacity with any other
enterprise. Surge has entered into indemnification agreements with certain of
its officers and directors in accordance with the Surge By-Laws.
Under the NRS, a corporation may generally indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement of any proceedings (other than
derivative actions), investigations, whether civil or administrative or criminal
in nature, if they acted in good faith on behalf of the corporation and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. Similar standards are
applicable in derivative actions, except that indemnification may be made only
for (1) reasonable expenses (including attorneys' fees) and certain amounts paid
in settlement, and (2) in the event the person seeking indemnification has been
adjudicated liable, amounts deemed proper, fair and reasonable by the
appropriate court upon application thereto. The NRS provides that to the extent
that such persons have been successful in defense of any proceeding, they must
be indemnified by the corporation against expenses. Generally, the termination
of any action, suit or proceeding by judgment, order, settlement, conviction
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that such person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best intent of the
corporation, and with respect to a criminal investigation, or action, he had
reasonable case to believe that his conduct was lawful. If a corporation does
not so indemnify such persons, they may seek, and a court may order,
indemnification under certain circumstances even if the board of directors or
stockholders of the corporation have determined that the persons are not
entitled to indemnification.
In addition, under both acts, expenses incurred by an officer or
director in connection with a proceeding may be paid by the corporation in
advance of the final disposition, upon receipt of an undertaking by such
director or officer to repay such amount if he is ultimately found not to be
entitled to indemnification by the corporation.
Under the NRS, there is no statutory requirement to provide such
indemnification provisions in the Articles of Incorporation or the By-Laws.
Neither the Global By-Laws nor the Global Articles contain any language that
would otherwise limit such indemnification.
The Global By-Laws provide that amendment or repeal of the
indemnification provisions of the Global By-Laws would be on a prospective basis
only, and neither repeal nor modification of such provisions would adversely
affect rights to indemnification in effect at the time of any act or omission
which is the subject of a proceeding against an indemnified person. The
indemnification provisions of the Global By-Laws are intended to apply to
proceedings arising from acts or omissions occurring before or after their
respective adoption or execution.
New York law, Nevada law, Delaware Law and the By-Laws of Superus,
Surge and Global may permit indemnification for liabilities arising under the
Securities Act or the Securities Exchange Act (the
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"Exchange Act"). The Board of Directors of all entities herein has been advised
that, in the opinion of the SEC, indemnification for liabilities arising under
the Securities Act or the Exchange Act is contrary to public policy and is
therefore unenforceable absent a decision to the contrary by a court of
appropriate jurisdiction.
Limitation of Personal Liability of Directors
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. However, no such provision can eliminate or limit the
liability of a director for:
o any breach of the director's duty of loyalty to the
corporation or its shareholders;
o acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of the law;
o violation of certain provisions of the DGCL;
o any transaction from which the director derived an improper
personal benefit; or
o any act or omission prior to the adoption of such a provision
in the certificate of incorporation.
The Superus Certificate of Incorporation provides that, to the fullest
extent permitted by the DGCL, a director of Superus shall not be liable to
Superus or any of its shareholders for monetary damages for breach of fiduciary
duty as a director. The Superus Certificate of Incorporation also provides,
that, to the fullest extent permitted by the DGCL, a director and officer and
certain employees acting on their behalf, shall be indemnified against any
action resulting from their duties on behalf of Superus.
The NYBCL provides that a corporation's certificate of incorporation
may contain a provision eliminating or limiting the personal liability of
directors to the corporation or its shareholders for damages for any breach of
duty in such capacity. However, no such provision can eliminate or limit the
liability of any director:
o if a judgment or other final adjudication adverse to such
director establishes that such director's acts or omissions
were in bad faith or involved intentional misconduct or a
knowing violation of law, that the director personally gained
in fact a financial profit or other advantage to which such
director was not legally entitled, or that the director's acts
violated certain provisions of the NYBCL;
o for any act or omission prior to the adoption of such a
provision in the certificate of incorporation.
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The Surge Certificate of Incorporation provides that no director will
be personally liable to Surge or any of its shareholders for damages for any
breach of duty as a director; provided, however, that the liability of a
director will not be eliminated or limited:
o if a judgment or other final adjudication adverse to him or
her establishes that his or her acts or omissions were in bad
faith or involved intentional misconduct or a knowing
violation of law, that he or she personally gained in fact a
financial profit or other advantage to which he or she was not
legally entitled, or that his or her acts violated Section 719
of the NYBCL (which includes declaration of dividends,
purchase of capital stock, distribution of assets to
shareholders after dissolution of the corporation and loans to
directors to the extent contrary to New York law); or
o for any act or omission prior to the adoption of this
provision by the shareholders of Surge.
Section 78.037 of the NRS allows a corporation to provide in its
Articles of Incorporation that a director or officer will not be personally
liable for monetary damages to the corporation or its stockholders for breach of
fiduciary duty as a director or officer, except that such provision must not
eliminate or limit the liability of a director or officer for (i) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law; or (ii) the payment of distributions in violation of Section 78.300 of the
NRS. Global's Articles of Incorporation do not currently contain such a
provision.
Derivative Actions
Under each of the Nevada Rules of Civil Procedure (the "Nevada Rules"),
the DGCL, and the NYBCL, a person may not bring a derivative action unless the
person was a stockholder of the corporation at the time of the challenged
transaction or unless the person acquired the shares by operation of law from a
person who was a stockholder at such time. The Nevada Rules, the NYBCL and Rule
23.1 of the Delaware Court of Chancery Rules, also provide that a complaint in a
derivative proceeding must be verified and must allege with particularity the
efforts, if any, made by the plaintiff to obtain the desired action, and the
reasons for his failure to obtain the action he desires or for not making the
effort. The Nevada Rules also provide that a derivative action may not be
maintained if it appears that the plaintiff does not fairly and adequately
represent the interests of stockholders. Both the NRS, the NYBCL, and the
Delaware Court of Chancery Rules, also provide that an action shall not be
dismissed or compromised without the approval of the court having jurisdiction
of the action.
Distributions and Redemptions.
A Nevada corporation may make distributions to its stockholders as long
as, after giving effect to such distribution (1) the corporation would be able
to pay its debts as they become due in the usual course of business and (2) the
corporation's total assets would not be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise, which
Global's Articles of Incorporation do not) the amount that would be needed if
the corporation were to be dissolved at the time of the distribution to satisfy
the preferential rights upon dissolution of stockholders whose preferential
rights are superior to those receiving the distribution. Such determinations may
be made by the board of directors based on financial statements, fair market
valuation of any other reasonable method. A New York corporation may
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declare, pay or make dividends and other distributions to its shareholders
except when currently the corporation is insolvent or would thereby be made
insolvent, or when the declaration, payment or distribution would be contrary to
any restrictions in its Certificate of Incorporation. In addition, the NYBCL
provides that dividends may generally be declared and paid and other
distributions made out of surplus only, so that the net assets of the
corporation remaining after such payment shall at least equal the amount of its
stated capital. Under both the NRS and NYBCL, a corporation's redemption of its
own capital stock is subject to the same restrictions as apply to a
distribution. Neither Global's Articles, nor Surge's Certificate of
Incorporation contain language that otherwise restrict such distributions.
Additionally, the NYBCL provides that shareholders may request, in
writing, an annual balance sheet and profit and loss statement for the prior
year, as well as contain other interim financial statements if they were mailed
to shareholders or otherwise made publicly available.
Under the DGCL, a corporation may only pay dividends out of surplus or
net profit. Additionally, under the DGCL, a corporation may not redeem any
shares is such redemption would cause an impairment of its capital.
Loans to Directors and Officers
Under Section 715 of the NYBCL, a corporation may make a loan or
guaranty to directors only if such loan or guaranty is approved by a vote of
such corporation's shareholders not including any votes of shares held by such
interested officer or director. The NYBCL provides that such an approval may be
made by the board, if the Certificate of Incorporation so permits.
Under Nevada law, a corporation may make a loan or guaranty to
directors or officers if (i) the financial interest is known or disclosed to the
board of directors or committee and noted in the minutes, and the board or
committee authorizes the transaction in good faith by a majority vote sufficient
for the purpose without counting the vote of the interested director; (ii) the
financial interest is known or disclosed to the stockholders, and the
stockholders authorize the transaction by a vote of stockholders holding a
majority of the voting power; or (iii) the transaction is fair to the
corporation at the time it is authorized or approved.
Under the DGCL, a corporation may lend money to, or guarantee any
obligation of, an officer, including an officer who is a director, when it is
deemed, in the judgment of the Board of Directors, to be reasonably expected to
benefit the corporation.
The foregoing summary does not purport to be a complete statement of
the rights of holders of Superus Common Stock, Surge Common Stock and Global
Common Stock under, and is qualified in its entirety by reference to Delaware
law, New York law and Nevada law, respectively, and the Certificate of
Incorporation and By-Laws of Superus, Surge and Global.
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SURGE--MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the materials contained in this
Management's Discussion and Analysis 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 Surge's historical
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 Surge's filings with the SEC. Although
forward-looking statements in this Report reflect the good faith judgment of
Surge's management, such statements can only be based on facts and factors
currently known by Surge. 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 Surge in this proxy statement and prospectus, as an attempt
to advise interested parties of the risks and factors that may affect Surge's
business, financial condition and results of operations and prospects. See also
"Introductory Comment" above.
Fiscal Year Ended November 30, 1999 as Compared to Fiscal Year Ended November
30, 1998.
Net sales for Surge Components, Inc. and its subsidiary
Challenge/Surge Inc. ("Challenge") collectively for the fiscal year ended
November 30, 1999 ("Fiscal 1999") increased by $3,419,376, or 39%, to
$12,147,025, as compared to net sales of $8,727,649 for the fiscal year ended
November 30, 1998 ("Fiscal 1998"). The net sales for Surge without Challenge's
sales increased by $1,688,634, or 29%, when compared to Fiscal 1998. This growth
was attributable primarily to increased sales volumes as a result of Surge's
investment in an increased sales force. In addition, Surge's existing customers
are buying additional product lines.
Challenge's net sales increased by $1,748,760, or 60%, when compared to
Fiscal 1998. This increase was primarily attributable to the economic effect of
the shortage of electronic components in the broker distributor market in which
Surge's subsidiary, Challenge, operates in the fourth quarter 1999. This
shortage has resulted in a higher demand of electronic products in the broker
market. There can be no assurance, however, that these improving conditions will
continue in 2000.
Surge's gross profit for Fiscal 1999 increased by $1,081,174, or 54%,
as compared to Fiscal 1998. The increase in Surge's gross profit was a result of
increased sales and higher profit margins. The higher margins were primarily a
result of Surge making its operations more efficient by reducing inventory
acquisition costs. Surge is making an effort to improve the efficiency of
inventory management and has instituted a policy of increasing direct shipments
to its customer's factories overseas. This has resulted in a substantial
reduction of import related fees.
General and administrative expenses for Fiscal 1999 increased by
$312,149, or 18%, as compared to Fiscal 1998. These increases are primarily due
to costs associated with additional filings with the SEC and costs related to
the terminated merger with Orbit Network Inc. Also, the increase is due to the
hiring of additional staff such as office, purchasing and warehouse personnel.
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Selling and shipping expenses for Fiscal 1999 increased by $156,482,
or 18%, as compared to Fiscal 1998. These increases are primarily due to Surge's
commitment towards increasing sales and its related investment in additional
salespeople during Fiscal 1999. Surge is committed to increasing sales through
authorized distributors, global and domestic sales representatives, an Internet
Web site, literature, and participation in trade shows.
Interest expense for Fiscal 1999 decreased by $34,936, or 100%, as
compared to Fiscal 1998. This decrease is due to Surge not purchasing through
letters of credit and/or borrowing bankers acceptances. Surge intends to
continue utilizing letters of credit and bankers acceptances on an as needed
basis based on its cash needs.
Investment income for Fiscal 1999 decreased by $77,124, or 26%, as
compared to Fiscal 1998. This decrease is primarily due to Surge's use of
previously invested funds in its operations.
As result of the foregoing, Surge had net loss from operations and net
income of $(73,215) and $85,064 for Fiscal 1999, as compared to loss from
operations and net income of $(681,594) and $(274,166) for Fiscal 1998.
Liquidity and Capital Resources
As of November 30, 1999 Compared to November 30, 1998
Working capital decreased by $148,392 for Fiscal 1999 from $5,825,337
at November 30, 1998 to $5,676,945 at November 30, 1999. This decrease resulted
primarily from the decrease in cash and marketable securities and an increase in
accounts payable and accrued expenses. Surge's Current Ratio (current assets to
current liabilities) decreased to 4.36:1 at November 30, 1999, as compared to
5.12:1 at November 30, 1998, as a result of funds being used in operations and
increased accounts payable and accrued expenses. The average number of days to
collect receivables decreased from 57 days to 51 days. Inventory turned more in
Fiscal 1999 as a result of Surge's efficiency in managing inventory and
increased sales volumes. Working capital levels are expected to be adequate to
meet the current operating requirements of Surge.
In April 1998, Surge renewed the letter of credit agreement with its
bank through May 31,1999 allowing Surge to obtain up to $800,000 in outstanding
letters of credit and $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. Surge 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 Surge to be in compliance with certain financial ratios
including a debt to equity ratio and a minimum amount of tangible net worth. In
May 1999, the letter of credit agreement with the bank expired. Surge is
negotiating a new agreement with the bank.
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Surge 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, Surge 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. Surge renovated its current facilities during 1998 at a total cost of
$237,000. Additionally, the renovation provides additional space for test labs,
which allow Surge to provide customers with prompt information regarding the
specifications of its products and additional sales staff expected to manage
Surge's sales growth. In May 1998, Surge 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 Surge's
facilities, Surge expects to continue to incur significant operating costs.
These costs consist principally of payroll and marketing related charges. The
future profitability of Surge will therefore depend on increased future sales
levels. In March 1999, Surge opened a marketing office in Taiwan. This office
will provide marketing and customer service for the Asian market. The cost and
related expenses of this office have been minimal since Surge is utilizing the
same office space used by its supplier management group. Surge has been advised
that this facility suffered only minor damage in the September 1999 earthquake.
Surge has updated its equipment, procedures and personnel in the hopes
it will better enable itself to attract new customers as well as increase the
sales volume with its existing customers, and is seeking to expand sales to its
existing customer base by offering a broad range of complementary products. In
1997, Surge established a Web site, giving the engineering community exposure
and access to any and all information about Surge and its products, which they
would consider to include in their design. In January 2000, Surge updated its
Web site capability.
Approximately 57% and 38% of the total goods purchased by Surge in
1999 and 1998 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. However, in order for Challenge to remain
competitive, they have begun importing purchases from manufacturers in Asia. In
Fiscal 1999, this represented 16% of the total goods purchased by Challenge. In
addition approximately 12% and 4% of the 1999 and 1998 sales for Surge and
Challenge, respectively, are exported to various countries. Surge has minimized
the risk of currency fluctuations by purchasing and selling its products in
United States currency.
On December 29, 1998, Surge 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 Surge's common stock. This transaction was terminated by
Surge in August 1999.
In March 1999, the underwriters exercised a portion of their warrants
received during Surge's July 1996 Public Offering. In exchange for $8,736, the
underwriters received 54,600 Warrants. These Warrants are identical to those
issued pursuant to Surge's public offering.
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In December 1999, Surge entered into two note agreements with the bank
for aggregate borrowings of $500,000. The notes, which accrue interest at the
prime rate, were due on December 31, 1999. These notes have subsequently been
paid.
During Fiscal 1999, Surge had net cash used in operating activities of
$977,656, as compared to $168,092 provided by operating activities in Fiscal
1998. The decrease in cash used in operating activities resulted from a increase
in accounts receivable and inventory and increase in accounts payable and
accrued expenses, as partially offset by Surge's net income.
Surge had net cash used in investing activities of $266,315 for Fiscal
1999, as compared to $1,214,945 for Fiscal 1998. In October 1999, Surge lent
Global $1,000,000 the funds for which came in part from the sale of the
marketable securities. Surge reinvested dividends, pursuant to its investment
program, into marketable securities. Additionally, Surge incurred costs related
to the improvements of its current facilities.
Surge had net cash provided by financing activities of $16,361 for
Fiscal 1999, as compared to $461,620 used in financing activities for Fiscal
1998. This increase in the cash provided by financing activities was the result
of proceeds from issuance of warrants and exercised options. As a result of the
foregoing, Surge had a net decrease in cash of $1,227,610 during Fiscal 1999, as
compared to a net decrease of $1,508,473 for Fiscal 1998.
Surge expects that its cash flow from operations, current investment
program and Surge's line of credit agreement will be sufficient to meets its
current financial requirements over at least the next twelve months.
On December 8, 1999, Surge entered into an Asset Purchase Agreement
which provides for the purchase of all of the assets and assumption of certain
liabilities of Global, in exchange for approximately 23,900,000 shares of
Surge's Class B Common Stock, which will be issued as a "tracking stock" of
Global's business if the GDIS Acquisition is approved and consummated. The
Assets of Global will be held by GDIS, a wholly owned Delaware subsidiary.
Additionally, on February 16, 2000, Surge entered into a Merger Agreement and
Plan of Reorganization to acquire MailEncrypt.com, Inc. ("Mail") the terms of
which provide for the issuance of 1,821,400 shares of Superus's Class B Common
Stock to the four shareholders of Mail, and the merger of Mail into a wholly
owned subsidiary of Surge. The merger of Mail into Surge is also to be
conditioned on the consummation of the GDIS Acquisition. The Class B Common
Stock will also track the business of Mail.
Additionally, Surge has incurred debt in the amount of approximately
$7.0 million as a result of a private offering of Convertible Promissory Notes
in December 1999 through February 2000. The Convertible Promissory Notes accrue
interest at a rate of 12% per annum commencing February 1, 2001, or
approximately $720,054 per annum, and are payable on or before December 31, 2000
if the GDIS Acquisition is not consummated.
On October 8, 1999, Surge made a secured loan to Global, in the
principal amount of $1,000,000, and received a 10% Convertible Secured
Promissory Note in exchange therefore (the "Global Note"). The Global Note was
secured by all of the assets of Global and is junior to certain secured bank
credit facilities
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of Global. Additionally, the loan was secured by 300,000 Global Shares which
were pledged by Mr. Richard Baker, the President of Global. The Global Note was
convertible into one Global Share for every three dollars ($3.00) of principal
and interest outstanding on the loan, if the originally contemplated merger with
Global was not consummated. Effective February 1, 2000, an additional $5,500,000
of proceeds derived from the Note Offering, pending satisfaction of certain
conditions, may be loaned to Global and the terms of the Global Note were
amended so as to increase the principal amount to a maximum of $6,500,000 and
increase the conversion ratio from $3.00 to $1.00 of principal and interest
outstanding on the Global Note for every share of Global converted.
Simultaneously therewith, the number of shares pledged by Mr. Richard Baker,
Global's President, was increased from 300,000 to 500,000 Global shares.
If the GDIS Acquisition is completed, the obligations of Global under
the Global Note will be forgiven and discharged in full. If the GDIS Acquisition
is not consummated by July 31, 2000, the Global Note will become convertible, or
payable upon demand. Surge believes that Global may have liquidity problems and
may not be able to pay the amount due under the Global Note if the GDIS
Acquisition is not consummated. Additionally, none of Global's securities are
registered for resale. As such, in the event of a default of the Global Note, or
failure of the GDIS Acquisition to be consummated for any reason, Surge has
reason to believe that the 500,000 Global Shares pledged by Mr. Baker along with
the shares of Global issuable upon conversion of the Global Note and all of the
assets of Global as secured by the Global Note, may not be sufficient to satisfy
Global's obligations under the Global Note. As such, the failure of the GDIS
Acquisition to close, could have material adverse consequences to Surge.
Year 2000 Issue
Some computers, software, and other equipment include programming
codes 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 were widely expected to increase in frequency and
severity as the year 2000 approached, and are commonly referred to as the "Year
2000 Problem."
While Surge has not suffered any material effects relating to the Year
2000 Problem since January of 2000, the Year 2000 Problem could have latent
affects on computers, software, and other equipment used, operated, or
maintained by Surge or its suppliers and customers. Accordingly, Surge reviews
on an ongoing basis its internal computer programs and systems to ensure that
the programs and systems will not fail. Surge has been advised by MIS
Consultants and 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. Surge has spent approximately $15,600 to become
Year 2000 compliant and does not anticipate incurring any additional costs.
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. Surge has not, to date, experienced any failure of
such equipment, but no assurance can be made that such problems could not arise
in the future. Surge estimates the total cost to Surge of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on Surge's business or results of operations.
This estimate
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is being monitored even after January 1, 2000, and will be revised as additional
information becomes available.
Surge's accounting system is not linked to any outside software system.
However, Surge has limited or no control over the actions of these third party
suppliers and customers. Thus, while Surge 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 Surge 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 Surge's business, financial condition,
and results of operation. To date, no such third parties have reported any
material Year 2000 Problems.
Based on the activities described above, Surge does not believe that the Year
2000 Problem will have a material adverse effect on Surge's business or results
of operations.
While no material Year 2000 Problems have arisen or become visible to
date, the discussion of Surge's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements, and the Year 2000
compliance involves multiple issues. Surge'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.
Inflation And Increasing Interest Rates
In recent years, the effects of inflation have "tightened," slightly,
as indicated by the average consumer price index, which has increased slightly
over the past two years. Surge 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 Surge's business.
However, inflation and increasing interest rates have had a significant effect
on the economy in general and, therefore, could affect Surge's future operating
results. Moreover, recent announcements by the Federal Reserve, as well as
increases in salaries and the GDP generally, has had many Wall Street analysts
predicting that the Federal Reserve will increase interest rates during 2000.
Even minor increases in interest rates can increase the company's cost of
capital and offset revenues. Moreover, Surge has recently incurred approximately
$6.5 million of debt as a result of the Note Offering.
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SURGE -- DESCRIPTION OF BUSINESS
General
Surge is a supplier of electronic products and components. These
products include capacitors, which are electrical energy storage devices, and
discrete components, such as semiconductor rectifiers, transistors and diodes,
which are single function low power semiconductor products that are packaged
alone as compared to integrated circuits such as microprocessors. Surge's
products are typically utilized in the electronic circuitry of diverse products,
including, but not limited to, automobiles, cellular telephones, computers,
consumer electronics, garage door openers, household appliances, power supplies
and smoke detectors. Surge'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 15 independent manufacturers. Surge does not have any binding
long-term supply, distribution or franchise agreements with its distributors.
Surge acts as the exclusive sales agent through independent sales representative
organizations in North America for many of its manufacturers pursuant to oral
agreements. Through Surge's wholly-owned subsidiary, Challenge, Surge 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 historically purchased such components and products in the open market
on the best available terms and generally keeps small inventories. During the
latter part of 1999, Challenge began selling two new product lines which
required maintaining higher inventory levels. 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 Surge.
The acquisition of Orbit Networks, Inc., as disclosed by Surge in prior
filings, has been terminated by Surge's Board of Directors in August of 1999.
Surge was incorporated under the laws of the State of New York on
November 24, 1981. Surge 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. Surge's principal executive
offices are located at 1016 Grand Boulevard, Deer Park, New York 11729; and its
telephone number is (631) 595-1818. Challenge/Surge, Inc. is a New York
corporation, was formed in 1988, and is a wholly owned subsidiary of Surge
("Challenge").
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. Surge focuses its
efforts on the distribution of capacitors and discrete components, a small
subset of the electronic component market.
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The electronics industry has been characterized by intense price
cutting and rapid technological changes and development which could materially
adversely affect Surge'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 Surge'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 Surge's products. Accordingly,
any downturn in the electronics industry in general, could adversely affect
Surge'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",** include electronic commerce, supply chain
integration, strategic alliances and globalization. Surge is finding itself
needing to address these dynamics as it plans its strategy for the next several
years. Additionally, the businesses of both Global and Mail, which Surge intends
to acquire, are primarily Internet related. The Internet industry is categorized
as rapidly developing and changing. Moreover, the technology industry as a
whole, and Internet companies in particular, tend to be extremely sensitive to
the economy and fluctuating Interest rates.
Products
Surge supplies a wide variety of electronic components bearing Surge's
private "Surge" label which can be broadly divided into two categories --
capacitors and discrete components. For both the fiscal years ended November 30,
1998 ("Fiscal 1998") and November 30, 1999 ("Fiscal 1999"), capacitors accounted
for approximately 79% of Surge's sales in both years while discrete components
accounted for approximately 21%, respectively, of Surge's sales. Capacitors and
discrete components can be categorized based on various factors, including
function, construction, fabrication and capacity. The principal products sold by
Surge under the Surge name or 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 applications, blockage of DC current,
as frequency determining and timing elements, as filters and delay-line
components, and in voltage transient suppression (circuit protection devices).
Surge's product line of capacitors includes:
Aluminum Electrolytic Capacitors. These capacitors, which are Surge's
principal product, are storage devices used in power applications to store and
release energy as the electronic circuitry demands. They are commonly used in
power supplies and can be found in a wide range of consumer electronics
products. Surge'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 also
intended and designed to facilitate clear and thorough record keeping of all
quality control and testing information. This system is also intended and
designed to ensure clear communication from one department to another about the
information (i.e., quality control, production or engineering). This permits
Surge to monitor its quality control/manufacturing process information and to
respond to any customer questions.
- --------
**Published by Distribution Research and Education Foundation, Washington, D.C.
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Ceramic Disc Capacitors. These capacitors are the least expensive and
are widely used in the electronics industry. They are commonly used to bypass or
filter semiconductors in resonant circuits and are found predominantly in a wide
range of low cost 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. Surge's supplier in Taiwan has a facility fully certified for
the International Quality Standard ISO 9002.
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.
Surge almost exclusively distributes discrete, low power semiconductor
components rather than integrated circuits.
Rectifiers. Low power semiconductor rectifiers are devices that convert
alternating current ("AC" power) into one directional current ("DC" power) 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.
Surge 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. Surge 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 Surge 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 Surge
include a wide variety of light emitting diode products and numeric display
products.
Circuit Protection Devices. Surge'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. Surge has initiated marketing
relationships with certain Asian manufacturers of audible components to sell
these products worldwide.
New Products. Surge is in the process of introducing new discrete
semiconductor components and capacitors which are intended to complement Surge'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. Surge is currently marketing surface mount rectifiers
which are used in miniature or compact products such as cellular telephones and
pagers. Surge is also marketing multilayer ceramic capacitors widely used in
computers and telecommunications applications for filtering. Surge also plans to
enter the Internet and E-commerce business by acquiring Global and Mail. There
is no assurance that the acquisition of these entities' businesses will be
completed, or that if successful, that Surge will be able to compete
successfully. Moreover, as the Internet industry is relatively young, there is
no way to predict future performance of these businesses, or of the industry as
a whole.
Inventory
Surge's products have been historically stable in price and have not
been very susceptible to obsolescence as are many other electronic components.
In order to obtain the best available price from its suppliers, Surge will
typically waive the right to obtain refunds if prices are subsequently lowered
prior to Surge's sale of the products, as well as the right to return inventory
to manufacturers. Surge generally tries to pass these savings on to its
customers. Surge intends to implement a bar code system to improve the
efficiency of its inventory control. A bar code system will enable Surge 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, Surge believes
that it is necessary to maintain large inventories which makes Surge more
susceptible to price and technology changes. Surge has used the proceeds of its
Public Offering to maintain its inventories. At any given time, Surge 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. Surge's inventory
currently contains more than 50 million component units consisting of more than
3,000 different part numbers. Although the number of components and products
will continue to increase as Surge continues to increase its inventories, it
will still generally maintain a two to four month inventory. Surge'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 Fiscal 1999 and 1998, the
average per component sales price of the products sold by Surge was
approximately $.07. As of November 30, 1999 and November 30, 1998, Surge
maintained an inventory of $1,442,067 and $1,159,111, 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. Currently, there is an shortage of electronics
products in the United States markets. The shortage of electronic products has
resulted in increased business among broker distributors. An increase in
Challenge's broker distribution business is reflected in the increase in net
sales from $2,922,643 in Fiscal 1998 to $4,671,404 in Fiscal 1999. Challenge
currently maintains larger inventories. Challenge is seeking to obtain product
rights to certain brand name product lines and establish direct relationships
with those manufacturers.
Although Surge 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 57% of
the total goods purchased by Surge in Fiscal 1999 were manufactured in foreign
countries, with the majority purchased in Taiwan 52%, China 26%, South Korea
10%, India 4%, Hong Kong 5% and Japan 3%. Surge purchases its products from
approximately 15 different manufacturers, for many of which Surge 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 Surge have obtained or
have applied for the International Quality Standard ISO 9002 certification.
Surge predominantly purchases its products in United States currency in order to
minimize the risk of currency fluctuations. In most cases, Surge utilizes two or
more alternative sources of supply for each of its products with one primary and
one complementary supplier for each product. The products are manufactured to
Surge's order with the "Surge"
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logo and label. Surge is continually building relationships with suppliers and
from time to time adds new suppliers when needed. Surge's relationships with
many of its suppliers date back to the commencement of Surge's import operations
in 1983.
Surge generally does not enter into any binding, long term, written
agreements with any of its suppliers. Based upon the experience of Surge's
Management and Surge's positive working relationship with its current
manufacturers, Surge does not believe that written agreements are, or shall be
in the foreseeable future, necessary to continue to obtain its products. Surge
has established payment terms with its manufacturers including letters of credit
and 60 day open account terms.
For Fiscal 1999 two suppliers each accounted for in excess of 10% of
Surge's net purchases. The two are Lifu Electronics, a Taiwanese company, and
Master Instrument New York Company, Inc., a New York corporation. Purchases from
these suppliers in Fiscal 1999 were approximately $1,761,131, and $1,288,116,
respectively, or 19.9% and 14.5%, respectively. In Fiscal 1998 purchases from
the foregoing two suppliers were approximately $1,264,215 and $1,206,277,
respectively, or 20.2% and 19.2%, respectively, of total purchases. However,
Surge does not regard any one supplier as essential to its operations, since
equivalent replacements for most of the products Surge markets are either
readily available from one or more of Surge'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 Surge's two
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
Surge's sales efforts are directed towards OEM customers in numerous
industries where Surge's products have wide application. Surge currently employs
nine sales and marketing personnel, including two of its executive officers, who
are responsible for certain key customer relationships. Surge's executive
officers also devote a significant amount of time to developing and maintaining
continuing relations with Surge's key customers.
Surge uses independent sales representatives or 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 15% of sales of Surge
for Fiscal 1999. 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
Surge's marketing and sales efforts. This permits Surge to avoid the significant
costs associated with creating a direct marketing network. Surge has maintained
relationships with certain of its sales organizations since 1988 and continues
to engage new sales organizations as needed. Surge believes that additional
sales organizations and representatives are available, if required.
In March 1999, Surge entered into an agreement with Future Electronics
Inc. ("Future") for the marketing, promotion and distribution of Surge's
products. The agreement is for a one-year period and automatically renews for
one-year periods unless terminated in writing by either party. Future is a world
wide authorized distributor of passive components. Management anticipates that
this relationship with Future will introduce Surge's products to many new
potential customers.
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Surge engages independent sales representative organizations in various
regions throughout the United States for marketing to OEM customers and
distributors. In August 1999, Surge replaced its West Coast Regional Sales
Manager and at the same time, Surge restructured its management so as to
subdivide its former Midwest Regional Sales Manager's duties among the West
Coast and East Coast Regional Sales Managers. Surge believes that such regional
sales managers will ensure that Surge's sales activities function properly.
Surge has initiated a formal national distribution program to attract more
distributors to promote Surge's products. Surge has appointed a National
District Manager to develop and manage this program. Surge expects this market
segment to contribute significantly to Surge's sales growth over time.
Many OEMs require their suppliers to have a local presence and Surge's
network of independent sales representatives are responsive to these needs. In
that regard, in order to service the growing importance of the electronics
community, during 1998 Surge opened a quality support/engineering location and a
sales location in California. There are no current plans to open additional
locations. In March 1999, Surge opened a marketing office in Taiwan. This office
provides marketing and customer service for the Asian market. The cost and
related expenses of this office have been minimal since Surge is utilizing the
same office space used by its supplier management group. Surge has been advised
that this facility suffered only minor damage in the September 1999 earthquake.
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, 2000, Challenge entered into a verbal agreement
which renewed a prior agreement to supply audible transducers for computer
keyboards to Intel Corporation. The agreement is for one year and it is
terminable at will by Intel Corporation. There can be no assurance Challenge
will continue to have a relationship with Intel.
As of November 30, 1999, Surge had distribution 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
Surge'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.
Surge utilizes the services of the Progressive Marketing Corp.,
Melville, New York, an unaffiliated marketing/public relations organization,
which publicizes Surge's achievements and helps Surge 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 Surge.
Other Surge marketing efforts include generation and distribution of
Surge's product catalogs and brochures and attendance at trade shows. Surge has
produced an exhibit for display at electronics trade
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shows throughout the year. Surge's products were promoted at electronic
distribution shows in Las Vegas, Nevada in 1998 and 1999 and intends to exhibit
at the May 2000 show to continue its commitment and focus on the distribution
segment of the industry. Surge produces sales literature to advertise Surge's
products and to participate in additional trade shows.
Customers
Surge'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. Surge requests its distributors to provide point of sales
reporting which enables Surge to gain knowledge of the breakdown of industries
into which its products are sold. However, based on its sales to OEMs, Surge
believes that no one industry accounted for a majority of the applications of
the products it sold in Fiscal 1999 or Fiscal 1998. For Fiscal 1999, three
customers accounted for 39.6% of the Surge's net sales (Millennium Components
16.7%, Leviton Manufacturing Co. 11.5%, and Chamberlain Group Inc. 11.4%).
Surge's discrete components are often sold to the same clients as its
capacitors. These OEM customers typically accept samples for evaluation and, if
approved, Surge works towards procuring the next orders for these items.
Typically, Surge 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 Surge, and in fact,
during Fiscal 1999 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 Surge's contracts and good working relationships with its
distributors, Surge offers the OEMs, when purchasing through distributors,
extended payment terms, just-in-time deliveries and one-stop shopping for many
types of electronic products.
Competition
The markets for Surge's products are highly competitive. Surge competes
with numerous well- established foreign and domestic importers, and numerous
local, regional and national distributors. Surge'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 Surge's competitors are well established, with substantial expertise,
and possess substantially greater financial, marketing, personnel and other
resources than Surge. Surge 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. Surge's motto is "never
say no," as Surge 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
Surge has made an investment in computer hardware and software. Surge's
management information systems ("MIS") consultants are responsible for software
and hardware upgrades, maintenance of current
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software and related databases, and designing custom systems. Surge believes
that its MIS personnel are important to Surge's success and believes in
continually upgrading its hardware and software. As part of its MIS program,
Surge is implementing 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 Surge are equipped with computer terminals to
assist in providing up-to-date reliable information to customers. Surge's
purchasing department manages Surge'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 Surge's computer system. Surge intends to
continually evaluate and upgrade its IBM compatible computer system.
Customer Service
Surge 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. Surge intends to increase its customer service
capabilities.
Proprietary Information
Surge holds no patents and has no trademarks or copyrights registered
in the United States Patent and Trademark Office or in any state, exclusive of
the assignment of the pending trademark application for Superus. While such
protection is not currently considered essential to the success of its business,
it may become important to Surge in the future.
Surge 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 Surge are manufactured in Asia, including
such countries as Taiwan, South Korea, Hong Kong, India, Japan and China. The
purchase of goods manufactured in foreign countries is subject to a number of
risks, including economic disruptions, transportation delays and interruptions,
foreign exchange rate fluctuations, imposition of tariffs and import and export
controls, and changes in governmental policies, any of which could have a
material adverse effect on Surge's business and results of operations.
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. Surge 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.
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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. Surge'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
Surge 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 Surge in the future. Any significant disruption in the delivery
of merchandise from Surge's suppliers, substantially all of whom are foreign,
could have a material adverse impact on Surge'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 Surge. Surge
believes it is in substantial compliance with all material federal, state and
local laws and regulations regarding safe working conditions. Surge believes
that the cost of compliance with such governmental regulations is not material.
Backlog
As a result of an increase in sales, as of November 30, 1999, Surge's
backlog was approximately $3,698,735 as compared with approximately $2,417,086
at November 30, 1998. Substantially all backlog is shipped by Surge in 90 to 180
days. Year to year comparisons of backlog are not necessarily indicative of
future operating results.
Employees
As of November 30, 1999, Surge employed 24 persons, two of whom are
employed in executive capacities, seven are engaged in sales, one in
engineering, two in purchasing, four are engaged in administrative capacities,
two are in customer service, two are in bookkeeping and four are in warehousing.
Twenty-three (23) employees are employed full-time and one is employed part-time
by Surge. None of Surge's employees are covered by a collective bargaining
agreement. Surge considers its relationship with its employees to be good.
Description of Property
Surge leases its executive offices and warehouse facility, located at
1016 Grand Boulevard, Deer Park, New York, 11729, at an annual rental of $72,176
during 1998 and $79,472 during 1999. The lessor is Great American Realty of Deer
Park Co., an entity owned equally by Surge's President, Vice President and a
Director, Mark Siegel. 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. Surge remodeled the warehouse to provide for a more
efficient flow in the warehouse. During 1998, Surge renovated the office
facilities to allow for expansion of the sales department, clerical, finance and
purchasing departments. Surge believes the new working environment has lead to
greater productivity. Any leasehold improvements will be and will remain the
property of the lessor.
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Legal Proceedings
Surge is not currently subject to any legal proceedings.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE RECAPITALIZATION
AND BELIEVES IT TO BE IN THE BEST INTEREST OF OUR SHAREHOLDERS. ACCORDINGLY, OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL ONE.
SURGE APPRAISAL RIGHTS
Surge is a New York corporation. Section 910 and Section 623 of the New
York Business Corporation Law (the "NYBCL") provide dissenter's rights
(sometimes referred to as "appraisal rights") under certain circumstances to
shareholders of a New York corporation that is involved in a merger.
Record holders of Surge common stock, Surge Convertible Preferred Stock
and Surge Class A Warrants (collectively "Surge Securities") that follow the
appropriate procedures, as set forth in Section 623 are entitled to appraisal
rights under Section 910 in connection with the Merger of Surge with and into
Superus (the "Superus Merger.")
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO
APPRAISAL RIGHTS UNDER THE NYBCL AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL
TEXT OF SECTIONS 623 AND 910, WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX F TO
THIS PROXY STATEMENT AND PROSPECTUS. ALL REFERENCES IN SECTIONS 623 AND 910 TO A
"SHAREHOLDER" AND IN THIS DISCUSSION TO A "RECORD HOLDER" ARE TO THE RECORD
HOLDER OF THE SHARES OF SURGE SECURITIES IMMEDIATELY PRIOR TO THE EFFECTIVE DATE
AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST
IN SHARES OF SURGE SECURITIES HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH
AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW
THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT APPRAISAL
RIGHTS.
THIS PROXY STATEMENT AND PROSPECTUS CONSTITUTES NOTICE OF APPRAISAL
RIGHTS TO THE HOLDERS OF SURGE SECURITIES.
IN ORDER TO EXERCISE YOUR RIGHTS TO DISSENT AND APPRAISAL, YOU MUST NOT
VOTE FOR THE RECAPITALIZATION AND MUST FOLLOW EACH AND EVERY INSTRUCTION
HEREIN
Sections 623 and 910 of the New York Business Corporation Law give to
any shareholder of Surge who wishes to object to the Superus Merger (an
"Objecting Shareholder") the right to receive from Surge in cash, the fair value
of his or her shares, provided that the Superus Merger is not abandoned or fails
to be approved and authorized, and provided, further, that the following
procedure is carefully followed.
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(a) The Objecting Shareholder must not vote in favor of the
Recapitalization and, before the proposal to approve the
Recapitalization is submitted to a vote at the Special Meeting of
Shareholders, where this Proposal 1 will be put to vote, he or she
must file with Surge written objection thereto stating his or her
intention to demand payment for his or her shares. The written
objection should be sent to Surge Components, Inc., Attention of
Mr. Steven J. Lubman, Corporate Secretary. Registered Mail, Return
Receipt Requested is recommended. The objection may also be
submitted at the meeting, but before a vote is taken on the
Superus Merger, as part of the Recapitalization.
(b) The objection shall include (i) a notice of election to dissent,
(ii) the shareholder's name and residence address, (iii) the
number of shares as to which the shareholder dissents and (iv) a
demand for payment of the fair value of the shareholder's shares
if the Superus Merger is consummated.
(c) A Negative Vote is Not Sufficient. A shareholder may not dissent
as to less than all of the shares as to which he has a right to
dissent, held by him of record that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record
by such nominee or fiduciary.
(d) Within ten days after the date of the Annual Meeting, Surge must
give written notice to each Objecting Shareholder that the Superus
Merger has been authorized by the vote of Surge's shareholders.
(e) Together with the written demand or within one month thereafter,
the Objecting Shareholder must submit certificates representing
all of his shares of Surge's stock to Surge or its transfer agent
for the purpose of affixing a notation indicating that a demand
for payment has been made. Otherwise, at the option of Surge,
exercised by written notice given within 45 days from the date of
filing of the notice to dissent, he or she will lose his
objector's rights, unless a court, for good cause shown, otherwise
directs.
(f) Within 15 days after the later of the Effective Date or last day
of the period during which written demand by the Objecting
Shareholder must be made (but in no case later than 90 days from
the date of meeting), Surge shall make a written offer by
registered mail to each Objecting Shareholder to pay for his or
her shares at a specified price which Surge considers to be their
fair value. Such offer shall be accompanied by a statement setting
forth the aggregate number of shares with respect to which notices
of election to dissent have been received and the aggregate number
of holders of such shares. If the Superus Merger has been
consummated at the time of such offer, the offer shall also be
accompanied by (i) the advance payment to each Objecting
Shareholder who has submitted to Surge his or her stock
certificates as provided in paragraph (e), of an amount equal to
80% of the amount of such offer, or (ii) as to each Objecting
Shareholder who has not yet submitted his or her stock
certificates, a statement that Surge will make an advance payment
to him or her of an amount equal to 80% of the amount of such
offer promptly upon submission of his or her stock certificates.
Every advance payment or statement as to advance payment shall
include advice to the Objecting Shareholder to the
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effect that acceptance of such payment does not constitute a
waiver of any dissenters' rights. Any offer shall be made at the
same price per share to all Objecting Shareholders.
(g) If, within 30 days after making such offer, the Objecting
Shareholder and Surge agree upon the price to be paid for his or
her shares, payment must be made by Surge within 60 days of the
date of the making of such offer upon the surrender of the
certificates representing his or her shares.
(h) If Surge fails to make such offer as provided in paragraph (f) or
if the Objecting Shareholder and Surge fail to agree upon the
price to be paid within 30 days of the date of Surge's offer,
Surge shall, within 20 days after the expiration of the applicable
time period, institute a special proceeding in the Supreme Court
of the State of New York, County of Suffolk to determine the
rights of the Objecting Shareholder and to fix the fair value of
his or her shares.
(i) If Surge fails to institute such special proceeding the Objecting
Shareholder may do so within 30 days after the expiration of such
20 day period. Failure of the Objecting Shareholder to institute
such proceedings will result in the loss of his or her objector's
rights unless the court, for good cause shown, otherwise directs.
(j) Within 60 days after the final determination of the special
proceeding, Surge shall pay to each Objecting Shareholder the
amount found to be due him or her, upon surrender of the
certificates representing his or her shares.
The foregoing summary of the rights of Objecting Shareholders does not
purport to be complete and is qualified in its entirety by reference to Sections
623 and 910 of the New York Business Corporation Law, a copy of which appears in
Annex F to this Proxy Statement.
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PROPOSAL 2-- APPROVAL OF GDIS ASSET PURCHASE AGREEMENT
The asset purchase agreement dated December 8, 1999 (the "Purchase
Agreement") is, by and among Surge, GDIS Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Surge ("GDIS") and Global DataTel,
Inc., a Delaware corporation ("Global"). It provides for the acquisition of all
of Global's assets (the "GDIS Acquisition") by GDIS. An aggregate of 239,000
shares of Surge's Series A Redeemable Convertible Preferred Stock, $.001 par
value per share ("Preferred Shares ") are currently being held in escrow for the
benefit of Global's shareholders. See "Asset Purchase Agreement - Treatment of
Global Securities" below.
The Purchase Agreement has been unanimously approved by the Surge and
Global Boards of Directors and provides that the GDIS Acquisition will be
completed if approval of Proposal 2 by Surge's and Global's stockholders is
obtained and Proposals 1 are also approved by Surge's shareholders and all other
conditions to the Purchase Agreement are satisfied or waived. See "Conditions to
the Acquisition" below. In full consideration for the sale, transfer,
conveyance, assignment and delivery of the assets by Global to GDIS and in
reliance upon the representations and warranties made by Global and for other
consideration, Surge has paid to GDIS 239,000 Preferred Shares, issuable on a
100 for 1 basis to the Global stockholders. The Preferred Shares are being held
in escrow pending completion of final audits, fairness opinions, regulatory and
any other required approvals, and approval of the GDIS Acquisition by Surge's
and Global's shareholders under this Proposal 2. Upon the Effective Date, each
of Surge's Preferred Shares will automatically convert into, and shall vote on a
converted basis of, 100 shares of Superus Class B Common Stock.
The shareholders of Surge and Global are each being asked herein to
approve the Purchase Agreement and the issuance of Superus Class B Common Stock
to the Global stockholders.
Global DataTel, Inc.
Global DataTel, Inc. has its principal executive offices at 3333
Congress Avenue, Suite 1404, Delray Beach Florida 33445. Global maintains a Web
site at "www.GlobalDataTel.com." Global's common stock ceased trading on the
NASD's OTC Bulletin Board market under the symbol "GDIS" in December 1999. It is
intended that on completion of the GDIS Acquisition the Class B Common Stock
shall be listed for trading on the Nasdaq National Market System as a tracking
stock. The Class B Common Stock shall represent the assets of both GDIS, and
MailEncrypt, and the business and financial condition of these two subsidiaries
after the Effective Date.
Global, through its wholly-owned subsidiary, is a leader in Latin
America in medium to large Web and system integration projects. Global is a
first tier IBM Business Partner, Microsoft Solution Provider, Lotus Premier Team
Provider and distributor for JBA International ERP Company. Global also
distributes hardware for Compaq, Dell, Hewlett-Packard and Cisco Systems.
Certain publicly available information is retrievable from the SEC's Web site at
"www.sec.gov."
eHOLA, a wholly owned subsidiary of Global, provides dial-up Internet
access in over 350 cities in Latin America and also provides both simple and
sophisticated e-commerce business solutions through distribution partnerships
with such industry leaders as BroadVision, Inc. - See "Global - Description of
Business" below.
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Asset Purchase Agreement
Effective Date. Completion of the GDIS Acquisition shall be conditioned
upon the completion by both Surge and Global of their due diligence and
satisfaction of all representations and warranties under the Purchase Agreement.
Surge and Global must obtain the required vote of their shareholders under this
Proposal 2.
Treatment of Global Securities
(i) Each 100 issued and outstanding shares of Common Stock, $.001
par value, of Global ("Global Shares") shall be converted into the right to
receive one Surge Preferred Share which are now being held in escrow. Stock
certificates representing ownership of the Global Shares shall continue to
evidence ownership of such Preferred Shares. Global also currently has 2,000,000
employee stock options issued to certain employees (the "Global Employee
Options"). These options will convert into options to purchase Class B Common
Stock, with identical terms, and at the same rate as the Global Shares.
(ii) No fraction of Preferred Shares (or underlying Class B Common
Stock) will be issued, but in lieu thereof, each holder of Global Shares who
would otherwise be entitled to a fraction of a share of Class B Common Stock
(after aggregating all fractional Class B Common Stock to be received by such
holder) shall be entitled to receive from Surge an amount of cash, without
interest (rounded to the nearest whole cent), equal to the product of (i) such
fraction, multiplied by, (ii) the average closing bid price of Class B Common
Stock for the five (5) consecutive trading days ending on the trading day
immediately prior to the Effective Date, as reported on Nasdaq or any exchange
on which the Common Stock may then be traded. A fractional interest shall not
entitle the owner thereof to vote such interest or to any other rights as a
security holder with respect to such interest.
Stock Options and Warrants. At the Effective Date, Global's common
stockholders and option holders will not have to take any action and their
securities will automatically be re-designated. Global's shareholders will be
contacted by an Exchange Agent for purposes of exchanging the Global Shares and
Global Employee Options.
The Exchange Ratio. The Exchange Ratio under the Purchase Agreement is
as follows: one hundred Global Shares for each Preferred Share of Surge, or an
aggregate of 239,000 Preferred Shares. At the Effective Date following
shareholder approval herein, each Preferred Share will automatically convert and
shall vote on an as converted basis for l00 shares of Class B Common Stock. Each
Global employee option shall be converted into an equal number of options to
purchase Class B Common Stock. The Surge Class A Warrants shall likewise be
convertible, at the sole discretion of each holder thereof, into an equal number
of Class B Warrants and shall remain identical in terms to wit, exercisable at
$5.00 per warrant for one share of Class B Common Stock, and callable if the
Class B Common Stock trades at or above $7.50 per share for 20 consecutive
trading days and shall expire on July 31, 2003. Should Superus split, reclassify
or combine its Common Stock, or pay or grant all shareholders of Superus a stock
dividend or other stock distribution, then the Exchange Ratio in so far as it
relates to any securities would be adjusted to reflect such event. Pursuant to
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the terms and conditions of the Purchase Agreement, after the repayment to Surge
of $1 million of the outstanding loan, GDIS and MailEncrypt shall be entitled to
72% of all net proceeds from the exercise of Class B Warrants with the remaining
28% to be paid to New Surge. The outstanding Superus options granted to Surge
management shall become immediately exercisable to purchase 2,650,000 shares of
Class B Common Stock at $2.69 per share and Surge management will forfeit all
rights to 5,300,000 shares previously granted to them.
Reasons for the Acquisition
Surge and Global each believe that the GDIS Acquisition will result in
a combined company with an enhanced financial position, stronger product
pipeline and deeper organizational and other resources. The following specific
reasons are believed by the companies to support the GDIS Acquisition:
Complementary Product Development Programs. The companies have
complementary programs in various product areas.
Entrance and Expansion of Internet Business. The GDIS Acquisition
brings with it, eHOLA, a leading Internet Service Portal which is an Internet
Service/Contract Provider specializing in the Latin American marketplace. eHOLA
signed a collaboration agreement with IBM whereby eHOLA is pre-loaded in all IBM
Aptiva computers shipped to Latin America. eHOLA is a diverse multilingual
portal that provides a central starting point for finding a variety of
information on the Internet. eHOLA would mark Surge's entrance into the growing
Internet arena.
Broader Sources of Income. The GDIS Acquisition brings with it
advantageous distribution mechanisms throughout Latin America with Global Web
and system integration relationships, and the ability to utilize those channels
to provide Latin American businesses access to eHOLA's e-commerce business
solutions and Internet access.
Stronger Financial Position and Cash Resources. Superus' cash otherwise
available following the GDIS Acquisition will be invested towards marketing and
development of eHOLA. Global does not have, on its own, the distribution network
necessary for mass marketing and distribution. The combined cash position of
Superus after the GDIS Acquisition should allow Superus to further develop
certain products, to invest in new technologies or products and to acquire other
companies. New Surge also offers a sourcing advantage for high quality, low cost
Internet appliances such as set-top boxes and personal computers.
Enhanced Manufacturing Capability. The GDIS Acquisition will expand the
combined companies' manufacturing and distribution capacity and capabilities.
Lack of Market Support and Undervaluation of Surge Securities. Surge
believes that its securities have suffered significant undervaluation caused by
limited market support and lack of market coverage or following by financial
analysts. Certain of these services used to be provided by the Company's
underwriters, neither of which are in business any more. The GDIS Acquisition
will make Surge shareholders holders of a combined entity, with a diverse
business including computers and the Internet which has been, and Surge and
Global hopes will in the future be, more receptive to market support and
following.
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Surge believes that the recent performance of its securities in the
marketplace confirms the above-described belief. On August 19, 1999, following
Surge's announcement that it had terminated the proposed acquisition of Orbit
Network, Surge's existing common stock was trading at approximately $.91 per
share and was $1.75 per share on October 7, 1999, the day prior to the signing
of the original Merger Agreement with Global. Following the announcement on
October l3, 1999, of the Surge's then proposed merger with Global, its common
stock increased to $2 3/8 per share, and continued to increase to $6 3/16 per
share at January 21, 2000, prior to the MailEncrypt announcement, before
reaching $10 per share in early March 2000.
Talented Management Team. The Boards of Directors of Global and Surge
believe the combined companies will have a strong, talented management team
combining key managers at Global with key Surge managers. All of Global's and
Surge's management teams are expected to continue with the combined companies.
Interests of Executive Officers and Directors
The executive officers and Directors of Surge have substantial direct
and indirect benefits in the completion of the GDIS Acquisition. Messrs. Ira
Levy, Steven J. Lubman, David Siegel and Mark Siegel, the Board of Surge, will
benefit substantially from the completion of the GDIS Acquisition. Upon the
completion of this transaction their 2,650,000 Superus options to purchase an
equal number of shares of Class B Common Stock will be immediately exercisable.
These options are exercisable at an exercise price of $2.69 per share that is
far below current market prices of the existing Common Stock. The $2.69 per
share exercise price was equal to the fair market value on December 7, 1999, the
day prior to the execution of the GDIS Purchase Agreement. Upon completion of
the GDIS Acquisition, management will forfeit all rights and entitlement to
5,300,000 options granted by Surge in December 1998. The exchange rate on the
Superus Options for the earlier granted Options is the same two for one rate as
all other Surge employee options and Surge's existing common stock may be
converted into Class A Common Stock and exchanged on a two for one basis for
Superus Class B Common Stock. See Proposal 5 - "Ratification of Acceleration of
Exercisability of Superus Options to Surge Management."
Additionally, pursuant to the Purchase Agreement, the current officers
and directors of Surge at the Effective Date, will remain as officers and
directors of New Surge for a period of three years following the Effective Date.
The Purchase Agreement also provided for amendments to Messrs. Levy and Lubman's
employment agreements with New Surge. These amendments provide for a right of
first refusal to purchase New Surge if there is a change of control of New Surge
(other than the GDIS Acquisition), and warrants to purchase up to 19% of New
Surge capital stock for nominal value if New Surge receives an offer for a "firm
commitment" underwriting. See Proposal 6 - "Election of Directors-Employment
Agreements."
In addition, the executive officers of Global will receive both direct
and indirect benefits to the completion of the GDIS Acquisition. Mario Habib, an
executive officer of eHOLA, Inc. and eHOLA, S.A., both of which are subsidiaries
of Global, who is a nominee-director of Superus, and Richard Baker, President of
Global, would both benefit substantially from the exchange of Global options and
Global shares, respectively, into options and shares of Class B Common Stock of
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Superus at an exercise price per share equal to the fair market value of Global
common stock when granted.
Differences Between Rights of Securityholders of Surge and Superus
The rights of Surge shareholders after the GDIS Acquisition will be
substantially the same as they are now, except they will own shares of a Class A
Common Stock which is a "tracking stock," tracking but not owning the assets and
business of New Surge. At the Effective Date, Common Stock Class A Common Stock
in turn, shall be convertible into Class B Common Stock on the basis of one
share of Class B Common Stock for every two shares of Class A Common Stock. As a
result of the issuance of Class B Common Stock, the existing Surge stockholders
will own approximately 17% of the approximately 29 million voting securities of
Superus following the Effective Date including those issued to MailEncrypt
shareholders, but excluding all shares issuable upon conversion of options,
warrants and notes.
Superus Certificate of Incorporation to Include Class B Common Stock
In order to implement the transactions contemplated by the GDIS
Purchase Agreement, and issue Class B Common Stock to the Global shareholders,
Superus and Surge will file articles of merger in Delaware and New York,
respectively. Surge's and Global's shareholders are being asked herein to
approve the Recapitalization Proposal 1 and to issue shares of Class B Common
Stock to the Global shareholders pursuant to this Proposal 2. A copy of the
Superus Certificate of Incorporation is attached hereto as Annex B hereto.
Certain Consequences of the GDIS Acquisition
Effective Date. The GDIS Acquisition will take effect as soon as
practicable after the special meeting and approval by the stockholders of Surge
and Global of this Proposal 2. Upon the Effective Date of the Registration
Statement, of which this prospectus becomes a part, this prospectus will be
distributed to all Global shareholders. At the Effective Date, the business
operations of Global will cease and its assets and certain liabilities will be
transferred into GDIS which shall assume Global's business operations and
shareholders of Global will become holders of Class B Common Stock of Superus.
Operations of GDIS. The current members of Global's Board of Directors,
as well as Global's management will not be affected by the GDIS Acquisition.
GDIS and New Surge's businesses will be operated independently of each other.
Generally, those matters not in the ordinary course of business, or which affect
Superus' status as a publicly owned company, e.g., its filing obligations with
the SEC and its listing requirements with Nasdaq, or matters before the
Compensation Committee shall be determined by the Superus Board of Directors.
Number of Shares of Common Stock Outstanding. The number of outstanding
shares of Class A Common Stock and Class B Common Stock immediately following
the GDIS Acquisition and the MailEncrypt Merger are expected to be approximately
4,928,958 and 26,821,900, respectively, and will vote equally on all matters.
Approximately 17% of the shares with voting privileges will be owned by Surge's
current shareholders, 77% by Global's current shareholders and 6% by
MailEncrypt's current shareholders, not including any shares issuable upon
exercise of warrants and options or conversion of notes. Giving effect to the
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possible exercise of Surge's 716,000 employee stock options, 2,850,000 Superus
Options to Surge management and the 3,479,600 Class A Warrants; 1,500,000
options to purchase Class B Common Stock issued to Adam J. Epstein and 2,000,000
Global employee options, Surge's, Global's and MailEncrypt's current
shareholders would own approximately 34%, 58% and 8% of Superus' 44,586,600 then
outstanding voting shares. As such, New Surge shareholders will have much less
ability to effect the control over Superus.
Additional Shares Issuable upon Conversion of Notes
Pursuant to Surge's private note offering of 12% Convertible Promissory
Notes ("Notes") in late 1999 and early 2000, approximately $7 million in Notes
have been sold by Surge to certain accredited investors. The terms of the Notes
provide that in the event of shareholder approval of the GDIS Acquisition in
this Proposal 2, such Notes will convert automatically at a rate of $3.00 of
principal amount outstanding, for each share of Class B Common Stock converted.
Thus, the Notes will convert into approximately 2,334,000 shares of Class B
Common Stock, or approximately 8.3% of the Company's 25,721,400 issued and
outstanding shares of Class B Common Stock on the Effective Date plus these
shares, but prior to the exercise or conversion of any other securities.
In the event that the GDIS Acquisition is not approved, the terms of
the Note require that Surge obtain shareholder consent for purposes of approving
the conversion of all Notes to Surge's existing common stock at a conversion
price of $2.50 of principal amount so converted, or an aggregate of 2,800,000
shares of Common Stock.
Approval of the conversion of the Notes and issuance of the underlying
shares of Class B Common Stock is an integral part of approval of the GDIS
Acquisition in this Proposal 2.
Federal Income Tax Consequences.
See Proposal 1 - "The Recapitalization Proposal - Material Federal
Income Tax Consequences" which includes a discussion of the tax consequences of
the GDIS Acquisition.
Accounting Treatment of the Acquisition.
Upon consummation of the GDIS Acquisition, Surge's wholly owned
subsidiary, GDIS, will be the owner of all of Global's assets. The transfer of
assets will be at book value because the conversion of the Global Shares into
Class B Common Stock will be accounted for as a reverse acquisition.
Integration of the Businesses
The GDIS Acquisition involves the integration of two companies that
have previously operated independently. There can be no assurance that the
companies will not encounter difficulties in integrating the operations of the
two companies or that the benefits expected from such integration will be
realized. Any delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on the combined companies'
business, operating results or financial condition. Furthermore, there can be no
assurance that the operations, managements and personnel of the two companies
will be compatible or that GDIS or New Surge will not experience the loss of key
personnel. See "Risk Factors."
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Validity of the Class B Common Stock, Class B Warrants
The validity of the Class B Common Stock and Class B Warrants and the
issuance of Class B Common Stock upon exercise thereof will be passed upon for
Superus by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158.
Upon the Effective Date, SBK Investment Partners, a partnership consisting of
members of Snow Becker Krauss P.C., will receive an aggregate of 200,000 already
issued and outstanding Global shares convertible into an equal number shares of
Class B Common Stock.
Conditions to the Acquisition
The consummation of the GDIS Acquisition is subject to the satisfaction
of certain conditions, including, among others, (a) obtaining requisite
stockholder approvals of Surge's and Global's stockholders; (b) the absence of
any injunction prohibiting the consummation of the GDIS Acquisition or
materially changing the terms or conditions of the GDIS Acquisition; (c) the
proxy statement and prospectus being declared effective by the Commission; (d)
the receipt of accountants' customary "cold comfort" letters; (e) the Class A
Common Stock, Class B Common Stock and Class B Warrants to be issued in
connection with the GDIS Acquisition being authorized for trading on Nasdaq; (f)
each party having performed all of its agreements and satisfied all conditions
contained in the Purchase Agreement in all material respects; (g) the
representations and warranties of each party to the Purchase Agreement being
true and correct at closing except where the failure to be true and correct
would not have a material adverse effect on the business, results of operations
or financial condition of either party and its respective subsidiaries, taken as
a whole (a "Material Adverse Effect"); (h) the receipt of certain legal opinions
with respect to the tax consequences of the Acquisition; and (i) the receipt of
fairness opinions to both the Company and Global and their respective
shareholders from independent investment bankers.
Fairness Opinions
Surge will retain a registered broker-dealer to render an opinion to
the Surge Board of Directors as to the fairness, from a financial point of view,
to the holders of Surge common stock, of the GDIS Acquisition. Global will
retain a registered broker-dealer to render an opinion to the Global Board of
Directors as to the fairness, from a financial point of view, to the holders of
Global common stock, of the GDIS Acquisition. Summaries of the opinions will be
included in the revised preliminary proxy materials and the full text of the two
fairness opinions will be filed with the SEC and attached as exhibits to this
proxy statement and prospectus.
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GLOBAL--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the materials contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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, lack of working
capital, general economic downturns, economic, social and political conditions
in Colombia and other parts of Central and South America, and other risks
detailed from time to time in Global's filings with the SEC. Although
forward-looking statements in this proxy statement and prospectus reflect the
good faith judgment of Global's management, such statements can only be based on
facts and factors currently known by Global. 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 Global in this proxy statement and prospectus,
as an attempt to advise interested parties of the risks and factors that may
affect Global's business, financial condition and results of operations and
prospects.
Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997.
During 1998, Global changed its focus, disposing of the operations
previously carried on by Global (primarily related to the publication of the
Travel Agents Hotel Guide) and acquiring five companies operating in the
computer and electronics industry and a developing company in the Internet
service business. As a result, comparison of Global's operations would not be
meaningful. The following table summarizes the unaudited results of operations
for the acquired companies:
Year Ended December 31,
1998 1997
---- ----
Net sales $21,457,159 $22,418,020
Cost of goods sold 15,620,783 15,976,712
Gross profit 5,836,376 6,441,308
Selling, general & administrative expenses 2,768,733 2,687,395
Payroll and related expenses 2,626,204 3,009,959
Profit from operations 441,439 743,954
Net sales for the year ended December 31, 1998 decreased by $960,861,
or 4%, to $21,457,159, as compared to $22,418,020 for the year ended December
31, 1997. This decrease was primarily the result of the completion of various
contracts during 1997 and the early part of 1998. Since the majority of Global's
operations are located in Colombia, sales volumes for Global's operations are
highly dependent on the economic, social and political conditions in Colombia.
Global's gross profit for the year ended December 31, 1998 decreased by
$604,932, or 9%, to $5,836,376, as compared to $6,441,308 for the year ended
December 31, 1997. The decrease in the gross profit resulted from the decrease
in sales volume. The gross profit as a percentage of sales remained relatively
the same decreasing to 27% in 1998 as compared to 29% in 1997.
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Selling, general and administrative expenses increased by $81,338, or
3%, to $2,768,733 for the year ended December 31, 1998, as compared to
$2,687,395 for the year ended December 31, 1997. The increase was primarily the
result of increased depreciation expenses related to property purchased in 1997
and 1998.
Payroll expenses decreased $383,755, or 13% to $2,626,204 for the year
ended December 31, 1998, as compared to $3,009,959 for the year ended December
31, 1997. Global is in the process of making the operations more efficient
through the combining of the efforts of the various subsidiaries.
As a result of the above, the acquired companies on a proforma basis,
had income from operations totaling $441,439 in 1998 as compared to $743,954 in
1997.
Nine Months Ended September 30, 1999 as Compared to the Nine Months Ended
September 30, 1998
The following table summarizes, on a proforma basis the unaudited
results of operations for the acquired companies:
Nine Months Ended
September 30,
1999 1998
---- ----
Net sales $ 9,583,440 $15,760,387
Cost of goods sold 6,287,233 9,952,169
Gross profit 3,296,207 5,808,218
Selling, general & administrative expenses 3,253,453 2,446,536
Payroll and related expenses 2,531,876 2,136,089
Income (loss) from operations $(2,489,122) 1,225,593
Net sales for the nine months ended September 30, 1999 ("Fiscal 1999")
decreased by $6,176,947, or 39%, to $9,583,440, as compared to $15,760,387 for
the nine months ended September 30, 1998 ("Fiscal 1998"). This decrease was
attributable primarily to having Global's main supplier sell directly to
clients, with Global receiving a commission on the sale rather then recognizing
the sale. In this way, Global is limiting its credit risk.
Global's gross profit for Fiscal 1999 decreased by $2,512,011, or 43%,
to $3,296,207, as compared to $5,808,218 for Fiscal 1998. The decrease in the
gross profit resulted primarily from the decrease in sales volume. Global has
reduced the amount of inventory it keeps on hand and the related carrying costs
as a result of Global's main supplier selling directly to the customer,
Selling, general and administrative expenses increased by $806,917, or
33% to $3,253,453 in Fiscal 1999, as compared to $2,446,536 for Fiscal 1998. The
increase in these expenses relates to the costs associated with the commencing
of operations for eHOLA.
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Payroll expenses increased by $395,787, or 19% to $2,531,876 in Fiscal
1999, as compared to $2,136,089 in Fiscal 1998. The increase is due to the
hiring of additional staff such as marketing, design, and technical personnel.
These increases are primarily due to Global's commitment towards increasing
sales and its related investment in internet e-commerce activities during the
third quarter of Fiscal 1999.
As a result of the above, the acquired companies on a proforma basis,
had a loss from operations totaling $2,489,122 in Fiscal 1999, as compared to
income from operations totaling $1,225,593 in Fiscal 1998.
Liquidity and Capital Resources
Global's Current Ratio changed to 0.71 at September 30, 1999, as
compared to 0.85 at December 31, 1998, as a result of an increase of other
current assets, accounts payable and accrued expenses. At December 31, 1998,
Global had a working capital deficiency totaling $856,923. The deficiency
primarily relates to the funds expended or to be expended for the purchase of
Micro, DLR and Casa. During the nine months ended September 30, 1999, the
working capital deficiency increased to $2,374,269. Global incurred net losses
totaling $2,627,486 during the nine months ended September 30, 1999, which it
financed through increases in accounts payable and accrued expenses and proceeds
totaling $300,000 from the issuance of stock.
As substantially all of Global's operations are currently conducted in
Colombia, Global is subject to special consideration and significant risks not
typically associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. Global's results
may be adversely affected by changes in the political and social conditions in
Colombia, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion, remittance abroad,
and rates and methods of taxation among other things. Since its working capital
has been limited, obligations and commitments have gone unfulfilled. Global's
current financial situation, as well as the ongoing funding to support the
initial operations of eHOLA, will require Global to obtain additional financing
in order to meet its obligations during the next twelve months. Global has
secured such financing from Surge in the form of a $4,100,000 Subordinated
Convertible Note described below.
Global has had losses generated from operations for several years.
These losses have generally been financed through stockholder loans, proceeds
from stock issuances or the issuance of shares to pay for services rendered to
Global. During 1998, Gold Coast issued 1,198,500 shares of its common stock to
officers, directors, employees and others for services rendered. The shares were
valued at $.20 per share. During 1998, Gold Coast issued 2,870,000 shares of its
common stock for cash at $.20 per share pursuant to Rule 504 of Regulation D. On
February 5, 1999, Global completed an offering under Rule 504 of Regulation D
for 100,000 shares of its common stock at $3.00 per share. The offering was
subscribed to in full by a related party.
On December 14, 1998, Global sold its interest in a subsidiary, The
Travel Agent's Hotel Guide, Inc., a Nevada corporation, to Ameriresource
Technologies, Inc. in consideration for a convertible debenture in the face
amount of $3,350,000, bearing interest at the rate of seven (7%) percent per
annum and convertible in three years into common stock of Ameriresource. Gold
Coast Resources had acquired a 20% interest in the Travel Agent's Hotel Guide,
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Inc. on August 17, 1998, by payment of 7,000,000 shares of Common Stock shares
to David Newren, a former officer and director of Global. The remaining 80% had
previously been acquired by the issuance of 600,000 shares of Gold Coast
Resources common stock.
At one time, Gold Coast Resources pursued mergers with Biostasis, Inc.,
Shoulder Shade Products, Inc., Secure Bind, Inc., and Fox Broadcasting Inc., but
rescinded these transactions in August 1998, canceling the shares of preferred
stock previously issued to each of these entities.
On September 30, 1998, Global acquired all of the outstanding stock of
ICR in exchange for 105,000 shares of convertible preferred stock valued at
$0.001 per share and 4,243,843 shares of common stock valued at $.20 per share.
The net assets acquired and liabilities assumed approximated $90,000 and
$190,000, respectively. The purchase resulted in goodwill of approximately
$950,000.
On September 30, 1998, Global acquired MES for 357,143 common shares of
Global common stock, valued at the book value of MES. The net assets acquired
and liabilities assumed approximated $1,152,000 and $913,000, respectively.
On November 30, 1998, Global acquired DLR for $300,000 ($100,000 due at
closing and five monthly installments of $40,000 thereafter, as defined) in
cash, and 60,000 shares of Global common stock, valued at $3.00 per share. The
net assets acquired and liabilities assumed approximated $3,527,000 and
$1,786,000, respectively. The acquisition resulted in goodwill of $502,000.
Global did not make all required payments under the agreement and was in default
until the final payment was put into escrow in March 2000.
On November 30, 1998, Global acquired Micro for $150,000, payable in
six consecutive monthly payments from the date of closing, and 70,000 shares of
Global common stock, valued at $3.00 per share. The net assets acquired and
liabilities assumed approximated $890,000 and $748,000, respectively. The
purchase resulted in goodwill of $218,000. Global has satisfied all of its
obligations under the agreement and has completed making all payments in full as
of early March 2000.
On November 30, 1998, Global acquired Casa for $840,000, payable in 9
monthly payments of $93,333 commencing at the date of the closing and 392,000
shares of Global common stock, valued at $3.00 per share. The net assets
acquired and liabilities assumed approximated $3,300,000 and $1,800,000,
respectively. The purchase resulted in goodwill of approximately $512,000.
Global has satisfied all of its obligations under the agreement and has
completed making all payments in full as of early March 2000.
At December 31, 1998 Global had only one class of common stock
outstanding and a Series A Convertible Preferred Stock. The Series A Convertible
Preferred Stock has a liquidating value of no less than $35,000,000 and has
preference over all other stock in a liquidation. The conversion value is based
on the liquidating value and a maximum share price of 111 shares of common stock
for one share of preferred stock. There are no arrearages in preferred
dividends. On June 25, 1999, the shares were converted into 13,000,001 shares of
Global common stock.
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On March 14, 1996, DLR obtained a mortgage from a bank for the purchase
of their office facility in Bogota, Colombia. The mortgage expires on March 2012
and had an initial principal balance of $99,400. The mortgage agreement allows
for an increase in the outstanding principal balance due to monetary adjustments
as mandated by the Colombian Central Bank.
The Colombian subsidiaries obtain short-term financing from banks and
financing companies. Interest on such obligations range between 34% and 44%
annually and is determined by the financing source subsequent to the
availability of funds. Most of these obligations are personally guaranteed by
officers of the companies and the balance owed as of December 31, 1998
approximated $1,132,000.
ICR has available a $100,000 line of credit, at 10% interest,
personally guaranteed by the majority stockholder of Global, for working capital
purposes. As of December 31, 1998, the balance owed on this line of credit was
approximately $43,000.
The Colombian subsidiaries have credit facilities from IBM for the
purchase of computer equipment which are guaranteed by certain shareholders and
officers of the Colombian subsidiaries. The credit facilities at December 31,
1998, approximated $1,200,000 for Casa, $600,000 for DLR, and $150,000 for
Micro.
In October 1999, Global issued a subordinated Convertible Promissory
Note (the "Note") in the amount of $1,000,000. The Note was due on June 1, 2000
and accrued interest at the rate of 10% per annum. In December 1999, Global
entered into an asset purchase agreement with Surge whereby Surge would acquire
the assets of Global in exchange for stock to be treated as a "tracking stock"
covering the assets sold by Global. In connection with the execution of the
Purchase Agreement, the Note was canceled and replaced with a new Subordinated
Convertible Promissory Note ("Convertible Note") payable to Surge for
$6,250,000. The Convertible Note accrues interest at the rate of 10% per annum.
Upon completion of the GDIS Acquisition by Surge, the Convertible Note and all
accrued interest will be forgiven. If the acquisition does not occur by July 31,
2000, Surge, at its own discretion, may convert this note into the common stock
of Global on a dollar for dollar basis at a conversion price equal to 90% of the
average closing price of Global's common stock for the preceding 20 trading days
or Surge may demand repayment. The Convertible Note is secured by the pledge
of certain shares of Global stock owned by the President of Global. Among other
conditions, the completion of the GDIS Acquisition is conditioned on the
approval of both companies' stockholders and successful completion of due
diligence.
In April 1999, Global entered into an option agreement with a
consultant, in partial payment of services rendered. The agreement grants
250,000 shares of Global common stock, at an exercise price of $5.75 per share.
The options are non-dilutive. To date, no options have been exercised.
Global's cost of upgrading its computer systems for the effect of the
year 2000 did not materially affect its operations and constituted the normal
periodic ongoing cost of maintaining and improving its computer system. There
can be no guarantee that the computer system of significant suppliers or payors
will be timely converted to remediate Year 2000 issues and would not have an
adverse impact on Global. Additionally, general problems such as electric power,
water and sewer etc., are beyond the ability of Global to determine, and would
affect most other companies in the geographic area of Colombia. As of October
30,1999, Global had tested its internal systems and had determined that it was
in year 2000 compliance with both software and hardware used internally to
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transact our day to day operations. At the actual turn of the century, Global
did not experience any year 2000 difficulties.
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. Global 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 Global's business. However, inflation
and changing interest rates have had a significant effect on the economy in
general and, therefore, could affect Global's future operating results.
Potential Acquisitions
It is expected that Global will continue to seek potential acquisitions
and/or venture partners consistent with its business objectives during the
period prior to the effective date of this proxy statement and prospectus.
Global presently has no agreements, understandings or arrangements to enter into
any such transaction. It is intended that no action will be taken that would
cause a delay in any nature to this proxy statement or the timing of the
proposed shareholder meetings. However, it is possible that during this period,
Global may enter into letters of intent with potential acquisitions and/or
merger candidates providing that any such letters will generally be expressions
of interest and non-binding. In any event, such transactions will be subject to
subsequent approval by Superus after the pending shareholder meeting. In the
event, however, that Global, Surge or MailEncrypt enter into a binding
acquisition agreement prior to the Effective Date for a material acquisition the
shareholder meetings would be delayed until such time as Surge was able to
distribute revised proxy materials with the required acquisition company
financial statements and other required disclosures.
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GLOBAL - DESCRIPTION OF BUSINESS
Development of Business
Global DataTel, Inc., was originally incorporated in the State of Utah
in 1980, as LaPlate Oil and Mining, Inc., and changed its name to Gold Coast
Resources, Inc. in 1982. The company's state of incorporation was changed in
December 1996 to the State of Nevada. In December 1998, the Company's name was
changed to Global DataTel, Inc. and the existing officers and directors of the
Company resigned, and new officers and directors were elected.
In 1998, a number of significant transactions took place. In September
1998, Global acquired International Computer Resources, Inc. ("ICR"), a Florida
corporation, which does business as an IBM computer reseller, and Mantenimiento
Electronico de Sistemas, Limited, ("MES"), a Colombian corporation, which does
business as a computer integrator and service provider.
In November, 1998, Global acquired three additional Colombian
corporations, CASA Informatica, S.A., ("CASA"), DLR & CIA, Ltda., ("DLR") and
Micro Star, Ltda., ("MICRO"). CASA, an IBM computer reseller, was acquired for
$849,000 in cash and promissory note and 392,000 restricted shares of Global
common stock valued at $1,960,000. DLR, an IBM computer reseller and system
integrator, was acquired for a total consideration of $600,000, which was paid
$300,000 in cash and promissory note and 60,000 restricted shares of Global
common stock valued at $300,000. MICRO, also a IBM computer reseller and system
integrator, was acquired for a total consideration of $500,000, which was paid
$150,000 in cash and promissory note and 70,000 restricted shares of Global
common stock valued at $350,000.
Global now has three wholly owned or controlled operating subsidiaries:
Global DataTel de Colombia, S.A. (GDC), incorporated under the laws of
Colombia on May 10, 1999, is a subsidiary consisting of four acquired
companies in Colombia, MES, CASA, DLR and MICRO. These companies are
involved in the computer system integration business. Global owns 94.9%
of the capital stock of GDC, with 100% of the voting rights. Under
Colombian law, a foreign corporation cannot own more than 94.9% of a
Colombian corporation.
On Line Latin America, S.A. (OLA), incorporated under the laws of
Colombia on January 3, 1999, is in the Internet service business.
Global owns 94.9% of the capital stock of OLA, with 100% of the voting
rights.
eHOLA, Inc (eHOLA), incorporated on December 31,1998, in Las Vegas,
Nevada, (formerly Electronic Latin America On-Line, Inc.), is a
wholly-owned subsidiary engaged in the Internet service business and
provision of e-business solutions.
The operations of International Computer Resources, Inc. ("ICR") are
now conducted under Global DataTel, Inc., and form the North American component
of the Information Systems Division.
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Gold Coast Resources prior to September 1998 was involved in the
marketing of the "Travel Agent's Hotel Guide", a publication that allowed travel
agents exposure to Hotels and hotels around the world. Prior to that, Gold Coast
Resources was involved in oil, gas, mining and mineral investments.
On December 14, 1998, the Company sold its interest in a subsidiary,
The Travel Agent's Hotel Guide, Inc., a Nevada corporation, to Ameriresource
Technologies, Inc. in consideration for a convertible debenture in the face
amount of $3,350,000, bearing interest at the rate of seven (7%) percent per
annum and convertible in three years into common stock of Ameriresources.
Gold Coast Resources had acquired 20% interest in the Travel Agent's
Hotel Guide, Inc. on August 17, 1998, by payment of 7,000,000 shares of common
stock (subsequently reverse split to 3,500,000) to David Newren, a former
officer and director of Global. Global had previously acquired an 80% interest.
At one time, Gold Coast Resources pursued mergers with Biostasis, Inc.,
Shoulder Shade Products, Inc., Secure Bind, Inc., and Fox Broadcasting Inc., but
rescinded these transactions in August 1998, canceling the 1,000,000 shares of
preferred stock previously issued to each of these entities.
Narrative Description of Business.
Global DataTel de Colombia, (GDC) is the largest operating subsidiary
of Global, with over 95% of its revenues and profits. This subsidiary is the
South American component of our Information Systems Division. The North American
component of our Information Systems Division presently accounts for
approximately 5% of the Company's revenues and profits. GDC is a midrange to
large Web and system integration computer solution provider. In Colombia, GDC is
authorized by various leading high tech companies as a reseller. GDC represents
such firms as IBM Corp., Compaq Computer, Microsoft, and Lotus. The GDC
subsidiary has been authorized by IBM de Colombia to resell midrange and
personal computer systems and IBM's operating system software and utilities in
Colombia. We deal directly with IBM de Colombia for order fulfillment. We are
also authorized to resell Compaq Corp. systems in Colombia. We can purchase
directly or through their distributors as best suits ours needs. The Microsoft
Corp. has authorized Global to be a Microsoft Solution provider. The Lotus
Corp., an IBM company, has authorized us to resell their products. These
products are primarily purchased through their authorized distributors in
Colombia. Global is also an authorized reseller in Colombia of Global One
telecommunications products and services. Global One is a corporation owned
jointly by Sprint, French Telecom, and Deutche Telecom. They operate Global One
outside their primary markets. To date, we have had minimal success in offering
their services and products as a reseller.
The primary focus is to provide presale consulting to Colombia's
largest national, government, and international companies, to determine the best
solution to their particular information system requirements. Based upon this
analysis, GDC can provide clients with a fully integrated solution which may
include hardware, software and services from various sources. The products may
include an AS/400 mini-computer, which becomes the host system in a centric
computing architecture operating under IBM's proprietary OS/400 operating
system. The applications suite that reside on these hosts may include an ERP
application such as JBA's System 21 product localized and customized for each
account. The Information Systems Division's main business is to provide system
consulting, resale of new micro, mini, or mainframe hardware,
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as well as software and complementary contract services as needed. These
services may include help desk, contract programming, training, and
hardware/software maintenance contracts. Sale of new hardware typically may
include wintel based micro computers such as IBM desktops, IBM AS/400-RS/6000
mini computers, and IBMS/390 mainframes. A typical sales cycle begins with
either a sales lead from one of our suppliers such as IBM, or a direct outbound
sales call from one of our salespersons. We market primarily in Colombia , with
4 offices in the major cities. Our staff includes 170 employees, all of them
full-time employees. Customer support is determined by the product or service
that has been supplied to the account. In the case of new hardware, the supplier
handles the warranty directly and subsequently may market an ongoing service
agreement. Software products may include Microsoft, Lotus, JBA, and several
other complimentary application software programs as may be deemed necessary in
order to provide satisfactory results. Services include various supplemental
after sale products such as executive training, employee implementation, and
long term contractual maintenance agreements.
Our largest order to date is from La Cachareria La Catorce a large
supermarket chain headquartered in Cali, Colombia. This order is primarily for
IBM Point of sale hardware and software. As of February 1, 2000, we had
fulfilled approximately $850,000 of the contract rollout. The year 2000 should
constitute $500,000 with the balance subject to review.
The customer support for software and services, may reside with Global,
with certain levels of support accorded our company from the supplier. New
product developments include e-commerce solutions as well localization of some
software programs for our suppliers such as JBA International. At the moment we
have no intellectual property rights, or patents, and licenses.
The division operates across a broad horizontal marketplace and is not
limited to any single vertical market. We compete in a very competitive
marketplace against not only other integrators, but also manufacturers such as
Sun Microsystems, as well as IBM themselves in certain instances. Global is well
positioned in the marketplace and has a good reputation in fulfilling the client
contracts. Our competitors however, may have greater resources or superior
products, than our offerings. The competitive nature of system integration
requires a talented workforce to compete effectively. The competition may have
expertise in certain areas that would give that company an edge in winning a
contract and vise versa.
Because of our concentration of business in Colombia, we are dependent
on the laws of that country to offer our products and services. At present there
is substantially no known detrimental regulations concerning the products we
sell, such as IBM, Compaq and other computer manufacturers, as well the services
we provide as part of standard set of offering to the commercial sector in
Colombia. The internet division has to date not been adversely effected by any
governmental rules or regulatory laws. It is possible legislation may be enacted
that could effect both divisions ability to conduct business in Colombia.
On Line Latin America, S.A., and eHOLA operate under our On Line
Services Division. This division's main business is two-fold: to provide dial-up
internet access ("Internet Access") in the United States, Central America, and
South America, (which is marketed under the eHOLA name) and to provide both
simple and sophisticated e-commerce business solutions ("Technology Solutions").
Our Internet Access operations commenced on April 22, 1999. We
presently offer internet access in the following countries: Argentina, Bolivia,
Brazil, Chile, Colombia, El Salvador, Equador, Guatemala,
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Mexico, Paraguay, Peru, United States and Venezuela. We are in testing phase,
and are actively seeking subscribers. eHOLA offers, for one basic yearly
subscription price per country, unlimited internet access in the countries
listed above, the service also includes the world wide web multilingual portal
www.eHOLA.com. The service also includes free e-mail and Microsoft Internet
Explorer browser. As of February 1, 2000, we had 333 Internet access
subscribers; approximately 2,000 registered users; subscriptions revenues of
$13,842 and advertising revenues to date of $5,000.
The Technology Solutions operations are in their development stage.
eHOLA endeavors to provide both simple and sophisticated e-commerce business
solutions to Latin American companies with which eHOLA/com comes in contact by
virtue of GDC's (and its progeny's) Web and system integration engagements, its
Internet Access clientele, business visitors to its Internet business center,
and through its own direct solicitations. eHOLA's Technology Solutions
operations have attracted relationships with top-tier American technology
providers (e.g., Broadvision) seeking to capitalize upon GCC's and eHOLA's
unique Latin American Synergies.
The Internet in Latin America is still in its infancy as compared to
the United States or Europe as looked at from a population penetration
percentage. Although the market place is relatively new, competition is growing
more robust. Though eHOLA endeavors to engage in predominately business-to-
business e-commerce in Latin America where there is presently limited
competition due to the high distribution channel barriers to entry, there is no
guarantee that competition in this realm will remain comparatively tepid.
Employees
As of March 3, 2000, Global had 225 full-time employees and no
part-time employees, 175 of which were employed by Global DataTel - de Colombia,
the Colombian subsidiary of Global, and 50 of which were employed by eHOLA.
Property and Leases
Global presently maintains the following facilities:
Information Systems Division - North America
Warehouse and sales office totaling approximately 2,500 sq. ft. and an
office suite totaling approximately 2,000 sq. ft. in Delray Beach, Florida,
which is leased through the year 2002, at a yearly rental of $37,200. The
building is a commercial technical center with approximately 5 individual
companies located directly adjacent.
Information Systems Division - South America
Bogota, Colombia - One sales office totaling 6,000 sq. ft., which is
leased through May, 2000. The annual rent is $69,600.
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One service office totaling 4,000 sq. ft., which is leased through
April, 2001. The annual rent is $19,200; and
One administration building totaling 5,000 sq. ft., which is a stand
alone structure that is 75% utilized and has enough room for expected growth.
This building is owned by the Company without major encumbrances other than a
first mortgage.
Cali, Colombia - One sales/technical office totaling 1,200 sq. ft.,
which is leased through January, 2000. The annual rent is $10,200.
Medillen, Colombia - One sales/technical office totaling 95 sq. meters
which is leased through December, 1999. The annual rent is $6,600.
Barranquilla, Colombia - One sales/technical office totaling 2,500 sq.
ft., which is leased through August, 2000. The annual rent is $19,200.
We are considering relocating to a central facility in Bogota, Colombia
in early 2000, which would replace the two rental offices there.
One Line Services Division - North America
The On Line Services Division shares the Information Systems Division
offices.
On Line Services Division - South America
One administrative/sales/technical office of 5,000 sq. ft. in
Barranquilla, Colombia, which is leased through January, 2001. The annual rent
is $43,200.
Our present annual lease obligations for 1999 total approximately
$205,000. The renewable leases provide for rental increases of 5%-10%.
All corporate facilities are covered by general business insurance
policies. Present utilization of our facilities is at approximately 75%.
We also utilize our suppliers in-country backbone facilities to allow
access to our network, thereby eliminating any need for additional offices.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE GDIS ASSET PURCHASE AGREEMENT AND THE ISSUANCE OF THE SHARES OF CLASS B
COMMON STOCK TO THE GLOBAL SHAREHOLDERS (PROPOSAL 2)
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GLOBAL APPRAISAL RIGHTS
If You Are A Shareholder of Global DataTel, Inc., You Are Hereby Given Notice
That You Have Certain Dissenter's And Appraisal Rights Under Nevada Law.
BECAUSE A PROXY CARD WHICH IS RETURNED BUT DOES NOT CONTAIN VOTING
INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED FOR APPROVAL OF THE GDIS ASSET
PURCHASE AGREEMENT, GLOBAL SHAREHOLDERS WHO WISH TO EXERCISE THEIR DISSENTERS'
RIGHTS MUST EITHER REFRAIN FROM SIGNING AND RETURNING HIS PROXY CARD OR, IF HE
SIGNS AND RETURNS HIS PROXY CARD, VOTE AGAINST OR ABSTAIN FROM VOTING ON THE
ADOPTION OF THE PURCHASE AGREEMENT.
THE FULL TEXT OF NEVADA STATUTES NRS 92A.300 THROUGH 92A.500 ARE
INCLUDED AS ANNEX G HERETO, AND ARE INCORPORATED HEREIN BY REFERENCE.
SHAREHOLDERS WHO WISH TO PERFECT THEIR RIGHTS AS DISSENTING
SHAREHOLDERS IN THE EVENT THE PURCHASE AGREEMENT IS ADOPTED MUST:
(1) FILE WITH GLOBAL DATATEL, INC., BEFORE THE TAKING OF THE VOTE
ON THE ACQUISITION AGREEMENT AT THE SHAREHOLDER MEETING, A
WRITTEN OBJECTION TO THE ACQUISITION; AND
(2) MUST NOTE VOTE HIS SHARES IN FAVOR OF THE GDIS ASSET PURCHASE
AGREEMENT.
IN ADDITION, SHAREHOLDERS WHO WISH TO PERFECT SUCH RIGHTS MUST SUBMIT
THE CERTIFICATES REPRESENTING HIS SHARES TO GLOBAL OR ITS TRANSFER AGENT FOR
NOTATION THEREON THAT A NOTICE OF ELECTION TO DISSENT HAS BEEN FILED; SUCH
CERTIFICATES TO BE THEREUPON RETURNED TO THE STOCKHOLDER.
FAILURE TO SUBMIT SUCH CERTIFICATES FOR SUCH NOTATION WITHIN ONE MONTH AFTER THE
FILING OF THE NOTICE OF ELECTION TO DISSENT MAY CAUSE THE HOLDER TO LOSE HIS
DISSENTERS' RIGHTS UNDER NEVADA LAW. SEE, SPECIFICALLY, "RIGHTS OF DISSENTING
SHAREHOLDERS" BELOW.
RIGHTS OF DISSENTING SHAREHOLDERS. SECTIONS OF THE NEVADA REVISED
STATUTES GIVE TO ANY SHAREHOLDER OF THE COMPANY WHO WISHES TO OBJECT TO THE GDIS
ACQUISITION (AN "OBJECTING SHAREHOLDER") THE RIGHT TO RECEIVE FROM GLOBAL IN
CASH, THE FAIR VALUE OF HIS OR HER SHARES, PROVIDED THAT THE GDIS ACQUISITION IS
NOT ABANDONED OR FAILS TO BE APPROVED AND AUTHORIZED, AND PROVIDED, FURTHER,
THAT THE FOLLOWING PROCEDURE IS CAREFULLY FOLLOWED.
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(a) The Objecting Shareholder must not vote in favor of the GDIS
Acquisition and, before the proposal to approve the GDIS
Acquisition is submitted to a vote at the special meeting of
shareholders, to be held on ______ __, 2000, he or she must
file with Global written objection thereto stating his or her
intention to demand payment for his or her shares. The written
objection should be sent to Global DataTel, Inc., Attention of
Mr. Antonio Serrato, Secretary. Registered Mail, Return
Receipt Requested is recommended. The objection may also be
submitted at the meeting, but before a vote is taken on the
GDIS Acquisition with Surge. Simply voting against the GDIS
Acquisition on its own, does not constitute adequate Notice
and objection.
(b) The objection shall include (i) a notice of election to
dissent, (ii) the shareholder's name and residence address,
(iii) the number of shares as to which the shareholder
dissents and (iv) a demand for payment of the fair value of
the shareholder's shares if the GDIS Acquisition is
consummated.
(c) A Negative Vote is Not Sufficient. A shareholder may not
dissent as to less than all of the shares as to which he has a
right to dissent, held by him of record that he owns
beneficially. A nominee or fiduciary may not dissent on behalf
of any beneficial owner as to less than all of the shares of
such owner, as to which such nominee or fiduciary has a right
to dissent, held of record by such nominee or fiduciary.
(d) Within ten days after the date of the special meeting, Global
must send written notice to each Objecting Shareholder that
the GDIS Acquisition has been authorized by the vote of
Global's shareholders.
(e) Together with the written demand or within one month
thereafter, the Objecting Shareholder must submit certificates
representing all of his shares of Global's stock to Global or
its transfer agent for the purpose of affixing a notation
indicating that a demand for payment has been made. Otherwise,
at the option of Global, exercised by written notice given
within 45 days from the date of filing of the notice to
dissent, he or she will lose his objector's rights, unless a
court, for good cause shown, otherwise directs.
(f) Within 15 days after the later of the Effective Date or last
day of the period during which written demand by the Objecting
Shareholder must be made (but in no case later than 90 days
from the date of meeting), Global shall make a written offer
by registered mail to each Objecting Shareholder to pay for
his or her shares at a specified price which Global considers
to be their fair value. Such offer shall be accompanied by a
statement setting forth the aggregate number of shares with
respect to which notices of election to dissent have been
received and the aggregate number of holders of such shares.
If the GDIS Acquisition has been consummated at the time of
such offer, the offer shall also be accompanied by (i) the
advance payment to each Objecting Shareholder who has
submitted to Global his or her stock certificates as provided
in paragraph (e), of an amount equal to 80% of the amount of
such offer, or (ii) as to each Objecting Shareholder who has
not yet submitted his or her stock certificates, a statement
that Global will make an advance payment to him or her of an
amount equal to 80% of the amount of such offer promptly upon
submission of his or her
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stock certificates. Every advance payment or statement as to
advance payment shall include advice to the Objecting
Shareholder to the effect that acceptance of such payment does
not constitute a waiver of any dissenters' rights. Any offer
shall be made at the same price per share to all Objecting
Shareholders.
(g) If, within 30 days after making such offer, the Objecting
Shareholder and Global agree upon the price to be paid for his
or her shares, payment must be made by Global within 60 days
of the date of the making of such offer upon the surrender of
the certificates representing his or her shares.
(h) If Demand for payment remains unsettled, Global shall, within
60 days of the date of demand, institute a special proceeding
in the Nevada District Court wherein GDIS resides in the State
of Nevada to determine the rights of the Objecting Shareholder
and to fix the fair value of his or her shares.
(i) If Global fails to institute such special proceeding and the
demand for payment is unsettled, after 60 days, the Objecting
Shareholder shall be paid the amount demanded.
(j) Within 60 days after the final determination of the special
proceeding, Global shall pay to each Objecting Shareholder the
amount found to be due him or her, upon surrender of the
certificates representing his or her shares.
The foregoing summary of the rights of Objecting Shareholders does not
purport to be complete and is qualified in its entirety by reference to Sections
92A.300 through 92A.500 of the Nevada Revised Statutes, a copy of which appears
in Annex G to this proxy statement.
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PROPOSAL 3-APPROVAL OF MAILENCRYPT MERGER AGREEMENT
The Merger Agreement and Plan of Reorganization (the "Merger
Agreement") dated as of February 16, 2000, is by and among MailEncrypt.com,
Inc., a California corporation, ("MailEncrypt"), the MailEncrypt shareholders,
Mail Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Surge ("MAC") and Surge. The Merger Agreement provides for the
acquisition of MailEncrypt by Surge through the statutory merger of MailEncrypt
with and into MAC (the "Mail Merger"). The sole consideration for the Mail
Merger is the issuance of 1,821,400 shares of Class B Common Stock of Superus to
be issued pro rata to the shareholders of MailEncrypt.
The Merger Agreement has been unanimously approved by the Board of
Directors and provides that the Mail Merger will be completed if the approvals
of Surge's stockholders required therefore are obtained (MailEncrypt's
shareholders already approved the merger) including, but not limited to,
approval of Proposal 2 - Approval of the GDIS Acquisition and the issuance of
Class B Common Stock and all other conditions to the Merger Agreement are
satisfied or waived.
The shareholders of Surge are being asked herein to approve the Merger
Agreement and the issuance of the Class B Common Stock to the MailEncrypt
stockholders.
MailEncrypt.com, Inc.
MailEncrypt seeks to become a leading business-to-business provider of
web-based encrypted e-mail solutions. Due to the rapid world-wide proliferation
of e-mail and commensurate privacy concerns associated with e-mail, it is the
Management's belief that encrypted e-mail will become commonplace for government
agencies, financial institutions, health care organizations,
insurance/law/accounting firms, e-commerce and individuals alike.
Merger Agreement
Effective Date. Completion of the Mail Merger is conditioned upon the
satisfaction of all representations and warranties under the Merger Agreement,
completion of final audits, the fairness opinion to Surge stockholders, and any
required approvals . Surge must obtain the required vote of its shareholders
under this Proposal 3, as well as Proposals 1 and 2. The four shareholders of
MailEncrypt have already approved the Merger.
Loan. Pursuant to the terms and conditions of the Merger Agreement,
Surge loaned MailEncrypt $750,000. The loan is evidence by a 10% convertible
promissory note due July 30, 2000. On the completion of the Mail Merger, the
note and all accrued and unpaid interest shall be forgiven by Surge. In the
event that the Mail Merger is terminated the note is convertible into common
stock of MailEncrypt at a pre-money valuation of $15 million.
Treatment of MailEncrypt Securities
All shares of Common Stock, no par value, of MailEncrypt
("MailEncrypt Shares") including those issued and outstanding and options to
purchase shares of Common Stock shall be converted into the
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right to receive an aggregate of 1,821,400 shares of Class B Common Stock. The
share exchange ratio shall be 1.475 shares of MailEncrypt common stock for one
share of Class B Common Stock. MailEncrypt also currently has 57,000 employee
stock options issued to one consultant. These options will be treated on an as
exercised basis and converted into shares of Class B Common Stock.
Stock Options and Warrants. At the Effective Date, MailEncrypt's common
stockholders and option holder will not have to take any action and their
securities will automatically be re-designated. MailEncrypt's shareholders will
be contacted by an exchange agent for purposes of exchanging the MailEncrypt
shares and options.
Finders' Fee. Morgan Stanley Dean Witter will be paid a finder's fee of
100,000 shares of Class B Common Stock upon shareholder approval of this
Proposal 3.
Reasons for the Merger
The Board of Directors of both Surge and MailEncrypt each believe that
the primary objective of the Mail Merger is to form a strategic acquisition for
a combined company with an enhanced financial position and deeper organizational
and other resources. The Mail Merger is intended to provide MailEncrypt with the
resources needed to enhance and market its services while providing Surge with a
broader product offering. The following specific reasons are believed by the
companies to support the Merger:
Strategic Partner for eHOLA.
Global MailEncrypt solutions shall, among other things, be offered to
all of Global's and eHOLA's customers in Latin America and beyond, a large
untapped market. Upon implementation, eHOLA would be the first, or among the
first, ISPS in the world to offer secure e-mail. Furthermore, MailEncrypt will
attempt to become a leading provider of encryption technology in Latin America,
and other emerging Internet economies, as well as in the United States. By
combining MailEncrypt's encryption technology with the Internet capabilities
Surge has acquired through its acquisition of Global, the Mail Merger will serve
to expand the scope of services that can be provided to the customers of both
companies.
Broader Sources of Income. The combined companies are expected to
generate income from joint ventures, royalty arrangements and marketing of the
combined products. By combining the resources of the operating subsidiaries, the
combined companies may, in the long-term, be able to achieve diversification of
income sources.
Stronger Financial Position and Access to Capital Markets. The combined
cash position of Superus after the Mail Merger should allow Superus to further
develop certain products and services, to invest in new technologies or products
and to acquire other companies. Superus is expected to have immediate access to
greater financial resources, including access to the public markets, following
completion of the Mail Merger.
Stronger Combined Organization. The GDIS and New Surge organization is
well established with developed Internet operations and sales and marketing
channels, which will facilitate MailEncrypt's sales
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and marketing and development activities. In addition, MailEncrypt being part of
a public company, together with Superus' organizational resources, should allow
MailEncrypt to attract additional strategic partners.
Talented Management Team. The Boards of Directors of Surge and
MailEncrypt believe the combined companies will have a strong, talented
management team combining key managers at MailEncrypt and Global with key Surge
managers. Pursuant to the terms of the Merger Agreement, Adam J. Epstein,
MailEncrypt's President and CEO, resigned from those positions and became
Chairman of the Board and Acting CEO of Surge. Upon the Effective Date, Mr.
Epstein will remain Chairman and become the CEO of Superus. Prior to joining
Mail, Mr. Epstein was the Senior Vice President, Business Development,
Tickets.com (Nasdaq: TIXX). His availability and employment by Superus was an
additional reason for the Mail Merger. In addition to his significant experience
with Internet companies he will be responsible for several areas in which
Superus, as a public company, required assistance. These include, but are not
limited to directing the operations of Superus' public relations, investor
relations, investment banking and Internet functions. See Proposal 6 - "Election
of Directors of Superus" below for the terms of Mr. Epstein's employment
agreement and certain biographical information concerning Mr. Epstein.
In addition, Michael Patchen and David Bird, the founders of
MailEncrypt, have entered into one-year employment agreements with Superus to be
followed by six-month consulting agreements. Messrs. Patchen and Bird have
licensed the software language they developed specifically for MailEncrypt to
such company on an exclusive basis. They have also granted certain option rights
to MailEncrypt to acquire rights to the software language they developed prior
to the formation of MailEncrypt that may have numerous other uses.
Interests of Executive Officers and Directors
The executive officers and Directors of New Surge and Adam J. Epstein,
Superus' Chairman of the Board and Acting Chief Executive Officer, have
substantial direct and indirect benefits to the completion of the Mail Merger as
described under Proposal 2 - "Approval of the GDIS Asset Purchase Agreement -
Interests of Executive Officers and Directors."
Superus Certificate of Incorporation Includes Class B Common Stock
In order to implement the transactions contemplated by the Merger
Agreement, and issue Class B Common Stock to the MailEncrypt Shareholders,
Superus has filed a Certificate of Incorporation to create Class A Common Stock
and Class B Common Stock. Surge's shareholders are being asked herein to approve
the Recapitalization Proposal 1 and upon the Effective Date of the
Recapitalization, Superus will issue shares of Class B Common Stock to the
MailEncrypt shareholders pursuant to this Proposal 3. A copy of the Superus
Certificate of Incorporation is attached hereto as Annex B hereto.
Certain Consequences of the Merger
Effective Date. The Mail Merger will take effect as soon as practicable
after the special meeting and approval by the stockholders of Surge of this
Proposal 3, as well as Proposals 1 and 2, and satisfaction of the conditions set
forth in the Merger Agreement. Upon the Effective Date of the Registration
Statement,
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of which this prospectus becomes a part, this prospectus will be distributed to
all MailEncrypt shareholders and option holders to enable them to resell the
shares of Class B Common Stock to be issued to them in a private placement. See
"Plan of Distribution." At the Effective Date, the separate corporate existence
of MailEncrypt will cease and the shareholders of MailEncrypt will become
holders of Class B Common Stock of Superus. The business operations of
MailEncrypt will be carried on by the newly formed subsidiary of Superus.
Operations of MailEncrypt
The current members of MailEncrypt's Board of Directors, as well as
MailEncrypt's management, except Mr. Epstein, will not be affected by the Mail
Merger. MailEncrypt, GDIS and New Surge's businesses will be operated
independently of each other. Generally, matters not in the ordinary course of
business, or which affect Superus' status as a publicly owned company, e.g., its
filing obligations with the SEC and its listing requirements with Nasdaq, or
matters before the Compensation Committee shall be determined by the Superus
Board of Directors.
Number of Shares of Common Stock Outstanding. The number of outstanding
shares of Class A Common Stock and Class B Common Stock immediately following
the Mail Merger and GDIS Acquisition are expected to be approximately 4,928,958,
and 24,102,000, respectively, and will vote equally on all matters.
Approximately 17% of the shares with voting privileges will be owned by Surge's
current shareholders, 77% by Global's current stockholders and 6% by
MailEncrypt's current shareholders, not including any shares issuable upon
exercise of warrants, options and notes. Giving effect to the possible exercise
of Surge's 716,000 employee stock options, 2,850,000 Superus Options and the
3,479,600 Class B Warrants; 1,500,000 options to purchase Class B Common Stock
granted to Adam J. Epstein and approximately 2,000,000 Global employee options,
Surge's, Global's and MailEncrypt's current shareholders would each own
approximately 34%, 58%, and 8% of Superus' approximately 42 million then
outstanding voting shares. As such, New Surge shareholders will have much less
ability to effect control over Superus.
Federal Income Tax Consequences. See Proposal 1 - "The Recapitalization
Proposal - Material Federal Income Tax Consequences" which includes a discussion
of the tax consequences of the Mail Merger.
Accounting Treatment of the Acquisition. Upon consummation of the Mail
Merger, Surge's wholly owned subsidiary, MAC, will be the owner of any of
MailEncrypt's assets. The transfer of assets will be at book value because the
conversion of the MailEncrypt Shares into Class B Common Stock will be accounted
for as a purchase.
Integration of the Businesses
The Mail Merger involves the integration of two companies that have
previously operated independently. There can be no assurance that the companies
will not encounter difficulties in integrating the operations of the two
companies or that the benefits expected from such integration will be realized.
Any delays or unexpected costs incurred in connection with such integration
could have a material adverse effect on the combined companies' business,
operating results or financial condition. Furthermore, there can
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be no assurance that the operations, managements and personnel of the two
companies will be compatible or that MailEncrypt or New Surge will not
experience the loss of key personnel. See "Risk Factors."
Validity of the Class B Common Stock, Class B Warrants
The validity of the Class B Common Stock and Class B Warrants and the
issue of Class B Common Stock upon exercise thereof will be passed upon for
Superus by Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158.
Upon the Effective Date, SBK Investment Partners, a partnership consisting of
members of Snow Becker Krauss P.C., will receive an aggregate of 200,000 already
issued and outstanding Global Shares convertible into an equal number shares of
Class B Common Stock.
Conditions to the Mail Merger
The consummation of the Mail Merger is subject to the satisfaction of
certain conditions, including, among others, (a) obtaining requisite stockholder
approvals of Surge's stockholders for Proposals 1, 2 and 3 and Global's
stockholders for Proposal 2; (b) the absence of any injunction prohibiting the
consummation of the Mail Merger or materially changing the terms or conditions
of the Mail Merger; (c) the proxy statement and prospectus being declared
effective by the SEC; (d) the receipt of accountants' customary "cold comfort"
letters; (e) the Class B Common Stock and Class B Warrants to be issued in
connection with the Mail Merger being authorized for trading on Nasdaq; (f) each
party having performed all of its agreements and satisfied all conditions
contained in the Merger Agreement in all material respects; (g) the
representations and warranties of each party to the Merger Agreement being true
and correct at closing except where the failure to be true and correct would not
have a material adverse effect on the business, results of operations or
financial condition of either party and its respective subsidiaries, taken as a
whole (a "Material Adverse Effect"); (h) the receipt of certain legal opinions
with respect to the tax consequences of the Mail Merger; (i) the receipt of
final audited and unaudited financial statements of MailEncrypt, and (j) the
receipt of the fairness opinions to Surge and Global and their respective
shareholders from independent investment bankers.
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MAILENCRYPT--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
The statements contained in this Management's Discussion and Analysis
of Financial Condition and Plan of Operations relating to MailEncrypt's
operating results and plans and objectives of management for future operations
may constitute forward-looking statements within the meaning Section 27A of the
Securities Act and of Section 21E of the Exchange Act. Actual results of
MailEncrypt may differ materially from those in the forward-looking statements
and may be affected by a number of factors, including the company's ability to
satisfy the various conditions contained in the Merger Agreement among
MailEncrypt, Surge, Mail Acquisition Corporation and MailEncrypt's shareholders.
We cannot assure that the transactions contemplated by the Merger Agreement will
be consummated on a timely basis, if at all.
Overview
The following discussion includes the operations of MailEncrypt.com,
Inc. for the period from March 17, 1999, the date on which the company was
incorporated in the State of California ("Inception"), to December 31, 1999.
This Management's Discussion and Analysis of Financial Condition and Plan of
Operations should be read in conjunction with MailEncrypt's Financial Statements
and the related notes thereto, which are included elsewhere in this proxy
statement/prospectus.
MailEncrypt is currently a development stage company which seeks to
become a leading business-to-business provider of web-based, encrypted e-mail.
MailEncrypt's proprietary platform uses 1,024 bit, military-strength encryption
to provide a comprehensive, easy-to-use, reliable and scalable service,
accessible from anywhere in the world where an Internet connection is available,
to send and receive e-mail with virtually total security.
MailEncrypt is a development stage company with no operations to date.
Management anticipates that future revenue will be comprised of user fees. The
user fees will be comprised of initial set up fees and annual royalties based
upon the number of users. Service fees will be comprised of consulting fees
emanating from integration, private-labeling, advanced support and challenging
implementations.
On February 16, 2000, MailEncrypt entered into the Merger Agreement
with Surge, Mail Acquisition Corporation and MailEncrypt's shareholders. The
Merger Agreement provides that MailEncrypt's shareholders (including the holders
of outstanding options to purchase shares of MailEncrypt's capital stock) will
receive, in the aggregate, 1,821,400 shares of Surge's Class B Common Stock upon
consummation of the Mail Merger. The transaction is subject to customary
conditions, including the receipt of required regulatory approvals. In
connection with the execution of the Merger Agreement, Surge loaned MailEncrypt
$750,000 pursuant to the terms of a convertible promissory note due July 30,
2000.
While MailEncrypt anticipates that the Mail Merger will be consummated
late in the second calendar quarter or early in the third calendar quarter of
2000, we cannot assure that the Mail Merger will be consummated or that
MailEncrypt will become a wholly owned subsidiary of Surge. In the event that
the Mail Merger is terminated, MailEncrypt will not be able to meet its cash
needs without additional
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borrowings or the issuance and sale of debt or equity securities. MailEncrypt
cannot assure that it would be able to borrow or raise such additional amounts,
or that the terms pursuant to which the company may be able to borrow or raise
such funds would be satisfactory to MailEncrypt.
Results of Operations
Net revenues. We had no revenues for the period from Inception (March 17, 1999)
to December 31, 1999.
General and administrative expenses. General and administrative expenses
consisted primarily of management compensation, professional fees, consulting
expense and travel expense. We expect general and administrative expenses to
increase in the future in response to the company's growth.
Loss from operations. Loss from operations for the period from Inception (March
17, 1999) to December 31, 1999 is as a result of MailEncrypt having had no
revenues. Accordingly, the loss represents the company's general and
administrative expenses. See "Net revenues" and "General and administrative
expense."
Liquidity and Capital Resources
From Inception (March 17, 1999) to December 31, 1999, MailEncrypt was
financed primarily through cash flow from financing activities. We had cash and
cash equivalents of $40,000 as of December 31, 1999.
Our operating activities used $51,000 from Inception to December 31,
1999, principally related to the net loss offset by an increase in accounts
payable and advances from our officers.
Net cash used in investing activities from Inception to December 31,
1999 was $9,000, relating to purchases of property and equipment.
Financing activities provided cash of $100,000 for the period ending
December 31, 1999, resulting from the issuance of common stock.
Our financial statements have been prepared assuming that MailEncrypt
will continue as a going concern. MailEncrypt is a development stage company
with no operations to date. In the course of developing and refining our
technology platform, we will continue to incur additional losses for the
foreseeable future. We believe that revenues from our products and services will
be received by the end of year 2000. We will require additional funds for our
operational activities and sales efforts. We are seeking financing through our
planned merger with Surge, and future collaborative arrangements with third
parties to meet our cash needs. There are no assurances that the merger with
Surge will be completed, that funds will be available to execute our operating
plan or that future collaborative arrangements will be consummated. These
factors raise substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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Year 2000 Readiness Disclosure
We have developed our web-based encrypted e-mail to be Year 2000
compliant. We continue to monitor our products, services, business systems and
infrastructure to ensure that latent defects do not manifest themselves over the
next few months. However, there can be no assurance that Year 2000 issues will
not have a material adverse impact on us since it is still early in the year
2000. Based upon information currently available, we believe that our most
reasonably likely worst case Year 2000 scenario would relate to a temporary
disruption in the supply of services or licenses resulting from problems with
the systems and services of third parties, rather than with our internal systems
or products. Monitoring costs and other Year 2000 project costs in the 2000 year
are not expected to be significant.
MAILENCRYPT -- DESCRIPTION OF BUSINESS
General
MailEncrypt.com, Inc. was incorporated in the State of California on
March 17, 1999. MailEncrypt is currently a development stage company which seeks
to become a leading business-to-business provider of web-based, encrypted e-mail
solutions. MailEncrypt's proprietary platform uses 1,024 bit, military-strength
encryption to provide a comprehensive, easy-to-use, reliable and scalable
service, accessible from anywhere in the world where an Internet connection is
available, to send and receive e-mail with virtually total security.
MailEncrypt's principal executive offices are located at 1550 Veteran
Avenue, Los Angeles, California 90024. The use of such premises has been
provided, without charge, by one of MailEncrypt's founders. MailEncrypt, which
operates primarily as a virtual company through the computer network connections
established among its employees and contractors, has no other physical
locations.
Industry Background
The Internet has emerged as one of today's most important and fastest
growing tools for commerce and communications, both in the United States and
abroad. Jupiter Communications estimates that at the end of 1998 there were over
77 million online users in the United States, and that by the end of 2002 this
number will increase to over 131 million. E-mail, which has evolved from a
simple personal messaging device to a powerful and cost-effective business tool,
is one of the most popular Internet applications. Jupiter Communications
projects that approximately 90 billion e-mail messages were sent in the United
States in 1998. More significantly, the Wall Street Journal has projected that
the number of e-mail mailboxes will more than double from their current levels
to reach 555 million mailboxes by 2002. According to International Data
Corporation, by 2002, approximately 7.9 billion e-mail messages will be sent
every day in the United States alone.
The rapid proliferation of e-mail has lead to the need for greater
security to protect the privacy and integrity of the medium. Security concerns
have accompanied the development of most Internet applications, but have been
particularly pronounced with respect to e-mail. These concerns became a matter
of widespread public attention in fall 1999 with the acknowledgments from, among
others, a major e-mail hosting provider and a major e-mail service provider that
serious breaches of security had exposed millions
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of personal and business e-mail accounts to public review. As public attention
has been focused on the vulnerability of e-mail and a number of analysts have
identified the need for secure e-mail technology to support the growth of
e-business, a significant market has developed for companies like MailEncrypt
that can offer virtually complete security to businesses and individuals who use
e-mail to transmit documents and other information over the Internet.
The MailEncrypt Solution
MailEncrypt seeks to address the need for more secure e-mail
communication by bringing state of the art cryptography technology to commercial
e-mail, and by combining the two in an accessible, user-friendly platform. This
platform, which is also fully scalable and can support a variety of commercial
uses, provides authentication, integrity and privacy for e-mail, anywhere in the
world where an Internet connection is available.
There are three primary bases of a lapse in e-mail security. The first
relates to authentication, which may be compromised by purposeful impersonation
techniques ranging from unauthorized use of another person's computer to the
illicit use of another person's e-mail header. As a result of this type of
impersonation, the recipient cannot be completely confident that an e-mail
message actually emanated from the purported sender. The second relates to
integrity. Specifically, at some point during the transmission of an e-mail, the
content of the message itself may be tampered with, thus misrepresenting the
sender and/or misleading the recipient. The third relates to privacy, which is
breached if, at some point during the transmission of an e-mail, the content of
the message, though undisturbed, is viewed by unintended recipients.
Cryptography, such as the 1,024 bit, military-strength e-mail
encryption technology employed by MailEncrypt is the most effective way to
ensure the authentication, integrity and privacy of e-mail. Through its reliance
upon one of the industry's most respected existing public key encryption
protocols, Gnu Privacy Guard, also known as "GPG" (which is conversant with
Pretty Good Privacy, also known as "PGP"), MailEncrypt is able to provide
authentication through use of algorithm-based digital signatures which confirm
that a particular message was actually sent by the purported sender and no one
else. At the same time, MailEncrypt is able to provide both integrity and
privacy through use of complex, algorithm-based public and private "keys" which
ensure that it is virtually impossible for anyone other than the intended
recipient to view, or tamper with, the contents of an e-mail.
In addition to utilizing a proven military-strength encryption protocol
to provide authentication, integrity and privacy, MailEncrypt's service is
web-based. There are several benefits to providing a web-based as opposed to a
software-based e-mail service:
o A web-based service allows e-mail users, who are increasingly
busy and more transient than ever before, to access their
e-mail via any Internet connection, even without their own
computers and without any personal or customized software;
o e-mail is substantially more prone to tampering when the
application resides on in-house corporate servers, as would
often be the case with software-based services; and
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o as evidenced by the financial success of, among others, e-mail
hosting providers, businesses have demonstrated a general
desire to outsource the administrative burdens and expense of
e-mail, particularly highly specialized aspects such as
security features.
MailEncrypt's revenue is expected to be comprised of user fees and
service fees. The user fees will be comprised of initial set up fees and annual
royalties based upon the number of users. Service fees will be comprised of
consulting fees emanating from integration, private-labeling, advanced support
and challenging implementations.
MailEncrypt Technology
Although e-mail encryption technology has existed for some time, it has
not previously gained widespread acceptance because the public has only recently
become aware of the need for greater e-mail security, and because the technology
necessary to combine military-strength encryption with a user-friendly messaging
service has not previously been exploited effectively in a commercial setting.
MailEncrypt has developed its service based in part on selected
technologies developed by third parties and licensed by MailEncrypt under
non-exclusive agreements. MailEncrypt uses a proprietary Diesel Engine Software
platform, written in Diesel's server side scripting language, which utilizes GPG
, a PGP conversant encryption algorithm. MailEncrypt has received a perpetual,
royalty-free license to the web- based encrypted e-mail application of Diesel,
and has entered into option agreements with Blueprint Networks, Inc., the owner
of Diesel, to purchase either or both of the web-based encrypted e-mail
application of Diesel and the Diesel Engine Software platform.
This technology is well suited for commercial exploitation in the form
of MailEncrypt's e-mail services because it can be utilized with virtually any
version of virtually any version of any Internet browser, which significantly
enhances the ease of use, accessibility and reliability of MailEncrypt's
service. In addition, the technology can be used on Macintosh, Windows or Unix
platforms, which further enhances the marketability of the services and expands
the potential user base. Moreover, because the services are conversant with the
existing PGP protocol, an individual can send encrypted e-mail to any existing
PGP user, even to one who has not registered to use MailEncrypt's services.
Strategy
MailEncrypt's objective is to become the leading provider of web-based,
encrypted e-mail. To achieve this objective, MailEncrypt intends to provide
comprehensive, reliable e-mail services based upon a platform that will become
the industry standard. To penetrate the market quickly, MailEncrypt intends to
market its services to selected businesses in target markets and to enter into
both reselling arrangements and strategic relationships with leading companies.
Initially, MailEncrypt's primary target market consists of the legions
of businesses that have a particular need (e.g. arising out of fiduciary
relationships or sensitive technology) to protect confidential information
already sent in unprotected e-mails, or confidential information currently sent
in more expensive mediums due to the security shortcomings of their current
e-mail platforms. These businesses include those in the fields of law,
medicine/healthcare, finance (banks, brokerages, etc.), accounting/auditing,
insurance/underwriting, technology, and electronic commerce. To date, only a
small portion of this market currently utilizes a truly secure e-mail platform.
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As the use of web-based, encrypted e-mail becomes more ubiquitous in
the workplace, MailEncrypt believes that individuals will demand the same
technology for their personal use. Accordingly, following penetration of its
services into the business market, MailEncrypt expects individual use of its
web-based, encrypted e-mail services to grow exponentially through its
anticipated distribution relationships with large e-mail providers.
MailEncrypt has focused its initial business development efforts on
attracting large, high-profile corporate customers as the first users of its
services. As a result of these efforts, MailEncrypt has already recruited a
backlog of large law firms, electronic commerce companies, health care providers
and leading technology companies who are awaiting the roll-out of MailEncrypt's
services. Following the successful roll-out of its service offerings,
MailEncrypt intends to leverage its initial success in this area by attempting
to negotiate beneficial reselling arrangements with selected entities with
established distribution capabilities for security and information technology
products.
At the same time, MailEncrypt will aggressively pursue strategic
relationships with large e-mail providers, ISPs, portals and unified messaging
vendors through which MailEncrypt will have access to millions of existing
e-mail users. MailEncrypt believes that mutually beneficial strategic
relationships with these types of entities are viable because they have all
expressed a willingness to capture the revenue associated with premium, secure
e-mail service options for their customers.
MailEncrypt believes that these reselling relationships and premier
strategic partnerships will enable MailEncrypt to grow its distribution very
quickly with a correspondingly low cost of new user acquisition.
Competition
MailEncrypt competes in the developing market for secure messaging,
which is intensely competitive and rapidly changing. As a result of the nature
of the Internet and the relatively recent evolution of secure messaging, this
market is highly fragmented and uncertain. MailEncrypt's primary long-term
competitors may not have entered the market yet. Competition could result in
price reductions, changes in the way services are priced, reduced gross margin
and loss of market share, any of which could materially adversely affect
MailEncrypt's business. Many current and potential competitors have greater name
recognition, longer operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations, sales, distribution
and other resources. Some of MailEncrypt's potential competitors could be among
the largest and most well-capitalized companies in the world.
Current competitors include, but are not limited to, Incrypt.com,
Pop3now.com, Interbuz.com, Zixmail.com, Ziplip.com, Hushmail.com,
Certifiedmail.com, Docspace.com, Postx.com, Interosa.com and Tumbleweed
Software, Inc. In addition, ISP's, portals and others may elect in the future to
offer encrypted, web-based e-mail services.
If one or more of MailEncrypt's current or future competitors were to
achieve leading positions in the industry or if they were to expand
relationships with significantly larger companies through mergers,
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acquisitions or otherwise, MailEncrypt's business could be seriously harmed. In
addition, potential competitors may bundle or incorporate the functionality of
MailEncrypt's services into their services in a manner that adversely affects
the demand for MailEncrypt's services.
At present, however, MailEncrypt believes that the services provided by
its existing competitors are generally distinguishable from those provided by
MailEncrypt because the competitive services frequently are:
o not available from any computer which has an Internet
connection, because they are largely software-based;
o not useable on any version of any browser;
o not useable on Mac and PC alike;
o only useable by registered users of their particular service;
and
o not functionally equivalent.
Intellectual Property Rights
MailEncrypt's success and ability to compete are substantially
dependent upon its technology and intellectual property. While MailEncrypt
relies on copyright, trade secret and trademark law to protect its technology
and intellectual property, the company believes that factors such as the
technological and creative skills of its personnel, new product and service
developments, frequent product and service enhancements and reliable product and
service maintenance are more essential to establishing and maintaining an
intellectual property leadership position. MailEncrypt has no patents or patent
applications pending, but is currently exploring potential means of protecting
its proprietary platform.
MailEncrypt generally enters into confidentiality or license agreements
with its employees, consultants and corporate partners and generally controls
access to and distribution of its products, documentation and other proprietary
information. Despite MailEncrypt's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use the
company's products, services or technology. Policing unauthorized use of our
proprietary information is difficult, and the steps MailEncrypt has taken might
not prevent misappropriation of its technology, particularly in foreign
countries where the laws may not protect proprietary rights as fully as do the
laws of the United States.
Substantial litigation regarding intellectual property rights exists in
the technology industry. From time to time, third parties have asserted and may
assert exclusive patent, copyright, trademark and other intellectual property
rights to technologies and related standards that are important to MailEncrypt.
MailEncrypt expects that it may be subject to infringement claims as the number
of competitors in its industry segment grows and the functionality of products
in different industry segments overlaps. Although MailEncrypt has not been party
to any litigation asserting claims that allege infringement of intellectual
property rights, it is possible that MailEncrypt may be a party to litigation of
this kind in the future. Any third party claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause service delays or require MailEncrypt to enter
into
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royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to MailEncrypt, if at all. A
successful claim of product infringement against MailEncrypt could harm the
company's business, perhaps significantly.
Government Regulation
MailEncrypt has been advised by counsel that its service, being
web-based as opposed to software-based, is not currently subject to direct
regulation by any domestic or foreign governmental agency, other than
regulations applicable to businesses generally, and laws or regulations directly
applicable to access to online commerce. However, due to the increasing
popularity and use of the Internet and other online services, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet or other online services covering issues such as encryption, user
privacy, Internet transaction taxation, pricing, content, copyrights,
distribution and characteristics and quality of products and services. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet could harm our
business.
Employees
As of February 16, 2000, MailEncrypt had three employees, who perform a
variety of general and administrative and operational (including software
development) functions. MailEncrypt is not subject to any collective bargaining
agreements and believes that its employee relations are good. Competition for
employees in our industry is intense and our future success depends on our
ability to attract, retain and motivate highly-skilled employees.
Legal Proceedings
MailEncrypt is not aware of any pending legal proceedings against it
that, individually or in the aggregate, would have a material adverse effect on
its business, results of operations or financial conditions. In the future,
MailEncrypt may be party to litigation arising in the course of its business,
including claims that we allegedly infringe third-party trademarks and other
intellectual property rights. These claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE MAIL MERGER AGREEMENT AND THE ISSUANCE OF THE SHARES OF CLASS B COMMON STOCK
TO THE MAILENCRYPT SHAREHOLDERS (PROPOSAL 3)
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PROPOSAL 4--RATIFICATION OF SUPERUS 2000
STOCK INCENTIVE PLAN
Background and Reasons for the Proposal
Upon the formation of Superus, Surge, as the sole shareholder of
Superus, adopted the Superus 2000 Stock Incentive Plan (the "Superus Plan") and
we are now seeking your ratification of such adoption. This is a non-binding
proposal and the plan will remain in place even if the Surge shareholders do not
ratify same. On March 8, 2000, the Superus board of directors adopted the
Superus Plan. The Plan permits the board of directors to issue both Class A
Common Stock and Class B Common Stock under the plan. The terms of the Superus
Plan are the same in all material respects as our existing stock incentive plan
except:
(1) both classes of Superus' common stock may be issued under the Plan;
and
(2) the total number of shares available for issuance under the Plan
has been increased from 850,000 shares of existing common stock, to an aggregate
of 15 million shares of Common Stock to be allocated by the Superus Board of
Directors and, when formed, the Superus Compensation Committee, between Class A
Common Stock and Class B Common Stock.
We believe the Superus Plan will promote the interests of Superus, each
subsidiary and our stockholders by helping to attract and retain qualified
employees, officers, directors and consultants. The Superus Plan is expected to
motivate participants by means of stock options, stock appreciation rights and
restricted shares to achieve long-term performance goals, and enable our
employees, officers, directors and consultants to participate in our long-term
growth and financial success.
The number of shares of Class A Common Stock and Class B Common Stock
available for issuance under the Plan has been determined in light of the
adjustments required to be made to the number of shares underlying options
currently outstanding. These adjustments are necessary in order to provide that,
following the Recapitalization, 716,000 options held by employees and others
with a business relationship to Surge will be exercisable for shares of Class A
Common Stock on a one-for-one basis, while all contractual rights to 5,300,000
Orbit Options held by Surge management, will be forfeited and 2,650,000 Superus
Options granted at the same rate as each two shares of existing common stock may
be converted into for one share of Class B Common Stock and be exchangeable for
Class B Common Stock, will accelerate and become immediately exercisable. An
additional 1,500,000 and 200,000 Superus Options to purchase Class B Common
Stock, respectively, were granted to our recently appointed Chairman of the
Board, Adam J. Epstein and the Chief Executive Officer of New Surge and a member
of the Superus Board, Ira Levy.
To understand the Superus Plan more fully, you should read the plan
which is attached to this proxy statement and prospectus as Annex E.
Our board of directors believes that this proposal is an integral part
of the Recapitalization, and will not implement this proposal unless Proposals
1, 2 and 3 are approved.
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Types of Awards under the Superus Plan
Awards granted under the plan may be in the any combination of the
following:
o stock options to purchase shares of either Class A Common
Stock or Class B Common Stock;
o stock appreciation rights. These are rights to receive the
spread or difference between the fair market value of shares
subject to an option and the corresponding exercise price of
the option. The spread may be payable in either stock, cash or
both. Under generally accepted accounting principles,
compensation expense must be recognized starting at grant and
the expense grows as the company's stock price increases; and
o restricted stock. These are awards of stock on which various
restrictions and conditions are imposed which must be
satisfied in order for the award to vest in the participant.
Eligibility
Under the terms of the Superus Plan,
o directors,
o officers,
o employees and
o consultants
of Superus and its subsidiaries designated by the compensation committee
administering the stock plan are eligible to participate in the plan.
Limitation on Awards to Any Individual
Under the Superus Plan, the maximum number of shares of common stock
with respect to which options or other awards may be granted to any individual
in any calendar year may not exceed 2.5 million shares of common stock.
Administration
The compensation committee of our board of directors will administer
the Superus Plan.
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Stock Options
Exercise Price. The purchase price of a share of Class A Common Stock
or Class B Common Stock covered by an option may not be less than 100% of the
fair market value of a share of that class of common stock on the date of grant.
Option Vesting and Exercising. The compensation committee administering
the Superus Plan will determine the vesting period and all other terms and
conditions of each option, except that no option may be exercisable more than
ten years from the date of its grant. The compensation committee may, in its
discretion, accelerate the vesting of any option.
An option may only be exercised to the extent that it is vested.
Participants may exercise options by delivering cash, Class A Common Stock,
Class B Common Stock or any combination thereof.
Termination of Employment. The compensation committee will determine
when, if at all, an option will vest when a participant in the Superus Plan
leaves Superus. Generally, if a participant's employment or service is
terminated other than by death or disability, his or her options will cease to
vest immediately and the options will terminate three months after termination
of employment or service. If a participant dies or becomes disabled, his or her
options will terminate after one year. In no event may an option terminate later
than ten years after granted.
Grants to Executive Officers and Employees as a Group. As of the date
of this proxy statement and prospectus:
o Adam J. Epstein, our Chairman of the Board and acting Chief
Executive Officer, held options to purchase 1,500,000 shares
of Class B Common Stock of Superus at an exercise price of
$6.50 per share, with 20% exercisable immediately and the
remainder over 36 equal monthly installments. Following the
approval of the Recapitalization Mr. Epstein will forfeit his
contractual rights to purchase 1,500,000 shares of Surge's
existing common stock.
o Ira Levy, a Director of Superus and President and Chief
Executive Officer of New Surge, held options to purchase
1,025,000 shares of Class B Common Stock of Superus at an
exercise price of $2.69 per share which will be immediately
exercisable upon approval of the Recapitalization and Proposal
5 and 200,000 shares of Class B Common Stock at an exercise
price of $6.50 per share. Following the Recapitalization and
approval of Proposal 5; Mr. Levy will forfeit existing options
to purchase 2,450,000 shares of Surge's existing common stock
exercisable at $2.00 per share in full settlement of his
contractual rights and his 1,025,000 options to purchase Class
B Common Stock will then become immediately exercisable. Mr.
Levy's 200,000 Class B Common Stock options vest 20%
immediately and the remainder over 36 equal monthly
installments. Following the approval of the Recapitalization,
Mr. Levy will forfeit his contractual rights to purchase
200,000 shares of Surge's existing Common Stock. Mr. Levy
also holds options to purchase 175,000 shares of our existing
common stock at exercise prices between $1.25 and $2.00 per
share which will be exercisable for an equal number of shares
of Class A Common Stock of Superus at the same prices
following the Recapitalization.
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o Steven J. Lubman, Secretary of Superus and Vice President and
a director of New Surge, held options to purchase 1,000,000
shares of Class B Common Stock of Superus at an exercise price
of $2.69 per share. Following approval of the Recapitalization
and of Proposal 5, Mr. Lubman will forfeit his existing
options to purchase 2,250,000 shares of Surge's existing
common stock exercisable at $2.00 per share in full settlement
of his contractual rights and his 1,000,000 options to
purchase Class B Common Stock will then become immediately
exercisable. Mr. Lubman also holds options to purchase 175,000
shares of our existing common stock at exercise prices between
$1.25 and $2.00 per share which will be exercisable for
175,000 shares of shares of Class A Common Stock of Superus at
the same prices following the Recapitalization.
o Mario Habib, a director of Superus and President of eHOLA held
options to purchase ___ shares of Global at an exercise price
of $10.00 per share. Following the Recapitalization, these
options will be exercisable for an equal number of shares of
Class B Common Stock at $10.00 per share.
o Richard Baker, President of GDIS, held options to purchase ___
shares of Global at an exercise price of $_____________.
Following the Recapitalization, these options will be
exercisable for an equal number of shares of Class B Common
Stock at $___ per share.
o all Surge employees and directors as a group, other than the
above referenced persons, held options to purchase an
aggregate of 367,000 shares of our existing common stock at
exercise prices ranging from $1.20 to $3.30 per share at a
weighted average price of $1.59 per share. Following the
Recapitalization, these options will be exercisable for an
equal number of shares of Class A Common Stock at the same
prices. Two non-employee directors of Surge held options to
purchase 350,000 and 250,000 shares of existing common stock
at an exercise price of $2.00 per share. Following the
Recapitalization and approval of Proposal 5, these options
will be forfeited in exchange for 400,000 and 225,000 options,
respectively, which have been granted to purchase Class B
Common Stock of Superus at $2.69 per share.
o all GDIS employees as a group, other than Messrs. Habib and
Baker described above, held options to purchase an aggregate
of ___ shares of GDIS Common Stock at a weighted average of
$____ per share. Following the Recapitalization, these options
will be exercisable for an equal number of shares of Class B
Common Stock at the same prices.
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o one consultant of MailEncrypt held options to purchase an
aggregate of 57,000 shares of MailEncrypt Common Stock at a
price of $.50 per share. Following the Recapitalization, these
options will be converted into shares of Class B Common Stock.
Stock Appreciation Rights
Stock appreciation rights may only be granted in conjunction with
options granted under the Superus Plan, either at the time of the option grant
or at any time after the option grant.
Stock appreciation rights may not be exercised by a participant who is
a director or officer (as defined under the securities laws) within six months
after being granted, except in the case of the death or disability of the
participant. Stock appreciation rights are exercisable only when the related
option is exercisable.
Upon exercise of a stock appreciation right, the participant will be
entitled to the difference between
o the fair market value of a share of the class of common stock
underlying the related option and
o the per share exercise price of the related option,
multiplied by the number of shares represented by the stock appreciation right.
The compensation committee will determine the form of payment, which may be in
cash, either class of common stock or any combination of cash and stock.
A stock appreciation right may be exercised without exercising the
related option, but the related option will be canceled to the extent the right
is exercised. Similarly, a related option may be exercised without exercising
the stock appreciation right, but the stock appreciation right will be canceled
to the extent the option is exercised.
Restricted Stock
The compensation committee may make restricted stock awards in Class A
Common Stock and Class B Common Stock. The compensation committee will
determine:
o the class of stock subject to the restricted stock award;
o the terms and conditions of the restricted stock award;
o the restricted period for the award;
o the restrictions applicable to an award, which may include
continued employment and specific corporate, divisional or
individual performance standards or goals;
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o whether the participant will receive dividends and other
distributions on the restricted stock during the restricted
period or whether they will be withheld until the restrictions
have been satisfied;
o whether the award will vest in the event of the participant's
death or disability prior to expiration of the restrictions;
and
o whether to waive any or all of the restrictions.
Upon an award of restricted stock, a participant will be a stockholder
with respect to those shares of restricted stock and will be entitled to vote
those shares. The stock certificate representing the restricted stock will be
held by Superus, together with stock powers executed by the participant in favor
of Superus, until the restricted period expires and any restrictions imposed are
satisfied.
Awards of restricted stock granted under the Superus Plan may qualify
for the performance-based compensation exemption to Section 162(m) of the Code.
As determined by the compensation committee in its sole discretion, either the
granting or vesting of these performance-based awards will be based upon
achievement of hurdle rates and/or growth in one or more of the following
business criteria:
o net earnings;
o earnings per share;
o net sales growth;
o market share;
o net operating profit;
o expense targets;
o working capital targets relating to accounts receivable;
o operating margin;
o return on equity;
o return on assets;
o planning accuracy (as measured by comparing planned results to
actual results);
o market price per share; and
o total return to stockholders.
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In addition, these performance-based awards may include comparisons to
the performance of other companies, which would be measured by one or more of
the criteria listed above. With respect to these performance-based awards, the
compensation committee will establish in writing the performance goals
applicable to a given period, and these goals will state, in terms of an
objective formula or standard, the method for computing the amount of
compensation payable to the participant if the performance goals are obtained.
The compensation committee will also establish in writing the individual
employees or class of employees to which the performance goals apply no later
than 90 days after the commencement of the period (but in no event after 25% of
the period has elapsed). No performance-based awards shall be payable to, or
vest with respect to, any participant for a given fiscal period until the
compensation committee certifies in writing that the objective performance goals
(and any other material terms) applicable to the period have been satisfied.
Amendment of the Superus Plan and Options
The board of directors may amend the Superus Plan from time to time,
except that stockholder approval is needed to:
o change the number of shares of Class A Common Stock or Class B
Common Stock subject to the plan or that may be granted to any
individual in any calendar year;
o change the class of eligible participants;
o change the performance criteria; or
o remove the administration of the Superus Plan from the
committee administering the plan.
Non-Transferability of Options
Except as provided by the compensation committee, other than with
respect to incentive options, awards may (1) not be transferred by a participant
during the participant's lifetime, (2) not be assigned or otherwise disposed of
except by will or by applicable laws of descent and distribution or (3) only be
exercised during the participant's lifetime by the participant or the
participant's guardian or legal representative.
Corporate Changes
The Superus Plan provides that the compensation committee may adjust,
as it deems appropriate, the maximum number of shares that may be subject to
options or awards or that may be granted to any individual in any calendar year,
and the terms of any outstanding options or awards under the Superus Plan, to
reflect changes in outstanding stock that occur because of stock dividends,
stock splits, Recapitalizations, reorganizations, liquidations or other similar
events.
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If we merge or consolidate with another corporation, liquidate or
dispose of all or substantially all of our assets while there are unexercised
options outstanding:
o after the effective date of the merger, consolidation,
liquidation or disposition, as the case may be, each holder of
an option will be entitled, upon exercise of the option, to
receive, in place of the applicable class of common stock, the
number and class or classes of stock or other securities or
property to which the holder would have been entitled if the
holder had held the stock underlying the option directly
immediately prior to the event in question; or
o if the options have not already become exercisable, the
compensation committee may accelerate vesting so that the
options will be exercisable in full.
Adjustments of Existing Stock Option Awards
If the Recapitalization proposal is approved and implemented,
outstanding stock options previously granted under the Surge Components, Inc.
1995 Employee Stock Option Plan, as amended, based upon shares of existing
common stock will be adjusted so that each holder of an outstanding award will
receive a corresponding award based upon an equal number of shares of Class A
Common Stock. If proposals 1, 2, 3 and 5 are approved, outstanding options to
Surge management to purchase an aggregate of 5,300,000 shares of our existing
common stock at $2.00 per share will be forfeited and 2,650,000 Options which
have been granted to purchase shares of Class B Common Stock of Superus,
exercisable at $2.69 per share, shall vest and become immediately exercisable.
This is the same two for one rate as the shares of existing common stock and
all other options are convertible into Class A Common Stock and exchangeable for
Class B Common Stock.
Future Issuances Pursuant to Superus Plan
Following implementation of the Recapitalization proposal, the
compensation committee may, in its discretion, grant awards with respect to
Class A Common Stock, Class B Common Stock, or both, in such amounts and types
as it determines in accordance with the terms of the Superus Plan.
In determining whether awards in respect of Class A Common Stock, Class
B Common Stock, or both, are to be made to specific employees, it is anticipated
that the compensation committee will consider, among other things, the identity
of the group to which the employee in question provides services. In addition,
because of the expected synergies between the businesses of New Surge and
Internet Operations, it is anticipated that services performed in respect of one
group would have at least an indirect effect upon the business of the other
group. Accordingly, it is anticipated that the compensation committee could
decide that in order to provide the maximum incentive to employees regarding the
overall success of Superus, it may be appropriate to grant awards consisting of
shares of both classes of common stock to employees performing services for one
group. If the compensation committee elects to grant awards to individual
employees with respect to both Class A Common Stock and Class B Common Stock,
the allocation of such awards between the two classes of common stock will be at
the committee's discretion. To the extent awards based upon one class of common
stock are granted to employees of the group relating to the other
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class of common stock, the issuance of shares of such class of common stock upon
exercise of such awards will not be treated as an inter-group interest and will
dilute the holders of the other class of common stock.
In connection with the allocation of expenses related to and proceeds
received upon the exercise of options awarded under the stock plan, such
expenses and proceeds will be attributed to New Surge, in the case of options to
purchase Class A Common Stock, and to Internet Operations, in the case of
options to purchase Class B Common Stock.
Certain Federal Income Tax Consequences
The statements in the following paragraphs of the principal federal
income tax consequences of awards under the Superus Plan are based on statutory
authority and judicial and administrative interpretations, as of the date of
this proxy statement and prospectus which are subject to change at any time
(possibly with retroactive effect). The law is technical and complex, and the
discussion below represents only a general summary.
Incentive Stock Options
Incentive Stock Options ("ISOs") must be granted pursuant to a plan
approved by shareholders. The option must not have a term in excess of ten years
(five years in the case of a shareholder who owns, directly or indirectly, 10
percent or more of the company stock). The option price must not be less than
the fair market value of the stock at the time the option is granted (110
percent in the case of 10 percent or greater shareholders). Although ISOs may be
exercised in any order, a maximum of $100,000 of value of ISOs - based on the
fair market value of the stock at the time of the grant - may become exercisable
(vest) for the first time in each calendar year. ISOs must be nontransferable.
At the time of grant, there is no income recognized. At the time of
exercise, there is no income recognized for purposes of the regular income tax.
However, for purposes of the alternative minimum tax ("AMT"), the option will be
treated as an option that does not qualify as an ISO. There are several
consequences of this rule: gain is recognized for AMT purposes, a section 83(b)
election may be needed by officers (see discussion infra), gain may be
recognized again for regular tax purposes when the ISO stock is sold, and a
prior year's minimum tax liability credit from Section 83 may be created. In
situations in which significant appreciation in the value of the stock subject
to an ISO may occur, the AMT may create a significant tax burden.
If an ISO is sold after satisfying the holding period described below,
the difference between the amount realized and the option price is taxed at a
much lower rate than ordinary income. Superus will get a deduction only if the
stock is sold before the holding period requirements for preferred tax treatment
are satisfied. The holding period for obtaining preferred tax treatment with
respect to stock acquired through the exercise of an ISO is two years from the
date of grant and one year from the date of exercise.
If an individual exercises an ISO by delivering Superus stock, the
exercise is tax free if the holding period for that tendered stock has been
satisfied (e.g., if stock was acquired through the exercise of an ISO, the
period is two years from the date of grant and one year from the date of
exercise.
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Stock Options That Are Not Incentive Stock Options. An individual who
receives an option which does not satisfy the statutory requirements for an
incentive stock option will not recognize any taxable income upon the grant of
an option or right. However, the individual generally will recognize ordinary
income upon exercise of an option in an amount equal to the excess of the fair
market value of the shares of Class A Common Stock or Class B Common Stock at
the time of exercise over the exercise price.
As a result of Section 16(b) of the Exchange Act, the timing of income
recognition may be deferred (generally for up to six months) for any individual
who is an officer or director of Superus or a beneficial owner of more than ten
percent (10%) of any class of equity securities of Superus. Absent a Section
83(b) election (as we describe below it under "Other Awards"), recognition of
income by the individual will be deferred until the expiration of the deferral
period, if any and the amount of income will be determined at the time the
Section 16(b) restriction lapses.
The ordinary income recognized with respect to the receipt of shares
upon exercise of an option will be subject to both wage withholding and other
employment taxes. In addition to the customary methods of satisfying the
withholding tax liabilities that arise upon the exercise of an option, Superus
may satisfy the liability in whole or in part by withholding shares of Class A
Common Stock or Class B Common Stock from those that otherwise would be issuable
to the individual or by the individual tendering other shares owned by him or
her, valued at their fair market value as of the date that the tax withholding
obligation arises.
A federal income tax deduction generally will be allowed to Superus in
an amount equal to the ordinary income included by the individual with respect
to his or her option or right, provided that such amount constitutes an ordinary
and necessary business expense to Superus and is reasonable and the limitations
of Sections 280G and 162(m) of the Code do not apply.
If an individual exercises an NQSO by delivering shares of Class A
Common Stock or Class B Common Stock, the individual will not recognize gain or
loss with respect to the exchange of such shares, even if their then fair market
value is different from the individual's tax basis. The individual, however,
will be taxed as described above with respect to the exercise of the option as
if he or she paid the exercise price in cash, and Superus likewise generally
will be entitled to an equivalent tax deduction.
Stock Appreciation Rights. As with nonqualified stock options, an
individual who receives a stock appreciation right has ordinary income subject
to withholding and other employment taxes at the time of exercise of the right.
The discussion relating to satisfaction of the withholding obligations, with
respect to nonqualified incentive stock options is equally applicable to stock
appreciation rights as is the discussion relating to Superus's tax deduction for
the amount of income.
Other Awards. With respect to other awards under the Superus Plan that
are either transferable or not subject to a substantial risk of forfeiture (as
defined in the Code and the regulations), individuals generally will recognize
ordinary income equal to the amount of cash or the fair market value of the
Class A Common Stock or Class B Common Stock received.
With respect to awards under the Superus Plan that are settled in
shares of Class A Common Stock or Class B Common Stock that are restricted as to
transferability and subject to a substantial risk of
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forfeiture--absent a written election pursuant to Section 83(b) of the Code
filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the award (a "Section 83(b) election")--an
individual will recognize ordinary income at the earlier of the time at which
(1) the shares become transferable or (2) the restrictions that impose a
substantial risk of forfeiture of the shares lapse, in an amount equal to the
excess of the fair market value (on such date) of such shares over the price
paid for the award, if any. Shares subject to the restrictions of Section 16(b)
of the Exchange Act are deemed to be subject to a substantial risk of forfeiture
for purposes of Section 16(b).
The ordinary income recognized with respect to the receipt of cash,
shares of Class A Common Stock, Class B Common Stock or other property under the
Superus Plan will be subject to both wage withholding and other employment
taxes.
Superus will be allowed a deduction for federal income tax purposes in
an amount equal to the ordinary income recognized by the individual, provided
that such amount constitutes an ordinary and necessary business expense to
Superus and is reasonable and the limitations of Sections 280G and 162(m) of the
Code do not apply.
If the compensation committee permits an individual to transfer an
option to a member or members of the individual's immediate family or to a trust
for the benefit of these persons or other entity owned by these persons and the
individual makes such a transfer and the transfer constitutes a completed gift
for gift tax purposes (which determination may depend on a variety of factors
including whether the option or a portion thereof has vested), then the transfer
will be subject to federal gift tax except, generally, to the extent protected
by the individual's $10,000 per donee annual exclusion, by his or her lifetime
unified credit or by the marital deduction. The amount of the individual's gift
is the value of the option at the time of the gift.
If the transfer of the option constitutes a completed gift and the
individual retains no interest in or power over the option after the transfer,
the option generally will not be included in his or her gross estate for federal
estate tax purposes. The transfer of the option will not cause the transferee to
recognize taxable income at the time of the transfer. If the transferee
exercises the option while the transferor is alive, the transferor will
recognize ordinary income as described above as if the transferor had exercised
the option. If the transferee exercises the option after the death of the
transferor, it is uncertain whether the transferor's estate or the transferee
will recognize ordinary income for federal income tax purposes.
Dividends and Dividend Equivalents. To the extent awards under the
Superus Plan earn dividends or dividend equivalents, whether paid currently or
credited to an account established under the Superus Plan, an individual
generally will recognize ordinary income with respect to the dividends or
dividend equivalents. Such income may be considered compensation income subject
to withholding when received.
Change in Control. In general, if the total amount of payments to an
individual that are contingent upon a "change of control" of Superus (as defined
in Section 280G of the Code), including payments under the Superus Plan that
vest upon a "change in control," equals or exceeds three times the individual's
"base amount" (generally, the individual's average annual compensation for the
five calendar years preceding the change in control), then, the payments may be
treated as "parachute payments" under the Code, in which case a portion of such
payments would be non-deductible to Superus and the individual would be subject
to a 20% excise tax on that portion of the payments.
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Certain Limitations on Deductibility of Executive Compensation. With
certain exceptions, Section 162(m) of the Code denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year (including any deduction with
respect to the exercise of an option or stock appreciation right). One of these
exceptions applies to performance-based compensation that has, among other
things, been approved by stockholders in a separate vote. If the amended plan is
approved by our stockholders, we believe that performance-based awards granted
prior to the first stockholder meeting under the amended plan and those stock
options and stock appreciation rights granted by the compensation committee
under the amended plan should qualify for the performance-based compensation
exception to Section 162(m) of the Code.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE SUPERUS PLAN AND BELIEVES
ITS ADOPTION TO BE IN THE BEST INTERESTS OF OUR SHAREHOLDERS. SURGE, AS THE SOLE
SHAREHOLDER OF SUPERUS HAS ADOPTED THE SUPERUS PLAN. ACCORDINGLY, OUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL, HOWEVER, THIS
IS A NON-BINDING PROPOSAL AND THE SUPERUS PLAN WILL REMAIN IN EFFECT REGARDLESS
OF THE VOTE.
Proposal 4 is conditioned, however, upon approval by stockholders of
the Recapitalization proposal and Proposals 2 and 3. If such proposals are not
approved by stockholders and implemented by the board, Proposal 4 will not be
implemented.
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PROPOSAL 5-RATIFICATION OF ACCELERATION OF EXERCISABILITY
OF SUPERUS OPTIONS ISSUED TO SURGE MANAGEMENT
This proposal relates to the ratification by stockholders of the
acceleration of the exercisability of 2,650,000 options under the Superus 2000
Stock Incentive Plan (see Proposal 4) to Ira Levy, Steven Lubman, David Siegel
and Mark Siegel, each of whom are current directors of Surge in satisfaction of
certain contractual rights (collectively, "Management Options"). These options
were granted by Superus to the Surge management mentioned above, which will
accelerate and become immediately exercisable upon stockholder approval of this
proposal, as well as proposals 1 and 2. At such time, Surge management will
relinquish all contractual rights and entitlement to 5,300,000 options granted
in December 1998 in connection with the then pending merger with Orbit Network
Inc. (the "Orbit Options"). The exchange ratio on the Management Options for
Orbit Options is the same two for one rate as all other Surge employee options
and Surge's existing common stock is convertible into Class A Common Stock and
then exchangeable on a two for one basis for Superus Class B Common Stock.
On December 28, 1998, Ira Levy and Steven J. Lubman, officers and
directors, were granted 2,450,000 and 2,250,000 five-year options, respectively,
and David Siegel and Mark Siegel, directors, were granted 350,000 and 250,000
options, respectively, each with an exercise price of $2.00 per share. The
options were not exercisable until the fourth anniversary date of the date of
grant, however, in the event the Company's proposed merger with Orbit was
approved by the shareholders, the options were to accelerate and become
immediately exercisable. These Orbit Options were the result of arms-length
negotiations with Orbit and were originally proposed by Orbit. The Orbit Options
were granted by the Surge Board of Directors, however, the transaction was a
reverse acquisition of Surge by Orbit, as the proposed transaction gave Orbit
voting control of Surge. Therefore, the grant of the Orbit Options was in
actuality proposed by Orbit and subsequently retained as part of the GDIS
Acquisition, as a result of arms-length negotiations. The grant of these options
was considered an integral part of the incentive to induce management to remain
employed by the Company despite the change of control, and to induce the
management to negotiate and complete the transaction in a fashion that would
maximize shareholder value by restructuring Surge's operations.
The Board of Directors of Surge as part of the execution of the
Purchase Agreement for the GDIS Acquisition in December 1999, amended the
accelerating event of exercisability to become completion of the GDIS
Acquisition at a higher exercise price of $2.69 per share, the closing market
value of Surge's existing common stock on December 7, 1999, the day prior to the
execution of the GDIS Purchase Agreement. Upon the formation of Superus in March
2000, Surge management was granted 2,650,000 Management Options, or exactly half
as many Management Options as Orbit Options, under the Superus Plan exercisable
at $2.69 per share of Class B Common Stock. This price was deemed to be equal to
the fair market value of Superus Class B Common Stock when agreements were
entered into and the options were issued. The Management Options are not
exercisable prior to December 28, 2002 (the same date as the Orbit Options), but
will become immediately exercisable if Proposal 5 is approved.
There were several reasons for the grant of the original Orbit Options.
In connection with Surge's 1996 public offering, Surge management, which owned a
substantial portion of the outstanding stock as a privately owned company, gave
up control to the public stockholders. The Company conserved its capital
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for more than three years after the public offering and had cash and marketable
securities in excess of $4 million when it began searching for an acquisition
candidate. Surge management believed that Surge's stock was undervalued at the
time of the public offering and even more so in the aftermarket as there was
little market support for electronic company stocks. Management believes that
this was evidenced by the low market price for the common stock before the
announcements of the GDIS and Mail transactions. The reason why Surge management
sought out these acquisitions was primarily to increase shareholder value which
has already occurred. The Company believes that it was only as a result of
Management's seeking out and negotiating the GDIS Acquisition and the Mail
Merger, that there has since been a substantial increase in shareholder value
and that maintaining and maximizing shareholder value in a rapidly evolving
e-commerce and technology arena is dependent on prompt and efficient completion
of the transactions proposed herein. This Proposal 5, concerning the
acceleration of the exercisability of the Management Options granted to Surge
management, will be addressed in the fairness opinion, namely that the entire
acquisition is fair and reasonable to Surge's minority shareholders. The
fairness opinion can only speak as of the day the GDIS Purchase Agreement was
entered into. Surge is therefore seeking acceleration of the exercisability of
the Superus Options to Surge management to be dependent on successful, prompt
completion of proposals 1 and 2 herein. See "Proposal 1 - The Recapitalization
Proposal - Fairness Opinions."
Upon approval of this Proposal 5, as well as Proposals 1 and 2, the
vesting and exercisability of Messrs. Levy, Lubman, Siegel and Siegel's options
will accelerate.
In view of the historical market prices of Surge's existing Common
Stock and increase in shareholder value as a result of management's seeking out
and negotiating the GDIS Acquisition and the Mail Merger, the Company is seeking
ratification of the immediate exercisability of the Superus Options to Surge
management.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
RATIFICATION OF ACCELERATION OF EXERCISABILITY OF SUPERUS OPTIONS TO
SURGE MANAGEMENT (PROPOSAL 5)
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PROPOSAL 6 - ELECTION OF DIRECTORS OF SUPERUS
Surge's Board of Directors is currently comprised of four directors.
Three of the four directors will not stand for re-election at the special
meeting. The Board of Directors has nominated Adam J. Epstein, Ira Levy, and
Mario Habib, for election as Directors of Superus at the special meeting, to
hold office, subject to the provisions of Superus' By-laws, for a one-year term,
or until their successors are duly elected and qualified. Adam J. Epstein is
serving as Chairman of the Board, Ira Levy, is serving as New Surge's
representative and Mario Habib is serving as Global's representative to the
board. Superus expects to expand the Board of Directors to seven (7) directors a
majority of whom shall be independent directors, prior to the Effective Date. It
is intended that the accompanying form of Proxy will be voted FOR the election
as Directors of the three (3) nominees named above, unless the Proxy contains
contrary instructions. Proxies which direct the Proxy holders to abstain or do
not direct the Proxy holders to vote for or withhold authority in the matter of
electing Directors will be voted FOR the election of each of the three (3)
directors named below. Proxies cannot be voted for a greater number of persons
than the number of nominees named in the proxy statement. Only a plurality of
votes cast are necessary for the election of the directors.
Management has no reason to believe that any of the nominees will not
be a candidate or will be unable to serve. However, in the event that any of the
nominees should become unable or unwilling to serve as a director, the Proxy
will be voted for the election of such person or persons as shall be designated
by the directors.
Set forth is certain information, as of the Effective Date, concerning
each nominee.
Name Age Positions
---- --- ---------
Adam J. Epstein 34 Chairman of the Board and
Acting Chief Executive Officer
Ira Levy 42 Director of Superus and
President of New Surge
Mario Habib 42 Director of Superus and
President of eHOLA, Inc. and
eHOLA, Inc. S.A.
Adam J. Epstein was elected Chairman of the Board and acting Chief
Executive Officer of Surge as of February 16, 2000. He was elected to the same
position upon the formation of Superus in March 2000. Upon the Effective Date he
shall become Chief Executive Officer of Superus. Mr. Epstein joined MailEncrypt
as its President and Chief Executive Officer on September 1, 1999 and resigned
from these positions upon becoming Chairman of the Board of Surge. Mr. Epstein
has assembled large, complex, and successful Internet based-businesses, in
addition to possessing a mix of entrepreneurial and legal experience. Prior to
joining MailEncrypt, Mr. Epstein served as Senior Vice President, Business
Development of Tickets. com, Inc., from May 1999 (when Tickets. com, Inc. merged
with Advantix, Inc.) until August 1999. From May 1998 to May 1999, Mr. Epstein
served as Vice President, Strategic Development, General Counsel, and Secretary
of Tickets.com, Inc. Prior thereto, Mr. Epstein was an attorney in the San
Francisco office of Brobeck, Phleger & Harrison. Mr. Epstein received a
Bachelor's
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degree, with honors, from Vassar College in 1987, and a Juris Doctor Degree from
Boston University School of Law in 1990.
Ira Levy has served as President of Surge and a Director since its
inception on November 24, 1981. He was elected a director of Superus upon its
formation in March 2000. From 1976 to 1981 Mr. Levy was employed by Capar
Components Corp. ("Capar"), an importer and supplier of capacitor and resistor
products.
Mario Habib has served as President of eHOLA and On Line Latin America
S.A., wholly owned subsidiaries of Global, since 1998. He was elected a director
of Superus upon its formation in March 2000. From 1979 to 1998 Mr. Habib was the
General Manager of Yidi Industries, a manufacturing concern, Mr. Habib received
a bachelor's degree in mechanical engineering from Purdue University in 1979.
Committees and Meetings of the Board of Directors
Surge held two formal meetings of the Board of Directors during the
fiscal year ended November 30, 1998 ("Fiscal 1998") and took action by written
consent in lieu of a meeting on seven occasions. Surge held one formal meeting
of the Board of Directors during the fiscal year ended November 30, 1999
("Fiscal 1999") and took action by written consent in lieu of a meeting on seven
occasions. Additionally, a Special Committee of the Board of Directors took
action by written consent on one occasion. The Audit and Compensation Committees
held one meeting during each of Fiscal 1998 and the Audit Committee held one
meeting during Fiscal 1999. David Siegel and Mark Siegel serve on Surge's Audit
and Compensation Committees with David Siegel as chairman. The Compensation
Committee reviews and approves the compensation to be paid to certain officers
of Surge.
Directors Compensation
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 incurred on behalf of Surge, 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 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, all of which vested immediately and
expire on July 5, 2003. On September 2, 1999, Mark Siegel and David Siegel were
each granted options to purchase 10,000 common shares and Ira Levy and Steven
Lubman were each granted 50,000 options to purchase common shares exercisable at
$1.46 per share, which vested immediately and expire on September 1, 2004. On
December 7, 1999, Mark Siegel and David Siegel were each granted options to
purchase 10,000 of Surge's common shares and Ira Levy and Steven Lubman were
each granted 50,000 options to purchase common shares, exercisable at $2.6875
per share, which vested immediately and expire on December 6, 2004. All of the
foregoing options shall be converted into options to an equal number of shares
of Class A Common Stock at the same exercise prices upon stockholder approval
herein.
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In addition, on December 28, 1998, an aggregate of 5,300,000 options in
connection with the proposed merger with Orbit Network, Inc. ("Orbit Options")
were issued to Ira Levy (2,450,000), Steven J. Lubman (2,250,000), David Siegel
(350,000) and Mark Siegel (250,000). The Orbit Options were to become
exercisable on December 28, 2002, at $2.00 per share, and will expire on
December 28, 2003. Messrs. Levy, Lubman, Siegel and Siegel were granted
2,650,000 options, under the Superus Plan with identical terms except that the
new options issued under the Superus Plan will be exercisable for Class B Common
Stock at $2.69 per share ("Superus Options"). The exchange ratio on the Superus
Options for the Orbit Options is the same two for one ratio as all other Surge
employee options and existing common stock is convertible into Class A Common
Stock and then exchangeable for Class B Common Stock. Upon completion of the
GDIS Acquisition, such persons have agreed to forfeit any contractual rights
relating to their Orbit Options in exchange for immediate vesting and
exercisability of their Superus Options.
On February 16, 2000, Adam J. Epstein, our Chairman of the Board, was
granted options to purchase 1,500,000 shares of Class B Common Stock in
connection with the execution of his employment agreement. On February 16, 2000,
Ira Levy, President of Surge, was granted options to purchase 200,000 shares of
Class B Common Stock. All of these options are exercisable at $6.50 per share
and will expire on February 16, 2005.
No member of the Board of Directors attended, in person or
telephonically, fewer than 75% of the total number of meetings of the Board and
committees thereof upon which he served during Fiscal 1998 or 1999.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires Surge's
officers, directors and persons who own more than ten percent of a registered
class of Surge's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and ten percent shareholders are
required by regulation to furnish Surge with copies of all Section 16(a) forms
they file. Based solely on Surge's copies of such forms received or written
representations from certain reporting persons that no forms were required for
those persons, Surge believes that, during the time during Surge's Fiscal year
ended November 30, 1999, all filing requirements applicable to its officers,
Directors and greater than ten percent beneficial owners were complied with in a
timely manner.
Executive Compensation
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to Surge during the fiscal years ended
November 30, 1999, 1998 and 1997 by those persons who served as Chief Executive
Officer and any Named Executive Officer who received compensation in excess of
$100,000 during such years.
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<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------
Other Annual Shares
Name and Salary Bonus Compensation Underlying
Principal Position Year ($) ($) ($)(1) Options(#)
- ------------------ ---- ----- ----- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ira Levy 1999 $200,000 $ 51,996 0 50,000
President and CEO (1) 1998 $200,000 $ 85,211 (2) 0 0
1997 $197,500 $ 52,325 (2) 0 75,000
Steven J. Lubman 1999 $200,000 $ 56,614 0 50,000
Vice President (1) 1998 $200,000 $ 20,538 (2) 0 0
1997 $199,000 $ 53,565 (2) 0 75,000
</TABLE>
- ----------
(1) Ira Levy is also the Vice President and Director of Challenge. Mr. Lubman is
the President and Director of Challenge.
(2) The above compensation figures do not include the cost to Surge of the use
of automobiles leased by Surge, the cost to Surge of benefits, including
premiums for life insurance and any other perquisites provided by Surge to such
persons in connection with Surge's business all of which does not exceed the
lesser of $50,000 or 10% of such person's annual salary and bonus.
Material Legal Proceedings
None.
Option Grants in Last Fiscal Year
The table below includes the number of stock options granted to the
executive officers named in the Summary Compensation Table during Fiscal 1999
and exercise information.
<TABLE>
<CAPTION>
Individual Grants
-----------------
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Exercise Expiration
Name Granted(#) Fiscal Year Price ($/sh) Date
---- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ira Levy 2,450,000(1) 45.60% $2.00 12/28/03
50,000 0.91% $1.46 9/1/04
Steven J. Lubman 2,250,00(1) 41.01% $2.00 12/28/03
50,000 0.9% $1.22 9/1/04
</TABLE>
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- ----------
(1) Indicates "Orbit Options" issued to both Ira Levy and Steven J. Lubman on
December 28, 1998, in connection with the terminated Orbit transaction.
Currently the 5,300,000 Orbit Options are exercisable at $2.00 per share and
become exercisable on December 28, 2002. In connection with the execution of the
GDIS Purchase Agreement on December 8, 1999, the accelerating event of the Orbit
Options was changed from the completion of the Orbit Merger to the completion of
the GDIS Acquisition at the higher exercise price of $2.69 per share (the fair
market value on December 8, 1999 when the GDIS Purchase Agreement was executed)
and will remain the same in all other respects. Upon the formation of Superus,
Messrs. Levy, Lubman, Siegel and Siegel were granted one-half the number of
options under the Superus Plan at the same rate as all other Surge employee
options and two shares of Surge's existing common stock are convertible into
Class A Common Stock and exchangeable for one share of Class B Common Stock, or
a total of 2,650,000 options. Upon Shareholder approval of Proposal 5, these
four individuals have agreed to relinquish all contractual rights relating to
the Orbit Options and settle any claims relating thereto, in exchange for the
immediate vesting and exercisability of the Superus Options.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year 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 1999.
The numbers below are based on a market price of $2.00 per common share at the
close of business on November 30, 1999.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired at FY-End(#) at FY-End($)
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Ira Levy -0- -0- 125,000/ $69,250/0
2,450,000
Steven J. Lubman -0- -0- 125,000/ $69,250/0
2,250,000
</TABLE>
Employment Agreements
Surge entered into Employment Agreements (the "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 Surge, 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 Surge and determined at the
discretion of the Board of Directors. Their salaries may be increased annually
during the term of their employment at the discretion of the Board of Directors
(or a Compensation Committee). Their Agreements provide that during the term of
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employment with Surge and for a period of one year following termination of
employment, Messrs. Levy and Lubman are prohibited from engaging in activities
which are competitive with those of Surge. In March 1998, the employment
agreements were amended to extend 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
(other than the transactions discussed in this proxy statement and prospectus)
("Change of Control"), where Ira Levy or Steven J. Lubman is not elected to the
Board of Directors of Surge and/or is not elected as an officer of Surge and/or
there has been a change in ownership of at least 25% of the issued and
outstanding stock of Superus, 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. In such event, however, the right of first refusal
and warrants discussed in the following paragraph would not apply if they took
their parachute payments of 2.99 times their annual compensation.
Amendments to Employment Agreements if GDIS Acquisition is Approved
Surge, Global and GDIS, as well as Messrs. Levy and Lubman
individually, have entered into a letter agreement, dated October 8, 1999,
relating to the Amendments of such persons' employment agreements in the event
the GDIS Acquisition is consummated. The amendments provide that if there is a
Change of Control (as defined above), exclusive of the GDIS Acquisition, or a
consolidation or merger of the business of Surge, exclusive of Global (other
than where Surge is the surviving company), or the sale of all or substantially
all of the assets of Surge or the nature of Surge's business materially changes,
Messrs. Levy or Lubman may exercise a right of first refusal to purchase all of
the outstanding equity securities of Surge, or if no third party offer exists,
then at the fair market value of the stock. In addition, if Surge purposes to
make, or receives, a "firm commitment" public offering, Messrs. Levy and Lubman
shall each receive a warrant to purchase up to 9.5% of the equity securities of
Surge for nominal value.
Adam Epstein Employment Agreement
Surge has entered into a three-year employment agreement, effective
February 16, 2000, with Mr. Adam J. Epstein, naming him Chairman of the Board of
Directors and acting Chief Executive Officer. Commencing the Effective Date of
the Recapitalization proposed herein, Mr. Epstein shall also become the Chief
Executive Officer and remain Chairman of the Board of Superus. Mr. Epstein's
base salary is $200,000 per annum, subject to increase in certain circumstances.
Additionally, Mr. Epstein has received, in accordance with his employment
agreement, options to purchase 1,500,000 shares of Superus Class B Common Stock
at $6.50 per share under the Superus Plan. Of such options, 300,000 became
exercisable immediately, and the remaining options vest ratably on a monthly
basis as of the last day of the first 36 months following the date of grant,
subject to continued employment with Superus. The options become immediately
exercisable in the event of termination of employment by Superus without cause,
or change of control of Superus, and the options shall expire five years from
date of grant.
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Mario Habib Employment Agreement
Mr. Mario Habib has entered into a three year employment agreement,
expiring on May 31, 2002, with Global, as the President of eHOLA and On Line
Latin America, S.A., with a base salary of $180,000 per year and discretionary
bonuses and reimbursement of business expenses, and life insurance with a death
benefit of not less than $500,000. This employment agreement also provides for
the grant to Mr. Mario Habib of 350,000 options to purchase Global Common Stock
at $10.00 per share, and expiring on May 31, 2002. These options will be assumed
and converted into options to purchase 200,000 shares of Class B Common Stock,
at an exercise price of $10.00 per share, and expiring on May 31, 2002. The
employment agreement with Mr. Habib is renewable for two year periods unless
terminated by either party in writing in advance of such termination.
Stock Option Plan
In January 1996 Surge adopted and in February 1996 the shareholders
ratified, the 1995 Employee Stock Option Plan (the "Option Plan"). The Option
Plan, as amended, provides for the grant of options to qualified employees
(including officers and directors) of Surge, employees of Surge's subsidiary,
independent contractors, consultants and other individuals to purchase an
aggregate of 850,000 shares of common stock. The exercise price of all options
must be at least 85% of fair market value of the common stock on the date of
grant. All currently outstanding options issued under the Option Plan will be
given the holder thereof the right for six months following the Effective Date
to convert into one-half as many Class B Shares. As of February 16, 2000,
716,000 options had been granted under the Option Plan, 636,300 were outstanding
and 134,000 options were available for grant. Of the 636,300 options currently
outstanding, an aggregate of 430,000 were held by officers and directors as
follows: Ira Levy (175,000), Steven J. Lubman (175,000), David Siegel (40,000)
and Mark Siegel (40,000).
Certain Relationships and Related Transactions
Surge'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 Surge and Mark Siegel, a Director.
The monthly rental was $6,272 and $6,690 during Fiscal 1999 and 1998,
respectively, increasing at 3% per annum during the term of the lease which
expires on December 31, 2008.
Ira Levy and Steven J. Lubman entered into a Stock Purchase Agreement
in March 1992 which relates to their respective share ownership in Surge.
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 Surge,
in such manner to elect each of them as a director of Surge. Furthermore, in the
event of the death of either Messrs. Levy or Lubman, the survivor shall buy the
decedent's shares of Surge. 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.
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See "Employment Agreements" and "Amendments to Employee Agreements if
the GDIS Acquisition is Approved" above for information concerning Employment
Agreements entered into between Surge and Ira Levy and Steven Lubman and
possible changes thereto pending the GDIS Acquisition; and "Stock Options" above
concerning options granted to officers and directors of Surge.
Surge believes that the terms of each of the foregoing transactions
were no less favorable to Surge than could have been obtained from
non-affiliated third parties, although no independent appraisals were obtained.
Future transactions with affiliates of Surge, if any, will be on terms believed
by the Management to be no less favorable than are available from unaffiliated
third parties and will be approved by a majority of disinterested directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION FOR
THE NOMINEES NAMED ABOVE (PROPOSAL 6).
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PROPOSAL 7. RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Seligson & Giannattasio, LLP, (the
"Independent Auditors") of White Plains, New York, to continue as the Company's
auditors and to audit the books of account and other records of Surge for the
fiscal year-ended November 30, 1999 and 1998. Representatives of the Independent
Auditors will be present at the special meeting and will have the opportunity to
make a statement if they decide to do so. Additionally, representatives of the
Independent Auditors will be expected to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS STOCKHOLDERS VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF SELIGSON & GIANNATTASIO, LLP, AS THE COMPANY'S AUDITORS
(PROPOSAL 7).
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<PAGE>
MANAGEMENT AFTER THE RECAPITALIZATION
As of the date of this proxy statement and prospectus, the directors
and executive officers of Superus, their ages, the positions held by them and
the periods during which they have served in these positions were as follows.
These persons will assume these positions following the Recapitalization.
Adam J. Epstein 34 Chairman of the Board and Chief Executive
Officer of Superus
Ira Levy 42 Director of Superus and President of New
Surge
Mario Habib 42 Director of Superus and President of
eHOLA, Inc. and
On Line Latin America S.A.
Biographical information concerning each of the above three directors
appears under Proposal 6 - Election of Directors of Superus.
It is expected that all other executive officers and independent
directors of Superus will be appointed prior to the Effective Date.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date, certain
information concerning those persons known to Surge, based on information
obtained from such persons, with respect to the beneficial ownership (as such
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934,
hereinafter referred to as the "Exchange Act") of common stock by (i) each
person known by Surge to be the owner of more than 5% of the outstanding
existing common stock based on filings with the SEC and listing other
information, (ii) each nominee and Director of Surge, (iii) each executive
officer named in the Summary Compensation Table, and (iv) all Executive Officers
and Directors as a group. The common stock is the only outstanding class of
voting securities of Surge. Except as otherwise indicated, all securities are
beneficially owned, and investment and voting power is held by, the persons
named as owners.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percentage of
of Beneficial Owner(1) Beneficial Ownership(2) Common Stock beneficially owned(3)
- ------------------- ----------------------- ----------------------------------
<S> <C> <C>
Ira Levy 432,500(4) 7.5%
Adam J. Epstein 366,666(5) 6.9%
Mario Habib - nominee -0- 0%
Steven J. Lubman 430,000(6) 7.5%
All directors and executive
officers as a group (4 persons) 1,229,166(7) 21.8%
</TABLE>
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- ----------
(1) The business and mailing address of each person is c/o Surge Components,
Inc., 1016 Grand Boulevard, Deer Park, New York 11729.
(2) Unless otherwise noted, Surge believes that all persons named in the table
have sole voting and investment power with respect to all Common Stock or
warrants and options 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.
(3) Based on the equivalent of approximately 4,928,958 shares of Common Stock
issued and outstanding as of February 16, 2000.
(4) Includes 175,000 shares issuable upon exercise of currently exercisable
stock options. Includes shares of Common Stock 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 Proposal 6 -
"Election of Directors of Superus-Certain Relationships and Related
Transactions."
Does not include Orbit Options granted on December 28, 1998 to purchase
2,450,000 shares of Surge common stock which become exercisable on December 28,
2002, at $2.00 per share. Ira Levy, was granted options under the Superus Plan
to purchase 1,025,000 shares of Class B Common Stock exercisable at a higher
exercise price of $2.69 per share, the fair market value of Surge Common Stock
when the GDIS Purchase Agreement was executed. In the event that Proposals 1, 2
and 5 herein are approved, the Orbit Options will be forfeited and the
Management Options to purchase 1,025,000 shares of Class B Common Stock will
become immediately exercisable at the Effective Date, in full settlement of Mr.
Levy's contractual rights relating to the Orbit Options.
(5) Includes options to purchase 366,666 shares of Common Stock at $6.50 per
share which are exercisable within the next 60 days, and does not include
options to purchase 1,133,334 shares of Common Stock which become exercisable in
increments of 33,333 1/3 of such options each on the last day of each month for
a period of 36 months following the original issuance, for a total of 1,500,000
options.
(6) Includes 175,000 shares issuable upon exercise of currently exercisable
stock options. Includes shares of Common Stock 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 Proposal 6- Election
of Directors-Certain Relationships and Related Transactions." Does not include
Orbit Options to purchase 2,250,000 shares of Surge common stock granted to Mr.
Lubman. In the event that Proposals 1, 2, 3 and 5 herein are approved, these
options will be forfeited and the Management Options to purchase 1,000,000
shares of Class B Common Stock at $2.69 per share, will become immediately
exercisable at the Effective Date, in full settlement of Mr. Lubman's
contractual rights relating to the Orbit Options.
(7) Includes 716,666 shares issuable upon exercise of currently exercisable
options.
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PRICE RANGE ON EXISTING COMMON STOCK
AND DIVIDEND POLICY
The common shares, par value $.001 per share (the "Common Shares") and
the Redeemable Class A Common Share Purchase Warrants (the "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 "SPRS" and "SPRSW", respectively.
Until February 23, 2000, our securities traded under the symbols "SRGE" and
"SRGEW". In addition, the Common Shares and Class A Warrants are listed on the
Boston Stock Exchange under the symbols "SPD" and "SPDW," respectively.
The following table sets forth for the periods indicated (based on
fiscal year), the high and low bid prices of Surge's Common Shares from December
1, 1997, through February 17, 2000, 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.
Security Trading Period High Low
- -------- -------------- ---- ---
Common Shares
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
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 ENDED NOVEMBER 30, 1999:
FIRST QUARTER
(December 1, 1998 - February 28, 1999) 3 1/2 15/32
SECOND QUARTER
(March 1, 1999 - May 31, 1999) 5 27/32 1 3/8
THIRD QUARTER
(June 1, 1999 - August 31, 1999) 3 1/8 2 3/4
FOURTH QUARTER
(September 1, 1999 - November 30, 1999) 2 3/8 1 1/8
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FISCAL YEAR ENDING NOVEMBER 30, 2000:
FIRST QUARTER
(December 1, 1999 - February 17, 2000) 8 3/16 1 3/4
Class A Warrants
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 1/32
THIRD QUARTER
(June 1, 1998 - August 31, 1998) 1 1/2 1/4
FOURTH QUARTER
(September 1, 1998 - November 30, 1998) 9/16 3/32
FISCAL YEAR ENDED NOVEMBER 30, 1999:
FIRST QUARTER
(December 1, 1998 - February 28, 1999) 1 1/16
SECOND QUARTER
(March 1, 1999 - May 31, 1999) 13/16 3/16
THIRD QUARTER
(June 1, 1999 - August 31, 1999) 1 3/16 3/16
FOURTH QUARTER
(September 1, 1999 - November 30, 1999) 3/4 1/4
FISCAL YEAR ENDING NOVEMBER 30, 2000:
FIRST QUARTER
(December 1, 1999 - February 17, 2000) 3 3/4 5/8
On March 10, 2000, the closing price of a Common Share and a Class A
Warrant on the Nasdaq SmallCap market system were $9 3/8 and $4 11/16,
respectively.
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As of February 16, 2000, Surge had 171 and 32 recordholders of its
Common Shares and Class A Warrants, respectively, and reasonably believed it had
in excess of 300 beneficial holders of its Common Shares. As of November 26,
1999, Surge had approximately 2,304 beneficial owners of its Common Shares.
Surge has not paid any cash dividends on its Common Shares during the
last two fiscal years and does not anticipate paying any in the foreseeable
future. The Board of Directors will need to retain any earnings in order to
support the growth of Superus' business.
PLAN OF DISTRIBUTION
This Prospectus relates to approximately 4,900,000 shares of Class A
Common Stock which are being issued to the current shareholders of Surge common
stock, the 23,900,000 shares of Class B Common Stock being issued to the Global
shareholders, the 1,821,400 shares of Class B Common Stock being issued to the
shareholders of MailEncrypt, the 1,100,000 shares of Class B Common Stock being
issued to our financial advisor and a finder, and the 2,333,334 shares of Class
B Common Stock issuable upon conversion of the $7 million of 12% Convertible
Notes issued by Surge, and the re-sales of such shares by such shareholders who
are deemed to be "affiliates" as such term is defined in the Securities Act.
This Prospectus also relates to the 3,479,600 Class B Common Stock Purchase
Warrants ("Class B Warrants") being issued to the current warrantholders of
Surge, as well as the exercise and re-sale of the 3,479,600 shares of Class B
Common Stock underlying those warrants.
The 2,334,000 shares of Class B Common Stock issuable upon conversion
of the $7 million of Notes issued in the private offering, are subject to a
lockup provision and may not be sold without written consent of Superus for a
one-year period following the Effective Date.
Additionally, certain of the shares of Class A Common Stock and Class B
Common Stock, are owned by affiliates and are subject to the resale provisions
of Rule 145 of the Securities Act, and may be offered for re-sale from time to
time under this prospectus and in accordance with Rule 145. These affiliates are
also sometimes referred to herein as "Selling Stockholders."
The shares and Class B Warrants may be issued without restrictive
legend and may be sold without restriction. Prior to any use of this prospectus
for the resale of the shares, the Company will amend or supplement this
prospectus, if necessary, to set forth the name of any affiliates who received
their securities in this transaction. The names of the Selling Stockholders, the
number of shares beneficially owned by such Selling Stockholders, the number of
shares to be offered for resale by such Selling Stockholders, and any other
material information with respect to the plan of distribution that has not
previously been disclosed. The supplemented or amended prospectus will also
disclose whether any Selling Stockholder has held any position or office with,
been employed by or otherwise had a material relationship with, Surge or any of
its affiliates during the three years prior to the date of the supplemental or
amended prospectus.
The Selling Stockholders and/or their assignees, transferees,
intermediaries, donees, pledgees or other successors may, from time to time,
offer and sell the shares or warrants through underwriters, dealers, brokers or
agents, or directly to one or more purchasers. Such transactions may be effected
by the Selling Stockholders at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices which may be changed. The distribution of the shares by the Selling
Stockholders may be effected from time to time in one or more transactions that
may take place in the over-the-counter market on Nasdaq including (a) ordinary
broker's transactions and transactions in which the broker solicits purchasers;
(b) privately negotiated transactions or pledges; (c) sales to one or more
broker/dealers for resale of such shares for their own account as principals,
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pursuant to this Prospectus; (d) block trades (that may involve crosses) in
which the broker or dealer so engaged will attempt to sell the securities as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; or (e) in exchange distributions and/or secondary
distributions. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Stockholders holders in connection with
such sales.
The Selling Stockholders, their assignees, transferees, intermediaries,
donees, pledges or other successors in interest through whom the shares are sold
may be deemed "underwriters" within the meaning of Section 2 (11) of the
Securities Act, with respect to the shares offered and any profits realized or
commissions received may be deemed to be underwriting compensation. Any
broker-dealers that participate in the distribution of the shares also may be
deemed to be "underwriters", as defined in the Securities Act, and any
commissions, discounts, concessions or other payments made to them, or any
profits realized by them upon the resale of any shares purchased by them as
principals, may be deemed to be underwriting commissions or discounts under the
Securities Act.
Surge will pay all expenses incident to the registration of the shares.
Surge will not pay, among other expenses, commissions and discounts of
underwriters, dealers or agents or the fees and expenses of counsel for the
Selling Stockholders. In some cases, Surge may agree to indemnify the Selling
Stockholders and any broker-dealer that participates in transactions involving
the sale of shares against certain liabilities, including liabilities under the
Securities Act.
There can be no assurance that any of the Selling Stockholders will
sell any or all of the shares of common stock offered by them hereunder.
This prospectus also may be used, with Surge's consent, by assignees,
transferees, intermediaries, donees, pledges or other successors of the Selling
Stockholders or by other persons acquiring the shares who wish to offer and sell
such shares under circumstances requiring or making desirable its use. The sale
of the shares by the Selling Stockholders or any assignees, transferees,
intermediaries, donees, pledgees or other successors of the Selling Stockholders
is subject to the prospectus delivery and other requirements of the Securities
Act. To the extent required, during any period in which offers or sales are
being made, Surge will use its best efforts to file and distribute, one or more
amendments or supplements to this prospectus or a new registration statement
with respect to the shares to set forth the names of the Selling Stockholders
and describe any material information with respect to the plan of distribution
not previously disclosed in this prospectus, including, but not limited to, the
number of shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, if any, the purchase price paid
by the underwriter for shares purchased from a Selling Stockholder, and any
discounts, commission or concessions allowed or reallowed or paid to dealers and
the proposed selling price to the public.
If shares are sold in an underwritten offering, the shares may be
acquired by an underwriter for their own account and may be further resold from
time to time in one or more transactions, including negotiated transactions, at
market prices prevailing market prices, at negotiated prices, or at fixed
prices. The names of the underwriters with respect to any such offering and
terms of the transactions, including any underwriting discounts, concessions or
commissions and other items constituting compensation of the underwriters and
broker-dealer, if any, will be set forth in a supplement to this prospectus
relating to such offering. Any public offering price and any discounts,
concessions or commissions allowed or reallowed or paid to broker-dealer may be
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changed from time to time. Unless otherwise set forth in a supplement to the
prospectus, the obligations of the underwriters to purchase the shares will be
subject to certain conditions precedent and the underwriters will be obligated
to purchase all of the shares specified in such supplement if any such
supplement if any such shares are purchased.
If the shares are sold in an underwritten offering, the underwriters
may engage in passive market making transactions in the warrants, Class A Common
Stock or Class B Common Stock, in accordance with Rule 103 of Regulation M under
the Exchange Act. In general, a passive market maker may not bid for, or
purchase, the securities at a price that exceeds the highest independent bid. In
addition, the net daily purchases made by any passive market maker generally may
not exceed 30% of its average daily trading volume in the class of common stock
during a specified two month period, or 200 shares, whichever is greater. A
passive market maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the class of common stock in question
above independent market levels. Underwriters and dealers are not required to
engage in passive market making and may end passive market making activities at
any time.
In order to comply with certain states' securities laws, if applicable,
the shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the shares may not
be sold unless the particular securities being sold have been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is compiled with.
OTHER MATTERS
The Board of Directors is not aware of any business to be presented at
the special meeting except the matters set forth in the Notice and described in
this proxy statement. Unless otherwise directed, all shares represented by Board
of Directors' Proxies will be voted in favor of the proposal of the Board of
Directors described in this proxy statement. If any other matters come before
the special meeting, the persons named in the accompanying Proxy will vote on
those matters according to their best judgment.
EXPENSES OF SOLICITATION
We will pay the cost of soliciting proxies for the special meeting. In
addition to soliciting by mail, our directors, officers and other employees may
solicit proxies in person, or by telephone, facsimile transmission or other
means of electronic communication. We will also pay brokers, nominees,
fiduciaries and other custodians their reasonable fees and expenses for sending
proxy materials to beneficial owners and obtaining their instructions. We have
retained __________ __________ to perform various solicitation services. We have
agreed to pay __________ __________ a fee of approximately $__________ for their
services plus out-of-pocket expenses. For information about compensation that we
will pay Equilink, LLC for its services, you should read "Proposal 1--The
Recapitalization Proposal--Financial Advisor."
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INFORMATION ABOUT
STOCKHOLDER PROPOSALS
No person who intends to present a proposal for action at a forthcoming
shareholders' meeting of Superus may seek to have the proposal included in the
proxy statement or form of proxy for such meeting unless that person (a) is a
record beneficial owner of at least 1% or $1,000 in market value of shares of
Common Stock, has held such shares for at least one year at the time the
proposal is submitted, and such person shall continue to own such shares through
the date on which the meeting is held, (b) provides Superus in writing with his
name, address, the number of shares held by him and the dates upon which he
acquired such shares with documentary support for a claim of beneficial
ownership, (c) notifies Superus of his intention to appear personally at the
meeting or by a qualified representative under New York law to present his
proposal for action, and (d) submits his proposal timely. A proposal to be
included in the proxy statement or proxy for Surge's next annual meeting of
shareholders, will be submitted timely only if the proposal has been received at
Superus' executive offices no later than ___________, 2000. If the date of such
meeting is changed by more than 30 calendar days from the date such meeting is
scheduled to be held under Superus' By-Laws, or if the proposal is to be
presented at any meeting other than the next annual meeting of shareholders, the
proposal must be received at Superus' principal executive office at a reasonable
time before the solicitation of proxies for such meeting is made.
Even if the foregoing requirements are satisfied, a person may submit
only one proposal of not more than 500 words with a supporting statement if the
latter is requested by the proponent for inclusion in the proxy materials, and
under certain circumstances enumerated in the SEC's rules relating to the
solicitation of proxies, Superus may be entitled to omit the proposal and any
statement in support thereof from its proxy statement and form of proxy.
Request for Annual Report on Form 10-KSB And/Or Quarterly Reports on Form 10-QSB
Copies of Surge's Annual Report on Form 10-KSB for the fiscal year
ended November 30, 1999, or for any other report as filed with the SEC,
including the financial statements (but without exhibits), can be obtained
without charge by shareholders (including beneficial owners of Surge's Common
Stock) upon written request to Steven J. Lubman, Surge's Secretary, Surge
Components, Inc. 1016 Grand Boulevard, Deer Park, NY 11729. The Company files
all such reports by and such EDGAR filings may be found and retrieved for file
from the Worldwide Web at www.sec.gov.
EXPERTS
The consolidated financial statements of Surge Components, Inc. and its
subsidiary as of November 30, 1999 and for the two years ended November 30, 1999
and 1998 included in this Prospectus have been included in reliance upon the
report of Seligson & Giannattasio, LLP, independent certified public
accountants, given upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Global DataTel, Inc. and its
subsidiaries as of December 31, 1998 and for the year ended December 31, 1998
included in this Prospectus have been included in reliance upon the report of
Seligson & Giannattasio, LLP, independent certified public accountants, given
upon the authority of said firm as experts in accounting and auditing.
-184-
<PAGE>
The consolidated financial statements of Global DataTel, Inc. (formerly
known as Gold Coast Resources, Inc.) and its subsidiaries as of December 31,
1997 and for the period from April 1, 1997 to December 31, 1997 included in this
Prospectus have been included in reliance upon the report of Schvaneveldt and
Company, independent certified public accountants, given upon the authority of
said firm as experts in accounting and auditing.
The financial statements of MailEncrypt.com, Inc. as of December 31,
1999 and for the period from March 17, 1999 (inception) to December 31, 1999
included in this Prospectus have been included in reliance upon the report of
McKennon, Wilson & Morgan LLP, independent certified public accountants, given
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
Snow Becker Krauss P.C., New York, New York, has rendered opinions
concerning the validity of the common stock and concerning certain tax matters
described under "Proposal 1--The Recapitalization Proposal--Material Federal
Income Tax Consequences." Upon the Effective Date, SBK Investment Partners, a
partnership consisting of members of Snow Becker Krauss P.C., will receive an
aggregate of 200,000 already issued and outstanding Global Shares convertible
into an equal number shares of Class B Common Stock.
New York, New York By order of the board of directors,
__________ __________, 2000 Steven J. Lubman
Secretary
-185-
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Financial Statements
for the Year Ended November 30, 1999
Independent Auditors' Report F - 2
Consolidated Balance Sheet F - 3 - 4
Consolidated Statements of Income and
Comprehensive 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 - 20
Global DataTel, Inc and Subsidiaries
Index to Financial Statements
for the Nine Months Ended September 30, 1999
Independent Auditors' Report F - 21 - 22
Consolidated Balance Sheets F - 23 - 24
Condolidated Statements of Operations
and Comprehensive Income F - 25
Consolidated Statements of Stockholders' Equity F - 26
Consolidated Statements of Cash Flows F - 27 - 28
Notes to Consolidated Financial Statements F - 29 - 43
MailEncrypt.com, Inc
Index to Financial Statements
for the period March 17, 1999 (inception) To December 31, 1999
Independent Auditors' Report F - 44
Balance Sheet F - 45
Statement of Operations F - 46
Statement of Stockhoders' Deficit F - 47
Statement of Cash Flows F - 48
Notes to Financial Statements F - 49 - 53
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, 1999 and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity
and cash flows for each of the two years ended November 30, 1999. 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, 1999 and the results of their operations and their
cash flows for the two years ended November 30, 1999 in conformity with
generally accepted accounting principles.
Seligson & Giannattasio, LLP
N. White Plains, New York
February 4, 2000
F-2
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1999
ASSETS
Current assets:
Cash (Note 2) $ 159,612
Note Receivable - Global Datatel, Inc. (Note 3) 1,000,000
Marketable securities (Note 2) 2,232,294
Accounts receivable (net of allowance for
doubtful accounts of $22,634) 2,251,640
Inventory 1,442,067
Prepaid expenses and taxes 201,153
Cash surrender value 82,187
-----------
Total current assets $7,368,953
Fixed assets - net of accumulated depreciation
of $183,290 (Note 4) 321,406
Other assets:
Deferred acquisition costs (Note 2) 63,687
Security deposits 2,985
Deferred tax asset (Note 9) 89,223
-----------
Total other assets 155,895
----------
Total assets $7,846,254
==========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
November 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,283,067
Accrued expenses and taxes 408,941
----------
Total current liabilities $1,692,008
Commitments and contingencies
(Notes 2, 5, 6, 7, 8, 10, 11, 12, 13 and 15)
Stockholders' equity (Note 7):
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, 4,858,958
shares issued and outstanding 4,859
Additional paid-in capital 6,386,063
Unrealized holding loss (Note 2) (52,856)
Retained deficit (183,820)
----------
Total stockholders' equity 6,154,246
----------
Total liabilities and stockholders' equity $7,846,254
==========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended November 30,
1999 1998
---------------------------
Sales $12,254,241 $8,925,948
Less returns and allowances 107,216 198,299
----------- ------------
Net sales 12,147,025 8,727,649
Cost of goods sold 9,068,308 6,514,813
Inventory reserve (Note 8) -- 215,293
----------- ------------
Gross profit 3,078,717 1,997,543
----------- ------------
Operating expenses:
General and administrative
expenses 2,071,834 1,759,685
Selling and shipping expenses 1,030,844 874,362
Depreciation 49,254 45,090
----------- ------------
Total operating expenses 3,151,932 2,679,137
----------- ------------
Loss from operations (73,215) (681,594)
----------- ------------
Other income (expenses):
Investment income 216,774 293,898
Interest expense -- (34,936)
Loss on disposal of assets (37,757) (7,936)
----------- ------------
Total other income (expenses) 179,017 251,026
----------- ------------
Income (loss) before income taxes 105,802 (430,568)
Income taxes (benefit) (Note 9) 20,738 (156,402)
----------- ------------
Net income (loss) 85,064 (274,166)
Other comprehensive (loss) income:
Unrealized holding (loss) gain on securities
arising during the period (188,319) 59,483
Reclassification adjustment - loss
on sale of securities, net of taxes of $14,714 23,044 -
----------- ------------
Total comprehensive loss $ (80,211) $ (214,683)
==========- ===========
Weighted average shares outstanding
Basic 4,858,024 4,836,835
Diluted 5,876,468 4,836,835
Earnings (loss) per share
Basic $ .02 $ (.06)
Diluted $ .01 $ (.06)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Additional Unrealized
Preferred Stock Common Stock Paid-In Holding
Shares Amount Shares Amount Capital Gain
------ ------ ------ ------ ------- ----
<S> <C> <C> <C> <C> <C> <C>
Balance - December 1, 1997 -- $ -- 4,823,958 $4,824 $6,335,862 $ 75,980
Proceeds of issuance of stock -- -- 18,000 18 13,614 --
Proceeds of exercised options -- -- 11,000 11 20,232 --
Net unrealized gain in
marketable securities -- -- -- -- -- 59,483
Net loss for the period -- -- -- -- -- --
----- ----- --------- ------ ---------- ----------
Balance - November 30, 1998 -- -- 4,852,958 4,853 6,369,708 135,463
Proceeds of issuance of A warrants -- -- -- -- 8,736 --
Proceeds of exercised options -- -- 6,000 6 7,619 --
Net unrealized loss in marketable
securities -- -- -- -- -- (188,319)
Net income for the period -- -- -- -- -- --
----- ----- --------- ------ ---------- ----------
Balance - November 30, 1999 -- $ -- 4,858,958 $4,859 $6,386,063 $ (52,856)
===== ===== ========= ====== ========== ==========
<CAPTION>
Retained Total
Earnings Stockholders'
(Deficit) Equity
--------- ------
<S> <C> <C>
Balance - December 1, 1997 $ 5,282 $6,421,948
Proceeds of issuance of stock -- 13,632
Proceeds of exercised options -- 20,243
Net unrealized gain in
marketable securities -- 59,483
Net loss for the period (274,166) (274,166)
---------- ----------
Balance - November 30, 1998 (268,884) 6,241,140
Proceeds of issuance of A warrants -- 8,736
Proceeds of exercised options -- 7,625
Net unrealized loss in marketable
securities -- (188,319)
Net income for the period 85,064 85,064
---------- ----------
Balance - November 30, 1999 $(183,820) $6,154,246
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 85,064 $ (274,166)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation 49,254 45,090
Deferred income taxes (1,192) (89,427)
Provision for losses on accounts receivable 6,910 --
Loss on disposal of assets 37,757 7,936
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (1,068,584) 354,570
Inventory (282,956) 69,830
Prepaid expenses and taxes (55,627) (78,369)
Cash surrender value (27,030) (25,368)
Accounts payable 177,767 145,227
Accrued expenses and taxes 100,981 12,769
---------- ----------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES (977,656) 168,092
---------- ----------
INVESTING ACTIVITIES
Purchase of marketable securities (196,298) (961,075)
Acquisition of fixed assets (45,873) (253,870)
Loan to Global Datatel, Inc. (1,000,000) --
Sale of marketable securities 975,856 --
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (266,315) (1,214,945)
---------- ----------
See accompanying notes to consolidated financial statements
F-7
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
1999 1998
---- ----
FINANCING ACTIVITIES
Net borrowings under
letter-of-credit agreement $ -- $ (495,495)
Proceeds from issuance of warrants 8,736 13,632
Proceeds from exercised options 7,625 20,243
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 16,361 (461,620)
---------- -----------
NET CHANGE IN CASH (1,227,610) (1,508,473)
CASH AT BEGINNING OF PERIOD 1,387,222 2,895,695
---------- -----------
CASH AT END OF PERIOD $ 159,612 $ 1,387,222
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 11,618 $ 2,062
=========== ===========
Interest paid $ -- $ 34,936
=========== ===========
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
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, 1999 is as follows:
Aggregate cost $2,285,150
Gross unrealized loss (52,856)
----------
$2,232,294
==========
Cost of the securities used in the computation of realized gains and losses is
determined using the average cost method. During 1999, the Company and
Subsidiary sold $975,856 of the above shares and had a realized loss of $37,757.
During 1998, there were no sales of these securities.
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, 1999 and 1998.
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:
F-9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, notes 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, 1999 and 1998, the Company's
uninsured cash balances totaled $54,763 and $145,998, 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.
Deferred Acquisition Costs
Deferred acquisition costs consist of expenses incurred related to the purchase
of Global Datatel, Inc. which will be included in the purchase price and
amortized over a 20 year period.
Accrued Vacation Pay
Employees are required to take vacation in the year of entitlement. Accrued
unpaid vacation entitlement has not been significant.
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.
F-10
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 (Loss) Per Share
Earnings per share for the years ended November 30, 1999 and 1998 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.
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
intended to be Y2K compliant by January 1, 2000. The Company has experienced
virtually no Y2K problems in January 2000 and does not expect to incur any
further costs.
Reclassifications
Certain prior year information has been reclassified to conform to the current
year's reporting presentation.
NOTE 3 - NOTE RECEIVABLE - GLOBAL DATATEL, INC.
In October 1999, the Company entered into a $1,000,000 Subordinated Convertible
Promissory Note agreement (the "Note") with Global Datatel, Inc. ("Global"). The
Note accrued interest at the rate of 10% per annum and was due on June 1, 2000
and was secured by certain Global stock owned by Global's president. Upon
completion of the acquisition of Global by the Company, the Note and accrued
interest would be forgiven. In January 2000, the Note was replaced, with a new
note and available borrowing, pending satisfaction of certain conditions, in the
principal amount of up to $4,100,000. (Note 15)
F-11
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 4 - FIXED ASSETS
Fixed assets consist of the following at November 30, 1999:
Furniture and fixtures $ 85,093
Leasehold improvements 250,719
Computer equipment 168,884
--------
504,696
Less - accumulated depreciation 183,290
--------
Total fixed assets $321,406
========
Depreciation expense for the years ended November 30, 1999 and 1998 was $49,254
and $45,090, respectively.
NOTE 5 - 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. Among other provisions, 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. The Company's assets
collateralize these borrowings. 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 May 1999, the letter of credit agreement with the bank expired. The Company
is negotiating a new agreement with the bank.
NOTE 6 - 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, 1999
totaled approximately $130,000. Pension expense for the years ended November 30,
1999 and 1998 was $2,068 and $2,254, respectively.
F-12
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 7 - 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.
In January 2000, the Company designated 260,000 shares of the 1,000,000
authorized shares of preferred stock as Non-Voting Redeemable Convertible Series
A Preferred Stock. These shares are entitled to share in dividends on a pro-rata
basis with the common shares if and when declared and each share is convertible
into 100 shares of Class B Common Stock, upon completion of the proposed
recapitalization of the Company. None of the preferred stock was issued as of
November 30, 1999.
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, subject to
redemption. At November 30, 1999, none of the warrants have been exercised.
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:
Weighted Avg.
Exercise Price
Shares Per Share
Options outstanding December 1, 1997 304,000 $1.42
Granted 20,000 $2.09
Exercised (11,000) $1.25
-------
Options outstanding November 30, 1998 313,000 $1.52
Granted 187,000 $1.65
Exercised (6,000) $1.25
Canceled (4,000) $2.00
-------
Options outstanding November 30, 1999 490,000 $1.59
=======
Options exercisable November 30, 1998 250,500 $1.45
=======
Options exercisable November 30, 1999 437,750 $1.54
======= =====
Exercise prices for options outstanding as of November 30, 1999 ranged from
$1.25 to $3.20. The weighted-average remaining contractual life of these options
is approximately five years.
F-13
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
Additional Stock Options Granted
In December 1998, the Company granted options to purchase 5,300,000 shares of
the Company's common stock to certain of its officers and directors. The options
are exercisable four years from the grant date at an exercise price of $2 per
share. The options expire five years from the date of the grant.
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, 1999 and
1998 would have been $(1,582,768) and $(245,296) and $(.33) and $(.05) had the
new method been applied.
Compensation to non-employees 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 63.13%, 86.78% and 85.81% for awards granted
in 1999 and 136% for awards granted in 1998; 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.
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.
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.
Upon the completion of the proposed acquisitions in Note 15, the Rights Plan
will be terminated.
F-14
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
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.
Exercise of Underwriter Warrants
In March 1999, the underwriters exercised a portion of their warrants received
during the Company's July 1996 Public Offering. In exchange for $8,736, the
underwriters received 54,600 Warrants. These Warrants are identical to those
issued pursuant to the Company's Public Offering.
NOTE 8 - 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. During the year ended November 30, 1999, the
Company sold $23,563 of these inventories.
NOTE 9 - 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, 1999:
Deferred tax asset:
Inventory reserves $89,274
Deferred tax liability:
Fixed assets 51
-------
Net deferred tax asset $89,223
=======
F-15
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 9 - INCOME TAXES (Continued)
The Company's income tax expense consists of the following:
Year Ended
November 30,
1999 1998
------- -------
Current:
Federal $ 12,611 $ (70,934)
States 9,319 3,959
--------- -----------
$ 21,930 $ (66,975)
========= ===========
Deferred:
Federal $ (915) $ (64,515)
States (277) (24,912)
--------- -----------
$ (1,192) $ (89,427)
========= ===========
Provision for income taxes (benefit) $ 20,738 $ (156,402)
========= ===========
Pursuant to New York State law, the Company is required to carry forward net
operating losses of approximately $216,000, which will expire in 2018.
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,
1999 1998
------- -------
U.S. Federal income tax statutory rate 34% (34)%
State income tax, net of Federal
income tax (benefit) 6 (6)
Nontaxable dividends (18) (11)
Tax (benefit) from lower tax brackets (19) 19
Sale of previously reserved inventory 17 --
Other -- (4)
----- -------
Effective tax rate 20% (36)%
===== =======
NOTE 10 - RELATED PARTY TRANSACTIONS
Lease
The Company leases office and warehouse space through December 31, 2008 from a
corporation that is controlled by officers of the Company. The following is a
schedule of future minimum rental payments required at November 30, 1999:
F-16
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 10 - RELATED PARTY TRANSACTIONS (continued)
Year Ending November 30,
2000 $ 77,332
2001 79,654
2002 82,048
2003 84,514
2004 87,047
2005 and thereafter 383,277
---------
$793,872
Rental expense for the years ended November 30, 1999 and 1998, was $84,767 and
$78,960, respectively.
NOTE 10 - 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 are not elected as an officer of the Company
and/or there has been a change in ownership of at least 25% of the issued and
outstanding stock of the Company, and such issuance was not approved by either
officer, 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 notice by either party.
NOTE 11 - 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. Among other provisions, 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-17
<PAGE>
NOTE 12 - MAJOR CUSTOMERS
Revenues to single customers in excess of 10% of the Company's total sales
consists of the following:
Year Ended
November 30,
1999 1998
------- -------
Customer A $2,027,803 $ --
Customer B 1,381,463 --
Customer C 1,398,374 1,446,555
Customer D -- 920,438
NOTE 13 - 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,
1999 1998
------- -------
Supplier A $1,761,131 $1,264,215
Supplier B 1,288,116 1,206,277
Supplier C -- 730,316
NOTE 14 - EXPORT SALES
Export sales consist of the following:
Year Ended
November 30,
1999 1998
------- -------
Surge Components Inc.
Canada $ 50,914 $ 13,847
Europe 4,244 39,212
Asia 1,151,378 209,836
Central America 32,977 --
Challenge/Surge Inc.
Canada $ 14,624 $ 12,845
Europe 70,130 --
Asia 162,177 64,212
F-18
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 15 - SUBSEQUENT EVENTS
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.
Pending Acquisition of Global Datatel, Inc.
In October 1999, the Company entered into a merger agreement with Global
Datatel, Inc. ("Global"). In December 1999, the parties terminated the merger
agreement and the Company entered into an asset purchase agreement with Global.
Among other provisions, the Company agreed to purchase the assets of Global and
its subsidiaries in exchange for 239,000 shares of the Company's Series A
Redeemable Convertible Preferred Stock ("Series A Preferred"). Following
approval of the acquisition by the shareholders of the Company and Global, each
share of the Series A Preferred will automatically convert into 100 shares of
Surge's Class B Common Stock. Each holder of the current Class A Common Stock
Warrants shall have the right to purchase one share of the Class B Common Stock
pursuant to the same conditions as currently exists. In addition, each holder of
the Company's current common stock shall have the right to exchange two shares
of the Company's Common Stock for one share of Class B common stock. The
purchase is conditioned on the completion of regulatory and other approvals and
other conditions precedent.
Pending Acquisition of MailEncrypt.com Inc.
In January 2000, the Company entered into a letter of intent to purchase
MailEncrypt.com Inc. in exchange for 1,821,400 shares of the Company's Class B
Common Stock. The acquisition is subject to the execution of definitive
documentation, shareholder approval and the satisfaction of certain conditions
precedent.
Issuance of Stock Options
In December 1999, the Company granted options to certain of its employees and
consultants, pursuant to the Option Plan, to purchase 209,000 shares of the
Company's Common Stock at an exercise price of $2.6875 per share.
From December 1, 1999 through the date of this report, eight employees and one
consultant exercised 46,500 shares at an aggregate exercise price of $63,900.
Private Placement Offering
As of January 2000, the Company, had raised $6,000,449 through the sale of
convertible promissory notes in a private placement offering ("Private
Placement") pursuant to regulation D of the Securities Act of 1933, as amended.
The offering, as amended, is seeking to raise up to $7,000,000 of principal
amount of promissory notes. The use of all of the proceeds from the Private
Placement will be used to fund the activities of Global and MailEncrypt.com.
These notes accrue interest at the rate of 12% per annum and are due on or
before December 31, 2000. Upon approval of the acquisition of Global, these
notes will automatically be converted into the Company's Class B common stock at
a conversion price of $3 per share. In the event, the Global acquisition does
not occur, these notes will automatically be converted into the Company's
current common stock at a conversion price of $2.50 per share. Under no
circumstances will the promissory notes convert into more than 19.9% of the
equity shares of the Company, without prior shareholder approval.
F-19
<PAGE>
NOTE 15 - SUBSEQUENT EVENTS (Continued)
Subordinated Convertible Promissory Note
In February 2000, the Company replaced the previous note receivable with Global
Datatel, Inc. (Note 3) with a Subordinated Convertible Promissory Note
("Convertible Note") totaling up to $4,100,000. To date $1,000,000 has been
loaned to Global, and the remaining $3,100,000 may be loaned to Global, upon
satisfaction of certain conditions. The Convertible Note accrues interest at the
rate of 10% per annum. Upon completion of the acquisition of Global by the
Company, the Convertible Note and all accrued interest shall automatically be
forgiven. If the acquisition does not occur by July 30, 2000, the Company may,
at its own discretion, convert this note into the common stock of Global on a
dollar for dollar basis, at the conversion price equal to 90% of average closing
price of Global stock for the preceding 20 trading days or demand repayment. The
Convertible Note is secured by the pledging of certain shares of stock owned by
the President of Global.
Note Payable to Bank
In December 1999, the Company entered into two note agreements with a bank for
aggregate borrowings of $500,000. The notes, which accrue interest at the prime
rate, are due on December 31, 1999. These notes have subsequently been paid.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
TO THE BOARD OF DIRECTORS
GLOBAL DATATEL, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of Global
DataTel, Inc. and Subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations and comprehensive income,
cash flows and changes in shareholders' equity for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
We did not observe the taking of the inventories on the date of the
acquisition of the subsidiaries, since those dates were prior to the time we
were initially engaged as auditors for the Company. We were unable to
satisfy ourselves about the inventory quantities by means of other auditing
procedures.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to observe the
physical inventories taken as of the acquisition date of the subsidiaries,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Global DataTel, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year ended December 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's working capital deficiency raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Seligson & Giannattasio, LLP
N. White Plains, NY
February 14, 2000
F-21
<PAGE>
INDEPENDENT AUDITORS REPORT
Board of Directors
Gold Coast Resources, Inc., and Subsidiaries
I have audited the accompanying balance sheet of Gold Coast Resources, Inc. and
Subsidiaries, as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period April 1, 1997 to December
31, 1997. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of Gold Coast Resources, Inc., and
Subsidiaries, as of December 31, 1997, and the results of its operations and its
cash flows for the period April 1, 1997 to December 31, 1997, in conformity with
generally accepted accounting principles.
Schvaneveldt and Company
Salt Lake City, Utah
June 9, 1998
F-22
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Current assets:
Cash $ 50,638 $ 133,676
Accounts receivable, net of allowance
for doubtful accounts of $404,595 and
$389,880, respectively 2,898,273 2,867,344
Due from stockholders -- 364,380
Inventories 1,012,152 1,127,611
Other current assets 1,984,496 447,214
----------- ----------
Total current assets 5,945,559 4,940,225
----------- ----------
Property, plant and equipment, net of
accumulated depreciation of $346,449 and
$309,332, respectively 549,279 522,585
----------- ----------
Other assets:
Goodwill, net of accumulated amortization of
$98,137 and $17,018, respectively 2,082,052 2,163,171
Other assets 30,691 531,345
----------- ----------
Total other assets 2,112,743 2,694,516
----------- ----------
Total assets $8,607,581 $8,157,326
========== ==========
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Current liabilities:
Short term borrowings, banks $ 1,029,405 $ 998,477
Deferred revenues 44,759 409,081
Accounts payable 3,774,950 2,300,541
Accrued expenses 2,809,047 1,032,382
Notes payable to shareholders 661,667 1,056,667
----------- -----------
Total current liabilities 8,319,828 5,797,148
Mortgage payable - bank 72,921 97,159
----------- -----------
Total liabilities 8,392,749 5,894,307
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock 25,000,000 shares
authorized, par value $.001, -- and 105,000
shares issued and outstanding as of September 30, 1999
and December 31, 1998, respectively -- 105
Common stock, 50,000,000 shares authorized
par value $.001, 22,280,124 and 9,180,123 shares
issued and outstanding as of September 30, 1999
and December 31, 1998, respectively 22,280 9,180
Paid in capital 9,954,939 9,667,934
Accumulated deficit (10,003,334) (7,375,848)
Foreign currency translation adjustment 240,947 (38,352)
----------- ----------
Total stockholders' equity 214,832 2,263,019
----------- ----------
Total liabilities and stockholders'
equity $ 8,607,581 $8,157,326
=========== ==========
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Nine Months
Nine Months Ended Year Ended Ended
September 30, December 31, December 31,
1999 1998 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $9,583,440 $ -- $1,862,339 $ 14,973
Costs of goods sold 6,287,233 -- 728,140 --
---------- ---------- ---------- ------------
Gross profit 3,296,207 -- 1,134,199 14,973
---------- ---------- ---------- ------------
Selling, general, and administrative expenses 2,889,371 -- 769,314 188,376
Payroll and related expenses 2,531,876 -- 1,383,821 --
Interest expense 434,448 -- 18,663 --
Other (income) expense (70,366) -- -- 1,908,263
---------- ---------- ---------- ------------
Total expenses 5,785,329 -- 2,171,798 2,096,639
---------- ---------- ---------- ------------
Loss before provisions for income taxes (2,489,122) -- (1,037,599) (2,081,666)
Provision for income taxes 138,364 -- 134,839 --
---------- ---------- ---------- ------------
Loss from continuing operations (2,627,486) -- (1,172,438) (2,081,666)
---------- ---------- ---------- ------------
Discontinued operations:
Loss from operations from subsidiary sold -- (435,269) (625,473) --
Loss on sale of subsidiary -- -- (1,910,431) --
---------- ---------- ---------- ------------
Loss from discontinued operations -- (435,269) (2,535,904) --
---------- ---------- ---------- ------------
Net loss (2,627,486) (435,269) (3,708,342) (2,081,666)
Other comprehensive income (loss):
Foreign currency translation, net of tax 279,299 -- (38,352) --
---------- ---------- ---------- ------------
Comprehensive loss $(2,348,187) $(435,269) $(3,746,694) $(2,081,666)
============ ========== ============ ============
Loss per share - Basic and diluted
Loss per share from continuing operations $ (.12) $ -- $ (.17) $ (329.17)
Loss per share from discontinued operations -- (.08) (.37) --
----------- ---------- ----------- ------------
Net loss per share - Basic and diluted $ (.12) $ (.08) $ (.54) $ (329.17)
=========== ========== =========== ============
Weighted average shares outstanding
Basic 22,267,256 5,191,030 6,836,755 6,324
Diluted 22,267,256 5,191,030 6,836,755 6,324
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Additional Currency
Preferred Stock Common Stock Paid-in Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustments Total
------ ------ ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance April 1, 1997 -- $ -- 5,787 $ 6 $3,207,203 $(1,585,840) $ -- $1,621,369
Shares issued for service-- -- -- 125 -- 50 -- -- 50
Shares issued for investment-- -- -- 1,250 1 494 -- -- 495
Class A preferred shares issued
for Condor Insurance 500,000 500 -- -- -- -- -- 500
Class B preferred shares issued
for 800 Biostasis, Inc. 1,000,000 1,000 -- -- 271,895 -- -- 272,895
Class C preferred shares issued
for Shoulder Shade 1,000,000 1,000 -- -- -- -- -- 1,000
Class D preferred shares issued
for Secure Bind, Inc. 1,000,000 1,000 -- -- -- -- -- 1,000
Class F preferred shares issued
for 80% of the Travel Agents
Hotel Guide, Inc. 1,000,000 1,000 -- -- 2,341,806 -- -- 2,342,806
Net loss for the period -- -- -- -- -- (2,081,666) -- (2,081,666)
--------- ------- ---------- --------- ---------- ----------- ------- ----------
Balance at December 31, 1997 4,500,000 $4,500 7,162 $ 7 $5,821,448 $(3,667,506) $ -- $2,158,449
Rescinded preferred (4,500,000) (4,500) -- -- (271,895) -- -- (276,395)
Shares issued for services -- -- 1,198,500 1,199 198,001 -- -- 199,200
Shares issued for cash -- -- 2,870,000 2,870 571,130 -- -- 574,000
Shares tendered by stockholders -- -- (3,518,525) (3,519) 3,519 -- -- --
Shares issued to purchase
subsidiaries 105,000 105 8,622,986 8,623 3,345,731 -- -- 3,354,459
Foreign currency translation -- -- -- -- -- -- (38,352) (38,352)
Net loss for the period -- -- -- -- -- (3,708,342) -- (3,708,342)
--------- ------- ---------- --------- ---------- ----------- ------- ----------
Balance at December 31, 1998 105,000 $ 105 9,180,123 $ 9,180 $9,667,934 $(7,375,848) $(38,352) $2,263,019
Conversion of preferred shares (105,000) (105) 13,000,001 13,000 (12,895) -- -- --
Shares issued for cash -- -- 100,000 100 299,900 -- -- 300,000
Foreign currency translation -- -- -- -- -- -- 279,299 279,299
Net loss for the period -- -- -- -- -- (2,627,486) -- (2,627,486)
--------- ------- ---------- --------- ---------- ----------- ------- ----------
Balance at September 30, 1999
(unaudited) -- $ -- 22,280,124 $ 22,280 $9,954,939 $(10,003,334) $240,947 $ 214,832
========= ======= ========== ========= ========== =========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Nine Months Ended Year Ended Ended
September 30, December 31, December 31,
1999 1998 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,627,486) $ (435,269) $(3,708,342) $(2,081,666)
Adjustment to reconcile net loss to net
cash (used) provided by operations
Loss on impaired assets and sales of assets -- -- -- 288,375
Loss on sale of land -- -- -- 1,619,888
Other losses, net -- -- 276,395 50
Loss on sale of division -- -- 1,910,431 --
Depreciation and amortization 118,236 5,969 49,310 120,885
Provision for bad debt expense 14,715 -- (249,295) --
Changes in operating assets and liabilities:
Accounts receivable (45,644) -- 378,098 --
Inventories 115,459 -- (70,981) --
Other assets (1,023,417) (11,202) 124,446 (10,749)
Accounts payable and accrued expenses 3,237,863 (28,883) 725,880 (1,298)
Deferred revenues (364,322) -- 171,722 --
------------ ------------ ----------- ------------
Net cash used in operating activities (574,596) (469,385) (392,336) (64,515)
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (63,811) -- (2,601) (8,216)
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of notes payable (388,310) (104,533) (395,044) 72,731
Net advances from stockholders 364,380 -- 388,009 --
Proceeds from issuance of common stock 300,000 574,000 574,000 --
------------ ------------ ----------- ------------
Net cash flows provided by financing activities 276,070 469,467 566,965 72,731
------------ ------------ ----------- ------------
Foreign currency effect on cash 279,299 -- (38,352) --
------------ ------------ ----------- ------------
Net change in cash (83,038) 82 133,676 --
Cash at beginning of year 133,676 -- -- --
------------ ------------ ----------- ------------
Cash at end of year $ 50,638 $ 82 $ 133,676 $ --
============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Nine Months Ended Year Ended Ended
September 30, December 31, December 31,
1999 1998 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 434,448 $ -- $ 18,663 $ --
========= =========== =========== ==========
Income taxes $ 138,364 $ -- $ 134,839 $ --
========= =========== =========== ==========
Non-cash investing and financing transactions:
Preferred shares issued to purchase subsidiaries $ -- $ 105 $ 105 $2,618,201
Common shares issued for services -- 199,200 199,200 50
Common shares issued to purchase subsidiaries -- 1,088,455 2,654,455 495
--------- ----------- ----------- ----------
$ -- $ 1,287,760 $ 2,853,760 $2,618,746
========= =========== =========== ==========
</TABLE>
F-28
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------------------------
Organization - Global DataTel, Inc. ("the Company") was originally incorporated
under the laws of the State of Utah on April 17, 1980 as La Plate Oil and
Mining, Inc. On October 1,1982 the Company changed its name to Gold Coast
Resources, Inc. ("Gold Coast"). On September 30, 1998 Gold Coast purchased 100%
of the outstanding common stock of International Computer Resources ("ICR") (a
Florida corporation) and Mantenimiento Electronico de Sistemas Limited ("MES")
(a Colombian corporation). On December 2, 1998 the company changed its name to
Global DataTel, Inc.
On November 30, 1998, the Company purchased three unrelated companies in
Colombia, South America, DLR & CIA ("DLR"), Micro Star LTD. ("Micro"), and CASA
Informatica "("Casa"). The companies acquired are also in the business of
providing software and hardware solutions to companies in their markets.
Previous to the acquisition of ICR and MES, Gold Coast Resources was a
development stage company that, through a wholly-owned subsidiary The Travel
Agents Hotel Guide, Inc. ("Hotel"), was engaged in the business of developing a
hotel guide selling advertising space to the hotel and travel industry. Gold
Coast sold Hotel on December 14, 1998.
The Company currently engages primarily in the sale and distribution of medium
and high-end computer and software products, including Enterprise Resource
Planning (ERP) suites, as well as, providing information technology solutions
and support to medium and large business clients primarily in Central and South
America. The Company has distribution agreements with International Business
Machines ("IBM"), Lotus, Cisco Systems, and JBA.
The following is summary of the significant policies followed in the preparation
of the consolidated financial statements.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash - For purposes of cash flows the Company considers investments of three
months or less as cash equivalents.
F-29
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Revenue Recognition - Revenues from services are recognized as the services are
performed. Revenues from the sales and installation of a hardware package are
recognized when the installation is substantially completed and operational.
Change in Fiscal Year - Effective April 1, 1997, the Company changed its fiscal
year to end on December 31.
Inventories - Inventories are principally composed of finished goods and are
stated at the lower of cost (first-in, first-out method) or market.
Accounts Receivable - The Company periodically reviews the adequacy of the
allowance for doubtful accounts and maintains the allowance for doubtful
accounts at a level which management believes is sufficient to cover potential
credit losses.
Property, Plant and Equipment - Property, plant, and equipment is recorded at
cost. Depreciation is generally on a straight-line basis over the estimated
useful lives of the related assets as follows:
Building and improvements 20 years
Furniture and office equipment 5 - 10 years
Computer and EDP equipment 5 years
Transportation equipment 5 years
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect 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 reported
period. Actual results could differ from those estimates.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk consists primarily of accounts
receivable and debt securities. Concentration of credit with respect to accounts
receivable as of December 31, 1998 was limited to an amount due from an agency
of the Colombian Government, which represented approximately 22% of the net
accounts receivable. Subsequent to year-end this balance was paid. The Company
provides for estimated credit losses at the time of sale based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
F-30
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Fair Value - The Company has a number of financial instruments, none of which is
held for trading purposes. The Company estimates that the fair value of all
financial instruments at September 30, 1999 and December 31, 1998, does not
differ materially from the aggregate carrying values of these financial
instruments recorded in the accompanying balance sheets. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. 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.
Investments - The Company utilizes Statement of Financial Accounting Standards
("SFAS") Number 115, "Accounting for Certain Investments in Debt and Equity
Securities" to account for its investments. The Company's investments consist
primarily of a convertible debenture from a publicly traded company and are
being reported as held to maturity securities. Held to maturity securities are
carried at amortized cost. Held to maturity securities declines in fair value
below amortized cost that are other than temporary, are included in earnings.
Goodwill - Goodwill, which represents the excess of acquisition costs over the
net assets acquired in the business combinations, is amortized on the
straight-line method over 20 years. The carrying amount of goodwill is reviewed
annually using estimated undiscounted cash flows for the businesses acquired
over the remaining amortization periods.
Loss Per Share - Loss per share for all periods was computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding and also is adjusted for the assumed conversion of shares issuable
upon exercise of options and other convertible securities. The Company had
losses in each of the years presented and, accordingly, common stock equivalents
are excluded as the effect would be anti-dilutive.
Income Taxes - The Company and its U.S. subsidiary file a consolidated income
tax return. Foreign subsidiaries are not consolidated. The Company has adopted
SFAS 109 and this pronouncement caused no material changes on the financial
statements. The provision for income taxes is primarily related to the
reconciliation of the taxes paid and owed by the foreign subsidiaries in
accordance with the taxing rules and regulation promulgated by the Colombian
government as of December 31, 1998. Approximately $34,000 of the tax provision
included in the accompanying statement of operations relates to ICR, the U.S.
subsidiary. The Company has approximately $1,900,000 of net operating loss
carryforwards, which are subject to certain restrictions and limitations based
on the Company's ownership changes during 1998.
F-31
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------------------
Translation of Foreign Currency - The Company's Colombian subsidiaries are
translated in accordance with Statement of Financial Accounting Standards No. 52
(SFAS No. 52), which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rates prevailing during
the period. For purposes of SFAS No. 52, the Company considers the Colombian
Peso to be the functional currency. The effects of unrealized exchange
fluctuations on translating foreign currency assets and liabilities into U.S.
dollars are accumulated as the cumulative translation adjustment in
shareholders' equity. Realized gains and losses from foreign currency
transactions are included in the results of operation for the period.
Fluctuations arising from intercompany transactions are long term in nature and
are accumulated as cumulative translation adjustments.
Interim Reporting - Information pertaining to the nine months ended September
30, 1999 and 1998 has not been audited. In the opinion of management, the
unaudited interim financial information reflects all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation. Results
for interim periods are not necessarily indicative of results for a full year.
Year 2000 Computer Readiness - Unaudited - The Company is in the process of
evaluating the effect of the year 2000 ("Y2K") on its computer systems. The
Company believes that the cost of upgrading its systems will not materially
affect the operations but will constitute the normal periodic ongoing cost of
maintaining and improving its computer system.
The Company has initiated communications with all of its significant suppliers
to determine the extent to which the Company's operations are vulnerable to
those third parties failure to remediate their own Y2K issues. There can be no
guarantee that the system of such companies or payors will be timely converted
and would not have an adverse impact on the Company. Additionally, general
problems such as electric power, water and sewer etc., are beyond the ability of
the Company to determine, and would affect most other companies in the
geographic area of Colombia. The Company experienced virtually no Y2K problems
in January 2000 and does not expect to incur any material costs.
F-32
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITIONS
- ------------------------------
All acquisitions have been accounted for under the purchase method. The results
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition. In all of the acquisitions,
100% of the acquired companies were purchased.
ICR - On September 30, 1998, the Company acquired all of the outstanding stock
of ICR in exchange for 105,000 shares of convertible preferred stock valued at
$0.001 per share and 4,243,843 shares of common stock valued at $.20 per share.
The net assets acquired and liabilities assumed approximated $90,000 and
$190,000, respectively. The purchase resulted in goodwill of approximately
$950,000. The subsidiary of ICR, eHOLA.com, an Internet service provider, is
expected to generate the future realizable income necessary to justify the
resulting goodwill in this transaction.
MES - On September 30, 1998, the Company acquired MES for 357,143 common shares
of the Company's common stock, valued at the book value of MES. The net assets
acquired and liabilities assumed approximated $1,152,000 and $913,000,
respectively.
DLR - On November 30, 1998, the Company acquired DLR for $300,000 ($100,000 due
at closing and five monthly installments of $40,000 thereafter, as defined) in
cash, and 60,000 shares of the Company's common stock, valued at $3.00 per
share. The net assets acquired and liabilities assumed approximated $3,527,000
and $1,786,000, respectively. The acquisition resulted in goodwill of $502,000.
The Company has not made all required payments under the agreement and is
currently in default.
MICRO - On November 30, 1998, the Company acquired Micro for $150,000, payable
in six consecutive monthly payments from the date of closing, and 70,000 shares
of the Company's common stock, valued at $3.00 per share. The net assets
acquired and liabilities assumed approximated $890,000 and $748,000,
respectively. The purchase resulted in goodwill of $218,000. The Company has not
made all required payments under the agreement and is currently in default.
CASA - On November 30, 1998, the Company acquired Casa for $840,000, payable in
9 monthly payments of $93,333 commencing at the date of the closing and 392,000
shares of the Company's common stock, valued at $3 per share. The net assets
acquired and liabilities assumed approximated $3,300,000 and $1,800,000,
respectively. The purchase resulted in goodwill of approximately $512,000. The
Company has not made all required payments under the agreement and is currently
in default.
F-33
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
- ------------------------------------------
The Company issued non-interest-bearing promissory notes to the shareholders of
DLR, Casa and Micro for the unpaid cash portion of the consideration for the
acquisitions. The terms of the notes for the individual companies acquired are
as presented in the preceding paragraphs and the amount due is reflected as
notes payable to stockholders in the accompanying consolidated balance sheet as
of December 31, 1998. The realization of a major portion of the assets in the
accompanying balance sheet as of December 31, 1998 is dependent upon continued
operations of the Company, and their ability to raise additional capital.
Management believes that actions presently taken to revise the Company's
operating and financial requirements will provide the opportunity for the
Company to continue as a going concern.
The following unaudited pro forma consolidated results of operations are
presented as if ICR, DLR, Casa, and Micro Star acquisitions had been made as of
January 1, 1998. The unaudited consolidated pro forma information is not
necessarily indicative of the combined results that would have occurred had the
acquisitions occurred on those dates, nor is it indicative of the results that
may occur in the future.
Year ended
December 31,
1998
----
(Unaudited)
Net sales $21,457,159
Net loss from continuing operations $ (349,593)
Net loss per share $ (.01)
F-34
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
The Company's property, plant, and equipment consist of the following:
September 30, December 31,
1999 1998
---- ----
(Unaudited)
Land $ 73,807 $ 73,807
Buildings 184,653 184,653
Office equipment 185,597 185,597
EDP equipment 451,671 387,860
-------- --------
Total property, plant, and equipment 895,728 831,917
Less: accumulated depreciation 346,449 309,332
-------- --------
Property, plant and equipment, net $549,279 $522,585
======== ========
Depreciation expense for the year ended December 31, 1998 and 1997 was $84,469
and $169, respectively. For the year ended December 31, 1998, depreciation is
included for the period from dates of acquisition to the end of the year (see
Note 2 acquisitions).
During 1997, Gold Coast exchanged 165,876 shares of Synfuels Technology, Inc.
and assumed two short-term notes amounting to $1,848,348 for 17.2 acres in
Henderson, Nevada. The management of Gold Coast believed that the
over-the-counter trading value would not be representative of the fair value of
large blocks of shares. Since the predecessor costs was determined by a non-cash
transaction and the acquisition by Gold Coast is in part a non-cash transaction
Gold Coast valued Synfuels Technology, Inc., shares at $10.00 per share or
$1,658,960. The value of the land used by Gold Coast is $3,507,732. An appraisal
of 2.2 acres of the property dated February 21, 1997, was $225,000 per acre.
Gold Coast feels this is representative of the entire 17.2 acres or a fair
market value of $3,870,000. On April 19, 1997 the note of $1,673,348 became due,
and on June 7, 1997 the note of $175,000 became due. Gold Coast was unable to
meet the payments for the notes and the accrued interest and property taxes
associated with the note. In an attempt to recover something from its investment
in the land, Gold Coast sold the property for the face amount of the notes
payable and $25,000 contingency due from the buyer, which was promised upon his
ability to make arrangements with the note holders to extend the payment date.
The buyer failed in his attempt to negotiate any extension and the note holder
repossessed the property. The loss from the sale of the land approximating
$1,620,000 is included in other expense in the accompanying statements of
operations for the nine months ended December 31, 1997.
F-35
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CONVERTIBLE DEBENTURE
- ------------------------------
On December 14, 1998, the Company sold Hotel to Ameriresource Technologies, Inc.
in exchange for a convertible debenture totaling $3,350,000. The debenture
accrues interest at the rate of 7% per annum and is due December 15, 2001. The
Company accounts for the debenture pursuant to SFAS Number 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company has deemed these
securities to be "held-to-maturity" securities as defined by the standard and
account for the debenture at amortized cost. Although the debenture is
guaranteed by a third party, there are sufficient collectability and enforcement
concerns to cause a permanent reduction in its market value. This security has
therefore been totally reserved and charged against the gain associated with the
sale of Hotel.
NOTE 5 - SHORT TERM BORROWINGS, BANKS
- -------------------------------------
The Colombian subsidiaries obtain short-term financing from banks and financing
companies. Interest on such obligations range between 34% and 44% annually and
is determined by the financing source subsequent to the availability of funds.
Most of these obligations are personally guaranteed by officers of the companies
and the balance owed as of December 31, 1998 approximated $1,132,000.
ICR has a $100,000 line of credit, at 10% interest, personally guaranteed by the
majority stockholder of the Company, for working capital purposes. As of
December 31, 1998, the balance owed on this line of credit was approximately
$43,000.
The Colombian subsidiaries have credit facilities from IBM for the purchase of
computer equipment which are guaranteed by certain shareholders and officers of
the Colombian subsidiaries. The credit facilities at December 31, 1998
approximated $1,200,000 for Casa, $600,000 for DLR, and $150,000 for Micro.
F-36
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - DEFERRED REVENUES
- ---------------------------
Deferred revenues are comprised mainly of customer deposits on orders. The
nature of the Colombian operations requires a delay between the time that an
order is placed and the completion of the contract. Consequently, the Company
requests deposits on such arrangements.
NOTE 7 - MORTGAGE PAYABLE - BANK
- --------------------------------
On March 14, 1996, DLR obtained a mortgage from a bank for the purchase of their
office facility in Bogota, Colombia. The mortgage expires on March 2012 and had
an initial principal balance of $99,400. The mortgage agreement allows for an
increase in the outstanding principal balance due to monetary adjustments as
mandated by the Colombian Central Bank. Therefor, management of the Company can
not reasonably determine minimum future payments. Although payments are due
currently, the entire balance has been classified as long-term because
management cannot determine, at this time, the amount that is due and payable in
the current year.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
On January 1, 1997, a subsidiary of the Company entered into a two-year lease
with an indefinite renewal option for office facilities in Bogota, Colombia. The
lease calls for an approximate negotiable increase of 18% at renewal. The lease
can be canceled by either party without prior notification.
On December 9, 1996, a subsidiary of the Company entered into a one-year lease
for office facilities in Medellin, Colombia. The lease is personally guaranteed
by one of the officers of the Company and a bond for approximately 50% of the
annual lease was submitted to the lessor. The lease can be terminated by either
party without prior notification and calls for negotiated annual increases.
F-37
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
- --------------------------------------------------
On August 16, 1997, a subsidiary of the Company entered into a one-year lease
with an indefinite renewal option for office space in Cali, Colombia. The lease
is personally guaranteed by an officer of the Company. The lease calls for
negotiated annual increases and can be canceled by non-fulfillment of the lease
terms.
On May 4, 1998, a subsidiary of the Company entered into a six-month agreement
to rent office space in Medellin, Colombia. The lease calls for an indefinite
renewal with annual increases to be tied to the legal inflation rate. The lease
may be canceled upon non-fulfillment of the lease terms with three months prior
notification.
On March 1, 1993, a subsidiary of the Company entered into a lease agreement
expiring in April 2000 to rent office space in Bogota, Colombia. The lease calls
for an indefinite renewable option.
On January 1, 1999, a subsidiary of the Company entered into a three-year lease
for office and warehouse space in Delray Beach, Florida. The lease is renewable
for an additional three years with annual increases of 5%.
As of December 31, 1998, the minimum lease obligation for leases that management
can determine to have a minimum obligation is as follows:
Year
1999 $ 66,396
2000 48,396
2001 44,796
--------
Total $159,588
========
NOTE 9 - CAPITAL STRUCTURE
- --------------------------
Additional 1998 Common Stock Issuances - During 1998, Gold Coast issued
1,198,500 shares of its common stock to officers, directors, employees and
others for services rendered. The shares were valued at $.20 per share. During
1998, Gold Coast issued 2,870,000 shares of its common stock for cash at $.20
per share pursuant to Rule 504 of Regulation D. During 1998, Gold Coast issued
3,500,000 shares of its common stock to an officer/director/major shareholder
for his minority interest in the Travel Agent's Hotel Guide, Inc. The shares
were valued at $0.10.
F-38
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - CAPITAL STRUCTURE (Continued)
- --------------------------------------
During 1997, Gold Coast acquired 135,751 free trading shares of Synfuels
Technology, Inc. by issuing 3,963 shares of its restricted common stock pursuant
to rule 144. An additional 30,125 shares were acquired by issuing 1,250 shares
of its common stock pursuant to Regulation D exemption. These shares were
exchanged for 17.2 acres of land in Henderson, Nevada. This land was
subsequently lost through repossession. Gold Coast's former President is also an
officer of Synfuels Technology, Inc.
Stock Split - On August 18, 1998 Gold Coast approved a 1 for 200 reverse split
of its common stock. On December 3, 1998 Gold Coast approved a 1 for 2 reverse
split of its common stock. All stock transactions have been restated to reflect
these reverse splits.
Preferred Share Issuances - During the period ending December 31, 1997, Gold
Coast issued Preferred shares of various classes to acquire five subsidiaries:
500,000 Preferred class A to acquire 500,000 shares of Condor Insurance
Limited, of Basseterre, St. Kitts, West Indies
1,000,000 Preferred class B to acquire 80% of Biostasis Corp.
1,000,000 Preferred class C to acquire 100% of Shoulder Shade, Inc.
1,000,000 Preferred class D to acquire 100% of Secure Bind, Inc.
1,000,000 Preferred class F to acquire the Travel Agents Hotel Guide, Inc.
Gold Coast issued 1,000,000 Class F Preferred shares for 80% of the outstanding
shares of Hotel. The Class F shares are redeemable for common stock based on the
performance guidelines established by the exchange agreement dated October 7,
1997. The Agreement specifies that for each $15,000 of earnings by Hotel, it may
redeem one share of class F preferred for 10 shares of common stock subject to
the rules and regulations of Rule 144. In the event that no earnings are
produced within a five-year period the preferred shares shall become
non-convertible.
F-39
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - CAPITAL STRUCTURE (Continued)
- --------------------------------------
Biostasis Corporation is a Utah corporation with no assets or operations at
December 31, 1997. Biostasis Corporation disposed of its investment assets and
the resulting loss of $278,600 is reflected on the consolidated statements of
operations for that year. Biostasis Corporation defaulted on its royalty payment
for marketing rights for an herbal product known as Dynaway. This asset of
$9,775 has also been written off.
On August 14, 1998, Gold Coast rescinded the mergers with the above subsidiaries
and canceled the preferred shares previously issued to each of these entities.
At December 31, 1998 the Company has only one class of common stock outstanding
and a Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock has a liquidating value of no less than $35,000,000 and has preference
over all other stock in a liquidation. The conversion value is based on the
liquidating value and a maximum share price of 111 shares of common stock for
one share of preferred stock. There are no arrearages in preferred dividends. On
June 25, 1999, the shares were converted into 13,000,001 shares of the Company's
common stock.
NOTE 10 - INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
- --------------------------------------------------------------
The Company operates predominantly in one industry segment, computer systems
design and hardware sales. The Company has two geographic groups, the U.S.
subsidiary and the Colombian subsidiaries. The geographic distributions of the
Company's identifiable assets, operating income and revenues are summarized in
the following table.
Year Ended December 31, 1998
----
Revenues from unrelated entities:
United States $ 594,126
Colombia 1,268,213
-----------
Total revenues $ 1,862,339
===========
Operating loss:
United States $ (527,102)
Colombia (510,497)
-----------
Total operating loss $(1,037,599)
===========
F-40
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS (Continued)
- --------------------------------------------------------------------------
Assets:
United States $ 4,902,609
Colombia 7,989,580
-----------
Total identifiable assets 12,892,189
Less: Corporate eliminations 4,284,608
-----------
Total assets $ 8,607,581
===========
The Company has only one significant supplier, IBM de Colombia, which accounted
for approximately 60% of the total purchases made during 1998.
NOTE 11 - SALE OF SUBSIDIARY
- ----------------------------
The Travel Agents Hotel Guide was a publication being developed by Gold Coast
and the former management of the Company for use by travel agents in order to
advertise and sell hotel rooms primarily throughout the United States. Gold
Coast acquired the publication rights, logo, client lists and business concept
from the former president of Hotel by issuing 3,500,000 shares of common stock
of Gold Coast.
On December 14, 1998, the Company sold Hotel for $3,350,000 in the form of a
convertible debenture issued by Ameriresources Technologies, Inc., a publicly
traded company, and guaranteed by Lexington Sales, Inc. (Note 4). The
accompanying statement of operations for the year ended December 31, 1998
reflect discontinued operations, the loss from operations of approximately
$629,000 and the gain on sale of the subsidiary of approximately $2,000,000,
less amount reserved of $3,350,000.
NOTE 12 - RELATED PARTY TRANSACTIONS
- ------------------------------------
The Company is a member of a group of affiliated entities and, has extensive
transactions and relationships with members of the group. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
F-41
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - OPERATING RISKS
- -------------------------
As substantially all of the Company's operations are currently conducted in
Colombia, the Company is subject to special consideration and significant risks
not typically associated with Companies operating in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. The Company's
results may be adversely affected by changes in the political and social
conditions in Colombia, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittance abroad, and rates and methods of taxation among other things. Since
its working capital has been limited, obligations and commitments have gone
unfulfilled.
NOTE 14 - SUBSEQUENT EVENTS
- ---------------------------
Proposed Debenture Offering - In February 1999, the Company signed a letter of
intent with Dirks & Company to act as the Managing Underwriter in connection
with a proposed offering of shares of Cumulative Convertible Debentures of the
Company. Dirks & Company intends to underwrite, on a firm commitment basis, such
number of Debentures which will result in gross proceeds of approximately $50
million. A firm commitment does not guarantee that the underwriter will fund the
proposed offering, since their commitment is not known until the twenty day
waiting period following the SEC approved registration has been filed. As of
this date no registration document relating to this proposed offering has been
filed and management has had no contact with the underwriter for several months.
Additional Stock Offering - On February 5, 1999 the Company did an offering
under Rule 504 of Regulation D for 100,000 shares of its common stock at $3.00
per share. The offering was subscribed to in full by a related party, and the
Form D was timely filed with the Securities and Exchange Commission.
Proposed Stock Purchase - In April 1999, the Company began negotiations to
acquire 100% of a computer solutions provider. The Company subsequently decided
not to complete the purchase.
Asset Purchase Agreement - In December 1999, the Company entered into an asset
purchase agreement with Surge Components, Inc. ("Surge") whereby Surge would
acquire the assets of the Company in exchange for stock to be treated as a
"tracking stock" covering the assets sold by the Company. Among other
conditions, the completion of the acquisition is conditioned on the approval of
both Companies' stockholders and successful completion of due diligence.
F-42
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENTS (Continued)
- ---------------------------------------
Convertible Promissory Note - In October 1999, the Company issued a subordinated
Convertible Promissory Note (the "Note") in the amount of $1,000,000 to Surge.
The Note is due on June 1, 2000 and accrues interest at the rate of 10% per
annum. Upon the successful completion of the asset purchase by Surge, the Note
is canceled and all interest accrued to date will be forgiven. If the asset
purchase with Surge is not completed by February 28, 2000 or is not approved by
the shareholders of both companies, Surge at its sole discretion may convert the
Note into common stock of the Company at a conversion price equal to 90% of the
average closing price of the Company's common stock for the twenty previous
trading days. In January 2000, the Note was canceled and replaced with a new
note totaling $4,100,000 (Note 14 - Subordinated Convertible Promissory Note).
Stock Options - In April 1999, the Company entered into an option agreement with
a consultant, in partial payment of services rendered. The agreement grants
250,000 shares of the Company's common stock, at an exercise price of $5.75 per
share. The options are non-dilutive. To date, no options have been exercised.
Subordinated Convertible Promissory Note - In February 2000, the Company entered
into a Subordinated Convertible Promissory Note ("Convertible Note") with Surge
for $4,100,000. The Convertible Note accrues interest at the rate of 10% per
annum. Upon completion of the Company's acquisition by Surge, the Convertible
Note and all accrued interest will be forgiven. If the acquisition does not
occur by July 31, 2000, Surge, at its own discretion, may convert this note into
the common stock of the Company on a dollar for dollar basis at a conversion
price equal to 90% of the average closing price of the Company's Common Stock
for the preceding 20 trading days or Surge may demand repayment. The Convertible
Note is secured by the pledge of certain shares of stock owned by the President
of the Company.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
MailEncrypt.com, Inc.
We have audited the accompanying balance sheet of MailEncrypt.com, Inc. (the
"Company") as of December 31, 1999, and the related statements of operations,
stockholders' equity and cash flows for the period from March 17, 1999
(Inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 MailEncrypt.com, Inc. as of
December 31, 1999, and the results of its operations, and its cash flows for the
period from Inception to December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in the development stage with no operating
history to the date of this report. The Company requires future financings
necessary for management to effect their operating plan. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Irvine, California
February 16, 2000
F-44
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Balance Sheet
December 31, 1999
ASSETS
Current assets -
Cash and cash equivalents $ 40,182
Equipment, net of accumulated depreciation of $1,074 8,120
---------
$ 48,302
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,500
Due to officers 43,158
---------
Total current liabilities 56,658
---------
Commitments and contingencies --
Stockholders' deficit:
Common stock, no par value, 5,000,000 shares
authorized; 2,132,000 shares issued and outstanding 102,675
Deficit accumulated during development stage (111,031)
---------
Total stockholders' deficit (8,356)
---------
$ 48,302
---------
See accompanying notes to financial statements.
F-45
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statement of Operations
Period from
March 17, 1999
(Inception) to
December 31, 1999
Net revenues $ --
Costs and expenses-
General and administrative expenses 111,031
-----------
Operating loss (111,031)
Other income (expense) --
-----------
Loss before income taxes (111,031)
Income taxes --
-----------
Net loss $ (111,031)
-----------
Basic and diluted loss per share: $ (.06)
-----------
Basic and diluted weighted average number
of common shares outstanding 1,952,000
-----------
See accompanying notes to financial statements.
F-46
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statement of Stockholders' Deficit
For the Period from March 17, 1999 (Inception)
Through December 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Development
Shares Amount Stage Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Common stock issued on March 17, 1999 1,900,000 $ -- $ -- $ --
(Inception) to founders at $0.00 for intangible
property
Common stock issued in March 1999 for $0.38
per share for cash 100,000 38,000 -- 38,000
Common stock issued September 1999 for $0.50
per share for cash 100,000 50,000 -- 50,000
Common stock issued September 1999 for $0.38
per share for cash 32,000 12,000 -- 12,000
Compensation expense on non-employee options 2,675 2,675
Net loss -- -- (111,031) (111,031)
--------- --------- --------- ---------
Balance at December 31, 1999 2,132,000 $ 102,675 $(111,031) $ (8,356)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statement of Cash Flows
Period
From March 17, 1999
(Inception) to
December 31, 1999
Cash Flows From Operating Activities -
Net loss $(111,031)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,074
Compensation expense on non-employee options 2,675
Changes in operating assets and liabilities:
Increase in accounts payable 13,500
Increase in due to officers 43,158
---------
Net cash used in operating activities (50,624)
---------
Cash Flows From Investing Activities -
Purchase of equipment (9,194)
---------
Cash Flows From Financing Activities -
Proceeds from issuance of common stock 100,000
---------
Net increase in cash - cash end of period $ 40,182
---------
See accompanying to financial statements.
F-48
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
Note 1 - Organization and Business
Organization
MailEncrypt.com, Inc. (the "Company") was originally incorporated on March 17,
1999, ("Inception") in the state of California under the name Mailcrypt.com,
Inc. The name was changed in September 1999 to MailEncrypt.com, Inc. The Company
develops web-based encrypted e-mail for commercial use. Its proprietary platform
utilizes the world's leading, military-strength, 1,024-bit, encryption protocol
in order to deliver seamless, secure, e-mail to its users. The Company plans to
provide service to customers based on a per-user fee. Since inception, the
Company has had no operations and, accordingly, is a company in the development
stage.
See subsequent events for discussion of definitive agreement dated February 16,
2000, executed for the Company to be acquired by Surge Components, Inc.
("Surge").
Note 2 - Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
company with no operations to date. In the course of its development of its
encrypted technology, the Company will continue to incur additional losses for
the foreseeable future. Management believes that revenues from its products will
be received by the end of year 2000. The Company borrowed $750,000 from Surge,
which is due July 30, 2000, or automatically convertible into the Company's
common stock if the merger with Surge is not completed by July 30, 2000. The
Company will require additional funds for its operational activities and sales
efforts. Management is seeking financing through its planned merger with Surge,
and future collaborative arrangements with third parties to meet its cash needs.
There are no assurances that the merger with Surge will be completed, that funds
will be available to execute the Company's operating plan or that future
collaborative arrangements will be consummated. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Fiscal Year End
The Company has elected a December 31 year end for financial and income tax
reporting purposes.
Principles of Management 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.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months to be cash equivalents.
See accompanying notes to financial statements.
F-49
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
Equipment
Equipment is recorded at cost and is depreciated using the straight-line method
over three years. Maintenance and repairs are charged to expense as incurred.
Significant renewals and betterments are capitalized. At the time of retirement
or other disposition of property and equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations.
Software Development Costs
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," states
that all costs incurred in connection with the development of software
subsequent to technological feasibility should be capitalized until such time
that the software is available to customers. The Company believes its current
process for developing software is essentially completed concurrent with the
establishment of technological feasibility and, as such, no costs have been
capitalized to date.
Impairment of Long-Lived Assets
The Company accounts for impairment of long-lived assets under the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Reporting Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income, as well as certain non-shareholder items that are reported directly
within a separate component of stockholders' equity and bypass net income. The
Company had adopted the provisions of this statement during 1999, with no impact
on the accompanying financial statements.
Research and Development Costs
Research and development costs are expensed as incurred.
Provision for Income Taxes
The Company accounts for its income taxes under an asset and liability method
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations.
See accompanying notes to financial statements.
F-50
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
At December 31, 1999, the Company had federal and California net operating loss
carryforwards amounting to approximately $111,000 in each jurisdiction, which
for federal reporting purposes expire in 2019, and for California purposes
expire in 2004. Section 382 of the Internal Revenue Code includes provisions
which may limit the net operating loss carryforwards available for use in any
given year if certain events occur, including significant changes in stock
ownership. The difference between the tax benefit assuming a combined federal
and California corporate income tax rate of 40% and amounts recorded in the
financial statements of 0% is the result of the Company recording a full
valuation allowance of $44,000 against its deferred tax assets.
Loss Per Common Share
The Company presents basic and diluted per-share information on the face of all
statements of operations issued. The Company's capital structure is not complex,
and accordingly, dual presentation is not required. Basic per-share information
is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted per-share information reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities, to the extent the effects of
these securities are not anti-dilutive.
Options to purchase 555,375 shares of common stock were outstanding as of
December 31, 1999. The effect of these stock options granted but not exercised
has been excluded in the computation of loss per common share as the effect
would have been anti-dilutive.
Financial Instruments
At December 31, 1999, the Company has no material assets considered financial
instruments. Financial liabilities with carrying values approximating fair value
include accounts payable and accrued liabilities.
Disclosures about Segments of an Enterprise and Related Information
SFAS No. 131, "Disclosures of an Enterprise and Related Information" requires
disclosures of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
stockholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Company adopted the provisions
of this statement for 1999. These disclosure requirements did not impact the
Company's financial position or results of operations. At December 31, 1999, the
Company had no identifiable assets or operations constituting a segment as
defined by this statement.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" defines a fair value
based method of accounting for stock-based compensation. However, SFAS 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB 25 must make pro forma disclosures of net income (loss) and
earnings (loss) per share, as if the fair value method of accounting defined in
SFAS 123 had been applied. The Company has elected to remain with the accounting
method of APB 25 and make the pro forma disclosures required under SFAS 123.
See accompanying notes to financial statements.
F-51
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
Note 3 - Stockholder Transactions
Common Stock Issuances
Upon the formation of the Company on March 17, 1999, the Company issued
1,900,000 shares of common stock to its founders for the contribution of certain
technology rights. All costs incurred in connection with the development of this
technology have been expensed as incurred, and accordingly, shares of common
stock issued in connection with the transfer of assets were reflected in the
accompanying financial statements at no value.
On March 31, 1999, the Company issued to a key employee 100,000 shares of common
stock at $0.50 per share, subject to anti-dilution provisions representing 5% of
the outstanding common stock at the date of issuance. The shares were issued at
the estimated fair value of the common stock at the date of issuance. On
September 1, 1999, the Company issued an additional 32,000 shares under the
anti-dilution provision. The additional shares issued resulted in an effective
purchase price of $0.38 per share for the 132,000 shares issued. In addition, on
March 31, 1999, the Company granted an option to this key employee to purchase
shares representing 2% of the outstanding common stock at $0.50 per share,
subject to anti-dilution provisions. The option to purchase 2% of the
outstanding common stock amounted to 48,375 shares. Such options were exercised
in February 2000.
On September 1, 1999, the Company issued 100,000 shares of common stock to its
then, newly retained president at a price of $0.50 per share. The Board of
Directors determined that such common stock was issued at the estimated fair
value per share at the date of issuance. The Company also granted options to
purchase 450,000 shares of common stock at $0.50 per share. Such options were
exercised in February 2000 through the issuance of a note totaling $225,000 (see
below).
Common Stock Purchase Options
The Company adopted the 1999 Stock Option Plan (the "Plan"). The maximum
aggregate number of shares subject to grant under the Plan is 750,000 shares.
The maximum term for these options is ten years from the date of grant. During
1999, the Company issued options to purchase an aggregate of 555,375 shares of
common stock at $0.50 share. Options to purchase 48,375 shares immediately
vested at the date of grant. Options to purchase the 507,000 vest over three
years, subject to acceleration in the event the Company affects a corporate
transaction, among other vesting provisions, including a change of control. Upon
the close of the merger with Surge (Note 5), all outstanding options will be
fully vested. The exercise prices of stock options have been determined by the
Board of Directors based on fair value of the underlying common stock at the
date of grant.
Of the options to purchase 555,375 shares of common stock granted in 1999,
options to purchase 57,000 shares were granted to a non-employee consultant.
Using the Black-Scholes model for valuing stock option, the Company valued the
options at $24,071 and recorded $2,675 of compensation expense in 1999. The
balance will be charged to expense in 2000.
On January 5, 2000, the holder of options to purchase 450,000 shares of common
stock exercised such options through the issuance of a note amounting to
$225,000. Such exercise is subject to lapsing repurchase rights in the event the
Company does not effect the merger with Surge.
See accompanying notes to financial statements.
F-52
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
As discussed in Note 2, the Company is required to disclose the effects on
operations and per share data as if the Company had elected to use the fair
value approach to account for all of its employee stock-based compensation
plans. Had the compensation cost for the Company's plans been determined using
the fair value method, the compensation expense would have had the effects
increasing the Company's net loss for the year ended December 31, 1999, to a pro
forma net loss of $131,445 with a pro forma net loss per share of $0.07. These
pro forma amounts were determined based upon the fair value of each option
granted during 1999 on its grant date, using the Black-Scholes option-pricing
model. Assumptions of no dividend yield, a risk free interest rate which
approximates the Federal Reserve Board's rate for treasuries at the time granted
of 6.00%, an expected life of four (4) years, and an expected volatility rate of
approximately 136% were applied to all options granted.
Note 4 - Related Party Transactions
Due to officers represents accrued salaries and accrued expenses due to certain
officers of the Company. Included in such amounts are accrued salaries of $6,500
per month under an employment agreement with a key employee dated August 1,
1999, aggregating $32,500 at December 31, 1999.
During 1999, the Company paid $12,000 to Blueprint Networks, Inc. ("Blueprint")
for services. Blueprint is controlled by two founders of MailEncrypt.com, Inc.
In the year 2000, the Company has paid an additional $12,000 to Blueprint. On
February 16, 2000, the Company entered into two 18-month employment agreements
with these founders in lieu of payments to Blueprint. Each of the two contracts
provide for salaries at approximately $10,400 per month during the 18-month
duration.
Note 5 - Subsequent Events
On February 16, 2000, the Company signed a definitive merger agreement and plan
of reorganization to be acquired by Surge in a merger transaction (the "Merger")
intended to qualify under Section 368(a)(1)(B) of the Internal Revenue Code.
Upon completion of the Merger, Surge will issue 1,821,400 shares of Class B
common stock in exchange for all issued and outstanding shares of the Company
(including options to acquire shares of the Company). If the Merger is not
closed by July 30, 2000, or if, among other conditions, the Class B common stock
has not been registered with the Securities Exchange Commission by such date,
the Company may elect to terminate the Merger agreement.
Upon the signing of the Merger agreement, the Company entered into a loan
agreement (the "Note") to borrow $750,000, payable July 30, 2000, together with
interest at 10% per annum, from Surge. The Note will automatically be cancelled
upon the close of the Merger. In the event the Merger is not consummated by July
30, 2000 or until otherwise extended by mutual consent of the parties, the Note
will be convertible into a number of shares equal to a pre-money, Company
valuation of $15 million.
See accompanying notes to financial statements.
F-53
<PAGE>
ANNEX F
SURGE SHAREHOLDER DISSENTER'S RIGHTS
Rights of Dissenting Owners Under the New York Business Corporation Law
for Surge Components, Inc. Shareholders
Section 910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A shareholder of a domestic corporation shall, subject to
and by complying with section 623 (Procedure to enforce shareholder's right to
receive payment for shares), have the right to receive payment of the fair value
of his shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to
the taking of an action specified in clauses (A), (B) and (C).
(A) Any plan of merger or consolidation to which the
corporation is a party; except that the right to receive payment of the fair
value of his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary corporations), or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations); or
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in subclause (i),
unless such merger effects one or more of the changes specified in subparagraph
(b) (6) of section 806 (Provisions as to certain proceedings) in the rights of
the shares held by such shareholder; or
(iii) Notwithstanding subclause (ii) of this clause, to a
shareholder for the shares of any class or series of stock, which shares or
depository receipts in respect thereof, at the record date fixed to determine
the shareholders entitled to receive notice of the meeting of shareholders to
vote upon the plan of merger or consolidation, were listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires shareholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the shareholders'
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the shareholders in
accordance with their respective interests within one year after the date of
such transaction.
1
<PAGE>
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the right to
receive payment of the fair value of his shares shall not be available to a
shareholder whose shares have not been acquired in the exchange or to a
shareholder for the shares of any class or series of stock, which shares or
depository receipt in respect thereof, at the record date fixed to determine the
shareholders entitled to receive notice of the meeting of shareholders to vote
upon the plan of exchange, were listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in paragraph (c)
of section 623.
(3) (Added, L 1997) Any shareholder, not entitled to vote with
respect to a plan of merger or consolidation to which the corporation is a
party, whose shares will be canceled or exchanged in the merger or consolidation
for cash or other consideration other than shares of the surviving or
consolidated corporation or another corporation.
Section 623. Procedure to enforce shareholder's right to receive payment for
shares
(a) A shareholder intending to enforce his right under a
section of this chapter to receive payment for his shares if the proposed
corporate action referred to therein is taken shall file with the corporation,
before the meeting of shareholders at which the action is submitted to a vote,
or at such meeting but before the vote, written objection to the action. The
objection shall include a notice of his election to dissent, his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares if the action is taken.
Such objection is not required from any shareholder to whom the corporation did
not give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.
(b) Within ten days after the shareholders' authorization
date, which term as used in this section means the date on which the
shareholders' vote authorizing such action was taken, or the date on which such
consent without a meeting was obtained from the requisite shareholders, the
corporation shall give written notice of such authorization or consent by
registered mail to each shareholder who filed written objection or from whom
written objection was not required, excepting any shareholder who voted for or
consented in writing to the proposed action and who thereby is deemed to have
elected not to enforce his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share
2
<PAGE>
exchange under paragraph (g) of section 913 (Share exchanges) shall file a
written notice of such election to dissent within twenty days after the giving
to him of a copy of the plan of merger or exchange or an outline of the material
features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the
shares, as to which he has a right to dissent, held by him of record, that he
owns beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such nominee
or fiduciary.
(e) Upon consummation of the corporate action, the shareholder
shall cease to have any of the rights of a shareholder except the right to be
paid the fair value of his shares and any other rights under this section. A
notice of election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer is
made. Upon expiration of such time, withdrawal of a notice of election shall
require the written consent of the corporation. In order to be effective,
withdrawal of a notice of election must be accompanied by the return to the
corporation of any advance payment made to the shareholder as provided in
paragraph (g). If a notice of election is withdrawn, or the corporate action is
rescinded, or a court shall determine that the shareholder is not entitled to
receive payment for his shares, or the shareholder shall otherwise lose his
dissenters' rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a shareholder as of the
consummation of the corporate action, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by the
board as of the time of such expiration or completion, but without prejudice
otherwise to any corporate proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or
within one month thereafter the shareholder of shares represented by
certificates shall submit the certificates representing his shares to the
corporation, or to its transfer agent, which shall forthwith note conspicuously
thereon that a notice of election has been filed and shall return the
certificates to the shareholder or other person who submitted them on his
behalf. Any shareholder of shares represented by certificates who fails to
submit his certificates for such notation as herein specified shall, at the
option of the corporation exercised by written notice to him within forty-five
days from the date of filing of such notice of election to dissent, lose his
dissenter's rights unless a court, for good cause shown, shall otherwise direct.
Upon transfer of a certificate bearing such notation, each new certificate
issued therefor shall bear a similar notation together with the name of the
original dissenting holder of the shares and a transferee shall acquire no
rights in the corporation except those which the original dissenting shareholder
had at the time of transfer.
(g) Within fifteen days after the expiration of the period
within which shareholders may file their notices of election to dissent, or
within fifteen days after the proposed corporate action is consummated,
whichever is later (but in no case later than ninety days from the shareholders'
3
<PAGE>
authorization date), the corporation or, in the case of a merger or
consolidation, the surviving or new corporation, shall make a written offer by
registered mail to each shareholder who has filed such notice of election to pay
for his shares at a specified price which the corporation considers to be their
fair value. Such offer shall be accompanied by a statement setting forth the
aggregate number of shares with respect to which notices of election to dissent
have been received and the aggregate number of holders of such shares. If the
corporate action has been consummated, such offer shall also be accompanied by
(1) advance payment to each such shareholder who has submitted the certificates
representing his shares to the corporation, as provided in paragraph (f), of an
amount equal to eighty percent of the amount of such offer, or (2) as to each
shareholder who has not yet submitted his certificates a statement that advance
payment to him of an amount equal to eighty percent of the amount of such offer
will be made by the corporation promptly upon submission of his certificates. If
the corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation
fails to make such offer within such period of fifteen days, or if it makes the
offer and any dissenting shareholder or shareholders fail to agree with it
within the period of thirty days thereafter upon the price to be paid for their
shares:
(1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last mentioned,
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding
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shall be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding
within such period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the expiration
of such twenty day period. If such proceeding is not instituted within such
thirty day period, all dissenter's rights shall be lost unless the supreme
court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as
provided in paragraph (g), have agreed with the corporation upon the price to be
paid for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The corporation
shall serve a copy of the petition in such proceeding upon each dissenting
shareholder who is a resident of this state in the manner provided by law for
the service of a summons, and upon each nonresident dissenting shareholder
either by registered mail and publication, or in such other manner as is
permitted by law. The jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make such
determination, is entitled to receive payment for his shares. If the corporation
does not request any such determination or if the court finds that any
dissenting shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as of
the close of business on the day prior to the shareholders' authorization date.
In fixing the fair value of the shares, the court shall consider the nature of
the transaction giving rise to the shareholder's right to receive payment for
shares and its effects on the corporation and its shareholders, the concepts and
methods then customary in the relevant securities and financial markets for
determining fair value of shares of a corporation engaging in a similar
transaction under comparable circumstances and all other relevant factors. The
court shall determine the fair value of the shares without a jury and without
referral to an appraiser or referee. Upon application by the corporation or by
any shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law and
rules.
(5) The final order in the proceeding shall be entered against
the corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at
such rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
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(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder the amount
found to be due him, upon surrender of the certificates for any such shares
represented by certificates.
(i) Shares acquired by the corporation upon the payment of the
agreed value therefor or of the amount due under the final order, as provided in
this section, shall become treasury shares or be canceled as provided in section
515 (Reacquired shares), except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
(j) No payment shall be made to a dissenting shareholder under
this section at a time when the corporation is insolvent or when such payment
would make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event
be deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation
and, if it is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders, and if
it is not liquidated, retain his right to be paid for his shares, which right
the corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.
(3) The dissenting shareholder shall exercise such option
under subparagraph (1) or (2) by written notice filed with the corporation
within thirty days after the corporation has given him written notice that
payment for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given to
him within twenty days after the expiration of such period of thirty days.
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(k) The enforcement by a shareholder of his right to receive
payment for his shares in the manner provided herein shall exclude the
enforcement by such shareholder of any other right to which he might otherwise
be entitled by virtue of share ownership, except as provided in paragraph (e),
and except that this section shall not exclude the right of such shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section,
any notice to be given by a corporation to a shareholder under this section
shall be given in the manner provided in section 605 (Notice of meetings of
shareholders).
(m) This section shall not apply to foreign corporations
except as provided in subparagraph (e)(2) of section 907 (Merger or
consolidation of domestic and foreign corporations).
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ANNEX G
Global Shareholder Dissenter's Rights -
Rights of Dissenting Owners Under Nevada Law for
Global DataTel Shareholders
92A.300 DEFINITIONS.-As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections.
92A.305 "BENEFICIAL STOCKHOLDER" DEFINED.-"Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or by
a nominee as the stockholder of record.
92A.310 "CORPORATE ACTION" DEFINED.-"Corporate action" means the action
of a domestic corporation.
92A.315 "DISSENTER" DEFINED,"Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "FAIR VALUE" DEFINED.--Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
92A.325 "STOCKHOLDER" DEFINED.-"Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation.
92A.330 "STOCKHOLDER OF RECORD" DEFINED.-"Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "SUBJECT CORPORATION" DEFINED.-"Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 COMPUTATION OF INTEREST.-Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances.
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92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP.-A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED LIABILITY
COMPANY.-The articles of organization or operating agreement of a domestic
limited liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT
CORPORATION.-1. Except as otherwise provided in subsection 2 and unless
otherwise provided in the articles or bylaws, any member of any constituent
domestic nonprofit corporation who voted against the merger may, without prior
notice, but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
2. Unless otherwise provided in its articles of incorporation or
bylaws, no member of a domestic nonprofit corporation, including, but not
limited to, a cooperative corporation, which supplies services described in
chapter 704 of NRS to its members only, and no person who is a member of a
domestic nonprofit corporation as a condition of or by reason of the ownership
of an interest in real property, may resign and dissent pursuant to subsection
1.
92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS
AND TO OBTAIN PAYMENT FOR SHARES.-I. Except as otherwise provided in NRS 92A.370
to 92A.390, a stockholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A. 160, inclusive, or the articles of incorporation and he is
entitled to vote on the merger, or
(2) If the domestic corporation is a subsidiary and is merged with its
parent under NRS 92A.
180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's interests will
be acquired, if he is entitled to vote on the plan.
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(c) Any corporate action taken pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are entitled
to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under
NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to him or the domestic corporation.
92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN
CLASSES OR SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF
MERGER.-1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu of
fractional owner's interests of-
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the plan of
merger or exchange, were either listed on a national securities exchange,
included in the national market system by the National Association of Securities
Dealers, Inc., or held of record by a least 2,000 interests of record; or
(2) A combination of cash and owner's interests of the kind described
in sub-subparagraphs (1) and (11) of subparagraph (1) of paragraph (b).
2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require action of
the stockholders of the surviving domestic corporation under NRS 92A. 130.
92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY
TO SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.- 1. A
stockholder of record may assert dissenter's rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the subject corporation in
writing of the name and address of each person on
whose behalf he asserts dissenter's rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which he dissents
and his other shares were registered in the names of different stockholders.
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2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if-
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has power to direct the vote.
92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.-1. If
a proposed corporate action creating dissenters' rights is submitted to a vote
at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders, the
domestic corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430. (Last amended by Ch. 208, L. '97, eff.
10-1-97.)
92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES. 1. If a
proposed corporate action creating dissenters' rights is submitted to a vote at
a stockholders' meeting, a stockholder who wishes to assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection I
is not entitled to payment for his shares under this chapter.
92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.- 1. If a proposed corporate action creating dissenters' rights
is authorized at a stockholders' meeting, the subject corporation shall deliver
a written dissenter's notice to all stockholders who satisfied the requirements
to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand for
payment is received;
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(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of the
proposed action and -requires - - that the person asserting dissenter's rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the subject corporation must receive the demand
for payment, which may not be less than 30 nor more than 60 days after the date
the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF
RIGHTS OF STOCKHOLDER.- 1. A stockholder to whom a dissenter's notice is sent
must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates,
if any, before the proposed corporate action is taken retains all other rights
of a stockholder until those rights are canceled or modified by the taking of
the proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter. (Last
amended by Ch. 208, L. '97, eff. 10- 1 -97.)
92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER
DEMAND FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.-I. The subject
corporation may restrict the transfer of shares not represented by a certificate
from the date the demand for their payment is received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.
92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.- 1. Except as
otherwise provided in NRS 92A.470, within 30 days after receipt of a demand for
payment, the subject corporation shall pay each dissenter who complied with NRS
92A.440 the amount the subject corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the subject corporation under
this subsection may be enforced by the district court:
(a) Of the county where the corporation's registered office is located;
or
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(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement of
income for that year, a statement of changes in the stockholders' equity for
that year and the latest available interim financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair value
of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under
NRS 92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF
DISSENTER'S NOTICE.- 1. A subject corporation may elect to withhold payment from
a dissenter unless he was the beneficial owner of the shares before the date set
forth in the dissenter's notice as the date of the first announcement to the
news media or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate of
- -the fair -value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment pursuant
to NRS 92A.480.
92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.-1. A dissenter may notify the
subject corporation in writing of his own estimate of the fair value of his
shares and the amount of interest due, and demand payment of his estimate, less
any payment pursuant to NRS 92A.460, or reject the offer pursuant to NRS 92A.470
and demand payment of the fair value of his shares and interest due, if he
believes that the amount paid pursuant to NRS 92A.460 or offered pursuant to NRS
92A.470 is less than the fair value of his shares or that the interest due is
incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for his
shares.
92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.1. If a demand for payment
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remains unsettled, the subject corporation shall commence a proceeding within 60
days after receiving the demand and petition the court to determine the fair
value of the shares and accrued interest. If the subject corporation does not
commence the proceeding within the 60-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. 'Me court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as par-ties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to
a judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject corporation;
or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment pursuant to
NRS 92A.470.
92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF
COSTS AND FEES.-1. The court in a proceeding to determine fair value shall
determine all of the costs of the proceeding, including the reasonable
compensation and expenses of any appraisers appointed by the court. The court
shall assess the costs against the subject corporation, except that the court
may assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously or not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
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(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the subject corporation,
the court may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefitted.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.
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SURGE COMPONENTS, INC.
1016 Grand Boulevard
Deer Park, N.Y. 11729
PROXY
The undersigned, a holder of Common Stock of Surge Components, Inc., a
New York corporation ("Surge"), hereby appoints IRA LEVY the proxy of the
undersigned, with full power of substitution, to attend, represent and vote for
the undersigned, all of the shares of Surge which the undersigned would be
entitled to vote, at the Annual Meeting of Shareholders of Surge to be held on
_________ __, 2000 any adjournments thereof, as follows:
1. The approval of a Recapitalization which includes the adoption of an
agreement and plan of merger which would merge Surge into Superus Holdings,
Inc. ("Superus") and each share of existing common stock will be converted into
one share of Class A Common Stock, which will track the performance of Surge,
and the Class B Common Stock of Superus which will track the Internet Operations
of Surge:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. The approval of the acquisition by Superus of all of the assets of Global
DataTel, Inc. and issuance of Class B Common Stock to all of Global DataTel,
Inc. shareholders:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. The approval of the merger of MailEncrypt.com Inc. into a wholly owned
subsidiary of Surge, and issuance of Class B Common Stock to all of
MailEncrypt.com, Inc.'s shareholders.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. The ratification on a non-binding basis of the adoption of the Superus 2000
Stock Incentive Plan and authorization of issuance of all shares of Class A
Common Stock and Class B Common Stock to be issued thereunder.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
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<PAGE>
5. The ratification of the acceleration of the exercisability of options under
the Superus 2000 Incentive Plan issued to certain Management of Surge
Components, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. The election of three members to the Board of Directors of Superus to hold
office for a one-year term and until their successors are duly elected and
qualified.
[ ] FOR all nominees listed below
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below. (Instructions:
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE
THROUGH OR OTHERWISE STRIKE OUT HIS OR HER NAME BELOW)
Adam J. Epstein, Ira Levy and Mario Habib
7. The ratification of the appointment of Seligson & Giannattasio, LLP, as
Surge's auditors for the fiscal years ended November 30, 1999 and 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
8. Upon such other matters as may properly come before the meeting or any
adjournments thereof.
The undersigned hereby revokes any other proxy to vote at such Annual
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitations hereof, said proxies are authorized to
vote in accordance with their best judgment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS ON THE OTHER SIDE HEREOF. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 1, 2, 3, 4, 5 and 7, FOR THE ELECTION OF THE THREE
DIRECTORS NAMED IN PROPOSAL 6, AND AS SAID PROXIES SHALL DEEM ADVISABLE ON SUCH
OTHER BUSINESS AS MAY COME BEFORE THE MEETING.
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<PAGE>
The undersigned acknowledges receipt of a copy of the Notice of Special
Meeting dated ________ __, 2000 relating to the special meeting.
_____________________________________________
_____________________________________________
_____________________________________________
Signature(s) of Shareholders(s)
The signature(s) hereon should correspond exactly with the name(s) of
the shareholder(s) appearing on the stock certificate. If stock is jointly held,
all joint owners should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If signer is a corporation,
please sign the full corporate name, and give title of signing officer.
Date: ___________________, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
SURGE COMPONENTS, INC.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE.
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<PAGE>
GLOBAL DATATEL, INC.
333 Congress Avenue, Suite 404
Delray Beach, FL 33445
PROXY
The undersigned, a holder of Common Stock of Global DataTel, Inc., a
Nevada corporation (the "Company"), hereby appoints RICHARD BAKER the proxy of
the undersigned, with full power of substitution, to attend, represent and vote
for the undersigned, all of the shares of the Company which the undersigned
would be entitled to vote, at the Special Meeting of Shareholders of the Company
to be held on _________ __, 2000 any adjournments thereof, as follows:
1. The approval of the acquisition by Superus Holdings, Inc. of all of the
assets of the Company and issuance of Class B Common Stock to all of Global
DataTel, Inc. shareholders:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Upon such other matters as may properly come before the meeting or any
adjournments thereof.
The undersigned hereby revokes any other proxy to vote at such Special
Meeting, and hereby ratifies and confirms all that said attorneys and proxies,
and each of them, may lawfully do by virtue hereof. With respect to matters not
known at the time of the solicitations hereof, said proxies are authorized to
vote in accordance with their best judgment.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS ON THE OTHER SIDE HEREOF. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR PROPOSAL 2, AND AS SAID PROXIES SHALL DEEM ADVISABLE ON SUCH
OTHER BUSINESS AS MAY COME BEFORE THE MEETING.
The undersigned acknowledges receipt of a copy of the Notice of Special
Meeting dated ________ __, 2000 relating to the special meeting.
_____________________________________________
_____________________________________________
_____________________________________________
Signature(s) of Shareholders(s)
-4-
<PAGE>
The signature(s) hereon should correspond exactly with the name(s) of
the shareholder(s) appearing on the stock certificate. If stock is jointly held,
all joint owners should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If signer is a corporation,
please sign the full corporate name, and give title of signing officer.
Date:____________________, 2000
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF
GLOBAL DATATEL, INC.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED ENVELOPE.
-5-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Except to the extent hereinafter set forth, there is no statute,
charter provision, by-law, contract or other arrangement under which any
controlling person, director, or officer of the Company is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
The Company's Certificate of Incorporation, as amended, and by-laws
provide for the indemnification of directors and officers to the fullest extent
allowed by Section 402(b) under the New York Business Corporation Law ("BCL").
No director shall be personally liable to the Corporation or its
shareholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law:
(i) if a judgment or other final adjudication adverse to him
establishes that:
(a) his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law;
(b) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
(c) his acts violated Section 719 of the BCL; or
(ii) for any act or omission occurring prior to the adoption of a
provision by Section 402(b) of the BCL.
No amendment to or repeal of this Item shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment.
The Company shall, to the full extent permitted by the BCL, as amended
from time to time, indemnify all persons whom it may indemnify pursuant thereto.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C> <C>
2.1 Asset Purchase Agreement, dated as of December 8, 1999, by and among the Company,
GDIS Acquisition Corp. as Buyer, and Global DataTel, Inc., as Seller. (1)
2.2 Merger Agreement and Plan of Reorganization, by and among MailEncrypt.com, Inc.,
MailEncrypt.com Shareholders, and Mail Acquisition Corporation dated February 16, 2000.(5)
*2.3 Agreement and Plan of Merger by and among the Company, Superus Holdings, Inc. and
Surge Acquisition Corp.
3.1(a) Certificate of Incorporation of Surge, as amended. (2)
3.1(b) Certificate of Amendment to Certificate of Incorporation of Surge, with respect to designation of
269,000 shares of Non-Voting Redeemable Convertible Series A Preferred Stock.(7)
3.1(c) Certificate of Incorporation of Superus Holdings, Inc.
*3.2(a) By-Laws of the Company. (2)
*3.2(b) By-Laws of Superus Holdings, Inc.
4.1 Form of Underwriter's Warrants. (2)
4.2 Form of Public Warrant Agreement. (2)
4.3 Specimen Common Share Certificate. (2)
4.4 Specimen Class A Warrant Certificate. (2)
*4.5 Specimen Class B Warrant Certificate.
4.6 Form of 12% Convertible Promissory Notes issued in December 1999 Private Note
Offering. (7)
4.7 Shareholder Protection Rights Plan Agreement dated as of June 30, 1997. (6)
4.8 Subordinated Convertible Promissory Note in the principal amount of $6,250,000, issued
by Global DataTel, Inc. (4)
4.9 Subordinated Convertible Promissory Note in the Principal amount of $4,100,000, issued
by Global DataTel, Inc. as replacement of the $1,000,000 Promissory Note.
4.10 Pledge Agreement, dated October 8, 1999, by and among Richard Baker, Global DataTel,
Inc., and Surge Components, Inc. (4)
4.11 Security Agreement, dated December 1, 1999, by and among Surge Components, Inc.,
GDIS Acquisition Corp., as Buyer and Global DataTel, Inc. (1)
*5.1 Opinion of Snow Becker Krauss P.C. regarding legality of issuance of shares.
*8.1 Opinion of Snow Becker Krauss P.C. regarding legality of tax matters.
9.1 Stock Purchase Agreement dated March 1992 by and between Ira H. Levy and Steven J.
Lubman. (2)
</TABLE>
- ------------------
* To be filed by Amendment.
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10.1 Surge Components 1995 Employee Stock Option Plan. (2)
10.2 Employment Agreement between the Company and Ira Levy. (2)
10.3 Employment Agreement between the Company and Steven J. Lubman. (2)
10.4 Revolving Credit Line Agreement between European American Bank and the Company. (2)
10.5 Agreement with Great American Realty of Deer Park dated June 1, 1998. (3)
10.6 Form of sales representative agreement. (2)
**10.7 Intel Corporation Purchase Agreement dated January 1, 1998. (2)
10.8 Amendment No. 1 to Employment Agreement between the Company and Ira Levy. (3)
10.9 Amendment No. 1 to Employment Agreement between the Company and Steven
Lubman. (3)
*10.10 Amendment No. 2 to Employment Agreement between the Company and Ira Levy.
*10.11 Amendment No. 2 to Employment Agreement between the Company and Steven Lubman.
10.12 Employment Agreement between the Company and Adam J. Epstein, dated February 16,
2000.
10.13 Superus 2000 Stock Incentive Plan.
11.1 Computation of Earnings Per Share
15.1 letter re: Unaudited Interim Financial Information
21.1 Subsidiaries of the Company.
23.1 Consent of Seligson & Giannattasio, LLP.
23.2 Consent of Schvaneveldt & Company
23.3 Consent of McKennon, Wilson & Morgan, LLP
23.4 Consent of Snow Becker Krauss P.C.
27. Financial Data Schedule.
(b) Financial Statement Schedules
99.1 Financial statement schedules required by Item 14(c) and Item 17(b)(9)
99.2 Reports Provided Pursuant to Item 4(b) of Form S-4.
</TABLE>
- -------------------
* To be filed by Amendment.
** Confidential Treatment for a portion of the contract has been granted by
the Securities and Exchange Commission.
(1) Incorporated by reference from the Company's Current Report on Form
8-K, Date of Report - December 8, 1999.
(2) 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, as amended by the Company's
Registration Statement on Form S-3 (No. 333-63371) declared effective
by the Securities and Exchange Commission on December 8, 1998.
(3) Incorporated by reference from the Company's Annual Report on Form
10-KSB, for the Fiscal Year ended November 31, 1998.
(4) Incorporated by reference from the Company's Current Report on Form
8-K, Date of Report - October 8, 1999.
II-3
<PAGE>
(5) Incorporated by reference from the Company's Current Report on Form
8-K, Date of Report - February 16, 2000.
(6) Incorporated by reference from the Company's Current Report on Form
8-K, Date of Report - June 30, 1997.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1999.
Item 22. Undertakings
(a) The Registrant hereby undertakes:
(1) To file, during any period in which it offers or
sells securities, a post-effective amendment to this
registration statement to:
(i) include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as
amended (the "Act");
(ii) reflect in the prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information in the registration statement;
and
(iii) include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Act, to treat
each post-effective amendment as a new registration
statement of the securities offered, and the offering
of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
(4) Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers
and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission
such indemnification is against public policy as
expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than
the payment by the small business issuer of expenses
incurred or paid by a director, officer or
controlling person of the small business issuer in
the successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities
being registered, the small business issuer will,
unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question
whether such indemnification by it is against public
policy as expressed in the Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
(5) For determining any liability under the Act, to treat
the information omitted from the form of prospectus
filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under
Rule 424(b)(1), or (4) or 497(h) under the Act as
part of this registration statement as of the time
the Commission declared it effective.
(b) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of
this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information
contained in documents filed subsequent to the effective date
of the registration statement through the date of responding
to the request.
(c) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Deer Park, State of New
York, on March 17, 2000.
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:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Adam J. Epstein
- ----------------------------- Chairman of the Board and March __, 2000
Adam J. Epstein Acting Chief Executive Officer
/s/ Ira Levy
- ----------------------------- President and Director March __, 2000
Ira Levy (Principal Executive Officer)
/s/ Steven J. Lubman
- ----------------------------- Secretary and Director March __, 2000
Steven J. Lubman (Principal Financial Officer)
/s/ Mark Siegel
- ----------------------------- Director March __, 2000
Mark Siegel
/s/ David Siegel
- ----------------------------- Director March __, 2000
David Siegel
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibit No. Name of Exhibit Page No.
- ---------- --------------- --------
<S> <C>
*2.3 Agreement and Plan of Merger by and among the Company, Superus
Holdings, Inc. and Surge Acquisition Corp.
3.1(c) Certificate of Incorporation of Superus Holdings, Inc.
*3.2(b) By-Laws of Superus Holdings, Inc.
*4.5 Specimen Class B Warrant Certificate
4.9 Subordinated Convertible Promissory Note in the Principal amount of
$6,250,000, issued by Global DataTel, Inc. as replacement of the
$1,000,000 Promissory Note.
*10.10 Amendment No. 2 to Employment Agreement between the Company and
Ira Levy.
*10.11 Amendment No. 2 to Employment Agreement between the Company and
Steven Lubman.
10.12 Employment Agreement between the Company and Adam J. Epstein,
dated February 16, 2000.
*10.13 Superus 2000 Stock Incentive Plan.
11.1 Computation of Earnings Per Share
21.1 Subsidiaries of the Company.
23.1 Consent of Seligson & Giannattasio, LLP.
23.2 Consent of Schvaneveldt & Company
23.3 Consent of McKennon, Wilson & Morgan, LLP
23.4 Consent of Snow Becker Krauss P.C.
27. Financial Data Schedule.
(b) Financial Statement Schedules
99.1 Financial statement schedules required by Item 14(c) and Item 17(b)(9)
*99.2 Reports Provided Pursuant to Item 4(b)
</TABLE>
<PAGE>
EXHIBIT 3.1(c)
CERTIFICATE OF INCORPORATION
of
SUPERUS HOLDINGS, INC.
(a Delaware Corporation)
* * * * * *
THE UNDERSIGNED, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly, Chapter 1, Title 8, of the Delaware Code and
the acts amendatory thereof and supplemental thereto and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation is:
SUPERUS HOLDINGS, INC.
SECOND: The location of the registered office of the Corporation in the
State of Delaware is at 1013 Centre Road, City of Wilmington, County of New
Castle, Delaware 19805. The name of the registered agent of the Corporation in
the State of Delaware at such address upon whom process against the Corporation
may be served is Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: (a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is ONE HUNDRED FIFTY MILLION
(150,000,000) shares of stock of the par value of $.001 per share, said shares
consisting of FIFTEEN MILLION (15,000,000) shares of Class A Common Stock, par
value $.001 per share (the "Class A Common Stock"), ONE HUNDRED TWENTY FIVE
MILLION (125,000,000) shares of Class B Common Stock, par value $.001 per share
(the "Class B Common Stock"), and TEN MILLION (10,000,000) shares of preferred
stock, par value $.001 per share (the "Preferred Stock"). The Class A Common
Stock and the Class B Common Stock are sometimes collectively called the "Common
Stock" and either shall sometimes be individually referred to as a class of
Common Stock.
(b) Preferred Stock. The Preferred Stock, par value $.001 per
share, may be issued from time to time in one or more series, each with such
distinctive designation as may be stated in the Certificate of Incorporation or
in any amendment hereto, or in a resolution or resolutions providing for the
issue of such stock from time to time adopted by the Board of Directors or a
duly authorized committee thereof. The resolution or resolutions providing for
the issue of shares of a
<PAGE>
particular series shall fix, subject to applicable laws and the provisions of
the Certificate of Incorporation, for each such series the number of shares
constituting such series and the designation and the voting powers, preferences
and relative, participating, optional or other special rights and the
qualifications, limitations or restrictions thereof, including, without limiting
the generality of the foregoing, such provisions as may be desired concerning
voting, redemption, dividends, dissolution or the distribution of assets,
conversion or exchange, and such other subjects or matters as may be fixed by
the Board of Directors or a duly authorized committee thereof under the General
Corporation Law of the State of Delaware.
FIFTH: The name and mailing address of the incorporator is as follows:
Ronniel Levy, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
SIXTH: The Board of Directors of the Corporation shall expressly have
the power and authorization to make, alter and repeal the By-Laws of the
Corporation, subject to the reserved power of the stockholders to make, alter
and repeal any By-Laws adopted by the Board of Directors. Unless and except to
the extent required by the By-Laws of the Corporation, elections of directors
need not be by written ballot.
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware as the by-laws may provide. The books of the corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the by-laws of the Corporation. Election of
directors need not be by written ballot unless the by-laws of the Corporation
shall so provide.
EIGHT: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
NINTH: Any action required to be taken or which may be taken at any
annual or special meeting of stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
TENTH: Any and all directors of the Corporation shall not be liable to
the Corporation or any stockholder thereof for monetary damages for breach of
fiduciary duty as director except as otherwise required by law. No amendment to
or repeal of this Article TENTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any act or omission of such director occurring prior to such
amendment or repeal.
-2-
<PAGE>
ELEVENTH: Any and all right, title, interest and claim in or to any
dividends declared by the Corporation, whether in cash, stock, or otherwise,
which are unclaimed by or such lesser period as permitted by the appropriate
escheat laws the stockholder entitled thereto for a period of six years after
the close of business on the payment date shall be and be deemed to be
extinguished and abandoned; such unclaimed dividends in the possession of the
Corporation, its transfer agents, or other agents or depositories shall at such
time become the absolute property of the Corporation, free and clear of any and
all claims for any person whatsoever.
TWELFTH: Each person who at any time is or shall have been a director
or officer of the Corporation and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that the person
is, or the person or the person's testator or intestate was, a director,
officer, employee or agent of the Corporation, or served at the request of the
Corporation as a director, officer, employee, trustee or agent of another
corporation, partnership, joint, venture, trust or other enterprise, shall be
indemnified against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any such threatened, pending or completed action, suit or
proceeding to the full extent authorized under Section 145 of the General
Corporation Law of the State of Delaware. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which
such director or officer may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
THE UNDERSIGNED, for the purposes of forming a Corporation under the
laws of the State of Delaware, does hereby make and execute this Certificate and
affirm and acknowledge, under the penalties of perjury, that this Certificate is
my act and deed and that the facts herein stated are true, and I have
accordingly set my hand hereto this 8th day of March, 2000.
/s/Ronniel Levy, Esq.
--------------------------
Ronniel Levy, Esq.
Incorporator
-3-
<PAGE>
EXHIBIT 4.9
THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY
NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED, DISPOSED OF OR
OFFERED FOR SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT COVERING THIS NOTE AND/OR THE COMMON STOCK
ISSUABLE UPON CONVERSION THEREOF, OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO GLOBAL DATATEL, INC. THAT AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
GLOBAL DATATEL, INC.
Principal Sum: $6,250,000
Holder: Surge Components, Inc.
Issuance Date: March 14, 2000
GLOBAL DATATEL, INC., a Nevada corporation (the "Corporation"), for value
received hereby promises to pay the principal sum set forth above (the
"Principal Sum") to the order of the above-referenced holder (the "Holder") on
or before July 31, 2000 (the "Maturity Date") subject to acceleration and
mandatory prepayment, as provided herein. Each payment by the Company pursuant
to this Note shall be made without set-off or counterclaim and shall be made in
lawful currency of the United States of America and in immediately available
funds. This note (the "Note") replaces and supersedes in its entirety a prior
note, dated October 8, 1999, in the principal amount of $1,000,000, which was
then replaced by a Note in the Amount of $4,100,000, which has accrued interest
until the date hereof, said interest remaining outstanding and continuing to
accrue herewith. In addition to said interest accrued to date, this note shall
accrue interest at the rate of ten percent (10%) per annum from and after the
date hereof for the full amount of the Principal Sum. Accrued and unpaid
interest shall be payable on the Maturity Date; after the Maturity Date until
paid in full; upon any prepayment on the amount prepaid; or on conversion (each,
an "interest payment date"). All computations of interest hereunder shall be
made based on the actual number of days elapsed in a year of 360 days (including
the first day, but excluding the last day, during which any such Principal Sum
is outstanding). This Note is subject to certain covenants of the Corporation as
indicated in Section 4 hereof.
1. Issuance. This Note is being issued pursuant to the terms of an Asset
Purchase Agreement, dated December 8, 1999 (the "Purchase Agreement"), which
replaced and superseded a prior Merger Agreement and Plan of Reorganization by
and among the Corporation, Global Datatel Acquisition Corporation and the Holder
(the "Merger Agreement").
1
<PAGE>
2. Prepayment. This Note may be prepaid in whole at any time or in part from
time to time. All payments by the Corporation hereunder shall be applied first
to pay any interest which is due, but unpaid, then to reduce the Principal Sum.
The Corporation (i) waives presentment, demand, dishonor, notice of dishonor,
protest or notice of any kind in connection with this Note and (ii) agrees to
pay to the holder hereof, on demand, all costs and expenses (including
reasonable legal fees and expenses) incurred in connection with the enforcement
and collection of this Note.
3. Security Agreement; Pledge and Personal Guarantees. Pursuant to a Security
Agreement, dated December 1, 1999, between the Corporation and the Holder, the
obligations of the Corporation under this Note are secured by all of the assets
of the Corporation, although subordinated in right of payment to bank and other
financial institution indebtedness. The obligations of the Corporation are also
secured pursuant to a Pledge Agreement, dated October 8, 1999, with respect to
certain shares of Common Stock of the Corporation.
4. Negative Covenants of Corporation The Corporation covenants and agrees that,
so long as this Note shall be outstanding, it will perform the obligations set
forth in this Section 4:
(i) Liquidation, Dissolution. The Corporation will not
liquidate or dissolve, consolidate with, or merge into or with, any other
corporation or other entity, except that any wholly-owned subsidiary may merge
with another wholly-owned subsidiary or with the Corporation (so long as the
Corporation is the surviving entity and no Event of Default shall occur as a
result thereof);
(ii) Sales of Assets. The Corporation will not sell, transfer,
lease or otherwise dispose of, or grant options, warrants or other rights with
respect to, all or a substantial part of its properties or assets to any person
or entity, provided that this clause (ii) shall not restrict the transactions
contemplated by the Purchase Agreement or any disposition made in the ordinary
course of business and consisting of
(1) capital goods which are obsolete or have no remaining
useful life; or
(2) finished goods inventories.
(iii) Redemptions. The Corporation will not redeem or
repurchase any outstanding equity securities of the Corporation, except for
rescission offers as necessary or appropriate to address possible violations of
applicable securities laws;
(iv) Indebtedness. The Corporation will not create, incur,
assume or suffer to exist, contingently or otherwise, any indebtedness which is
not expressly subordinated in right of payment to the Notes, except as may be
required in the future set forth in (v) below;
2
<PAGE>
(v) Negative Pledge. The Corporation will not create, incur,
assume or suffer to exist any mortgage, pledge, hypothecation, assignment,
security interest, encumbrance, lien (statutory or other), preference, priority
or other security agreement or preferential arrangement of any kind or nature
whatsoever (including any conditional sale or other title retention agreement
and any financing lease) (each, a "Lien") upon any of its property, securities,
revenues or assets, whether now owned or hereafter acquired, except:
(1) Liens granted to secure indebtedness to Senior
Lenders (as defined in Section 11 below) incurred to finance the
acquisition (whether by purchase or capitalized lease) of tangible
assets, but only on the assets acquired with the proceeds of such
indebtedness;
(2) Liens for taxes, assessments or other
governmental charges or levies not at the time delinquent or thereafter
payable without penalty or being contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books;
(3) Liens of carriers, warehousemen, mechanics,
materialmen and landlords incurred in the ordinary course of business
for sums not overdue or being contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books;
(4) Liens (other than Liens arising under the
Employee Retirement Income Security Act of 1974, as amended, or Section
412(n) of the Internal Revenue Code of 1986, as amended) incurred in
the ordinary course of business in connection with workers'
compensation, unemployment insurance or other forms of governmental
insurance or benefits, or to secure performance of tenders, statutory
obligations, leases and contracts (other than for borrowed money)
entered into in the ordinary course of business or to secure
obligations on surety or appeal bonds; and
(5) judgment Liens to the extent not covered by
insurance which do not exceed $100,000 and are in existence less than
30 days after the entry thereof or with respect to which execution has
been stayed;
(vi) Investments. The Corporation will not purchase, own,
invest in or otherwise acquire, directly or indirectly, any stock or other
securities or make or permit to exist any investment or capital contribution or
acquire any interest whatsoever in any other person or entity or permit to exist
any loans or advances for such purposes except for existing investments and
investments in direct obligations of the United States of America or any agency
thereof, obligations guaranteed by the United States of America and certificates
of deposit or other obligations of any bank or trust company organized under the
laws of the United States or any state thereof and having capital and surplus of
at least $500,000,000; provided, however, that nothing contained in this clause
(vi) shall preclude the Company from making acquisitions for the purpose of
expanding its business.
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(vii) Transactions with Affiliates. The Corporation will not
enter into any transaction, including, without limitation, the purchase, sale,
lease or exchange of property, real or personal, or the rendering of any
service, with any person or entity affiliated with the Corporation, except in
the ordinary course of and pursuant to the reasonable requirements of its
business and upon fair and reasonable terms not less favorable than would be
obtained in a comparable arms-length transaction with any other person or entity
not affiliated with the Corporation;
(viii) Dividends. The Company will not declare or pay any cash
dividends or distributions on its outstanding capital stock.
5. Cancellation; Conversion.
(a) On the completion of the acquisition (as set forth in the Purchase
Agreement), between the Corporation and the Holder the outstanding principal
balance of this Note and all accrued and unpaid interest shall automatically be
forgiven by the Holder and this Note shall be canceled.
(b) The Holder, at its sole discretion, may convert this Note into
common stock, $.001 par value ("Common Stock") of the Corporation in whole or in
part, at the conversion price set forth in Section 7 below, only if the
acquisition of the Corporation by the Holder is not approved by shareholders of
both companies or is not consummated for any other reason by July 31, 2000.
(c) Simultaneously with the issuance of this Note, the Corporation
shall reserve for issuance upon conversion of this Note the total number shares
of Common Stock issuable upon conversion of this Note. The Initial Conversion
Price shall be determined as set forth in Section 6 below, and may be adjusted
from time to time in accordance with Section 6 below (the "Conversion Shares").
The Conversion Shares shall be subject to the terms and conditions of a
Registration Rights agreement between the Corporation and the Holder of even
date herewith.
(d) If any capital reorganization or reclassification of the Common
Stock, stock split, reverse stock split, stock dividends, distribution on its
outstanding shares of Common Stock, stock combination, or consolidation or
merger of the Corporation with or into another corporation, or distribution of
the proceeds of any sale or conveyance of all or substantially all of its assets
to another corporation (a "Capital Event") shall be effected, then, as a
condition precedent of such Capital Event, the following provision shall be
made: the Holder of the Note shall, from and after the date of such Capital
Event sale have the right to receive upon conversion (in lieu of the shares of
Common Stock of the Corporation immediately theretofore issuable upon the
exercise of conversion rights), such shares of stock, securities or assets as
would have been issued or payable with respect to or in exchange for the number
of shares of Common Stock immediately theretofore issuable upon conversion of
the Note (regardless of whether the Note was actually convertible at such time).
In any such case, appropriate provision shall be made with respect to the rights
and interests of the Holders to the end that such conversion rights ' including,
without limitation, provisions for appropriate adjustments) shall thereafter be
applicable, as nearly as may be practicable in relation to any shares of stock,
securities or assets thereafter deliverable upon the conversion of the Note.
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(e) The Corporation covenants to call a meeting of stockholders to be
held on or before July 31, 2000 to, among other things, approve the completion
of the acquisition. The Board of Directors of the Corporation will recommend
that the stockholders of the Corporation vote in favor of such approval. The
date on which such approval is obtained is referred to herein as the
"Stockholder Approval Date."
6. Conversion Price. If this Note is converted by the Holder into shares of
Common Stock of the Corporation the conversion price shall be an amount equal to
ninety percent (90%) of the average closing price for the twenty trading days
prior to the Corporation's receipt of notice of conversion. If no such trading
price quotations are available, the Conversion Price shall be $1.00 of principal
and interest per share. The Initial Conversion Price for purposes of the
reservation of Section 5(c) above shall be $1.00 of principal and interest per
share of Common Stock converted into.
7. Issuance of Note and Conversion Shares. The Corporation represents, warrants
and covenants that the Corporation has full corporate power and authority to
execute and deliver this Note; the execution, delivery and performance by the
Corporation of this Note has been duly and validly authorized and approved by
the Corporation's Board of Directors; this Note has been duly and validly
executed and delivered by the Corporation and constitutes the legal, valid and
binding obligation of the Corporation enforceable against the Corporation in
accordance with its terms, except as such obligations and their enforceability
may be limited by applicable bankruptcy and other such similar laws affecting
the enforcement of creditors' rights generally; and all the Conversion Shares
will be duly and validly issued, fully paid and non-assessable, and not issued
in violation of the preemptive rights of any stockholder; the execution,
delivery and performance of the Note does not violate, conflict with or result
in a breach or default under (after the giving of notice or the passage of time
or both), or permit the termination of, any contract, right, other obligation or
restriction relating to or which affects the Conversion Shares or the
Corporation or any of its subsidiaries to which the Corporation or any of its
Subsidiaries is a party or by which either of them or their assets or business
may be bound or subject, or results in the creation of any lien upon the
Conversion Shares or upon any of the assets of the Corporation or its
subsidiaries pursuant to the terms of any contract.
8. Events of Default and Acceleration of the Note.
(a) An "event of default" with respect to this Note shall exist if any
of the following shall occur:
(i) The Corporation shall breach or fail to comply with any
provision of this Note and such breach or failure shall continue for five (5)
business days after written notice thereof to the Corporation by the Holder of
the Notes or its assignees.
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(ii) A receiver, liquidator or trustee of the Corporation or
of a substantial part of its properties shall be appointed by court order and
such order shall remain in effect for more than fifteen (15) days; or the
Corporation shall be adjudicated bankrupt or insolvent; or a substantial part of
the property of the Corporation shall be sequestered by court order and such
order shall remain in effect for more than fifteen (15) days; or a petition to
reorganize the Corporation under any bankruptcy, reorganization or insolvency
law shall be filed against the Corporation and shall not be dismissed within
forty-five (45) days after such filing.
(iii) The Corporation shall file a petition in voluntary
bankruptcy or request reorganization under any provision of any bankruptcy,
reorganization or insolvency law, or shall consent to the filing of any petition
against it under any such law.
(iv) The Corporation shall make an assignment for the benefit
of its Creditors, or consent to the appointment of a receiver, trustee or
liquidator of the Corporation, or of all or any substantial part of its
properties.
(b) If an event of default referred to in clause (i) above shall occur,
the Holder may, in addition to such Holder's other remedies, by written notice
to the Corporation, declare the principal amount of this Note, together with all
interest accrued and unpaid thereon, to be due and payable immediately. Upon any
such declaration, such amount shall become immediately due and payable and the
Holder shall have all such rights and remedies provided for under the terms of
this Note. If an event of default referred to in clauses (ii), (iii) or (iv)
shall occur, the principal amount of this Note, together with all interest
accrued thereon, shall become immediately due and payable and the Holder shall
have all such rights and remedies, if any, provided for under the terms of this
Note.
9. Interest Rate Limitation. It is the intent of Holder and the Corporation in
this execution of this Note, that the loan evidenced hereby be exempt from the
restrictions of applicable state usury laws. In the event that for any reason,
it should be determined that any such usury law is applicable to this Note, the
Holder and the Corporation stipulate and agree that none of the terms and
provisions contained herein shall ever be construed to create a contract for the
use, forbearance or detention of money requiring payment of interest at a rate
in excess of the maximum interest rate permitted to be charged by the laws of
such state. In such event, if the Corporation shall collect monies which are
deemed to constitute interest which would otherwise increase the effective
interest rate on this Note to a rate in excess of the maximum rate permitted to
be charged by applicable state law, all such sums shall, at the option of
Holder, be credited to the payment of the sums due hereunder or returned to the
Corporation.
10. Mandatory Prepayment. The Holder shall have the right to call this Note if
the Acquisition is not approved by its shareholders or if the acquisition of
Global is not consummated for any reason prior to July 31, 2000. This mandatory
prepayment provision shall require a 30 day prior written notice by the Holder
to the Corporation. Upon such notice, the outstanding principal and all interest
accrued and unpaid shall be due and payable upon the 31st day following the
Corporation's receipt of the written notice.
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11. Subordination. The Holder hereby subordinates the payment of all present and
future indebtedness under or on account of this Note to the payment of any and
all other debts, obligations and liabilities of the Corporation of any nature
whatsoever to all banks, any other financial institutions and International
Business Machines, Inc. ("IBM") (collectively, "Senior Lenders"), whether
absolute or contingent, due or to become due, now existing, hereafter arising,
or otherwise. Upon any distribution of any assets of the Corporation, whether by
reason of sale, reorganization, liquidation, dissolution, arrangement,
bankruptcy, receivership, assignment for the benefit of creditors, foreclosure
or otherwise, all such other Senior Lenders shall be entitled to receive payment
in full of the indebtedness to them prior to the payment of all or any part of
the indebtedness hereunder to the Holder. In addition, the Holder hereby agrees
to not accept any payments under the Note while there exists an event of default
under any indebtedness to a Senior Lender.
12. Miscellaneous.
(a) All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by telegram, by
facsimile, recognized overnight mail carrier, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows: (a) if to the Holder, to such address
as such Holder shall furnish to the Corporation in accordance with this Section,
or (b) if to the Corporation, to it at its headquarters office, or to such other
address as the Corporation shall furnish to the Holder in accordance with this
Section.
(b) The provisions of this Note may from time to time be amended,
modified or waived, if such amendment, modification or waiver is in writing and
consented to by the Corporation and the Holder of the Note.
No failure or delay on the part of the Holder in exercising
any power or right under this Note shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power or right preclude any other or
further exercise thereof or the exercise of any other power or right. No notice
to or demand on the Corporation, in any case, shall entitle it to any notice or
demand in similar or other circumstances. No waiver or approval by the Holder
shall, except as may be otherwise stated in such waiver or approval, be
applicable to subsequent transactions. No waiver or approval hereunder shall
require any similar or dissimilar waiver or approval thereafter to be granted
hereunder.
(c) If any provision of this Note shall for any reason be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision hereof, but this Note shall be construed as if such invalid
or unenforceable provision had never been contained herein. To the extent that
the Corporation makes a payment or payments to the Holder, and such payment or
payments or any part thereof are subsequently for any reason invalidated, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law or equitable cause,
then to the extent of such recovery, the obligation or part thereof originally
intended to be satisfied, and all rights and remedies therefor, shall be revived
and continued in full force and effect as if such payment had not been made or
such enforcement or setoff had not occurred.
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(d) The Corporation may consider that the person in whose name this
Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) unless the Corporation is
given specific notice to the contrary. In case of transfer of this Note, the
transferee agrees to notify the Corporation of such transfer and of its address,
and to submit appropriate evidence regarding such transfer so that this Note may
be registered in the name of the transferee. This Note is transferable only on
the books of the Corporation by the holder hereof, in person or by attorney, on
the surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
(e) THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS AND
INSTRUMENTS EXECUTED AND TO BE PERFORMED ENTIRELY IN SUCH STATE. THE PARTIES
HERETO HEREBY WAIVE TRIAL BY JURY AND CONSENT TO THE CHOICE OF VENUE OF THE
SUPREME COURT OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY OR THE FEDERAL
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK TO HEAR ANY DISPUTE IN
CONNECTION WITH THIS NOTE.
(f) THE HOLDER AND THE CORPORATION HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH,
THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED AND DELIVERED IN
CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE HOLDER OR THE CORPORATION, THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE HOLDER'S PURCHASING THIS NOTE.
(g) Upon the occurrence of an uncured event of default, the Holder of
this Note shall be entitled to recover its legal and other costs of collecting
on this Note, and such costs shall be deemed added to the principal amount of
this Note.
(h) In addition to all other remedies to which the Holder may be
entitled hereunder, Holder shall also be entitled to decrees of specific
performance without posting bond or other security.
IN WITNESS WHEREOF, the Corporation has caused this Note to be duly
executed in its name by its duly authorized officer on the date set forth below
Dated: as of March 14, 2000
GLOBAL DATATEL, INC.
By: /s/ Richard Baker
--------------------------------------
Richard Baker, Chief Executive Officer
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EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made effective as
of February 16, 2000 by and between SURGE COMPONENTS, INC., a New York
corporation (hereinafter, including its successors and/or parent, "Company"),
and ADAM EPSTEIN (hereinafter "Employee").
WHEREAS, Company is engaged in the business of supplying
electronic components and, through certain of its subsidiaries, offers Internet
access and web integration services focused primarily on the Latin American
market; and
WHEREAS, Employee is currently employed in the position of
President and Chief Executive Officer of MailEncrypt.com, Inc. ("MailEncrypt");
WHEREAS, the Company and MailEncrypt have entered into a
Merger Agreement and Plan of Reorganization (the "Merger Agreement") providing
for the acquisition by the Company of all of the outstanding shares of capital
stock of MailEncrypt in exchange for shares of capital stock of the Company (the
"Merger"); and
WHEREAS, effective upon the execution of the Merger Agreement
(the "Effective Date"), Company desires to employ Employee, and Employee desires
to be employed by Company, as set forth herein.
NOW THEREFORE, in consideration of the foregoing recitals and
the respective covenants, terms and provisions contained herein, the parties
hereto agree as follows:
1. EMPLOYMENT/SALARY. Company hereby agrees to employ
Employee, and Employee hereby accepts such employment, on the terms and
conditions set forth herein, commencing on the Effective Date and continuing for
a three year period thereafter (the "Term"), unless terminated earlier as
provided in Section 2 below. Employee shall report directly to the Company's
Board of Directors.
(a) Position; Duties. Employee shall be employed in the
position of Chairman of the Board ("Chairman") and, commencing upon the date of
the proposed reorganization pursuant to which Company will become a public
holding company (the "Reorganization Date"), Employee shall also become Chief
Executive Officer of Company. Between the Effective Date and the Reorganization
Date, Employee will serve as Acting Chief Executive Officer of the Company.
Notwithstanding the foregoing, at no time shall Employee assume day-to-day
operational and/or direct managerial control over the Company's existing
electronics components business, which duties shall at all times remain with and
be performed by Ira Levy in accordance with the terms of the employment
agreement, as amended, between Mr. Levy and the Company.
<PAGE>
During the Term, Employee will devote his full time and best
efforts to Company and will not engage in any outside employment or business
(whether for compensation or otherwise) without the prior written consent of
Company's Board of Directors. Employee shall at all times faithfully,
industriously and to the best of Employee's ability, experience and talent
perform all of the duties that may be assigned to Employee hereunder. The
services to be rendered by Employee shall include, without limitation, all
services customarily rendered by persons engaged in the same capacity or in a
similar capacity in the Internet industry, and such other services as may be
reasonably requested by Company from time to time. Employee shall be responsible
for the day-to-day operation of the Company and its businesses. Employee's
responsibilities shall specifically include, but not be limited to, directing
the operations of the Company's in-house public relations, investor relations,
investment banking and Internet functions, with responsibility for originating,
negotiating and closing all contracts and other agreements related thereto;
provided, however, that Employee may hire and/or designate all such persons
reasonably necessary to carry out these functions under Employee's general
supervision.
Notwithstanding the foregoing, however, this Agreement shall
not be interpreted to prohibit Employee from making personal investments,
serving on other boards of directors and advisory boards, attending educational
classes, or conducting private business affairs if those activities do not
materially interfere with the services required under this Agreement, provided
that Employee shall not directly or indirectly acquire, hold or retain any
material interest in any business competing, directly or indirectly, with the
business of Company, except for investments in mutual and other similar funds.
(b) Base Salary. The Company shall pay Employee as
compensation for his services hereunder a base salary, commencing as of the
Effective Date, at the annualized rate of $200,000.00 (the "Base Salary"),
subject to Section 1(c) hereof, which amount shall be paid in accordance with
the Company's payroll practices and subject to the usual and applicable required
withholding.
(c) Increases to Base Salary. In the event that any other
employee of the Company or any of its subsidiaries receives a base salary in
excess of $200,000.00, Employee's Base Salary shall be increased commensurately
so that his Base Salary remains at all times as high or higher than that
received by any other employee of the Company or its subsidiaries. In addition,
promptly following each anniversary of the Effective Date during the term of
this Agreement, the compensation committee of the Company's Board shall review
Employee's Base Salary and implement such increase, if any, as it shall
determine is reasonable and appropriate; provided, however, that in the event
any other employee of the Company or any of its subsidiaries has received an
increase to his or her base salary during the 12-month period preceding such
review of Employee's Base Salary, the amount of the increase to Employee's Base
Salary shall equal or exceed the amount of the greatest salary increase received
by any such other person.
(d) Bonus. Employee shall be entitled, during the term of this
Agreement, to an annual bonus at the discretion of the compensation committee of
the Board of Directors of the Company.
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2. TERMINATION.
(a) Termination for Cause. The Company may terminate this
Agreement immediately for cause as defined herein. If Employee's employment is
terminated "for cause", Employee shall be entitled to exercise his stock options
(in accordance with the terms thereof) to the extent vested as of the date of
termination, and to receive his accrued but unpaid Base Salary and vacation
through the date of termination, a pro-ration with respect to the bonus to which
he would otherwise be entitled and reimbursement for any expenses through the
date of termination, but shall not be entitled to receive any additional
compensation or accelerated vesting of his options. For purposes of this
Agreement, "Cause" is defined as: (i) any act of personal dishonesty taken by
the Employee in connection with his responsibilities to the Company which the
Board reasonably determines is injurious to the Company, (ii) Employee's
conviction of a felony or other crime involving moral turpitude which the Board
reasonably believes has had or will have a material detrimental effect on the
Company's reputation or business or which results in incarceration of Employee
for in excess of 15 days or (iii) the failure, refusal or neglect by Employee to
substantially perform all of his obligations to the Company after there has been
delivered to Employee a written demand for performance from the Company which
describes the basis for the Company's belief that Employee has not substantially
performed his duties and provides a 15 day cure period in connection therewith.
(b) Termination Without Cause. Employee and the Company
understand and acknowledge that Employee's employment with the Company
constitutes "at-will" employment. Therefore, Employee and the Company
acknowledge that, subject to the terms of this Agreement, either the Company or
Employee may terminate the employment relationship at any time with or without
cause, by giving written notice to the other party.
(c) Severance Payments and Other Benefits Upon Termination. If
the Company terminates Employee's employment without cause, or in the event of
an Involuntary Termination of the Employee, as hereinafter defined, the Company
(or its successor, as the case may be) shall pay Employee the following: (i) any
accrued but unpaid Base Salary and vacation through the date of termination;
(ii) a pro-ration with respect to any bonus to which he would otherwise be
entitled pursuant to any bonus or incentive compensation plan (or other
arrangement pursuant to which bonuses are awarded to employees on a formula
basis) adopted by the Board of Directors; (iii) reimbursement for any expenses
through the date of termination; (iv) the unvested portion, if any, of the stock
options granted by the Company to Employee shall be subject to the acceleration
provisions set forth in the stock option agreement applicable thereto; and (v) a
severance payment in an amount equal to Employee's then current annual Base
Salary, payable over a period of twelve (12) months following the effective date
of such Involuntary Termination or termination without cause, subject to
withholding as may be required by law. For purposes of this Agreement,
"Involuntary Termination" shall mean termination of Employee's employment with
the Company immediately following any of the following: (1) a reduction by the
Company of Employee's Base Salary as in effect immediately prior to such
reduction (including, for such purposes, the failure of the Company to maintain
in accordance with Section 1(c) hereof Employee's status as the most highly
compensated employee of the Company and its subsidiaries); (2) a material
reduction by the Company in the kind or level of employee benefits to which
Employee is entitled immediately prior to such reduction that is not generally
applicable to all executive level employees of Company; (3) a material reduction
by the Company of Employee's duties and responsibilities, including any
reduction in job title; (4) Employee's voluntary resignation following a Change
of Control, as hereinafter defined, in which Employee is not offered a position
of comparable pay and responsibilities in the same geographic area in which he
worked immediately prior to the Change of Control, or is required to report to
anyone other than the Company's Board of Directors; (5) Employee's voluntary
resignation after submitting a written proposal to the Board, which is prepared
in good faith and is a reasonable exercise of business judgment, outlining his
recommendations for the future and direction of the Company which is then
rejected by the Board; or (6) the continued breach by the Company of its
material obligations hereunder following 30 days' prior written notice thereof
by the Employee.
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For purposes of this Agreement, "Change of Control" means (i)
a merger or consolidation or other reorganization or transaction (but excluding
the recapitalization and reorganization of Company contemplated by the Merger
and/or the Merger Agreement) in which securities possessing more than 50% of the
total combined voting power of the Company's outstanding voting securities are
transferred or issued to a person or persons different from the persons holding
those securities immediately prior to such transaction, or (ii) the sale,
transfer or other disposition of all or substantially all of the Company's
assets.
(d) Termination of Merger Agreement. Employee and Company
expressly agree that this Agreement is being entered into concurrently with and
contingent upon execution of the Merger Agreement. If the Merger Agreement is
terminated after this Agreement has been executed, Employee or the Company may
immediately terminate this Agreement. If Employee's employment is terminated
hereunder, Employee shall be entitled to receive his accrued but unpaid Base
Salary and vacation through the date of termination, a pro-ration with respect
to the bonus to which he would otherwise be entitled and reimbursement for any
expenses through the date of termination. Employee shall also be entitled to
exercise any options that have vested as of the date of the termination. If
Employee's employment with Company is terminated as set forth in this Section
2(d), the Company agrees that it will not take any action, directly or
indirectly, to interfere with Employee's continuing relationship with
MailEncrypt.
3. BENEFITS.
(a) Executive Benefits. Employee shall be eligible to
participate in the employee benefit plans currently and hereafter maintained by
the Company of general applicability to other senior executives of the Company.
The benefits received by Employee under any such benefit plan shall be at least
commensurate with those received by any other employee of the Company or any of
its subsidiaries.
(b) Stock Options. Effective as of the Effective Date, the
Company shall grant Employee a stock option (the "Option") consisting of
1,500,000 shares of the Company's Class B Common Stock (or such other shares of
common stock as are exchangeable on a one-for-one basis into shares of Class B
Common Stock, the "Option Shares") at an exercise price equal to the fair market
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value of such Option Shares on the date of grant. The Option shall vest
immediately as to 300,000 Option Shares and the remainder thereof (consisting of
an option to purchase 1,200,000 Option Shares) shall vest ratably on a monthly
basis as of the last day of each of the first 36 months following the date of
grant, such that 1/36th of the Option will vest on the one-month anniversary of
the Effective Date and the Option shall be fully vested on the third anniversary
of the Effective Date, subject to Employee continuing to render services to the
Company. In addition, the Option shall be subject to acceleration upon the
occurrence of certain events, including if Employee is terminated by the Company
without cause (which shall result in acceleration of 50% of Employee's then
unvested options), if Employee is subject to an Involuntary Termination (which
shall result in acceleration of 50% of Employee's then unvested options), or due
to a Change of Control, as defined above (which shall result in acceleration of
100% of Employee's then unvested options), all as set forth in greater detail in
the stock option agreement by and between Employee and the Company (the "Stock
Option Agreement"), which agreement shall be substantially in the form of
Exhibit A hereto and is incorporated by this reference as if fully set forth
herein. In the event that Employee elects to terminate his employment with
Company without cause, or if Company terminates Employee "for cause" pursuant to
and as defined in Section 2(a) above, the Option shall immediately terminate,
and Employee shall be entitled to exercise the portion of the Option that was
vested on the date of termination only for such period of time as is provided in
the Company's Stock Option Plan and reflected in the Stock Option Agreement. In
all other respects, the Option shall be subject to the terms, definitions and
provisions of the Company's Stock Option Plan and the Stock Option Agreement.
(c) Vacation, Etc. Employee shall be entitled to vacation time
and sick leave during each calendar year during the term of this Agreement, in
such amounts as are at least equal to the amounts provided to any other employee
of the Company or any of its subsidiaries, without loss of compensation, in
addition to statutory holidays normally observed by Company in accordance with
Company's vacation and holiday policy adopted from time to time by Company.
(d) Expenses. The Company will pay or reimburse Employee for
reasonable travel, entertainment or other expenses incurred by Employee in the
furtherance of or in connection with the performance of Employee's duties
hereunder in accordance with the Company's established policies. Notwithstanding
the foregoing, the parties acknowledge that any amounts paid by the Company
pursuant to this Section 3(d) prior to the date on which the Company's
shareholders approve the Merger shall be reimbursed to the Company from the
proceeds of the sale of certain 12% convertible promissory notes due December
31, 2000, which the Company is currently offering to qualified investors.
(e) Perquisites. Employee shall be entitled, during the Term,
to a car allowance in the amount of $650 per month, and such other perquisites
as are at least commensurate with those received by any other employee of the
Company or any of its subsidiaries.
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All compensation payable to Employee hereunder shall be
subject to such deductions and withholdings as Company is from time to time
required to make pursuant to any federal, state or local law, governmental
regulation or order.
4. OFFICE LOCATION/SUPPORT. The Company will provide Employee
with the office space, support staff, and equipment that Employee needs in order
to perform his job duties herein. The location of the office (which is
contemplated to be in the San Francisco Bay area) will be selected by Employee.
Prior to securing and staffing any such office, Employee shall prepare and
submit to the Company's Board of Directors, for their approval, a budget with
respect thereto, which budget shall include a reasonable allowance for the
expenses incurred by Employee in relocating his residence to the vicinity of
such office location.
5. REPRESENTATION AND WARRANTIES. Employee represents and
warrants to Company that: (i) Employee is under no contractual or other
restriction or obligation that is materially inconsistent with the execution of
this Agreement, the performance of his duties hereunder, or the rights of
Company hereunder, including, without limitation, any development agreement,
non-competition agreement or confidentiality agreement previously entered into
by Employee, and (ii) Employee is under no physical, mental or other disability
that would substantially hinder or prevent the performance of his duties under
this Agreement.
6. CERTAIN COVENANTS.
(a) Intellectual Property Rights.
(i) Employee agrees that the Company will be the sole
owner of any and all of Employee's "Discoveries" and "Work
Product," hereinafter defined, made during the term of his
employment with the Company, whether pursuant to this
Agreement or otherwise. For purposes of this Agreement,
"Discoveries" means all inventions, discoveries, improvements,
and copyrightable works (including, without limitation, any
information relating to the Company's software products,
source code, know-how, processes, designs, algorithms,
computer programs and routines, formulae, techniques,
developments or experimental work, work-in-progress, or
business trade secrets) made or conceived or reduced to
practice by Employee during the term of his employment by the
Company, whether or not potentially patentable or
copyrightable in the United States or elsewhere. For purposes
of this Agreement, "Work Product" means any and all work
product relating to Discoveries.
(ii) Employee shall promptly disclose to the Company
all Discoveries and Work Product. All such disclosures must
include complete and accurate copies of all source code,
object code or machine-readable copies, documentation, work
notes, flow-charts, diagrams, test data, reports, samples, and
other tangible evidence or results (collectively, "Tangible
Embodiments") of such Discoveries or Work Product. All
Tangible Embodiments of any Discoveries or Work Project will
be deemed to have been assigned to the Company as a result of
the act of expressing any Discovery or Work Product therein.
6
<PAGE>
(iii) Employee hereby assigns and agrees to assign to
the Company all of his interest in any country in any and all
Discoveries and Work Product, whether such interest arises
under patent law, copyright law, trade-secret law,
semiconductor chip protection law, or otherwise. Without
limiting the generality of the preceding sentence, Employee
hereby authorizes the Company to make any desired changes to
any part of any Discovery or Work Product, to combine it with
other materials in any manner desired, and to withhold
Employee's identity in connection with any distribution or use
thereof alone or in combination with other materials. This
assignment and assignment obligation applies to all
Discoveries and Work Product arising during Employee's
employment with the Company (or its predecessors), whether
pursuant to this Agreement or otherwise. Employee's agreement
to assign to the Company any of his rights as set forth in
this Section 6(a)(iii) shall not apply to any invention that
qualifies fully under the provisions of California Labor Code
Section 2870, where no equipment, supplies, facility or trade
secret information of the Company was used and that was
developed entirely upon Employee's own time, and (i) that does
not relate to Company business or to the Company's actual or
anticipated research or development, or (ii) that does not
result from any work performed by Employee for the Company.
(iv) At the request of the Company, Employee shall
promptly and without additional compensation execute any and
all patent applications, copyright registration applications,
waivers of moral rights, assignments, or other instruments
that the Company deems necessary or appropriate to apply for
or obtain Letters Patent of the United States or any foreign
country, copyright registrations or otherwise to protect the
Company's interest in such Discovery and Work Product, the
expenses for which will be borne by the Company. Employee
hereby irrevocably designates and appoints the Company and its
duly authorized officers and agents as his agents and
attorneys-in-fact to, if the Company is unable for any reason
to secure Employee's signature to any lawful and necessary
document required or appropriate to apply for or execute any
patent application, copyright registration application, waiver
of moral rights, or other similar document with respect to any
Discovery and Work Product (including, without limitation,
renewals, extensions, continuations, divisions, or
continuations in part), (i) act for and in his behalf, (ii)
execute and file any such document, and (iii) do all other
lawfully permitted acts to further the prosecution of the same
legal force and effect as if executed by him; this designation
and appointment constitutes an irrevocable power of attorney
coupled with an interest.
(v) To the extent that any Discovery or Work Product
constitutes copyrightable or similar subject matter that is
eligible to be treated as a "work made for hire" or as having
similar status in the United States or elsewhere, it will be
so deemed. This provision does not alter or limit Employee's
other obligations to assign intellectual property rights under
this Agreement.
7
<PAGE>
(vi) The obligations of Employee set forth in this
Section 6 (including, without limitation, the assignment
obligations) will continue beyond the termination of
Employee's employment with respect to Discoveries and Work
Product conceived or made by Employee alone or in concert with
others during Employee's employment with the Company, whether
pursuant to this Agreement or otherwise. Those obligations
will be binding upon Employee, his assignees permitted under
this Agreement, executors, administrators, and other
representatives.
(b) Exposure to Proprietary Information.
(i) As used in this Agreement, "Proprietary
Information" means all information of a business or technical
nature that relates to the Company including, without
limitation, all information about software products whether
currently released or in development, all inventions,
discoveries, improvements, copyrightable work, source code,
know-how, processes, designs, algorithms, computer programs
and routines, formulae and techniques, and any information
regarding the business of any customer or supplier of the
Company or any other information that the Company is required
to keep confidential. Notwithstanding the preceding sentence,
the term "Proprietary Information" does not include
information that is or becomes publicly available through no
fault of Employee, or information that Employee learned prior
to the Effective Date.
(ii) In recognition of the special nature of his
employment under this Agreement, including his special access
to the Proprietary Information, and in consideration of his
employment pursuant to this Agreement, Employee agrees to the
covenants and restrictions set forth in Section 6 of this
Agreement.
(c) Use of Proprietary Information; Restrictive Covenants.
(i) Employee acknowledges that the Proprietary
Information constitutes a protectible business interest of the
Company, and covenants and agrees that during the term of his
employment, whether under this Agreement or otherwise, and
after the termination of such employment, he will not,
directly or indirectly, disclose, furnish, make available or
utilize any of the Proprietary Information, other than in the
proper performance of his duties for the Company.
(ii) Employee will not, during the term of this
Agreement or, solely with respect to clauses 2 and 3 of this
subparagraph (ii), for a period of one year thereafter (the
"Restricted Period"), anywhere within the United States (the
"Restricted Territory"), directly or indirectly (whether as an
owner, partner, shareholder, agent, officer, director,
employee, independent contractor, consultant, or otherwise):
8
<PAGE>
1. perform services for, or engage in, any
business that develops or sells products or services
which are competitive with any products or services
sold or developed by the Company for which Employee
has provided any assistance in planning, development,
marketing, training, support, or maintenance during
the period of Employee's employment with the Company
(the "Products");
2. except on behalf of the Company, solicit
any person or entity who is, or was at any time
during the twelve-month period immediately prior to
the termination of Employee's employment with the
Company, a customer of the Company for the sale of
the Products or any product or service of a type then
sold by the Company for which Employee provided any
direct, material assistance in planning, development,
marketing, training, support, or maintenance; or
3. solicit for employment any person who is,
or was at any time during the twelve-month period
immediately prior to the termination of Employee's
employment with the Company, an employee of the
Company.
(d) Scope/Severability. The parties acknowledge that the
business of the Company is and will be national and international in scope and
thus the covenants in this Section 6 would be particularly ineffective if the
covenants were to be limited to a particular geographic area of the United
States. If any court of competent jurisdiction at any time deems the Restricted
Period unreasonably lengthy, or the Restricted Territory unreasonably extensive,
or any of the covenants set forth in this Section 6 not fully enforceable, the
other provisions of this Section 6, and this Agreement in general, will
nevertheless stand and to the full extent consistent with law continue in full
force and effect, and it is the intention and desire of the parties that the
court treat any provisions of this Agreement which are not fully enforceable as
having been modified to the extent deemed necessary by the court to render them
reasonable and enforceable and that the court enforce them to such extent (for
example, that the Restricted Period be deemed to be the longest period
permissible by law, but not in excess of the length provided for in Section
6(c), and the Restricted Territory be deemed to comprise the largest territory
permissible by law under the circumstances).
(e) Return of Company Materials upon Termination. Employee
acknowledges that all records, documents, and Tangible Embodiments containing or
of Proprietary Information prepared by Employee or coming into his possession by
virtue of his employment by the Company are and will remain the property of the
Company. Upon termination of his employment with the Company, Employee shall
immediately return to the Company all such items in his possession and all
copies of such items.
9
<PAGE>
7. EQUITABLE REMEDIES.
(a) Employee acknowledges and agrees that the agreements and
covenants set forth in Sections 6(a), (b), (c), (d) and (e) are reasonable and
necessary for the protection of the Company's business interests, that
irreparable injury will result to the Company if Employee breaches any of the
terms of said covenants, and that in the event of Employee's actual or
threatened breach of any such covenants, the Company will have no adequate
remedy at law. Employee accordingly agrees that, in the event of any actual or
threatened breach by him of any of said covenants, the Company will be entitled
to immediate injunctive and other equitable relief, without bond and without the
necessity of showing actual monetary damages. Nothing in this Section 7 will be
construed as prohibiting the Company from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of any
damages that it is able to prove.
(b) Each of the covenants in Sections 6(a), (b), (c), (d) and
(e) will be construed as independent of any other covenants or other provisions
of this Agreement.
(c) In the event of any judicial determination that any of the
covenants in Sections 6(a), (b), (c), (d), and (e) are not fully enforceable, it
is the intention and desire of the parties that the court treat said covenants
as having been modified to the extent deemed necessary by the court to render
them reasonable and enforceable, and that the court enforce them to such extent.
8. MISCELLANEOUS.
(a) Modification; Prior Claims. This Agreement and the Stock
Option Agreement set forth the entire understanding and agreement of the parties
with respect to the subject matter hereof, supersede all existing agreements,
arrangements or understandings, whether oral or written, between them concerning
such subject matter, and may be modified only by a written instrument duly
executed by each party. Except as otherwise specifically provided for in this
Agreement, Employee hereby agrees and acknowledges that any and all
compensation, reimbursement or other obligations or liabilities of Company due
to Employee prior to the effective date of this Agreement have been received and
satisfied in full by Company and Employee hereby waives and releases any claims
which he may have relating thereto or resulting therefrom.
(b) Assignment. This Agreement shall inure to the benefit of,
and be binding upon, the parties and their respective successors and assigns;
provided, however, that this Agreement may not be assigned by Employee, nor may
any of Employee's duties hereunder be delegated, without the prior written
consent of Company, which consent may be given or withheld by Company in its
sole discretion. The rights of Company under this Agreement may not be assigned
without the consent of Employee, which consent may be given or withheld by
Employee in his sole discretion.
10
<PAGE>
(c) Excise Tax. If any payments or transfers of property to be
made to Employee hereunder are subject, in whole or in part, to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Excise Tax"),
and application of Section 280G of the Code can be avoided by an appropriate
shareholder vote pursuant to Section 280G(b)(5)(A) of the Code, the Company and
Employee agree that they will respectively take all reasonable steps necessary
or appropriate to obtain a favorable shareholder vote to ensure that the Excise
Tax and the provisions of Section 280G are not applicable with respect to such
compensation.
(d) Survival. The covenants, agreements, representations and
warranties contained in or made pursuant to (i) Sections 5 and 6 hereof by
Employee and (ii) Section 2(c) hereof by Company shall survive the termination
of this Agreement and Employee's employment with Company.
(e) Third Party Beneficiaries. Except as expressly provided
herein with respect to successors and assigns of the parties, this Agreement
does not create, and shall not be construed as creating, any rights enforceable
by any person or entity not a party to this Agreement.
(f) Waiver. The failure of either party hereto at any time to
enforce performance by the other party of any provision of this Agreement shall
in no way affect such party's rights thereafter to enforce the same, nor shall
the waiver by either party of any breach of any provision hereof be deemed to be
a waiver by such party of any other breach of the same or any other provision
hereof.
(g) Section Headings. The headings of the several sections in
this Agreement are inserted solely for the convenience of the parties and are
not a part of and are not intended to govern, limit or aid in the construction
of any term or provision hereof.
(h) Notices. All notices and other communications required or
permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered mail to, the party to be charged with receipt
thereof. Notices and other communications served by mail shall be deemed given
hereunder three (3) calendar days after deposit of such notice of communication
in the United States mail as certified or registered mail, with postage prepaid
and duly addressed to whom such notice or communications is to be given, in the
case of (i) Company: Surge Components, Inc., 1016 Grand Boulevard, Deer Park,
New York 11729 or (ii) Employee: Adam Epstein, 13955 Tahiti Way, Unit 163,
Marina del Rey, California 90292. Any party may change said party's address for
purposes of giving notices under this Section by giving to the other party a
written notice of such change in the manner provided in this Section.
(i) Severability. All sections, clauses thereof and covenants
contained in this Agreement are severable, and in the event any of them shall be
held to be invalid by any court, this Agreement shall be interpreted as if such
invalid sections, clauses or covenants were not contained herein.
11
<PAGE>
(j) Applicable Law. This Agreement is made with reference to
the laws of this State of California, and shall be governed by and construed in
accordance therewith. Any legal action, suit or proceeding brought by either
party to enforce or interpret any term or provision of this Agreement shall be
brought in the appropriate state or federal court located in Los Angeles,
California. The prevailing party in any such legal action, suit or proceeding
shall be entitled to have and recover from the losing party such prevailing
party's attorneys' fees and costs incurred in connection therewith.
12
<PAGE>
(k) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and have made it effective as of the Effective
Date of this Agreement.
COMPANY:
SURGE COMPONENTS, INC., a
New York corporation
By: /s/ IRA LEVY
------------------------
Ira Levy, President
EMPLOYEE:
/s/ ADAM EPSTEIN
---------------------------
Adam Epstein
13
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended
November 30,
1999 1998
------- -------
Basic earnings:
Net income (loss) $ 85,064 $ (274,166)
---------- ----------
Shares:
Weighted common shares outstanding 4,858,024 4,836,835
Employee's stock options -- --
---------- ----------
Total weighted shares outstanding 4,858,024 4,836,835
---------- ----------
Basic earnings (loss) per common share $ .02 $ (.06)
========== ==========
Diluted earnings:
Net income (loss) $ 85,064 $ (274,166)
---------- ----------
Shares:
Weighted common shares outstanding 4,858,024 4,836,835
Employee stock options 1,018,444 --
---------- ----------
Total weighted shares outstanding 5,876,468 4,836,835
---------- ----------
Diluted earnings (loss) per common share $ .01 $ (.06)
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
EXHIBIT II
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1 9 9 9 1 9 9 8 1 9 9 8 1 9 9 7
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Basic earnings:
Net loss $(2,627,486) $ (435,269) $(3,708,342) $(2,081,666)
----------- ---------- ----------- -----------
Shares:
Weighted common shares outstanding 22,267,256 5,191,030 6,836,755 6 ,324
----------- ---------- ----------- -----------
Net loss per share $ (.12) $ (.08) $ (.54) $ (329.17)
=========== ========== =========== ===========
Diluted earnings:
Net loss $(2,627,486) $ (435,269) $(3,708,342) $(2,081,666)
----------- ---------- ----------- -----------
Shares:
Weighted common shares outstanding 22,267,256 5,191,030 6,836,755 6,324
Employee stock options -- -- -- --
Other stock options -- -- -- --
Convertible note -- -- -- --
Total weighted shares outstanding 22,267,256 5,191,030 6,836,755 6,324
----------- ---------- ----------- -----------
Diluted net loss per common share $ (.12) $ (.08) $ (.54) $ (329.17)
=========== ========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SURGE COMPONENTS, INC.
Name of Entity Jurisdiction of Formation
-------------- -------------------------
Surge/Challenge, Inc. New York
Superus Holdings, Inc. Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 4, 2000, in the Registration Statement on Form
S-4 and related Prospectus of Surge Components, Inc and Subsidiary.
Seligson & Giannattasio, LLP
N. White Plains, New York
March 16, 2000
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 14, 2000, in the Registration Statement on Form
S-4 and related Prospectus of Surge Components, Inc and Subsidiary.
Seligson & Giannattasio, LLP
N. White Plains, New York
March 16, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Public Accountants
As an independent public accountant, I hereby consent to the
incorporation by reference in the Registration Statement of my report dated June
9, 1998, included in Global DataTel, Inc.'s Form 10-KSB for the year ended
December 31, 1997, and to all references to my firm included in this
Registration Statement.
Schvaneveldt & Company
Salt Lake City, Utah
February 18, 2000
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
We hereby consent to the use in the Prospectus, constituting part of this
Registration Statement on Form S-4 of our report dated February 16, 2000,
relating to the financial statements of MailEncrypt, Inc. which appear in such
Prospectus. We also consent to the reference to us under the heading experts, in
such Prospectus.
McKennon, Wilson & Morgan LLP
Irvine, California
March 7, 2000
<PAGE>
Exhibit 23.4
Consent of Counsel
We hereby consent to the reference to us under the captions "Legal
Opinions" and "Proposal 1 - The Recapitalization Proposal - Material Federal
Income Tax Consequences" in the prospectus contained in the Registration
Statement of Surge Components, Inc.
SNOW BECKER KRAUSS P.C.
New York, N.Y.
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of of Global DataTel, Inc. and
Subsidiaries income filed as part of the report on form 10 for the year ended
December 31, 1998 and is qualified in its entirety by reference to such report
on form 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 133,676
<SECURITIES> 0
<RECEIVABLES> 3,257,224
<ALLOWANCES> 389,880
<INVENTORY> 1,127,611
<CURRENT-ASSETS> 4,940,225
<PP&E> 831,917
<DEPRECIATION> 309,332
<TOTAL-ASSETS> 8,157,326
<CURRENT-LIABILITIES> 5,797,148
<BONDS> 97,159
0
105
<COMMON> 9,180
<OTHER-SE> 2,253,734
<TOTAL-LIABILITY-AND-EQUITY> 8,157,326
<SALES> 1,862,339
<TOTAL-REVENUES> 1,862,339
<CGS> 728,140
<TOTAL-COSTS> 2,153,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,663
<INCOME-PRETAX> (1,037,599)
<INCOME-TAX> 134,839
<INCOME-CONTINUING> (1,172,438)
<DISCONTINUED> (2,535,904)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,708,342)
<EPS-BASIC> (.54)
<EPS-DILUTED> (.54)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of income of surge Components and
Subsidiary filed as part of the report on form 10KSB for the year ended
November 30, 1999 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> XXX-XX-XXXX
<CASH> 159,612
<SECURITIES> 2,232,294
<RECEIVABLES> 2,274,274
<ALLOWANCES> 22,634
<INVENTORY> 1,442,067
<CURRENT-ASSETS> 7,378,953
<PP&E> 504,696
<DEPRECIATION> 183,290
<TOTAL-ASSETS> 7,846,254
<CURRENT-LIABILITIES> 1,692,008
<BONDS> 0
0
0
<COMMON> 4,859
<OTHER-SE> 6,149,387
<TOTAL-LIABILITY-AND-EQUITY> 7,846,254
<SALES> 12,147,025
<TOTAL-REVENUES> 12,363,799
<CGS> 9,068,308
<TOTAL-COSTS> 3,151,932
<OTHER-EXPENSES> 37,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 105,802
<INCOME-TAX> 20,738
<INCOME-CONTINUING> 85,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,064
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of income of Global DataTel, Inc. and
Subsidiaries filed as part of the report on form 10 for the period ended
September 30,1999 and is qualified in its entirety by reference to such report
on form 10.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 50,638
<SECURITIES> 0
<RECEIVABLES> 3,302,868
<ALLOWANCES> 404,595
<INVENTORY> 1,012,152
<CURRENT-ASSETS> 5,945,559
<PP&E> 895,728
<DEPRECIATION> 346,449
<TOTAL-ASSETS> 8,607,581
<CURRENT-LIABILITIES> 8,319,828
<BONDS> 72,921
0
0
<COMMON> 22,280
<OTHER-SE> 192,552
<TOTAL-LIABILITY-AND-EQUITY> 8,607,581
<SALES> 9,583,440
<TOTAL-REVENUES> 9,583,440
<CGS> 6,287,233
<TOTAL-COSTS> 5,350,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434,448
<INCOME-PRETAX> (2,489,122)
<INCOME-TAX> 138,364
<INCOME-CONTINUING> (2,627,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,627,486)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
