<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. 2)
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.
[ ] 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:
[X] 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. Fees were previously paid on March 17, 2000
<PAGE>
As filed with the Securities and Exchange Commission on June 29, 2000
Registration No. 333-32790
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
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 stockholders, Surge Components, Inc. will be
reincorporated in Delaware as Superus Holdings, Inc.
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: [_]
-i-
<PAGE>
<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 N/A (4) N/A (4) N/A (4) N/A (4)
Class B Common Stock,
$.001 par value 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 (13)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------
(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 "Merger") with and into Superus Holdings, Inc. ("Superus") which
will become the parent holding company registrant. Each share of 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 approximately 4,980,000 as of May 4,
2000 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"),
each exercisable at $5.00 per share until July 31, 2003 for one share of Class B
Common Stock. In accordance with Rule 457(0) under the Act, the number of
warrants being registered is not included in the table.
(5) 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. As of March 17, 2000, there were 3,479,600 Class A Warrants
outstanding, all of which were initially registered together with the underlying
Common Stock, on Surge's Registration Statement on Form SB-2 (File No.
333-630-NY), as amended, pursuant to Rule 429 under the Act, by Surge's
Registration Statement on Form S-3 (File No. 333-63371) declared effective on
December 8, 1998. In accordance with Rule 457(o) under the Act, the number of
shares being registered is not included in the table.
-ii-
<PAGE>
(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 stockholders 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 Stockholders. 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.
(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 stockholders 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.
(13) Paid on March 17, 2000, upon the initial filing of this proxy statement and
prospectus.
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.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
-iii-
<PAGE>
Subject to completion, dated June 29, 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, under which: we (Surge Components, Inc.) will transfer all
of our assets, subject to our 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"), a Delaware corporation, which will
become the public parent holding company. Your rights as a stockholder 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
and By-laws of Superus, which you should carefully read.
Superus, 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 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 if the acquisition proposals contained herein for Global DataTel,
Inc. and MailEncrypt.com, Inc. are approved.
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. We will seek NASDAQ listing of both classes of common stock and
the outstanding warrants.
At the special meeting, we will also ask you to (i) consider and
ratify, on a non-binding basis, Superus' adoption of a stock incentive plan,
(ii) ratify the acceleration of the exercisability of Superus stock options
issued to Surge management in consideration of their forfeiture of certain
outstanding options, (iii) elect a new Board of Directors, and (iv) 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. We encourage you to
read this entire document carefully, as it contains valuable detailed
information.
Sincerely,
Ira Levy, President
THE RECAPITALIZATION AND RELATED PROPOSALS INVOLVE CERTAIN RISKS.
PLEASE READ THE "RISK FACTORS" BEGINNING ON PAGE 27.
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.
STOCKHOLDERS 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.
<PAGE>
SURGE COMPONENTS, INC.
1016 Grand Boulevard
Deer Park, NY 11729
(631) 595-1818
Notice of Special Meeting of Stockholders
to be held
_______ __, 2000
_______________, 2000
To the Stockholders of Surge Components, Inc.:
You are cordially invited to attend the Special Meeting of the
Stockholders (the "special meeting") of Surge Components, Inc. ("Surge"), which
will also serve as our annual meetings of stockholders 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
stockholder 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 stockholders 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) To approve the Merger Agreement and Plan of Reorganization By and
Among Surge, MailEncrypt.com, Inc., the stockholders of MailEncrypt.com, Inc.
and Mail Acquisition Corporation, a wholly-owned subsidiary of 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 of
Superus.
(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.
-2-
<PAGE>
(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 stockholders 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 stockholders entitled to vote at the special meeting will be
open to examination by any stockholder, 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.
-3-
<PAGE>
Subject to completion, dated June 28, 2000
Proxy Statement of
GLOBAL DATATEL, INC.
Notice of
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 10:00 a.m., Eastern
Standard Time, on ____________________________, 2000.
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 and for up to approximately $6,250,000 of loans, we have transferred our
assets under a pledge to Surge and 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 and the entity holding our assets will become
a separate subsidiary of Superus, a Delaware holding corporation. Your rights as
a stockholder 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. This will permit separate market valuations for each class of stock.
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 stockholders.
Our board of directors unanimously recommends that you vote in favor of
the GDIS Acquisition.
1A
<PAGE>
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
The Recapitalization and related proposals involve certain risks.
Please read the "Risk Factors" beginning on page 27.
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.
2A
<PAGE>
TABLE OF CONTENTS
Page
No.
-----
INTRODUCTORY COMMENT - FORWARD-LOOKING STATEMENTS ........................... 7
QUESTIONS AND ANSWERS ABOUT PROPOSAL 1 -- THE RECAPITALIZATON PROPOSAL ...... 8
PROXY STATEMENT AND PROSPECTUS SUMMARY AND TERM SHEET........................10
COMPARISON OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK..................17
SURGE SELECTED FINANCIAL DATA................................................19
GLOBAL SELECTED FINANCIAL DATA...............................................20
MAILENCRYPT SELECTED FINANCIAL DATA..........................................21
PRO FORMA FINANCIAL INFORMATON ..............................................22
RISK FACTORS.................................................................27
CAPITALIZATION...............................................................43
WHERE YOU CAN FIND MORE INFORMATION..........................................46
SPECIFIC INFORMATION ABOUT THE SURGE SPECIAL MEETING AND VOTING..............47
Date, Time And Place Of Meeting.........................................47
Record Date.............................................................47
Proposals To Be Considered At The Meeting...............................47
Vote Required To Approve The Proposals..................................47
Quorum................................................................. 48
Procedure For Voting By Proxy...........................................48
SPECIFIC INFORMATION ABOUT THE GLOBAL SPECIAL MEETING AND VOTING.............49
Date, Time And Place Of Meeting.........................................49
Record Date.............................................................49
Proposal To Be Considered At The Meeting................................49
Vote Required To Approve The Proposal...................................49
Quorum..................................................................49
Procedure For Voting By Proxy...........................................49
PROPOSAL 1--THE RECAPITALIZATION PROPOSAL....................................51
General ................................................................51
Background and Reasons for the Recapitalization Proposal................53
Recommendation of the Board of Directors ...............................55
Management and Allocation Policies......................................55
Policies Subject to Change Without Stockholder Approval.................55
Fiduciary and Management Responsibilities...............................56
Financing Activities....................................................56
Competition Between Groups..............................................57
Transfer of Assets Between New Surge and Internet Operations............57
Access to Technology and Know-How.......................................58
Review of Corporate Opportunities.......................................58
Financial Statements; Allocation Matters................................58
4
<PAGE>
DESCRIPTION OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK................. 59
General............................................................... 59
Dividends............................................................. 60
Right of First Refusal and Preferences to Surge Management............ 61
Conversion of Class B Common Stock or Class A Common Stock
Upon an Adverse Tax Event ............................................ 61
General Dividend and Exchange Provisions of our
Certificate of Incorporation...................................... 61
Voting Rights......................................................... 62
Liquidation Rights.................................................... 62
Issuances of Class B Common Stock as Distributions
on Class A Common Stock and Vice-Versa ........................... 63
Repurchases of Class B Common Stock................................... 63
Preemptive Rights..................................................... 63
Special Meetings ..................................................... 64
Additional Share Issuances............................................ 64
Future Audited Financial Information.................................. 64
Nasdaq Listings of Superus Securities................................. 64
Exchange Procedures................................................... 64
Stock Transfer Agent, Registrar and Exchange Agent ................... 65
Financial Advisor..................................................... 65
Finder's Fee.......................................................... 65
Effect on Existing Options ........................................... 65
No Regulatory Approvals............................................... 65
Material Federal Income Tax Consequences.............................. 65
Comparison of Certain Rights of Surge Stockholders
Under New York And Delaware Law and of Global Stockholders
Under Nevada and Delaware Law.................................. 67
SURGE--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 81
SURGE - DESCRIPTION OF BUSINESS ...................................... 87
SURGE - APPRAISAL RIGHTS.............................................. 94
PROPOSAL 2-- APPROVAL OF GDIS ASSET PURCHASE AGREEMENT....................... 97
FAIRNESS OPINION TO SURGE STOCKHOLDERS................................101
FAIRNESS OPINION TO GLOBAL STOCKHOLDERS...............................106
GLOBAL--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................110
GLOBAL - DESCRIPTION OF BUSINESS .....................................116
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF GLOBAL................121
GLOBAL - APPRAISAL RIGHTS.............................................123
PROPOSAL 3--APPROVAL OF MAILENCRYPT MERGER AGREEMENT.........................125
MAILENCRYPT--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS.........................129
MAILENCRYPT - DESCRIPTION OF BUSINESS ............................... 130
5
<PAGE>
PROPOSAL 4--RATIFICATION, ON A NON-BINDING BASIS, OF ADOPTION
OF SUPERUS 2000 STOCK INCENTIVE PLAN..................................135
PROPOSAL 5--RATIFICATION OF ACCELERATION OF EXERCISABILITY OF SUPERUS
OPTIONS ISSUED TO SURGE MANAGEMENT ...................................144
PROPOSAL 6--ELECTION OF DIRECTORS OF SUPERUS.................................146
PROPOSAL 7-RATIFICATION OF APPOINTMENT OF AUDITORS...........................151
MANAGEMENT AFTER THE RECAPITALIZATION .......................................152
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF SURGE........................152
PRICE RANGE OF EXISTING COMMON STOCK AND
DIVIDEND POLICY.......................................................154
PLAN OF DISTRIBUTION.........................................................157
OTHER MATTERS................................................................158
EXPENSES OF SOLICITATION.....................................................159
INFORMATION ABOUT STOCKHOLDER PROPOSALS......................................159
EXPERTS ...............................................................159
LEGAL OPINIONS...............................................................160
ANNEX A -- Agreement and Plan of Merger relating to Recapitalization
ANNEX B -- Amended and Restated 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.
ANNEX D -- Merger Agreement and Plan of Reorganization dated February 16, 2000
By and Among MailEncrypt.com, Inc., the Stockholders 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 Dissenter's Rights
ANNEX H -- Fairness opinion of Houlihan Smith & Company, Inc.
ANNEX I -- Fairness opinion of Capitalink, L.C.
FINANCIAL STATEMENTS (Index)................................................F-1
Surge Components, Inc. and Subsidiary................................F-2
Global DataTel, Inc..................................................F-27
MailEncrypt.com, Inc. and Subsidiaries...............................F-49
Pro Forma Financial Statements ......................................F-61
6
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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
respective industries. Forward-looking statements may be identified by the use
of forward-looking terminology such as "may," "will," "project," "expect,"
"believe," "estimate," "anticipate," "intends," "continue", "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:
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.
Stockholders 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.
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.
7
<PAGE>
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 approve the GDIS
Acquisition and the MailEncrypt Merger 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 acquisition of MailEncrypt (Proposal
3) and 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.
What are the new classes of common stock?
The new classes of common stock consist of the Class A Common Stock (the
New Surge Stock) and the Class B Common Stock (the Internet Operations 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 named Surge Components, Inc.
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, Surge stockholders 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.
8
<PAGE>
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 is not intended to and, 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.
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. 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 ________.
9
<PAGE>
PROXY STATEMENT AND PROSPECTUS SUMMARY AND TERM SHEET
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 medium to large Web/system integration
projects in Latin America and eHOLA, which offers business ISP Services,
hosting/ASP solutions, packaged and customized Internet products, as well as
training and customer service. 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 Surge's offices at
1016 Grand Boulevard, Deer Park, New York 11729, and our telephone number is
(631) 595-1818; however, Superus is expected to relocate the company's corporate
headquarters to Superus' current offices at One Embarcadero Center, San
Francisco, California 94111; telephone number (415)956-8302.
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 51).
- Proposal 2 -- Approval of GDIS Asset Purchase Agreement (page 97).
- Proposal 3 -- Approval of MailEncrypt Merger Agreement (page 125).
- Proposal 4 -- Ratification on a Non-binding Basis of Adoption of
Superus 2000 Stock Incentive Plan (page 135).
- Proposal 5 -- Ratification of Acceleration of Exercisability of Superus
Options Issued to Surge Management (page 144).
- Proposal 6 -- Election of Directors of Superus (page 146).
- Proposal 7 -- Ratification of Appointment of Auditors (page 151).
10
<PAGE>
Proposals to be considered at the Global meeting:
Global stockholders are being asked to consider and vote upon the
following proposal at the special meeting:
- Proposal 2 -- Approval of GDIS Asset Purchase Agreement (page 97)
- - - - - - - - - - - - - - - - - - - - - - - - -
Our boards 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 Boards 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.
The directors and executive officers of Surge beneficially owned
approximately 10.5% of the outstanding shares of Surge's existing common stock
as of June 16, 2000, not including shares underlying their options. The eight
(8) holders of an additional 12% of the outstanding common stock have provided
Surge with written consents and have 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.
The directors and executive officers of Global beneficially owned
approximately 23.4% of the outstanding shares of Global's existing common stock
as of April 17, 2000, not including shares underlying their options. The holders
of at least approximately an additional 41% of the outstanding common stock have
agreed to give Global Management their proxies or have consented in writing to
the GDIS Acquisition. In total, 7 shareholders, holding approximately 65% of
Global's voting power, have consented to the GDIS Acquisition. 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.
General; Time and Place of Special We are furnishing this proxy statement
Meeting (Surge) and prospectus for solicitation by our
board of directors for use at a special
meeting of stockholders of Surge to be
held on ____________, ____ __, 2000 at
10 a.m., local time at the ____________
and at any and all adjournments or
postponements thereof.
Record Date (Surge) Our board of directors has fixed the
close of business on July 14, 2000 as
the record date for determining
stockholders entitled to notice of and
to vote at the special meeting or any
adjournments or postponements.
Vote required to approve the proposals Proposal 1 requires the favorable vote
(Surge) of the holders of a majority of the
outstanding shares of our existing
common stock. Proposal 6 requires only a
favorable vote of a plurality of votes
cast at the meeting as this vote relates
to electing directors. All other
proposals herein required approval of a
majority of votes cast at the special
meeting. Proposal 4 is a non-binding
vote of stockholders.
11
<PAGE>
Surge Surge Components, Inc., a New York
corporation, which, through a
wholly-owned subsidiary has acquired all
of Global's assets and certain of its
liabilities. Surge will recapitalize
into a Delaware corporation. A
description of Surge's business begins
on page 88.
General; Time and Place of Special We are furnishing this proxy statement
Meeting (Global) and prospectus for solicitation by our
board of directors for use at a special
meeting of stockholders of Global to be
held on ____________, 2000 at 10 a.m.,
local time at the ____________ and at
any and all adjournments or
postponements thereof.
Record Date (Global) Our board of directors has fixed the
close of business on July 14, 2000 as
the record date for determining
stockholders entitled to notice of and
to vote at the special meeting or any
adjournments or postponements.
Vote required to approve the proposals Proposal 2 required approval of a
(Global) majority of votes cast at the special
meeting.
Global Global DataTel, Inc., a Nevada
corporation, which is selling all of its
assets and certain of its liabilities to
Surge. Surge will recapitalize into a
Delaware corporation. A description of
Global's business begins on page 116.
Recapitalization (Proposal 1 - Page 51) The corporate reorganization being
proposed to Surge common stockholders
wherein Surge will reincorporate in
Delaware as "Superus Holdings, Inc."
begins with the transfer of all of the
assets of Surge into a wholly-owned
subsidiary of Surge and, all of the
assets of Global are already held in
trust by a separate subsidiary of Surge.
Surge and its subsidiaries will then
merge with and into Superus, a Delaware
corporation. If the MailEncrypt Merger
is approved, MailEncrypt will become a
third, wholly-owned subsidiary of
Superus. Superus will issue the Class A
Common Stock and the Class B Common
Stock. Read carefully the Agreement and
Plan of Merger attached hereto as Annex
A. Surge is often referred to in the
first person, until the completion of
the Recapitalization and the GDIS
Acquisition and MailEncrypt Merger, then
all referrals to "Superus," "us," "we"
or "our" refers to the combined entities
after the transaction.
New Surge Essentially the same as Surge, and its
electronic components operations, except
that New Surge will be a wholly-owned
Delaware subsidiary of Superus after the
Recapitalization. You will only be a
stockholder of Superus and this will not
be able to directly control New Surge.
New Surge's operations will be tracked
by the Class A Common Stock.
12
<PAGE>
Global Includes Global DataTel, Inc. a Nevada
corporation and all of its subsidiaries
prior to the GDIS Acquisition, and
refers to GDIS Acquisition Corp. after
the GDIS Acquisition. A description of
Global's business begins on page 116.
GDIS Acquisition Ratio of Global The acquisition pursuant to the Asset
Common Stock to Class B Common Purchase Agreement with Global and GDIS
Stock (Proposal 2 - Page 97) Acquisition Corp., dated December 8,
1999, wherein all Global's assets and
certain of its liabilities have been
transferred to Surge under a pledge
agreement pending stockholder approval.
In return, all holders of Global Common
Stock have received the right to receive
1 share of Preferred Stock for each 100
shares of Global owned. If the GDIS
Acquisition is approved by the Surge
stockholders, holders of Preferred
Stock, will then receive 100 shares of
Class B Common Stock under this proxy
statement and prospectus. Global common
stockholders therefore, will wind up
with the same number of shares of Class
B Common Stock as Global Common Stock
they own. Seven (7) persons or entities
holding approximately 65% of the voting
power of Global Common Stock, have
already consented to the GDIS
Acquisition.
MailEncrypt and MailEncrypt Merger Refers to MailEncrypt.com, Inc. a
(Proposal 3 - Page 125) California corporation. MailEncrypt will
be acquired and merged into a Delaware
subsidiary of Superus pursuant to the
MailEncrypt Merger Agreement. You are
being asked to approve the acquisition
of the MailEncrypt Merger Agreement in
Proposal 3 of this proxy statement and
prospectus. A description of
MailEncrypt's business begins on page
131.
Global Common Stock Approximately 23,900,000 common stock of
Global, par value $.001 per share.
Holders of a majority of the shares of
Global Common Stock are required to
approve the GDIS Acquisition pursuant to
this joint proxy statement and
prospectus. Global Common Stock now
represents Surge Preferred Stock which
is pledged for Global's stockholders and
will eventually, upon your approval of
the GDIS Acquisition in Proposal 2, be
converted into Class B Common Stock and
issued to the Global stockholders.
Non-Voting Preferred Surge's 239,000 Non-Voting Redeemable
Stock Convertible Series A Preferred Stock,
par value $.001 per share, issued to
holders of Global Common Stock in
exchange for Global's assets held under
a pledge under the GDIS Acquisition. The
Preferred Stock holders do not vote with
the Surge common stock holders herein,
but are entitled to the same dissenter's
rights, and are entitled to dividends on
a pro-rata basis with the Surge common
stock, and shall be paid prior to Surge
common stock. The Preferred Stock has a
minimal preference and is convertible
into Class B Common Stock if the GDIS
Acquisition is approved, or shall be
redeemed by Surge if it is not approved.
No fractional shares have been issued.
13
<PAGE>
Class A Common Stock Approximately 4,973,000 shares of Class
A Common Stock, par value $.001 per
share, of Superus, which will be issued
as a "tracking stock", tracking the
electronic components and distribution
operations of New Surge. The Class A
Common Stock will be issued on a
one-for-one basis to current holders of
Surge common stock. See the Comparison
of Class A and Class B common stock at
the end of this summary.
Class B Common Stock An aggregate of approximately 26,821,400
shares of Class B Common Stock, par
value $.001 per share, of Superus, which
will be issued as a tracking stock
tracking the assets and operations of
Global and MailEncrypt which are
referred to as our "Internet
Operations." 100 shares of Class B
Common Stock will be issued for each
share of Preferred Stock to current
Global Stockholders, or an aggregate of
23,900,000 shares of Class B Common
Stock. In the event the MailEncrypt
Merger is completed, an additional
1,821,400 shares of Class B Common Stock
will be issued to the MailEncrypt
stockholders. An aggregate of 1,100,000
shares of Class B Common Stock will also
be issued to our investment advisor and
a finder if Proposals 2 and 3 are each
adopted. In addition, up to 3,482,000
shares of Class B Common Stock may be
issued upon exercise of the Class B
warrants, and 4,850,000 shares of Class
B Common Stock may be issued upon
exercise of various options however
excluding the conversion of Class A
Common Stock and options for Class B
Common Stock for a six- month period
falling within the Effective Date. See
the Comparison of Class A and Class B
Common Stock at the end of this summary.
Class B Warrants Approximately 3,482,000 existing Surge
Class A warrants convertible into an
equal number of Class B Warrants
executable at $5.00 per warrant for one
share of Class B Common Stock.
Fairness Opinion to Surge An opinion with respect to the fairness
of the GDIS Acquisition and the
MailEncrypt Merger as they affect Surge,
has been rendered by an independent
financial consultant, Houlihan Smith &
Company, Inc. The full text of this
opinion is enclosed at the end of this
document as Annex H. A summary of the
opinion can be found commencing on page
101.
Fairness Opinion to Global An opinion with respect to the fairness
of the GDIS Acquisition as it affects
Global, has been rendered by an
independent financial consultant,
Capitalink L.C. The full text of this
opinion is enclosed at the end of this
document as Annex I. A summary of the
opinion can be found commencing on page
106.
Assumptions This document presumes the approval of
the GDIS Acquisition and the Surge
Recapitalization including the drop-down
of Surge into "New Surge". Thus, we use
the term "Superus" to refer to the
ultimate parent holding entity. If the
Surge Recapitalization is not approved,
but the GDIS Acquisition is, then all
references to Superus will refer to
Surge after the transaction, which will
still be the parent holding company, and
which will issue to the Global
Stockholders equity securities
substantially equivalent to the Class B
Common Stock.
14
<PAGE>
Conditions The MailEncrypt Merger is dependent on
the completion of the GDIS Acquisition,
but not vice versa. Even though we are
presenting all 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.
Internet Operations Includes all of the operations of
Global. If the acquisition of
MailEncrypt is also approved, then the
Internet Operations shall include all of
the operations of MailEncrypt.
Joint Proxy Statement and Prospectus This Joint proxy statement and
prospectus and the related Registration
Statement on Form S-4, , as first filed
by Surge with the Securities and
Exchange Commission on March 17, 2000,
and as may be amended, which calls the
special meetings for approval of all of
the matters set forth herein, and which
registers for Surge stockholders resale
under the Act, the Class A Common Stock,
Class B Common Stock and Class A
Warrants.
Effective Date The date of stockholder approvals of the
Surge and Global Stockholders of the
Proposals, as presented in this joint
proxy statement and prospectus.
Redemption of Preferred Stock if GDIS If the Surge stockholders do not approve
Acquisition Not Approved the GDIS Acquisition, or the GDIS
Acquisition does not close for any
reason, Surge shall redeem such
Preferred Stock at the stated par value
of $.001 per share, and you will remain
a stockholder of Global, as you are now.
Federal Income Tax Considerations Surge has received an opinion from its
counsel 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 tracking
stock, such as to the Class A Common
stock and the Class B Common Stock .
Therefore, the tax consequences of the
Recapitalization are not free from
doubt.
<PAGE>
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.
Adoption of Superus 2000 Stock Non-binding ratification of the Superus
Incentive Plan (Proposal 4, page 135) 2000 Stock Incentive Plan, already
approved by Surge, which provides for 15
million shares to Class A and Class B
Common Stock, of which 4,550,000 options
have been granted to date.
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<PAGE>
Acceleration of Exercisability of 2,650,000 options to purchase Class B
Superus Options (Proposal 5 - page 144) Common stock of Superus, at $2.69 per
share, as issued to Surge Management,
will become immediately exercisable if:
(a) the GDIS Acquisition is approved,
(b) the Recapitalization is approved,
(c) Surge Management agrees to forfeit
all of their rights to 5,300,000 Surge
options granted in December 1998 in
connection with a previously terminated
transaction.
Election of Superus Board The initial board of Superus shall
(Proposal 6 - page 146) consist of the following three (3)
persons: Adam J. Epstein (Chairman), Ira
Levy and Mario Habib, representing
MailEncrypt, New Surge and GDIS,
respectively, although Superus will
continue to seek unaffiliated directors
prior to the Effective Date.
Appointment of Surge Auditors Ratification of the appointment of
(Proposal 7 - page 151) 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 Our respective boards of directors have
Board of Directors 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 companies and our stockholders.
Our boards of directors unanimously
recommend that you approve each of these
proposals.
Risk Factors (Page 27) When evaluating the tracking stock
issuances and all of the proposals in
this Proxy Statement and Prospectus, you
should be aware of all the risk factors
we detail starting on page 27.
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COMPARISON OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
We have described in the following table the significant differences
between 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 is intended to track their respective
operations. This is a summary only and qualified by its entirety by this joint
proxy statement and prospectus (See also discussion commencing on Page 58.)
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
-------------------- --------------------
<S> <C> <C>
Tracks Performance of New Surge and electronic components Global, MailEncrypt and all Internet
operations. Operations.
Number Issued Approximately 4,973,000 to Surge 26,821,000 which includes 23,900,000
stockholders which is the same number to Global stockholders; 1,821,000 to
of shares of common stock currently MailEncrypt stockholders and
outstanding of Surge. 1,100,000 to advisors.
Conversion Two (2) Class A Common Stock Not convertible except in a Tax Event
convert into one (1) Class B Common at discretion of Board. (See pg. 61).
Stock for six months after Effective
Date of the Recapitalization, and
convertible in a Tax Event at discretion
of Board.
Liquidation or Dissolution of Will have rights to assets underlying Will have rights to assets underlying
either division, but not the New Surge and all electronic Global and MailEncrypt and all other
other components operations, as designated Internet Operations, as designated by
by the Board, but not Internet the Board, but not New Surge or electronic
Operations. Subject to certain components operations (See pg. 62).
management rights relating to New
Surge. (See pg. 62).
Liquidation or Dissolution of Will share in assets on a pro rata, share Will share in assets on a pro rata, share
entire holding company for share basis with Class B Common for share basis with Class A Common
(Superus) Stock (See pg. 62). Stock (See pg. 62).
Merger, Sale or spin-off of Will receive all net consideration Will receive all net consideration
either division but not the received for the transaction. Subject to received for the transaction.
other certain management rights relating to
New Surge.
Sale of some, but not all Board of Directors has discretion to Board of Directors has discretion to
assets of either division either distribute proceeds to Class A either distribute proceeds to Class B
Common Stockholders or reinvest in Common Stockholders or reinvest in
electronic components division, or any Internet Operations, or any
combination thereof. combination thereof.
Merger/sale of entire Will share in proceeds based on market Will share in proceeds based on
holding company value of Class A Common Stock as a market value of Class B Common Stock as a
percentage of market value of all shares percentage of market value of all shares
outstanding, subject to certain outstanding.
management rights relating to New Surge.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Voting Votes pro rata on all Superus matters Votes pro rata on all Superus matters
presented to stockholders for vote. presented to stockholder for vote. Also
Also gets to vote separately as a class gets to vote separately as a class on all
on all matters which adversely affect matters which adversely affect Class B
Class A Common Stock. Will not vote Common Stock. Will not vote for
for directors or directly control directors or directly control Global or
operations of New Surge. MailEncrypt, or any other Internet
Operations.
Dividend Policy None to date or planned in near future. None to date or planned in near future.
Capital to be reinvested into New Capital to be reinvested into Internet
Surge, and at discretion of Board. Operations, and at discretion of Board.
Dividend Payment Dividends may be paid out of New Dividends may be paid out of Internet
Availability Surge Available Dividend Amount, as Operations Available Dividend
defined in Amended and Restated Amount, as defined in Amended and
Certificate of Incorporation (See pg. Restated Certificate of Incorporation
61). (See pg. 61).
Warrants Outstanding After None. All Class A Common Share Approximately 3,482,000 (plus any
GDIS Acquisition Purchase Warrants to purchase Surge's still issuable) to purchase at $5.00 per
existing common stock will share and are redeemable at $.05 per
automatically be converted into warrant if the common stock trades at
Warrants to purchase an equal number or above $7.50 per share for 20
of Class B Common Stock, on equal consecutive trading days. These were
terms. warrants to purchase Surge common
stock.
Use of Proceeds in Event The first $1,844,000 of proceeds, if All proceeds in excess of $1,844,000,
Warrants are Exercised any, realized upon exercise of Class B if any, realized upon exercise of Class
Warrants will be used to repay B Warrants will be invested into the
indebtedness to New Surge. Internet Operations of Global and
MailEncrypt.
Employee Stock Options 717,000 options issued under Surge 2,650,000 stock options of Superus,
1995 Stock Option Plan, as amended under the Superus 2000 Stock
(See pg. Proposals 4 and 5). Incentive Plan, which will become
immediately exercisable by Surge
Management at $2.69 per share subject
to certain escrow and volume
limitations. An additional 2,200,000
options exercisable at between $6.50
and $8.3125 per share over a 36-42
month period commencing February 2000
have been issued under the plan to
Management of Superus and certain of
its subsidiaries. (See proposals 4 and
5).
Other Options 5,300,000 options issued to Ira Levy 2,000,000 options issued to certain
(2,450,000), Steven J. Lubman option holders of Global (See
(2,250,000), Mark Siegel (250,000) Proposals 4 and 5).
and David Siegel (350,000), all of
which will be cancelled and forfeited for
an aggregate of 2,650,000 stock options of
Superus for the purchase of Class B
Common Stock at a higher exercise price
of $2.69 per share.
12% Convertible Notes None Automatically convertible into Class B
Common Stock at the rate of $3.00 per
share upon the Effective Date.
Nasdaq Symbols SPRSA SPRSB and warrants under SPRSW.
</TABLE>
18
<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. The results of operations for the three month period ended
February 29, 2000 are not necessarily indicative of the results to be expected
for the full year. 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>
Three Months
Ended February
29, 28, For the Years Ended November 30,
--- --- ----------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Revenues 7,853 2,206 $12,147 $8,728 $10,834 $8,470 $8,765
Income (loss) from
continuing operations 1,393 (149) (73) (681) (120) 134 84
Net income (loss) 904 (99) 85 (274) 75 229 50
Basic earnings (Loss)
per share .18 (.02) .02 (.06) .02 .04 .02
As of February 29, As of November 30,
----------------- --------------------
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Total assets 15,896 7,846 7,654 8,174 7,728 2,624
Long-term debt - -- -- 1 4 5
</TABLE>
19
<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. and 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 five fiscal periods ended December 31, 1999 have
been derived from the audited consolidated financial statements of Global and
its subsidiaries and 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.
Historical financial information may not be indicative of GDIS's future
performance. The results of operations for the three month period ended March
31, 2000 are not necessarily indicative of the results to be expected for the
full year. 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>
Nine Months
Three Months Year Ended Ended Year Ended
Ended March 31, December 31, December 31, March 31,
2000 1999 1999 1998 1997 1997 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $2,530 $6,502 $ 13,837 $ 1,862 $ 15 $ -- $ --
Cost of sales 1,582 4,843 8,412 728 -- -- --
Operating expenses 2,337 805 7,888 2,160 2,097 41 --
Loss from
continuing operations 1,388 854 (2,656) (1,161) (2,082) (41) --
Net loss 1,388 614 (2,656) (3,696) (2,082) (41) --
Basic loss per share (.06) (.03) (.13) (.54) (329.17) (6.48) --
As of As of As of As of
March 31, December 31, December 31, March 31,
2000 1999 1998 1997 1997 1996
---- ---- ---- ---- ---- ----
Balance Sheet Data:
Total current assets $5,841 $ 4,758 $ 4,940 $ 135 $ -- $ -
Total assets 9,621 8,598 7,221 2,423 3,508 3,508
Total current liabilities 9,192 6,717 5,797 36 1,886 1
Long-term debt 74 73 97 105 -- -
Total stockholders'
(deficiency) equity 355 1,808 1,326 2,158 1,622 (1)
</TABLE>
20
<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 Mail Encrypt
prior to 1999. Historical financial information may not be indicative of
MailEncrypt's future performance. The results of operations for the three month
period ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full year. See also Proposal 3 - Approval of Mail Encrypt
Merger Agreement; MailEncrypt--Management's Discussion and Analysis of
Financial Condition and Plan of Operations" and "Business."
Statements of Operations Data:
<TABLE>
<CAPTION>
Period from Three Months
March 17, 1999 to Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Net revenues $ -- $ -
Costs and expenses - General and administrative 111,031 213,442
Operating loss (111,031) (213,442)
Other income (expense) -- (7,857)
Loss before income taxes (111,031) (221,299)
Income taxes -- -
Net loss $ (111,031) $ (221,299)
Basic and diluted loss per share $ (0.06) $ (0.09)
Weighted average shares 1,952,000 2,540,200
Balance Sheet Data: As of As of
December 31, 1999 March 31, 2000
----------------- --------------
Cash and cash equivalents $ 40,182 $ 673,172
Total current assets 40,182 673,498
Total assets 48,302 680,852
Total current liabilities 56,658 884,313
Total stockholders' equity (8,356) (203,461)
</TABLE>
21
<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 balance sheet date, February 29, 2000. The accompanying pro forma
statement of operations has been prepared as if the acquisitions occurred at the
beginning of the year ended February 29, 2000. 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 February 29, 2000. 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.
22
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
FEBRUARY 29, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
------------------------------------------- Pro forma
Surge MailEncrypt Global Pro forma Adjustments Consolidated
----- ----------- ------ --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash $ 5,716,090 $673,172 $ 37,380 $ 6,426,642
Notes receivable 2,915,876 -- -- 2,915,876 (4) --
Marketable securities 2,233,406 -- -- 2,233,406
Accounts receivable 2,485,514 -- 3,380,345 5,865,859
Inventory 1,318,459 -- 712,380 2,030,839
Prepaid expense 60,042 -- 1,710,672 1,770,714
Other current assets 122,698 326 -- 123,024
----------- -------- ----------- ------------
Total current assets 14,852,085 673,498 5,840,777 18,450,484
Fixed assets 329,991 7,354 488,049 825,394
Goodwill -- -- 1,149,628 4,442,728 (1) 222,136 (2) 5,370,220
Deferred acquisition costs 132,728 -- 2,060,000 250,000 (7) 4,442,728 (1) --
2,000,000 (9)
Other assets 2,985 -- 83,041 86,026
Loan costs 486,583 -- -- 486,583
Deferred taxes 91,373 -- -- 91,373
----------- -------- ---------- -----------
Total assets $15,895,745 $680,852 $9,621,495 $25,310,080
=========== ======== ========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
23
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
FEBRUARY 29, 2000
(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 $ 5,933,272 $832,900 $3,761,967 2,915,876 (4) $ 7,612,263
Accounts payable 1,268,746 42,372 4,074,758 5,385,876
Accrued expenses & taxes 1,523,891 9,041 1,429,312 773,475 (6) 3,735,719
----------- --------- ---------- -----------
Total current liabilities 8,725,909 884,313 9,266,037 16,733,858
------------ --------- ---------- -----------
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 4,933 353,869 23,773 23,773 (3) --
4,933 (5)
353,869 (8)
Common stock - class A -- -- -- 4,933 (5) 4,933
Common stock - class B -- -- -- 23,900 (3) 26,721
1,821 (8)
1,000 (9)
Additional paid-in-capital 6,533,029 -- 11,703,315 127 (3) 250,000 (7) 20,837,265
352,048 (8)
1,999,000 (9)
Other comprehensive income (88,336) -- 36,005 (52,331)
Note receivable from officer -- (225,000) -- (225,000)
Retained earnings 720,210 (332,330) (11,407,635) 995,611 (12,015,366)
------------ --------- ---------- -----------
Total stockholders' equity 7,169,836 (203,461) 355,458 8,576,222
------------ --------- ---------- -----------
Total liabilities and
stockholders' equity $15,895,745 $ 680,852 $9,621,495 $25,310,080
=========== ========= ========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
24
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Historical
------------------------------------------- Pro forma
Surge MailEncrypt Global Pro forma Adjustments Consolidated
----- ----------- ------ --------------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $17,794,156 $ -- $9,865,158 $27,659,314
Cost of goods sold 12,613,960 -- 5,150,189 17,764,149
General and
administrative expense 2,324,537 324,473 8,570,353 11,219,363
Selling expense 1,239,100 -- -- 1,239,100
Depreciation 50,702 -- 74,940 125,642
Amortization 97,317 -- 61,587 222,136 (2) 381,040
Interest expense 76,420 -- 712,285 773,475 (6) 1,562,180
Investment income 218,582 -- -- 218,582
Other expense -- 7,857 -- 7,857
Income taxes 522,989 -- (46,848) 476,141
----------- --------- ----------- -----------
Net income $ 1,087,713 $(332,330) $(4,657,348) $(4,897,576)
=========== ========= =========== ===========
</TABLE>
See notes to pro forma consolidated financial statements.
25
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF FEBRUARY 29, 2000
(UNAUDITED)
NOTE 1 - To reflect costs, aggregating $4,442,728, 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 2 - To reflect the amortization arising from the acquisitions, over a
twenty year period.
NOTE 3 - 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 4 - Reflects the cancellation of the notes payable by Global and Mail to
Surge pursuant to the asset purchase agreement and merger agreement,
respectively.
NOTE 5 - Reflects the conversion of Surge's existing Common Stock into Class A
Common Stock.
NOTE 6 - 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
February 29, 2000.
NOTE 7 - Reflects the issuance of 100,000 shares of Class B Common Stock as a
finders fee in the acquisition of Mail.
NOTE 8 - Reflects the acquisition of Mail in exchange for 1,821,400 shares of
Class B Common Stock.
NOTE 9 - Reflects the issuance of 1,000,000 shares of the Class B Common Stock
as a financial advisory fee in the Global transaction.
26
<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 32, we discuss risks which are common to both
groups. Beginning on page 34, we discuss risks which are specific to Internet
operations and page 37 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 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:
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.
27
<PAGE>
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
advertence 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 as
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.
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
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
28
<PAGE>
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 current officers and directors currently have a disproportionate
equity interest of either Class A or Class B Common Stock. 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 Common Stock and
the holders of Class B Common Stock diverge or conflict. We are attempting to
retain independent directors to the Board of Superus prior to the Effective
Date. Until such time, however, in order to maintain a disinterested status we
will attempt to seek an independent third party valuation or appraisal on
matters relating, directly or indirectly to issues which present an inherent
conflict of interest between Class A and Class B Common Stockholders.
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.
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
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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 stockholders
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 J. 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%, provided in all
instances, Messrs. Levy and Lubman do not voluntarily leave their employment
with New Surge.
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 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 Nasdaq OTC Bulletin Board and then the
transaction changed from a merger to a sale of substantially all of Global's
assets to Surge. 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 or less than double the price of Class A Common
Stock.
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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 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 stockholders who receive Class B Common Stock and to Surge
stockholders 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 of
Class B Common Stock, if the Recapitalization proposal, and Proposal 2 -
Adoption of GDIS Asset Purchase 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.
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 effect 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,
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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 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.
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
effect 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 effect 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 June 14, 2000, Surge had 4,945,047existing shares of Common Stock
outstanding, all of which shall be reclassified as Class A Common Stock and have
been registered as part of this registration statement. Following the approval
of Proposals 2 and 3, 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,
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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 it 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
stockholder 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
ofdiscouraging, 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's 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
$11,407,635 at March 31, 2000. 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 two years
ended December 31, 1999. This report states that if Global does not:
o obtain additional long-term financing arrangements and raise additional
funds; and
o increase revenues and/or decrease expenses,
it 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.
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.
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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.
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:
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o security
o ease of use and access
o reliability
o quality of service
o cost
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.
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.
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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
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
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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.
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.
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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.
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"). During the three-months ended February 29,
2000 our revenues increased to $7,853,000 as compared to $2,006,000 in the prior
year. We had record earnings of $904,000 as compared to a loss of $99,000 during
the prior year. However, net income for Fiscal 1999 was only $85,000 after we
incurred a net loss of $274,000 for Fiscal 1998. Given our historical losses
there can be no assurance we will be able to remain profitable.
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, 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.
Surge needs to maintain large inventories in order to succeed; price
fluctuations could harm us
In order to adequately service our 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 order in to obtain preferential pricing, waive the rights to
manufacturers' inventory protection agreements (including price protection and
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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 each of 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 components business has, from time to time, experienced periods of
extreme shortages in product supply, generally as the result of demand exceeding
available supply. When these shortages occur, suppliers tend to either increase
prices or reduce the number of units sold to customers. 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.
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' stockholders. 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,
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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 our 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
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 purchased 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
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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.
CAPITALIZATION
The tables below set forth the capitalization of Surge, Global and
MailEncrypt as of February 29, 2000, March 31, 2000 and March 31, 2000,
respectively, 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.
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Surge Components, Inc.
<TABLE>
<CAPTION>
As of February 29, 2000
----------------------------
Actual Pro Forma
------ ---------
(in thousands)
<S> <C> <C>
Long-term debt:
Other debt.............................................................. $ -0- $ -0-
Equity:
Surge Preferred Stock, $.001 par value,
1,000,000 authorized, 239,000 shares issued and
held in escrow at February 29, 2000 and pro forma.................... -0- -0-
Surge Common Stock, $.001 par value, 25,000,000
shares authorized, 4,932,958 shares issued and
outstanding, none pro forma.......................................... 5 -0-
Global Common Stock, $.001 par value, 50,000,000 shares authorized,
23,280,124 shares issued and outstanding,
none pro forma....................................................... 23 -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............................................................ -0- -0-
Superus Class A Common Stock, $.001 par value, 15,000,000 shares
authorized, none issued and
outstanding and 4,932,558 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.............................................. 18,236 18,537
Accumulated other comprehensive income.................................. 12 12
Retained Deficit ....................................................... (9,411) (9,411)
------- -------
Total equity............................................................ 8,968 9,170
======= =====
Total capitalization.................................................. 8,968 9,170
======= =====
</TABLE>
------------------------
(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 stockholders. Upon the approval of the GDIS Acquisition by
Surge stockholders, 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 stockholder approval of the
Recapitalization.
(3) See Proposals 2 and 3 for information concerning the issuance of Class B
Common Stock upon stockholder approval of the GDIS Acquisition and the
MailEncrypt Merger.
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<TABLE>
<CAPTION>
Global
As of March 31, 2000
------------------------------
Actual Pro Forma
--------- -----------
(in thousands)
<S> <C> <C>
Long-term debt:
Total long-term debt................................................ $ 74 $ 74
Equity:
Other............................................................... 11,727 11,727
Retained earnings................................................... (11,408) (11,408)
Other comprehensive income (loss)................................... 36 36
-------- --------
Total equity........................................................ 355 355
-------- --------
Total capitalization ............................................... 429 429
======== ========
MailEncrypt
As of March 31, 2000
--------------------
Actual
------
(in thousands)
Long-term debt..................................................................... $ -0-
Equity:
Common Stock.................................................................... 354
Deficit accumulated during the development stage................................ (332)
Total stockholders' deficit..................................................... (203)
------
Total capitalization ........................................................... (203)
======
</TABLE>
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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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SPECIFIC INFORMATION ABOUT THE SURGE SPECIAL MEETING AND VOTING
Date, Time And Place Of Meeting
We are providing this proxy statement and prospectus to Surge
Stockholders 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 July 14, 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 stockholders, 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 stockholders.
Each outstanding share of existing common stock is entitled to one vote
on each proposal. As of June 14, 2000, the most recent practicable date prior to
the date of this proxy statement and prospectus, Surge had issued and
outstanding 4,945,047 shares of existing common stock.
Our directors and executive officers beneficially owned approximately
11% and affiliates of Surge Common Stock as of June 14, 2000. Global and
MailEncrypt did not have any direct or indirect beneficial ownership of Surge.
Eight (8) unaffiliated stockholders of Surge representing an aggregate of
approximately 12% of the outstanding common stock of Surge have provided Surge
with written consents that they intend to vote all shares that they beneficially
own in favor of each of the proposals being considered at the special meeting.
Thus, Management and the eight stockholders intend to vote an aggregate of
approximately 23% of the outstanding common stock in favor of all proposals.
Surge has also been advised by broker-dealers with large stockholdings in Surge
and holding an aggregate of approximately 37% of the issued and outstanding
common stock, that, in accordance with Rule l4a-2(b)(1) of Regulation 14A under
the Exchange Act, they have given indications of votes in favor of Proposals 1
and 2, which are conditions for approval of all other Proposals and their
clients have been purchasing Surge common stock awaiting the Recapitalization
and acquisitions. Therefore, Surge reasonably believes that it has a total of
approximately 60% in favor of Proposals 1 and 2 which is in excess of the
required vote for such proposals.
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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>
SPECIFIC INFORMATION ABOUT THE GLOBAL SPECIAL MEETING AND VOTING
Date, Time And Place Of Meeting
We are providing this proxy statement and prospectus to Global
Stockholders 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 July 14, 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 1 if Proposals 1
and 2 are approved by Surge stockholders. If proposal 2 is not approved by Surge
stockholders, you will receive a substantially equivalent Common Stock of the
existing Surge a New York Corporation.
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 Proposal
Proposal 2 will require the favorable vote of a majority of the votes
of Global stockholders 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 May 3, 2000, the most recent practicable date
prior to the date of this proxy statement and prospectus, Global had issued and
outstanding 23,891,954 shares of common stock (which does not include 1,000,000
shares of common stock for which there is a stop order).
Our directors and executive officers and certain beneficial owners of
more than 5% of Global Common Stock, beneficially owned approximately 63% of
Global common stock as of May 1, 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 considered at the special
meeting, most of whom have already consented in writing to the GDIS Acquisition.
Therefore, the required approval of the Global Stockholders is expected.
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
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<PAGE>
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 merge (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 stockholders 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 stockholders of Global and MailEncrypt.
As the sole stockholders 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.
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.
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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' decision was conditioned upon our receipt
of fairness opinions to both the Surge stockholders and the Global stockholders
which are attached hereto as Annex H and I, respectively. 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 of
Superus - 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.
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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 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 stockholders 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. We attribute the decrease in
price after March 10, 2000, primarily to the general decline in SmallCap stocks.
The Recapitalization proposal is designed to separate the performance
of our electronic 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 19
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 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
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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 roup 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
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 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
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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
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,
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
Proposal 1 is conditioned upon approval by the stockholders of Surge of
the GDIS Acquisition set forth in Proposal 2. If the acquisition of Global is
not approved by Surge's stockholders and implemented by the Board, Proposal 1
will not be implemented.
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.
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 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.
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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.
Our current officers and directors currently have a disproportionate
equity interest of either Class A or Class B Common Stock. 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 Common
Stock and the holders of Class B Common Stock diverge or conflict. We are
attempting to retain independent directors to the Board of Superus prior to the
Effective Date. Until such time, in order to maintain a disinterested status we
will attempt to seek an independent third party valuation or appraisal on
matters relating, directly or indirectly to issues which present an inherent
conflict of interest between Class A and Class B Common Stockholders.
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 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.
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(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 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.
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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
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.
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
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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. Those costs which
can not otherwise be allocated shall be attributed to each of
Superus's operating subsidiaries according to their pro-rata equity
interests in Common Stock of Superus at the Effective Date.
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 to
the subsidiary generating those benefits, and used by Superus 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.
o Repayment of Loan to Surge. Global and Mail have received aggregate
loans of $1,844,000 from Surge commencing in October 1999. Following
the Effective Date of the Recapitalization, if Surge has not been
repaid any portion of this indebtedness it shall receive the first
proceeds from the exercise of the Class B Common Stock Warrants
until the $1,844,000 is repaid in full. Thereafter New Surge shall
receive, on a pro rata basis with Global and Mail, 28% of any net
proceeds received from the exercise of warrants and 72% shall be
paid to Global and Mail.
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.
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Upon implementation of the Recapitalization there are expected to be
4,945,047 shares (as of June 14, 2000) of Class A Common Stock issued and
outstanding, plus any shares issued before then upon exercise of options and
warrants. There will be approximately 26,821,400 shares of Class B Common Stock
issued and outstanding.
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 or either group, and any
other factors our board considers relevant.
The Superus certificate of incorporation permits 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 same class stock dividends and/or 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.
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.
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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 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% provided, in all
instances, Messrs. Levy and Lubman do not voluntarily leave their employment
with New Surge. See Proposal 6 - "Election of Directors of Superus-Employment
Agreements."
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 A 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.
In order to implement the above, the Superus Certificate of
Incorporation grants the Board the sole discretion, if and to the extent
necessary, to either change the authorized number of shares of either class
and/or increase the capitalization of either class of common stock and, amend
the Certificate of Incorporation so as to permit the board to reserve a
sufficient number of shares for issuance in the event of an adverse tax event.
Shareholder approval of the GDIS Acquisition in Proposal 2 includes within it,
approval of Board issuance of any additional shares upon a Tax Event.
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.
General Dividend and Exchange Provisions of our Certificate of Incorporation
Selection of Shares for Exchange/Redemption. There are no specific
redemption provisions in the Superus Certificate of Incorporation. If less than
all of the outstanding shares of a class of common stock are to be exchanged,
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we may exchange or 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,
exchange, 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 Stockholders.
Equal Per Share Voting Rights on Most Matters. 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.
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
Liquidation of Dissolution of Entire Corporation. Under the Superus
certificate of incorporation, in the event of the liquidation, dissolution or
winding up of our entire corporation, 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.
Liquidation, Dissolution, Merger or Sale of Assets Relating to One
Division. In the event of a sale of any assets, spin-off or merger relating only
to the Internet Operations, the holders of Class B Common Stock will have the
right to receive proceeds from the sale of all such assets or merger. Likewise,
in the event of a sale of New Surge or of any assets, spin-off or merger
relating to the electronic components business only, the holders of Class A
Common Stock will have the right to receive the proceeds from such sale, subject
to the right of first refusal of Ira Levy and Steven J.
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Lubman, Surge's founders and executive officers, to purchase New Surge. In both
instances, the Board may, in its sole discretion, reinvest such proceeds in the
respective class's underlying operations.
Merger or Sale of Assets of Entire Holding Company or Both Divisions
Together. In the event of a merger of Superus itself 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 combined. For example, if
75% of the market capitalization of Superus is represented by a particular
class, then the stockholders of said class will receive 75% of the consideration
exchanged in the transaction to all stockholders generally (subject, of course,
to the rights of holders of outstanding options, warrants or other derivative
securities).
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
Vice-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, 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.
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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.
Additionally, in the event of an adverse tax event finding, the board
of directors may, at its sole discretion, if necessary, amend the Certificate of
Incorporation to either change the number of authorized shares of either class
or of both classes, and/or to increase the total number of shares issuable or
both. This will only be done if and to the extent necessary to satisfy the
issuance of shares upon conversion in a tax event if there are not already
sufficient number of shares authorized by the Superus Certificate of
Incorporation.
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.
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 the GDIS Acquisition (Proposal 2), to have the Class B Common
Stock listed on the National Market System under the symbol "SPRSB." It is
anticipated 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.
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Stock Transfer Agent, Registrar and Exchange Agent
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, registrar and Exchange Agent for the Class B Common Stock upon
this issuance.
Financial Advisor
Equilink, LLC is acting as our financial advisor in connection with the
Recapitalization proposal, as well as Proposals 2 and 3. Our financial advisor
is being paid one million shares of Class B Common Stock contingent upon
stockholder 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.
Finder's Fee
Morgan Stanley Dean Witter is being paid a finder's fee of 100,000
shares of Class B Common Stock upon stockholder 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 or 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 stockholders.
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; and neither tracking stockholder can (2)
affect the determination of the Board of a subsidiary company; (3) cause any
subsidiary to be liquidated or merged; (4) vote as a stockholder 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 stockholder
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 stockholders.
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 stockholders 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.
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 stockholders 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 stockholders, as
well as Surge and MailEncrypt stockholders, where noted, and does not reflect
the particular facts and circumstances of each stockholder'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.
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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 Stockholders Under New York and Delaware
Law and of Global Stockholders Under Nevada and Delaware Law
Upon consummation of the Recapitalization, the stockholders 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 stockholders 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 stockholders 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 stockholders will be governed by the DGCL instead
of the NRS.
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 stockholders 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
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DGCL Section 203 (the "Delaware Business Combination Law"), in general,
prohibits a business combination between a corporation and an interested
stockholder within three years of the time such stockholder became an interested
stockholder, unless:
o prior to such time the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder 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
stockholders' meeting of at least 66 2/3% of the outstanding voting stock that
is not owned by the interested stockholder.
The term "business combination" is defined to include, among other
transactions between an interested stockholder 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 stockholder's
proportionate share ownership of the stock of any class or series of the
corporation or such subsidiary; and any receipt by the interested stockholder 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 stockholder" 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 stockholders. The Superus Certificate of
Incorporation and the By-Laws do not opt out of the Delaware Business
Combination Law.
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
stockholder" for a period of five years after the date on which the interested
stockholder became an interested stockholder. 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 stockholder 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 stockholder or its affiliates. The restrictions of the New York
Business Combination Law do not apply, however, to any business combination with
an interested stockholder if such business combination, or the purchase of stock
by the interested stockholder that caused such stockholder to become such, is
approved by the board of directors of the New York corporation prior to the date
on which the interested stockholder 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 stockholders and their
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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 stockholder vote and will not apply to any business
combination with an interested stockholder 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 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,
stockholders 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,
stockholders 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 stockholders;
and, in each case, the consideration such stockholders 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 stockholders;
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. Stockholders 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.
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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:
o consummation of a plan of merger to which the corporation is a party
and to which such stockholder 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 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 stockholders. 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,
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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.
Amendments To By-Laws
Under the DGCL, the power to adopt, alter and repeal by-laws is vested
in the stockholders, 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 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 stockholders 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 stockholders, 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 stockholders
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 stockholder 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
stockholders 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, stockholders do not have preemptive rights. Global's certificate
of incorporation does not allow for preemptive rights.
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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.
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.
Stockholder 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 stockholders 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
stockholders may be taken without a meeting, by written consent of the
stockholders 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
authorized to vote thereon were present and voted.
The NYBCL provides that stockholder 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, stockholder 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.
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
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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 Stockholder Proposals
Subject to the rights of any class or series of Superus Preferred
Stock, the Superus By-Laws require that nominations (other than by the Board of
Directors or a nominating committee) for the election of directors at a meeting
of stockholders must be made by written notice, delivered or made by first class
mail, to 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
stockholders, and (b) the close of business on the seventh day following the day
on which notice of such meeting is first given to stockholders, with respect to
an election of directors to be held at a special meeting of stockholders. In
addition, in order to cause Superus to include a proposal regarding matters
other than the election of directors, a stockholder must comply with the
requirements of SEC Rule 14a-8.
Surge's By-Laws provide that stockholder 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 Stockholders 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.
Special Stockholder Meetings
The DGCL provides that a special meeting of stockholders 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 stockholders 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 stockholders 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 stockholders 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 stockholders 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
stockholders representing at least fifty percent (50%) of the outstanding Surge
shares entitled to vote at such meeting.
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
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nor more than 60 days before the meeting and the Global's By-laws 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.
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.
Under both the DGCL and the NYBCL, any stockholder may, upon five days
written demand, inspect, in person or by agent or attorney, the stockholder
ledger or other record of stockholders during usual business hours. The written
demand under the DGCL must be under oath and state the purpose of such an
inspection. The stockholder may, unless denied for cause as stated below, copy
such records. The DGCL also allows stockholders, 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 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 within five years
sold or offered for sale any list of stockholders 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 stockholder is entitled to cumulate such stockholder'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 stockholder is entitled to cumulate such
stockholder's votes. The Surge Certificate of Incorporation does not contain
such a provision.
Size of the Board of Directors and No 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 stockholders 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 nor more than nine 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 up until the maximum of a nine
member board.
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
stockholders or by action of the board of directors under the specific provision
of a by-law adopted by the stockholders. At each annual meeting of the
stockholders, 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 stockholders to provide that
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directors be divided into either two, 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 stockholders) 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 stockholders. 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 stockholders, and, if the certificate of incorporation or
the specific provisions of a by-law adopted by the stockholders 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 stockholders. 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.
The Surge By-Laws provide that directors may be removed without cause
at any time by action of the majority of the stockholders 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
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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 stockholder or stockholders 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
stockholders. Unless the certificate of incorporation or the specific provisions
of a by-law adopted by the stockholders 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
stockholders. A director elected to fill a vacancy, unless elected by the
stockholders, will hold office until the next meeting of stockholders 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 stockholders 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 stockholders, 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.
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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 expenses beyond that provided
by statute may be provided by By-law, agreement, vote of stockholders,
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
stockholder 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 stockholder
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 stockholders.
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
stockholders, (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.
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
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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 are silent with respect to indemnification of its
officers, directors and employees.
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 "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 stockholders 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 stockholders;
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 stockholders 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 stockholders 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 stockholders 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 stockholders 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 stockholders 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. 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 declare,
pay or make dividends and other distributions to its stockholders 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 stockholders 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 stockholders or otherwise made publicly available.
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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 stockholders 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.
Results of Operations
Fiscal Quarter Ended February 29, 2000 As Compared to Fiscal Quarter Ended
February 28, 1999
Net sales for Surge and its subsidiary Challenge/Surge, Inc.
("Challenge") for the three months ended February 29, 2000 increased by
$5,647,131, or 256%, to $7,853,034 as compared to net sales of $2,205,903 for
the three months ended February 28, 1999. The net sales for Surge without
Challenge, increased by $447,281, or 26% when compared to the three months ended
February 28, 1999. This growth was attributable primarily to increased sales
volumes as a result of the Surge's investment in an increased sales force. In
addition, Surge's existing customers are buying additional product lines. The
net sales for Challenge increased by $5,227,216 when compared to the three
months ended February 28, 1999. This increase was primarily attributable to the
economic effect of the shortage of electronic components during the first
quarter fiscal 2000 in the broker distributor market in which, Challenge
operates. This shortage has resulted in a higher demand of electronic products
in the broker market. There can be no assurance, however, that these
substantially improved conditions will continue throughout 2000.
Surge's gross profit for the three months ended February 29, 2000
increased by $ 2,101,479, or 364%, as compared to the three months ended
February 28, 1999. Gross margin as a percentage of net sales, however, increased
from 26.2% for the three months ended February 28, 1999 to 34.1% for the three
months ended February 29, 2000. 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 the economic effect of the shortage of electronic
components in the broker distributor market. Also, Surge is 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 the three months ended February
29, 2000 increased by $252,703, or 54%, as compared to the three months ended
February 28, 1999. The increase is primarily due to performance bonuses. Surge
also hired additional staff such as office, purchasing and warehouse personnel
in the latter part of 1999.
Selling and shipping expenses for the three months ended February 29,
2000 increased by $208,256, or 83%, as compared to the three months ended
February 28, 1999. This increase is primarily due to the increased sales
commissions resulting from the increase in sales for the quarter. 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 the three months ended February 29, 2000 increased
by $76,420 as compared to the three months ended February 28, 1999. This
increase is primarily due to Surge incurring debt in the amount of approximately
$5,993,000, as a result of a private offering of Convertible Promissory Notes in
December 1999 through February 29, 2000.
Investment income for the three months ended February 29, 2000
increased by $39,565, or 75%, as compared to the three months ended February 28,
1999. This increase is primarily due to Surge's recording interest due from
Global and MailEncrypt.com, Inc.
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As result of the foregoing, Surge had a net income from operations of
$1,393,046 for the three months ended February 29, 2000, as compared to a net
loss from operations of $148,709 for the three months ended February 28, 1999.
Surge had net income of $904,030 for the three months ended February 29, 2000,
as compared to a net loss of $98,619 for the three months ended February 28,
1999.
Fiscal Year Ended November 30, 1999 as Compared to Fiscal Year Ended November
30, 1998
Net sales for Surge and its subsidiary 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.
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 February 29, 2000
Working capital increased by $449,231 during the three months ended
February 29, 2000 from $5,676,945 at November 30, 1999, to $6,126,176 at
February 29, 2000. This increase resulted primarily from the increase in cash,
note receivables and accounts receivable, as partially offset by the increase in
debenture payable, decrease in inventory and prepaid expenses and taxes. Surge's
Current Ratio (current assets to current liabilities) decreased to 1.7:1 at
February 29, 2000, as compared to 4.4:1 at November 30, 1999. Inventory turned
about twice as much in the three months ended February 29, 2000, as compared to
the three months ended February 28, 1999. The average number of days to collect
receivables decreased from 51 days to 27 days. This resulted primarily from an
acceleration in terms on the additional sales from the shortage of electronic
components in the broker distributor market. Management believes that working
capital levels are adequate to meet the current operating requirements of Surge.
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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.
Surge renovated its current facilities during 1998 at a total cost of
$237,000. Additionally, the renovation provides additional space for test labs,
which allows Surge to provide customers with prompt information regarding the
specifications of its products and provides space for additional sales staff. 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
staffing 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 increased payroll and marketing related
charges. The future profitability of Surge will therefore depend on maintaining
increased sales levels. 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.
Effective January 1, 2000, Challenge entered into a verbal agreement to
supply audible transducers for computer keyboards to Intel Corporation. The
agreement is for one year; however, it is terminable at will by Intel
Corporation. There can be no assurance that Challenge will continue to have a
relationship with Intel.
In March 1999, Surge entered into an agreement with Future Electronics
Inc. ("Future") for the marketing, promotion and distribution of its 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.
Surge has updated its equipment, procedures and personnel in the hopes
that 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.
In March 1999, the underwriters exercised a portion of their warrants
received during the Surge 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. In February and March 2000,
the underwriters exercised a portion of their warrants received from the
Company's July 1996 Public Offering in exchange for $116,640 and the
underwriters received 23,400 Shares.
In December 1999, Surge entered into two note agreements with a 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 been repaid.
During the three months ended February 29, 2000, Surge had net cash
provided by operating activities of $2,102,692, as compared to $519,743 used in
operating activities in the three months ended February 28, 1999. The increase
in cash provided by operating activities resulted from Surge's significant
increase in revenues and earnings and accrued expenses and taxes.
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Surge had net cash used in investing activities of $2,042,626 for the
three months ended February 29, 2000, as compared to $75,757 for the three
months ended February 28, 1999. As discussed more fully below, Surge loaned an
aggregate of $1,915,876 to Global and MailEncrypt.com, Inc. as of February 29,
2000.
Surge had net cash provided by financing activities of $5,496,412 for
three months ended February 29, 2000, as compared to $7,500 for the three months
ended February 28, 1999. This increase in the cash provided by financing
activities was a result of proceeds from a private placement and the result of
the proceeds from the exercise of stock options offset by loan costs. As a
result of the foregoing, the Company had a net increase in cash of $5,556,478
during the three months ended February 29, 2000, as compared to a net decrease
of $588,000 for the three months ended February 28, 1999.
Surge expects that its cash flow from operations, current investment
program and the Surge's private placement will be sufficient to meets its
current financial requirements over at least the next twelve months.
In December 1999, Surge 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 February 29, 2000, stock options totaling
62,700 shares at an aggregate exercise price of $92,400 were exercised.
In February 2000, Surge formed a Delaware corporation, Superus, as a
wholly owned subsidiary of Surge. Subject to stockholder approval and the
approval of the GDIS Acquisition, Surge intends to transfer all assets and
liabilities of Surge and Challenge/Surge Inc. to a newly formed wholly owned
subsidiary. Surge Company would then merge into Superus, which would become the
parent company (collectively, the "Recapitalization").
On December 8, 1999, the Surge entered into the Purchase Agreement
which provides for the purchase of all of the assets and assumption of certain
liabilities of Global, in exchange for approximately 239,000 shares of the
Company's Series A Preferred Stock, which will be converted into the 23,900,000
shares of Superus' Class B Common Stock, a "tracking stock" of Global's business
if the Global Acquisition is approved and consummated. The assets of Global will
be held by a wholly owned Delaware subsidiary of Superus. Additionally, on
February 16, 2000, the Company entered into a Merger Agreement and Plan of
Reorganization to acquire Mail, the terms of which provide for the issuance of
1,821,000 shares of MailEncrypt.com, Inc. Superus' Class B Common Stock to the
four stockholders of Mail, and the merger of Mail into a wholly owned subsidiary
of Superus. The merger of Mail into Superus is also conditioned on the
consummation of the Global Acquisition. The Class B Common Stock will also track
the business of Mail. Superus was formed for the purpose of effectuating the
Mail Merger and Global Acquisition, issuing the Class A Common Stock, Class B
Common Stock and Class B Warrants, and becoming the holding Company of the
businesses of the Company, Mail and Global.
As of February 29, 2000, Surge has incurred debt in the amount of
approximately $5,933,000 as a result of a private offering of Convertible
Promissory Notes. The Convertible Promissory Notes accrue interest at the rate
of 12% per annum commencing February 1, 2000, or approximately $712,000 per
annum, and is payable on or before December 31, 2000 if the Global Acquisition
is not consummated. In March 2000, Surge completed the Private Placement.
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 and is junior to certain secured bank credit
facilities 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.
In February 2000, Surge replaced the Global Note with a Subordinated
Convertible Promissory Note ("Convertible Note") totaling $6,250,000 and
increased the conversion ratio from $3.00 to $1.00 of principal and interest
outstanding on the Global Note for every share of Global converted into.
Simultaneously therewith, the number of shares pledged by Mr. Richard Baker was
increased from 300,000 Global shares to 500,000 Global shares before being
replaced by a new pledge agreement in May 2000. Through February 29, 2000,
$2,165,876 has been loaned to Global, and the remaining $4,084,124 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 Surge the Convertible Note and all accrued interest shall
automatically be forgiven. If the acquisition does not occur by July 31, 2000,
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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.
If the Global Acquisition is not consummated by July 31, 2000, the
Global Note will become convertible, or payable upon demand. The Company does
not believe that Global would be able to pay the amount due under the
Convertible Note if the Global Acquisition is not consummated. Additionally,
none of Global's securities are registered for resale. As such, in the event of
a default on the Convertible Note, or failure of the GDIS Acquisition to be
consummated for any reason, Surge has reason to believe that the security and
assets of Global may not be sufficient to satisfy Global's obligation under the
Convertible Note. As such, the failure of the Global Acquisition to close, could
have material adverse consequences to the Company.
In February 2000, Surge entered into an agreement with Mail whereby
Surge loaned $750,000 to Mail. The Note bears interest at the rate of 10% per
annum and is due July 30, 2000. Upon completion of the acquisition of
MailEncrypt by Surge the note and all accrued interest shall automatically be
forgiven. In the event the MailEncrypt Merger is terminated, the Note is
convertible into the Common Stock of Mail.
On February 16, 2000, Surge entered into an employment agreement with
Adam Epstein. The agreement, which names Mr. Epstein as Chairman of the Board
and acting Chief Executive Officer, calls for a base salary of $200,000 per
annum, subject to increase in certain circumstances. Pursuant to the agreement,
Mr. Epstein also received 5 year options to purchase 1,500,000 shares of Superus
Class B Common Stock, 300,000 of which are immediately exercisable and the
balance exercisable ratably on a monthly basis over 36 months.
In February 2000, the two founders of MailEncrypt each entered into
one-year employment agreements with Superus, which are to be followed, by
six-month consulting agreements. They have, in turn, licensed to Surge the
software language they developed specifically for MailEncrypt.
On March 24, 2000, Surge set up a bonus pool for certain of its
employees, totaling 10% of the pretax income for the quarter ended February 29,
2000.
In May 2000, Surge purchased a Certificate of Deposit with Citibank in
the amount of $500,000 which will be used to secure a letter of credit to Global
DataTel de Colombia for purposes of paying down Global's indebtedness to IBM in
South America. The nature of the secured letter of credit will thus permit
Global to repay IBM and borrow from Citibank in Colombia at a lower interest
rate then their current IBM loan.
Inflation And Increasing Interest Rates
Recent news indicates that our US economy has clearly exhibited
inflationary trends, as indicated by the average consumer price index, which has
increased materially over the past two years. The Company has generally been
able to offset the impact of rising costs through purchase price reductions. As
a result, inflation has not had, nor is it expected to have, a significant
impact on the Company's business. However, inflation and increasing interest
rates have had a significant effect on the economy in general and, therefore,
could affect the Company's future operating results. Moreover, recent
announcements by the Federal Reserve, as well as increases in salaries and the
GDP generally, has had interest rates during 2000. Even minor increases in
interest rates can increase the Company's cost of capital and offset revenues.
Moreover, the Company has recently incurred approximately $6,000,000 of debt as
a result of the Note Offering, which totaled $7,000,000.
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
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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 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.
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.
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 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.
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.
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
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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.
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.
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.
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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.
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 semi conductor
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
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(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.
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" 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,
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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.
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.
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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 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 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
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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.
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.
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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 June __, 2000, Surge and its subsidiary Challenge/Surge employed
___ 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.
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 STOCKHOLDERS. 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
stockholders 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
"STOCKHOLDER" 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.
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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 stockholder of Surge who wishes to object to the Superus Merger
(an"Objecting Stockholder") 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.
(a) The Objecting Stockholder 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 Stockholders, 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 stockholder's name and residence address, (iii) the number of
shares as to which the stockholder dissents and (iv) a demand for payment of the
fair value of the stockholder's shares if the Superus Merger is consummated.
(c) A Negative Vote is Not Sufficient. A stockholder 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 Stockholder that the Superus
Merger has been authorized by the vote of Surge's stockholders.
(e) Together with the written demand or within one month
thereafter, the Objecting Stockholder 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 Stockholder
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 Stockholder 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 Stockholder 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 Stockholder 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 Stockholder 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 Stockholders.
(g) If, within 30 days after making such offer, the Objecting
Stockholder 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 Stockholder 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 Stockholder and to fix the fair value of
his or her shares.
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(i) If Surge fails to institute such special proceeding the
Objecting Stockholder may do so within 30 days after the expiration of such 20
day period. Failure of the Objecting Stockholder 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 Stockholder 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 Stockholders 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, as amended (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. The Purchase Agreement has
been unanimously approved by the Surge and Global Boards of Directors. The GDIS
Acquisition will be completed if approval of Proposal 2 by Surge's and Global's
stockholders is obtained and all other conditions to the Purchase Agreement are
satisfied or waived. There are seven (7)shareholders of Global Common Stock
which own in excess of the majority of the outstanding Global Common Stock and
who have given Global management proxies to vote in favor of the GDIS
Acquisition or have consented to the GDIS Acquisition in writing. 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 consideration of up to approximately $6,250,000 of loans, the Global
assets were transferred under a pledge agreement and bill of sale for Surge. In
addition, in reliance upon the representations and warranties made by Global and
for other consideration, Surge has paid to GDIS an aggregate of 239,000 shares
of Surge's Series A Redeemable Convertible Preferred Stock, $.001 par value per
share ("Preferred Shares"), issuable on a 100 for 1 basis to the Global
stockholders. The Preferred Shares are being held in escrow subject only to
approval of the GDIS Acquisition by Surge's and Global's stockholders 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 stockholders 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 medium to
large Web/system integration projects in Latin America. 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 business ISP
services, hosting/ASP solutions, packaged and customized Internet products, as
well as training and customer service, through distribution partnerships with
such industry leaders as BroadVision, Inc. See "Global - Description of
Business" below.
Asset Purchase Agreement
Effective Date. Completion of the GDIS Acquisition shall be conditioned
upon the satisfaction of all representations and warranties under the Purchase
Agreement. Surge and Global must obtain the required vote of their stockholders
under this Proposal 2.
Pledge. On June 2, 2000, Global and Surge executed a Pledge Agreement
to secure the repayment of up to $6,250,000 of loans to Global. Pursuant to the
terms of the Pledge and a bill of sale all of Global's assets were transferred
and assigned to GDIS and Global has delegated full and complete power to manage
and conduct Global's business to Superus. Accordingly, Surge has taken control
over Global as of June 2, 2000. Management believes that other than holding the
shareholder meetings for Surge and Global, as it has consents from Global
shareholders in excess of a majority needed, everything required to be effected
for the GDIS Acquisition has been completed.
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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 a Preferred Share (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 stockholders 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
stockholder 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 stockholders 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
the terms and conditions of the Purchase Agreement, after the repayment to Surge
of $1,844,000 of outstanding loans, 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
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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 stockholders 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.
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. Management believes that the decline
in Surge's common stock price since March 10, 2000, when the Nasadq stock market
peaked, is in line with other SmallCap stocks.
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,
however, subject to certain escrow and volume limitations on sales. These
options are exercisable at an exercise price of $2.69 per share that is 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" and Annex H, the Fairness Opinion of
Houlihan Smith & Company, Inc.
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, provided, in all instances, Messrs. Levy and Lubman do
not voluntarily leave their employment with New Surge. See Proposal 6 -
"Election of Directors of Superus - 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 director of Superus, would benefit substantially from the
exchange of Global options and Global shares, respectively, into options and
shares of Class B Common Stock of Superus at an exercise price per share equal
to the fair market value of Global common stock when granted.
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Differences Between Rights of Securityholders of Surge and Superus
The rights of Surge stockholders 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, Surge common stock and 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 stockholders, but excluding all shares issuable upon conversion
of options, warrants and notes.
Superus Certificate of Incorporation Includes Class B Common Stock
In order to implement the transactions contemplated by the GDIS
Purchase Agreement, and issue Class B Common Stock to Global stockholders,
Superus and Surge will file articles of merger in Delaware and New York,
respectively. Surge's stockholders are being asked herein to approve the
Recapitalization Proposal 1 and to issue shares of Class B Common Stock to the
Global stockholders 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 Surge and Global stockholders. At the Effective Date, the
business operations of Global will cease and its assets (which are already held
under a pledge) and certain liabilities will be transferred into GDIS which
shall assume Global's business operations and stockholders 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
4,945,000 (excluding any options and warrant exercises prior to them) and
26,821,000, respectively, and will vote equally on all matters. Approximately
17% of the shares with voting privileges will be owned by Surge's current
stockholders, 77% by Global's current stockholders and 6% by MailEncrypt's
current stockholders, not including any shares issuable upon exercise of
warrants and options or conversion of notes. Giving effect to the possible
exercise of Surge's 716,000 employee stock options, 2,850,000 Superus Options to
Surge management and the 3,482,000 Class A Warrants; 2,000,000 options to
purchase Class B Common Stock issued to Superus management and 2,000,000 Global
employee options, Surge's, Global's and MailEncrypt's current stockholders would
own approximately 34%, 58% and 8% of Superus' approximately 45 million then
outstanding voting shares. As such, New Surge stockholders 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, $7 million in Notes have been sold
by Surge to certain accredited investors. The terms of the Notes provide that in
the event of stockholder 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 8.7% of the Company's 26,821,000 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.
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In the event that the GDIS Acquisition is not approved, the terms of
the Note require that Surge obtain stockholder 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."
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 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;
(e) each party having performed all of its agreements and satisfied all
conditions contained in the Purchase Agreement in all material respects; (f) 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"); and (g) the receipt of certain legal
opinions with respect to the tax consequences of the Acquisition.
Fairness Opinion To Surge Stockholders
Surge retained Houlihan Smith & Company, Inc. in connection with the
proposed GDIS Acquisition, as a financial advisor to render an independent
opinion to the Board of Directors of Surge. The purpose of the opinion was to
advise the Surge Board of Directors whether, in the opinion of the advisor, the
GDIS Acquisition is fair to Surge and its stockholders from a financial point of
view. The terms of the MailEncrypt Merger and the GDIS Asset Acquisition
resulted from the negotiations between Surge, Global and MailEncrypt and were
not initially determined by the advisor. The advisor's opinion was based upon a
review of the companies from a financial point of view. As described below,
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in the opinion of the financial advisor, the Recapitalization described in this
proxy statement and prospectus is fair, from a financial point of view, to the
stockholders of Surge as of the date of the opinion.
THE FULL TEXT OF HOULIHAN'S OPINION, DATED APRIL 26, 2000, IS ATTACHED
HERETO AS ANNEX H. THE OPINION CONTAINS A DESCRIPTION OF THE MATTERS CONSIDERED
BY HOULIHAN AND THE LIMITS OF ITS REVIEW. SURGE STOCKHOLDERS ARE ENCOURAGED TO
READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. HOULIHAN'S OPINION WAS PROVIDED
TO THE SURGE BOARD FOR ITS INFORMATION AND ONLY ADDRESSES THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW OF THE TERMS OF THE RECAPITALIZATION AND THE GDIS
ACQUISITION. HOULIHAN'S OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION BY SURGE TO ENGAGE IN THE TRANSACTIONS HEREIN AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF SURGE COMMON STOCK AS TO HOW THAT HOLDER SHOULD
VOTE. MANY FACTORS WERE TAKEN INTO CONSIDERATION BY THE SURGE BOARD IN MAKING
ITS DETERMINATION TO APPROVE THE MAILENCRYPT MERGER AND GDIS ACQUISITION AS
CONTEMPLATED IN THE VARIOUS AGREEMENTS, HOWEVER THE HOULIHAN OPINION WAS
PROVIDED AFTER THIS DECISION WAS MADE.
In arriving at its opinion, Houlihan, among other things:
a. Reviewed this S-4 Registration Statement of Surge subject to
completion as first filed with the Securities and Exchange
Commission ("SEC") on March 17, 2000 and amended as of April 28,
2000. This document contains the proxy statement of Surge and the
notice to Surge shareholders of a special meeting of the
shareholders and the prospectus of Surge.
b. Reviewed the financial terms of the transactions as provided in the
Merger Agreement and Plan of Reorganization for the acquisition of
MailEncrypt dated February 16, 2000 and the Asset Purchase Agreement
for the acquisition of the assets of Global dated December 8, 1999.
c. Reviewed relevant SEC filings for both Surge and Global including
8-Ks, 10-QSBs, and 10-KSBs.
d. Reviewed all of the corporate records of Surge including Articles of
Incorporation, By-laws, and other key corporate documents.
e. Reviewed audited and unaudited interim financial statements of
Surge, Global and MailEncrypt as filed in various SEC documents.
f. Reviewed detailed financial projections for Surge, Global and
MailEncrypt. These documents included several detailed operating
assumptions.
g. Performed a discounted cash flow analysis of Surge, Global and
MailEncrypt to estimate valuation ranges for each company.
h. Questioned Surge management and counsel about alternative strategies
for the Company other than the Recapitalization as currently
contemplated to enhance shareholder value.
i. Analyzed the historical trading price and volumes of Surge and
Global stock as quoted on the NASDAQ Small Cap Market for Surge and
OTC Bulletin Board and NQB Pink Sheets for Global.
j. Compared Surge, Global and MailEncrypt from a financial point of
view with certain other guideline public companies in the their
respective industries that we deemed to be relevant. Houlihan
focused on general financial ratios as well as equity and asset
valuation ratios.
k. Conducted such other studies, analyses, inquiries and investigations
as Houlihan deemed appropriate.
Houlihan considered such factors as it deemed relevant including, but
not limited to: (1) the relative valuations implied by the financial terms of
the Recapitalization, (2) the current trading prices and differences in current
liquidity of the stock of Surge and Global traded on the NASDAQ SmallCap Market
and the NQB Pink Sheets, respectively, (3) the historical financial operating
characteristics of Surge, Global and MailEncrypt, (4) the conditions of closing
of the
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Transactions, (5) other alternatives available to Surge to enhance shareholder
value, (6) the changes in corporate governance and basic capital structure as
proposed in the Recapitalization, (7) the financial impacts of the accelerated
excercisability and terms of the incentive stock options awarded to Surge
management as compensation for closing the Recapitalization, (8) the risks
associated with the combined operations and complex tracking stock capital
structure going forward, (9) the upside potential of the combined companies and
(10) other due diligence findings related to the Recapitalization.
Houlihan relied upon and assumed, without independent verification, the
accuracy, completeness and reasonableness of the financial and other information
provided, and further relied upon the assurances of Surge management that they
are unaware of any facts that would make the information provided to Houlihan to
be incomplete or misleading for the purposes of this Opinion. Houlihan further
relied upon the accuracy of publicly available financial data Houlihan has not
assumed responsibility for any independent verification of this information or
undertaken any obligation to verify this information. The management of Surge
informed Houlihan that the forecasts provided represent their best current
judgment, at the date of the Opinion, as to the future financial performance of
the Company, on a stand-alone basis. Houlihan assumed no responsibility for and
expressed no view as to the forecasts or the assumptions on which they were
based. Houlihan did not perform an independent evaluation or appraisal of the
assets of either Surge, Global or MailEncrypt. Furthermore, Houlihan requested
and received a representation letter from Surge management indicating that they
have read the Opinion letter and that they believe that it is accurate and does
not omit any material facts or assumptions.
Houlihan's Opinion is necessarily based on economic, market, financial
and other conditions as they exist on, and on the information made available to
as of, the date of the Opinion letter. Houlihan has disclaimed any obligation to
advise the Board of Surge or any person of any change in any fact or matter
affecting its Opinion, which may come or be brought to Houlihan's attention
after the date of the Opinion.
Houlihan's Opinion does not constitute a recommendation to the Board of
Surge to proceed with the Recapitalization or to the shareholders of Surge or
Global to vote for the proposals in the Recapitalization. The Opinion relates
solely to the question of fairness to Surge stockholders, from a financial point
of view, of the terms of the Recapitalization as currently proposed. Further
Houlihan expressed no opinion as to the structure, terms or effect of any other
aspect of the Recapitalization, including, without limitation, any effects
resulting from environmental issue(s), the application of any bankruptcy
proceeding, fraudulent conveyance, or other international, federal or state
insolvency law, or of any pending or threatened litigation affecting any of the
involved corporations.
Houlihan has expressed no opinion as to the income tax consequences of
the Recapitalization. Houlihan's Opinion does not address the relative merits of
the Recapitalization, nor does it address the Board's decision to proceed with
the Plan.
Each of the analyses conducted by Houlihan was carried out to provide a
different perspective on the Proposed Recapitalization, and to enhance the total
mix of information. Houlihan did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to the fairness, from a financial point of view, of the
Recapitalization to the Surge shareholders. Houlihan did not place any specific
reliance or weight on any individual analysis, but instead concluded that its
analyses taken as a whole, supported its determination. Accordingly, Houlihan
believes that its analyses must be considered as a whole and that selecting
portions of its analyses or the factors it considered, without considering all
analyses and factors collectively, could create an incomplete view of the
process underlying the analyses performed by Houlihan in connection with the
preparation of its Opinion.
Selected Guideline Public Company Analysis. Houlihan identified certain
companies deemed comparable to Surge and to Global and MailEncrypt (the
"Internet Operations"). The companies in our guideline group for Surge were: All
American Semiconductor, Diodes, Inc., Kent Corp., Microsemi Corp., Nu Horizons
Electronics and Taitron Components, Inc. The companies in our guideline group
for Global and MailEncrypt were quepasa.com, Rare Medium Group, Razorfish, Inc.,
Savoir Technology Group, Starmedia Network, Inc. and MarchFirst, Inc. Certain
financial, operating and market valuation characteristics of these companies
were analyzed. Houlihan compared the market equity valuations of these companies
to selected last twelve months operating results of the companies. Houlihan
compared these ratios to the analogous ratios of Global and Surge as of the date
of the Asset Purchase Agreement.
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With respect to the Internet Operations, the ratios of market value to revenue
and market value to book value for the guideline companies were as follows:
Valuation
Multiple Range Median
----------------- ----------
LTM Revenues...................... 0.1x - 713.8x 48.1x
2000 Revenues..................... 0.1x - 56.4x 16.2x
2001 Revenues..................... 2.2x - 26.0x 11.2x
Book Value........................ .8x - 16.3x 8.5x
Based on the December 8, 1999 closing Global stock price (the date the Asset
Purchase Agreement was signed) the following multiples are indicated for Global:
Valuation Multiple
-----------------------------------
LTM Revenues...................... 6.3x
2000 Revenues..................... 3.2x
2001 Revenues..................... 1.6x
Book Value........................ 340.3x
Houlihan did not derive a valuation parameter range based on any earnings
figures because Global had been experiencing losses.
With respect to Surge, the ratios of market value to net income (P/E
multiple), invested capital value (defined as market value of equity plus long
term debt) to EBITDA, market value to revenue and market value to book value for
the guideline companies were as follows:
Valuation
Multiple Range Median
----------------- ----------
P/E Multiple...................... (838.1)x - 2,407.7 35.5x
EBITDA............................ 13.3x - 33.7x 24.0x
LTM Revenues...................... .2x - 2.4x .9x
Book Value........................ .9x - 5.4x 3.0x
Based on the December 8, 1999 closing Surge stock price (the date the Asset
Purchase Agreement was signed) the following multiples are indicated for Surge:
Valuation Multiple
-----------------------------------
P/E Multiple ..................... 478.4x
EBITDA............................ (552.5)x
LTM Revenues...................... 1.1x
Book Value........................ .1x
None of the Publicly-Traded Guideline Companies utilized for comparison
purposes is identical to either Surge or Global. Accordingly, an analysis of
publicly-traded guideline companies is not mathematical, rather it involves
complex consideration and judgments concerning differences in financial and
operating characteristics of the guideline companies and other factors that
affect the public trading of the guideline companies or companies to which they
are being compared.
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Selected Guideline Transaction Analysis. Several thousand transactions were
screened in an attempt to find merger, acquisition or asset purchase
transactions involving companies similar to Surge, Global and MailEncrypt.
Typically financial information is not disclosed for private transactions, so
this analysis often is limited to analyzing transactions involving public
companies for which financial and valuation data is publicly disclosed.
Houlihan identified a group of recent merger and acquisition transactions
involving companies deemed comparable to Global and MailEncrypt and reviewed
transaction value to revenue multiples for these transactions.
Valuation
Multiple Range Median
----------------- ----------
LTM Revenues...................... 2.4x - 184.7x 13.7x
Houlihan did not derive the valuation parameter based on earnings or
book value because most of the guideline transactions involved companies with
negative earnings and book value.
The recent merger and acquisition transactions that were included in this
analysis were KDSistemas de Informacao LTDa/Starmedia Network (4/13/99),
Worldtalk Communications Corp./Tumbleweed (11/18/99), Cohesive Technology
Solutions Inc./Exodus Communications, Inc. (7/27/99), Speedyclick
Corp./Shopnow.com Inc. (11/12/99), Physicians Online Inc./Mediconsult.com Inc.
(12/16/99), Think New Ideas Ginc./AnswerThink Consulting Group (11/5/99) and
Future Tense, Inc./Open Market, Inc. (10/15/99), Market Guide Inc./Multex.com
Inc. (9/23/99) and Amplitude Software Corp. /Critical Path Inc. (8/31/99).
Houlihan identified a group of recent merger and acquisition transactions
involving companies deemed comparable to Surge and reviewed transaction value to
revenue multiples for these transactions.
Valuation
Multiple Range Median
----------------- ----------
LTM Revenues...................... .3x - 2.6x .4x
The recent merger and acquisition transactions that were included in
this analysis were Electrocomponents PLC/Allied Electronics (Avnet) (6/8/99),
Avnet, Inc./Marshall Industries (7/3/99), VerticalNet/NECX Exchange. (11/16/99),
and Communications World International/Willpower, Inc. (9/30/99).
Discounted Cash Flow Analysis. Houlihan performed a discounted cash flow ("DCF")
analysis for Surge, Global and MailEncrypt using management's projections
assuming that the Recapitalization is approved and completed. The discounted
cash flow was calculated assuming discount rates ranging from 12.0% to 15.0% for
Surge and from 20.0% to 45.0% for Global and MailEncrypt and was comprised of
the sum of the present values of:
o the projected unleveraged net free cash flows for the years 2000
through 2002 and
o the anticipated future 2002 exit value based upon capitalized 2002
cash flow. The capitalization rate was calculated by subtracting an assumed long
term growth rate of 5% from the discount rate.
This analysis implies a range of enterprise values of $76.8 million to $330.6
million for Global, a range of enterprise values of $2.2 million to $11.1
million for MailEncrypt and a range of enterprise values of $7.0 million to $9.8
million for Surge.
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Stage of Development Analysis. Houlihan conducted a separate analysis to
evaluate the consideration for the acquisition of MailEncrypt because of its
early stage of development and lack of revenue or other financial operating
results. Houlihan compared the indicated transaction value for the acquisition
to the Median Post Money Valuation of venture capital companies at similar
stages of development. This data was obtained from a Houlihan proprietary
venture capital financing database. Houlihan also considered informal
indications of interest from third party financing sources and acquirers for
Mail Encrypt.
Historical Stock Price Analysis. Houlihan reviewed the daily closing market
price and trading volume of each of the Surge and Global common stock over the
two-year period March 31, 1998 through March 31, 2000. Global data was only
available from December 1, 1998 when it began trading. Houlihan calculated total
trading volumes at various closing trade ranges of each. In addition, for each
of the Surge and Global Common Stock, Houlihan calculated (i) closing price
ranges as a percentage of total trading days in the sixteen-month period, (ii)
trading volume per price range as a percentage of total volume in the
twelve-month period, and (iii) trading volume as a percentage of total volume.
Houlihan also prepared and compared the following indices for the
two-year period March 31, 1998 through March 31, 2000; (i) Surge or Global
common stock price, as the case may be; (ii) the respective market
capitalization-weighted stock prices of the Publicly Traded Guideline Companies
for Surge and Global; and (iii) the Russell 3000 Index.
Analysis of Capital Structure Changes. Houlihan reviewed the financial impact of
the proposed changes to the capital structure of Surge. Specifically they
reviewed the Company's policies and procedures to avoid conflict of interests at
the directorial and executive level, regardless of whether or not these decision
makers have a Disproportionate Equity Position ("DEP"). Additionally, Houlihan
calculated the projected outstanding share ratio of Class A Common Stock to
Class B Common Stock and compared that to the ownership ratios of directors and
key executives. Houlihan also reviewed other basic corporate governance issues
with Surge Management.
Analysis of Accelerated Excercisability of Incentive Stock Options. Houlihan
analyzed the possible financial impact of the exchange of the Orbit Options for
new management incentive stock options and the accelerated excercisability of
these options. Several ongoing incentives were reviewed to motivate the
recipients of these options to continue in their current executive capacity and
to increase shareholder value. Additionally, Houlihan discussed terms for a
lock-up agreement to cover the common shares underlying these options to prevent
a negative impact on the stock price from the sale of a large block of newly
issued stock.
Houlihan, a member of the National Association of Securities Dealers,
as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. Houlihan
will receive a non-contingent fee plus reimbursement for all reasonable
out-of-pocket expenses from Surge relating to its services in providing the
Opinion. Under the terms of the agreement, Surge also agreed to indemnify,
defend and hold Houlihan harmless if Houlihan becomes involved in any way in any
legal or administrative proceeding related to the services Houlihan provided in
rendering the Opinion.
Fairness Opinion to Global Stockholders
In connection with the proposed GDIS Acquisition, Global engaged
Capitalink, L.C. ("Capitalink") to render an opinion as to the fairness, from a
financial point of view, to the Global stockholders, of the consideration to be
received. On March 10, 2000, Capitalink delivered its written opinion to the
Board of Directors of Surge and of Global that, based upon and subject to the
assumptions made, matters considered, and limitations on its review as set forth
in the opinion, from a financial point of view, the consideration to be received
in the GDIS Acquisition is fair to the Surge and Global stockholders.
THE FULL TEXT OF THE WRITTEN OPINION OF CAPITALINK DATED AS OF DECEMBER 8, 1999
IS ATTACHED AS ANNEX I AND IS INCORPORATED BY REFERENCE (THE "CAPITALINK
OPINION"). GLOBAL STOCKHOLDERS ARE URGED TO READ THE CAPITALINK OPINION
CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS
CONSIDERED, PROCEDURES FOLLOWED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
CAPITALINK IN RENDERING ITS OPINION. THE SUMMARY OF THE CAPITALINK OPINION SET
FORTH IN THIS INFORMATION STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
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No limitations were imposed by Global on the scope of Capitalink's
investigation or the procedures to be followed by Capitalink in rendering its
opinion. Capitalink was not requested to and did not make any recommendation to
the Board of Directors of Global as to the form or amount of consideration
received in the GDIS Acquisition, which, Capitalink assumed, was determined
through arms length negotiations between parties. The Capitalink Opinion is for
the use and benefit of the Board of Directors of Global in connection with its
consideration of the GDIS Acquisition and is not intended to be and does not
constitute a recommendation to any stockholder of Global as to how such
stockholder should vote with respect to the GDIS Acquisition. Capitalink was not
requested to opine as to, and its opinion does not address, Global's underlying
business decision to proceed with or effect the GDIS Acquisition.
Capitalink took into account its assessment of general economic, market
and financial conditions as well as its experience in connection with similar
transactions and securities valuations generally. Capitalink was not asked to
consider, and its opinion does not address, the relative merits of the GDIS
Acquisition as compared to any alternative business strategy that might exist
for Global.
In arriving at its opinion, Capitalink, among other things: (i)
reviewed the GDIS asset Purchase Agreement; (ii) reviewed the draft Proxy
Statement/Registration Statement on Form S-4 to be filed with the Securities and
Exchange Commission; (iii) reviewed publicly available financial information and
other data with respect to Global, including the General Registration of
Securities on Form 10-SB, dated July 26, 1999 and the amendments thereto dated
September 24, 1999, October 4, 1999, and October 12, 1999, the Current Reports
on Form 8-K, dated November 3, 1999 and January 10, 2000, and the Quarterly
Report on Form 10-QSB for the period ended September 30, 1999; (iv) reviewed
publicly available financial information and other data with respect to Surge,
including the Annual Reports on Form 10-KSB for the fiscal years ended November
30, 1999 and 1998, the Quarterly Report on Form 10-QSB for the period ended
August 31, 1999, and, the Current Reports on Form 8-K, dated October 22, 1999
and December 17, 1999; (v) reviewed certain other relevant financial and
operating data relating to Global and Surge made available from published
sources and from the internal records of the respective companies; (vi)
considered the historical financial results and present financial condition of
Global and Surge with those of other companies that we deemed relevant; (vii)
reviewed and analyzed the financial terms of certain transactions that
Capitalink deemed comparable to the GDIS Acquisition; (viii) reviewed certain
publicly available information concerning the trading of, and the trading market
for, the common stock of each of Global and Surge; (ix) reviewed and analyzed
certain publicly available information concerning the trading of, and the
trading market for, companies that Capitalink believed to be comparable to each
of Global and Surge; (x) reviewed and discussed with representatives of the
managements of Global and Surge certain financial and operating information
furnished to Capitalink and presented in each of the respective companies'
public filings, including revised Global financial statements that were provided
to Capitalink, but not yet filed as part of the Global public filings; (xi)
inquired about and discussed the GDIS Acquisition with Global management; and
(xii) performed such other analyses and examinations as were deemed appropriate.
In arriving at its opinion, Capitalink relied upon and assumed the
accuracy and completeness of all of the financial and other information that was
used without assuming any responsibility for any independent verification of any
such information and further relied upon the assurances of Global's and Surge's
management that they were not aware of any facts or circumstances that would
make any such information inaccurate or misleading. In arriving at its opinion,
Capitalink did not make a physical inspection of the properties and facilities
of either Global or Surge, and has not made or obtained any evaluations or
appraisals of the assets and liabilities (contingent or otherwise) of either
Global or Surge. Capitalink assumed that the GDIS Acquisition will be
consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, and all other applicable federal and state statutes,
rules and regulations. Capitalink's opinion was necessarily based upon market,
economic and other conditions as they existed on, and could be evaluated as of,
December 8, 1999. Accordingly, although subsequent developments may affect its
opinion, Capitalink did not assume any obligation to update, review or reaffirm
its opinion.
Each of the analyses conducted by Capitalink was carried out in order
to provide a different perspective on the GDIS Acquisition, and to enhance the
total mix of information available. Capitalink did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to the fairness, from a financial point of view, of the
GDIS Acquisition to the Global stockholders. Capitalink did not place any
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particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
Capitalink believes that its analyses must be considered as a whole and that
selecting portions of its analyses or the factors it considered, without
considering all analyses and factors collectively, could create an incomplete
view of the process underlying the analyses performed by Capitalink in
connection with the preparation of its opinion.
Capitalink analyzed the fairness of the GDIS Acquisition using the following
methodologies:
Selected Comparable Company Analysis: The selected comparable publicly
traded company analyses involves the separate review of companies deemed
comparable to Global, and subsequently, companies deemed comparable to Surge.
With respect to each analysis, Capitalink reviewed certain financial information
relating to each of Global and Surge in the context of the corresponding
financial information, ratios and public market multiples for the publicly
traded companies that it deemed comparable to each of Global and Surge. No
company used in Capitalink's analyses was deemed to be identical to either
Global or Surge; accordingly, Capitalink considered the multiples for such
comparable companies to be more relevant than the multiples of any single
company.
The companies used for purposes of the Global analysis were Starmedia
Network, Inc., USWeb Corp., Rare Medium Group, Razorfish Inc., and Savoir
Technology Group (the "Global Publicly-Traded Comparables"). The companies used
for purposes of the Surge analysis were Taitron Components, Inc., All American
Semiconductor, Nu Horizons Electronics, Kent Corporation, and Diodes
Incorporated (the "Surge Publicly-Traded Comparables" and together with the
Global Publicly-Traded Comparables, the "Publicly-Traded Comparables").
Based on publicly available information, Capitalink reviewed various
financial information of the Publicly- Traded Comparables, including, among
other things, market value, revenue, earnings per share, assets, and earnings
before interest and taxes ("EBIT"). Subsequent to such review and based on the
respective market values and enterprise values (defined as market value plus Net
Debt, which is equal to the aggregate book value of all debt, preferred stock
and minority interest, minus the aggregate cash and cash equivalents),
Capitalink calculated ranges of various multiples for Global and Surge and the
two respective groups of Publicly-Traded Comparables.
With respect to the Global Publicly-Traded Comparables, this analysis
indicated that the approximate enterprise value multiple of last twelve months
("LTM") revenue ranged from .1x to 73.5x, with a mean of 43.4x, and a median of
59.7x; the approximate enterprise value multiple of Calendar Year 2000 revenue
ranged from 5.0x to 20.8x, with a mean of 14.8x, and a median of 16.7x; and the
approximate enterprise value multiple of Calendar Year 2001 revenue ranged from
8.2x to 10.1x, with a mean of 9.2x, and a median of 9.2x. Based on the December
8, 1999 Global stock price, such enterprise value multiples for Global were
6.5x, 2.1x, and 1.6x, respectively.
The analysis also indicated that the approximate equity value multiple
of common equity ranged from .7x to 24.5x, with a mean of 10.9x, and a median of
7.7x; and the approximate equity value multiple of total assets ranged from .2x
to 21.9x, with a mean of 8.6x, and a median of 5.4x. Based on the December 8,
1999 Global stock price, such equity value multiples for Global were 362.4x, and
8.4x, respectively.
With respect to the Surge Publicly-Traded Comparables, this analysis
indicated that the approximate enterprise value multiple of LTM revenue ranged
from .3x to 1.4x, with a mean of .8x, and a median of .9x. Based on the December
8, 1999 Surge stock price, such enterprise value multiple for Surge was 1.2x.
The analysis also indicated that the approximate equity value multiple
of common equity ranged from .4x to 2.9x, with a mean of 1.6x, and a median of
2.0x; the approximate equity value multiple of net tangible common equity ranged
from .5x to 2.9x, with a mean of 1.8x, and a median of 2.2x; and the approximate
equity value multiple of total assets ranged from .1x to 1.7x, with a mean of
.8x, and a median of 1.0x. Based on the December 8, 1999 Surge stock price, such
equity value multiples for Surge were 2.7x, 2.7x, and 2.1x, respectively.
None of the Publicly-Traded Comparables utilized as a comparison is
identical to either Global or Surge, as the case may be. Accordingly, an
analysis of publicly-traded comparable companies is not mathematical, rather it
involves complex consideration and judgements concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading of the comparable companies or
company to which they are being compared.
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Selected Comparable Transaction Analysis: The selected comparable
transaction analysis involves a review of merger, acquisition and asset purchase
transactions involving companies deemed comparable to Global. Information is
typically not disclosed for transactions involving a private seller, even when
the buyer is a public company, unless the acquisition is deemed to be "material"
for the acquiror. As a result, the selected comparable transaction analysis is
limited to transactions involving the acquisition of a public company, or
substantially all of its assets, or the acquisition of a large private company,
or substantially all of its assets, by a public company.
Capitalink began its analysis by searching for transactions entered
into recently which were deemed comparable to the GDIS Acquisition. Capitalink
located nine transactions where financial data of the acquired company and the
terms of the transaction were disclosed. The resulting transactions are as
follows: (i) the acquisition of KD Sistemas de Informacao Ltda (a Brazilian free
web-based portal) by Starmedia Network Inc.; (ii) the acquisition of Worldtalk
Communications Corp. (a developer of Internet security technologies) by
Tumbleweed Communications Corp.; (iii) the acquisition of Cohesive Technology
Solutions Inc. (a technology services company) by Exodus Communications Inc.;
(iv) the acquisition of Speedyclick, Corp. (a website operator geared to women)
by Shopnow.com Inc.; (v) the acquisition of Physicians Online Inc. (an online
physician community) by Mediconsult.com Inc.; (vi) the merger between Think New
Ideas Inc. (an e-business and Internet solutions provider) and AnswerThink
Consulting Group (an e-business solutions provider); (vii) the acquisition of
Future Tense Inc. (an e-business technologies solutions developer) by Open
Market Inc.; (viii) the merger between Market Guide Inc. (an online financial
data company) and Multex.com Inc. (an investment research and information
services company); and (ix) the acquisition of Amplitude Software Corp. (a
developer of web-based application software) by Critical Path Inc.
(collectively, the "Comparable Transactions").
Based on the information disclosed in the Comparable Transactions,
Capitalink calculated a range of transaction value multiples based on (i)
trailing twelve months ("TTM") revenue, and (ii) total assets for such
transactions by dividing the respective transaction values (including cash paid,
shares issued, assumption of debt and/or other consideration to the seller) by
items (i) and (ii) above for each of the Comparable Transactions. Capitalink
also derived such multiples for the GDIS Acquisition based on Global's TTM
revenue.
This analysis indicated that the approximate transaction value multiple
of TTM revenue ranged from 2.4x to 36.3x, with a mean of 17.0x, and a median of
14.7x; and the approximate transaction value multiple of total assets ranged
from 2.5x to 125.0x, with a mean of 30.2x, and a median of 14.8x. The
corresponding transaction multiples for the GDIS Acquisition were 17.1x and
19.1x, respectively.
None of the Comparable Transactions, or other business combinations
utilized as a comparison, are identical to the GDIS Acquisition. Accordingly, an
analysis of comparable business combinations is not mathematical, rather it
involves complex considerations and judgements concerning differences in
financial and operating characteristics of the Comparable Transactions and other
factors that could affect the acquisition value of the comparable companies or
company to which they are being compared.
Discounted Cash Flow. Capitalink performed a discounted cash flow
("DCF") analysis, aggregating (x) the present value of Global's projected
unleveraged free cash flows over the three year forecast period with (y) the
present value of a range of terminal values. Free cash flow represents the
amount of cash generated and available for principal, interest and dividend
payments after providing for ongoing business operations; these free cash flow
figures were based upon operating and financial forecasts provided to Capitalink
by the management of Global. The range of terminal values represents the
residual value of Global at the end of the forecast period; this range of
terminal values was calculated by applying a range of implied multiples to
Global's revenue in the final year of the forecast period.
As part of the DCF analysis, Capitalink utilized (i) discount rates of
20% to 45%, which were chosen based upon several assumptions including interest
rates, the inherent business risk of Global and Global's estimated cost of
capital; and (ii) a range of terminal multiples. The resulting range of
enterprise values were then adjusted to account for Net Debt, yielding a range
of equity values for Global.
Based upon a range of terminal multiples of revenue for fiscal year
2002 of 2.5x to 15.0x, the implied enterprise value of Global ranged from
approximately $34.6 million to approximately $435.3 million; after subtracting
net debt, the implied equity value of Global ranged from approximately $32.9
million to approximately $433.6 million.
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Pro Forma Valuation Analysis. Capitalink determined the pro forma
valuation of the GDIS Acquisition on December 8, 1999, the date of the GDIS
Asset Purchase Agreement. Subsequently, Capitalink determined the pro forma
valuation of the GDIS Acquisition at various dates prior to such date to derive
the premium or discount. The pro forma valuation assumes that the consideration
in the GDIS Acquisition is the sum of (i) 46,900,000 shares of Class A Common
Stock (assumes that, because two shares of Class A Common Stock convert into one
share of Class B Common Stock, the converse is true whereby one share of Class B
Common Stock converts into two shares of Class A Common Stock); (ii) assumed
debt of $4.1 million; and (iii) assumed liabilities of $7.5 million. Therefore,
the variance in the price of the Class A Common Stock is the determining factor
in the pro forma valuation of the GDIS Acquisition at various dates.
Exchange Ratio Analysis. Capitalink determined the exchange ratio (the
"Exchange Ratio") in the GDIS Acquisition to be 2.0 based on the assumption
that, as of the date of the GDIS Asset Purchase Agreement, there were 23,450,000
shares of Global common stock outstanding, that would convert into 46,900,000
shares of Surge Class A Common Stock (assumes that, because two shares of Class
A Common Stock convert into one share of Class B Common Stock, the converse is
true whereby one share of Class B Common Stock converts into two shares of Class
A Common Stock). Capitalink reviewed the closing prices of each of the Surge and
Global common stock for various dates prior to the date of the GDIS Asset
Purchase Agreement to determine the premium or discount to the Exchange Ratio at
such dates.
Capitalink also reviewed the premium or discount to the Exchange Ratio
caused by the fluctuations of the daily closing prices of the Global and Surge
common stock.
Historical Stock Price Analysis. Capitalink reviewed the daily closing
market price and trading volume of each of the Global and Surge common stock
over the twelve-month period December 8, 1998 through December 8, 1999.
Capitalink calculated total trading volumes at various closing trade ranges of
each. In addition, for each of the Global and Surge Common Stock, Capitalink
calculated (i) closing price ranges as a percentage of total trading days in the
twelve-month period, (ii) trading volume per price range as a percentage of
total volume in the twelve-month period, and (iii) trading volume ranges as a
percentage of total volume.
Capitalink also prepared and compared the following indices for the
twelve-month period December 8, 1998 through December 8, 1999; (i) Global or
Surge common stock price, as the case may be; (ii) the respective market
capitalization-weighted stock prices of the Publicly-Traded Comparables for each
of Global and Surge; and (iii) the Russell 3000 Index.
Historical Financial Data Analysis. Capitalink reviewed and analyzed
certain financial information for each of Global and Surge, including the Annual
Reports on Form 10-KSB (for Surge only) and Quarterly Reports on Form 10-QSB. In
addition, Capitalink utilized revised Global financial statements that were
provided to Capitalink but not yet filed as part of the Global public filings.
In connection with its services in connection with the GDIS
Acquisition, Capitalink received $45,000. In addition, Global has agreed to
indemnify Capitalink for certain liabilities that may arise out of the rendering
this opinion.
Capitalink is an investment banking firm which, as part of its
investment banking business, regularly is engaged in the evaluation of
businesses and their securities in connection with mergers, acquisitions, and
private placements.
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
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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.
Three months ended March 31, 2000 as compared to the three months ended March
31, 1999.
Net sales for the quarter ended March 31, 2000 ("Fiscal 2000")
decreased by $3,971,627, or 61%, to $2,530,385, as compared to $6,502,012 for
the quarter ended March 31, 1999 ("Fiscal 1999"). This decrease was attributable
primarily to having Global's main supplier sell a significant amount of goods
directly to customers, with Global receiving a commission on the sale. In this
way, Global is limiting its credit risk.
Global's gross profit for Fiscal 2000 decreased by $710,115, or 43%, to
$948,650, as compared to $1,658,765 for Fiscal 1999. 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 $887,282, or
208% to $1,312,286 in Fiscal 2000, as compared to $425,004 for Fiscal 1999. The
increase in these expenses relates primarily to the costs associated with the
operations of ehola, which commenced during the second quarter 1999.
Payroll expenses increased by $617,918, or 210% to $911,918 in Fiscal
2000, as compared to $294,000 in Fiscal 1999. 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 since the later part of
1999.
As a result of the above, Global had a loss from operations totaling
$1,387,920 in Fiscal 2000, as compared to income from operations totaling
$853,676 in Fiscal 1999. Included in the net loss for Fiscal 2000, are losses
totaling approximately $590,000 from the operations of ehola.
Year Ended December 30, 1999 as Compared to the Year Ended December 30, 1998
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 results of operations for the
acquired companies:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $13,836,785 $21,457,159
Cost of goods sold 8,411,701 15,620,783
Gross profit 5,425,084 5,836,376
Selling, general & administrative expenses 4,345,900 2,768,733
Payroll and related expenses 3,541,784 2,626,204
(Loss) profit from operations (2,462,600) 441,439
</TABLE>
Net sales for the year ended December 31, 1999 ("Fiscal 1999")
decreased by $7,620,374, or 36%, to $13,836,785, as compared to $21,457,159 for
the year ended December 31, 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. In this way, Global limited its credit risk.
Beginning during the first quarter of 2000, Global reinstituted the policy of
purchasing equipment from this supplier.
Global's gross profit for Fiscal 1999 decreased by $411,292, or 7%, to
$5,425,084, as compared to $5,836,376 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.
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Selling, general and administrative expenses increased by $1,577,167,
or 57% to $4,345,900 in Fiscal 1999, as compared to $2,768,733 for Fiscal 1998.
The increase in these expenses relates to the costs associated with the
commencing of operations for eHOLA.
Payroll expenses increased by $915,580, or 35% to $3,541,784 in Fiscal
1999, as compared to $2,626,204 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 $2,462,600 in Fiscal 1999, as compared to
income from operations totaling $441,439 in Fiscal 1998.
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C>
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
</TABLE>
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.
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.
Liquidity and Capital Resources
As of March 31, 2000
Global's Current Ratio changed to 0.64 at March 31, 2000, as compared
to 0.71 at December 31, 1999, as a result of an increase of other current
assets, notes and accounts payable and accrued expenses. At December 31,
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1999, Global had a working capital deficiency totaling $1,960,013. During the
three months ended March 31, 2000, the working capital deficiency increased to
$3,351,536.
During the three months ended March 31, 2000, Global had net cash used
in operating activities of $1,332,205, as compared to $1,066,664 used in
operating activities in the three months ended March 31, 1999. The increase in
cash used in operating activities resulted primarily from losses incurred during
the three months ended March 31, 2000.
Global had net cash used in investing activities of $60,000 for the
three months ended March 31, 2000. These costs relate to the acquisition of the
assets of Global by Surge, as more fully described below.
Global had net cash provided by financing activities of $1,320,350 for
three months ended March 31, 2000, as compared to $1,083,790 for the three
months ended March 31, 1999. This increase in the cash provided by financing
activities was a result of proceeds from a convertible note with Surge as
described more fully below. As a result of the foregoing, Global had a net
decrease in cash of $136,199 during the three months ended March 31, 2000, as
compared to a net increase of $55,478 for the three months ended March 31, 1999.
As 95% 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 and
continuing operations of ehola, will require Global to obtain additional
financing in order to meet its obligations during the next twelve months. As a
result, Global has not been able to adequately fund the marketing of ehola.
Ehola has therefore been unable to attract and retain more than 350 paid
subscribers for its Internet service provider operations. Consequently, revenues
for ehola totaled less than $20,000 for the quarter ended March 31, 2000. Global
has obtained funds through a convertible note with Surge that has been used in
part to sustain the operations of Global. A significant amount of additional
funding is anticipated from the potential exercised of Surge warrants subsequent
to the completion of the proposed acquisition by Surge.
At March 31, 2000 Global 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 Global's
common stock.
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. Officers of the companies personally guarantee most of
these obligations and the balance owed as of March 31, 2000 approximated
$746,380.
ICR and Global have available lines of credit aggregating $148,750, at
10% interest, personally guaranteed by the majority stockholder of Global, for
working capital purposes. As of March 31, 2000, the balance owed on this line of
credit was approximately $135,612.
In December 1999, Global granted options to purchase 550,000 shares of
Global's Common Stock to an officer of Global. The options are exercisable over
a three year period at an exercise of $.52 per share. In March 2000, the options
were exercised using the cashless method into 492,800 shares of Global's Common
Stock.
As of December 31, 1999 as Compared to December 31, 1998
Global's Current Ratio changed to 0.71 at December 31, 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, 1999,
Global has a working capital deficiency totaling $1,960,013. The deficiency
primarily relates to the funds expended
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for the purchase of Micro, DLR and Casa in 1998 and start up costs relating to
eHOLA. Global incurred losses totaling $3,218,822 during Fiscal 1999, which it
financed through increases in accounts payable, accrued expenses, note payable
from Surge Components, Inc. and proceeds totaling $300,000 from the issuance of
stock.
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 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.
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 20% interest in the Travel Agent's Hotel Guide,
Inc. company 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 and 4,243,843
shares of common stock. The net assets acquired and liabilities assumed
approximated $90,000 and $190,000, respectively. The purchase has been reported
as a reverse acquisition.
On September 30, 1998, Global acquired MES for 357,143 common shares of
Global'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.
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'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 approximately
$502,000. Global did not make the payments as required and is in default on the
remaining obligation. In March 2000, the remaining payments due under the
agreement were placed in escrow while the parties negotiated a settlement.
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'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 approximately $218,000.
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'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.
At December 31, 1998 Global 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 13,000,000 shares of
Global's 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, 1999
approximated $450,000.
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, 1999, the balance owed on this line of credit was
approximately $95,000.
The Colombian subsidiaries have credit facilities from IBM for the
purchase of computer equipment which are guaranteed by certain stockholders and
officers of the Colombian subsidiaries. The credit facilities at December 31,
1999 approximated $1,200,000 for Casa, $600,000 for DLR, and $150,000 for Micro.
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. Among other
conditions, the completion of the acquisition is conditioned on the approval of
both companies' stockholders and successful completion of due diligence. Global
issued 1,000,000 shares of Global common stock for investment banking services
in connection with this transaction, which are the subject of a stop order for
failure of consideration.
In October 1999, Global issued a subordinated Convertible Promissory
Note (the "Note") in the amount of $1,000,000. 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 will be 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 stockholders of
both companies, Surge at its sole discretion may convert the Note into the
common stock of Global at a conversion price equal to 90% of the average closing
price of Global's common stock for the twenty previous trading days. In January
2000, the Note was cancelled to Surge and replaced with a new note totaling
$4,100,000.
In February 2000, Global replaced the previous Subordinated Convertible
Promissory Note ("Convertible Note") with Surge totaling up to $6,250,000.
Through February 29, 2000, $2,165,876 has been loaned to Global, and the
remaining $4,084,124 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 Global's acquisition by Surge, the Convertible Note and all
accrued interest will be forgiven. If the acquisition does not occur by July 30,
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 pledging
of certain shares of stock owned by the President of Global and two other Global
stockholders, as amended.
In April 1999, Global entered into an option agreement with a
consultant, in partial payment for services rendered. The agreement grants
250,000 shares of Global's common stock, at an exercise price of $5.75 per
share. The options are non-dilutive. To date, no options have been exercised.
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.
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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. 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 stockholder meetings. Global
has entered into letters of intent with potential acquisitions and/or merger
candidates providing that such letters are generally expressions of interest and
non-binding. 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 stockholder meetings may be delayed if necessary until such time
as Surge is able to distribute revised proxy materials with the required
acquisition company financial statements and other required disclosures.
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 (since paid) 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 (since partially paid) 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 (since paid)
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), now known as ehola.com S.A., is
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, under the laws of
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, 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
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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. (Currently called ehola.com 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") principally
to do business 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, 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 June 1,
2000, we had 205 Internet access subscribers; approximately 3,888 registered
users; subscriptions revenues of $29,881 and advertising revenues to date of
$8,634.
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.
Global is not dependent upon any major customer at the present time.
From time to time Global has had large government contracts. Such large
government contracts or clients are, in the opinion of Management, an exception.
As we purchase products only in connection with our sales, we do not experience
backlogs.
The South American component of our Information Systems Division, GDC,
accounts for approximately 95% of Global's revenues. The North American
component presently accounts for approximately 5%.
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Possible Future Acquisitions. Management believes that an important
element of Global's strategy to be a leading provider of e-business and
infrastructure solutions is and will continue to be organic growth and growth
through acquisitions. The web and systems integration, Internet access and
related businesses in Latin America are still relatively fragmented in
comparison to similar companies in the United States. This fragmented market
creates opportunities for companies like Global who are positioned to acquire
small, independent companies throughout Latin America and then aggregate these
companies within one business enterprise that can enjoy economies of scale and
other synergies.
Global presently has no definitive agreements to consummate any such
transactions, but has entered into discussions with a number of web and systems
integration companies and Internet service providers in Latin America with
respect to either entering into a letter of intent or acquiring an option to
purchase such businesses. Management expects that any such transactions would be
consummated, if at all, following the Recapitalization and consummation of the
GDIS Acquisition. Management also expects that the a majority of the
consideration paid to acquire such companies would be in the form of shares of
Class B Common Stock of Superus. However, there can be no assurance that any
such transactions will be consummated, or, if they are, as to the terms of the
definitive purchase agreements.
Litigation and Related Matters
Global has been named by Seven Oaks Holdings as a third-party defendant
in litigation in connection with the re-issuance of a stock certificate for
approximately 400,000 shares, with restrictive legend. A shareholder of Global
had pledged the shares to Seven Oaks Holdings in connection with a loan
transaction. Global management believes that it has meritorious defenses to such
action.
On October 5, 1999, the United States Securities and Exchange
Commission ("SEC") issued a Formal Order Directing Private Investigation
pursuant to Section 20(a) of the Securities Act and Section 21(a) of the
Exchange Act, as amended, in the Matter of Global DataTel, Inc., to determine if
any acts or practices were in violation of Sections 17(a) and 17(b) of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10-b-5 promulgated
thereunder. Global management believes that the SEC investigation is focused on
the accuracy of information published by the Global. Global has responded to all
requests for documentary information by the SEC in its investigation. The SEC
staff has taken testimony in this matter.
Employees
As of June 15, 2000, Global had ____________ full-time employees and no
part-time employees, 175 of which were employed by Global DataTel - de Colombia,
the Colombian subsidiary of Global, and 30 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.
One service office totaling 4,000 sq. ft., which is leased through
April, 2001. The annual rent is $19,200; and
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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.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF GLOBAL
The following table sets forth information regarding the beneficial
ownership, as defined in applicable regulations, of our common stock as of May
3, 2000 by the following individuals or groups: each person or entity who is
known by our to own beneficially more than 5% of outstanding stock Global of
Global each of the Named Executive Officers; each director of Global; and, all
directors and executive officers as a group. Except as otherwise indicated, and
subject to applicable community property laws, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock of Global held by them.
Applicable percentage ownership in the following table is based on
23,891,954 shares of common stock outstanding as of May 3, 2000 (1)(2). Common
stock is the only outstanding class of voting security of Global.
<TABLE>
<CAPTION>
Name/Address No. of Shares Percentage
Owner Class Beneficially Owned of Class
----- ----- ------------ ---------------
<S> <C> <C> <C>
Mario Habib(3)(4) Common 1,122,800 4.6%
Antonio Serrato(3)(5) Common 388,000 1.6%
Rafael Delgado(3)(6) Common 144,816 less than 1%
Richard Baker(7) Common 4,250,144 17.5%
AVG Family Trust(3) Common 3,592,929 15.0%
Lynn Tanner(8)(9) Common 3,792,928 15.9%
Robert P. DePalo(10) Common 1,700,000 7.1%
Old Oak Fund, Inc.(11) Common 1,794,000 7.5%
Jerre Daye (12) Common -- less than 1%
Officers and Directors or a Group Common 5,905,760 23.5%
(4 persons)
</TABLE>
(1) Unless otherwise noted, Global believes that all persons named in the table
have sole voting and investment power with respect to all Global Common Stock
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 their 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. The 23,
891,954 shares does not include the exercise of all options (identified below)
held by management exercisable within 60 days, which would increase the
outstanding common stock by 1,000,000, and also does not give effect to the
options granted to a consultant, Steven Spitz, CPA, in April, 1999, in partial
payment of services rendered, to acquire 250,000 shares of common stock at an
exercise price of $5.75 per share.
(2) Does not include 1,000,000 shares held by International Technology
Marketing, Inc. as to which a stop order has been imposed at the request of the
Company and which the Company is seeking to have cancelled. Mr. Baker has
pledged 1,090,700 of his shares to Surge to secure against any liability
incurred as a result of this matter.
(3) Address c/o Global DataTel, Inc, 3333 Congress Avenue, Suite 404, Delray
Beach, Florida, 33445.
(4) Includes options held, but not exercised, to acquire an additional 350,000
shares $7.12 per share and 200,000 shares at $2.00 per share. Mario Habib is
currently a Director of Superus and is President of eHola.com, Inc. and Online
Latin America, S.A.
(5) Includes options held, but not exercised, to acquire an additional 200,000
shares $7.12 per share. Antonio Serrato is currently Chief Operating Officer,
Secretary and a director of Global.
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(6) Includes options held, but not exercised, to acquire an additional 100,000
shares $7.12 per share. Rafael Delgado is currently the President of Global
DataTel de Colombia.
(7) Includes options held, but not exercised, to acquire an additional 350,000
shares at $7.12 per share. On June 21, 2000, Richard Baker resigned as the
President, CEO, Chairman and Director of Global.
(8) Address c/o David Kagel, Esq. 1801 Century Park East, Suite 2500, Los
Angeles California 90067.
(9) Includes 459,595 shares held by Dolphin Waves, Inc.; 1,111,111 shares held
by Surrey Management Ltd.; 1,111,111 shares held by Walcon Industries, Inc.; and
1,111,111 held by Willside International, Inc.
(10) Address 208-16 38th Avenue, Bayside, New York 11361
(11) Address 488 Madison Avenue, 8th Fl., New York NY 10022.
(12) Jerre Daye is currently a director of Global.
THE BOARD OF DIRECTORS OF BOTH SURGE AND GLOBAL RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF THE GDIS ASSET PURCHASE AGREEMENT AND THE ISSUANCE OF
THE SHARES OF CLASS B COMMON STOCK TO THE GLOBAL STOCKHOLDERS (PROPOSAL 2).
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GLOBAL APPRAISAL RIGHTS
If You Are A Stockholder 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 STOCKHOLDERS 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.
STOCKHOLDERS WHO WISH TO PERFECT THEIR RIGHTS AS DISSENTING
STOCKHOLDERS 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 STOCKHOLDER MEETING, A WRITTEN OBJECTION TO THE
ACQUISITION; AND
(2) MUST NOTE VOTE HIS SHARES IN FAVOR OF THE GDIS ASSET PURCHASE
AGREEMENT.
IN ADDITION, STOCKHOLDERS 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
STOCKHOLDERS" BELOW.
RIGHTS OF DISSENTING STOCKHOLDERS. SECTIONS OF THE NEVADA REVISED
STATUTES GIVE TO ANY STOCKHOLDER OF THE COMPANY WHO WISHES TO OBJECT TO THE GDIS
ACQUISITION (AN "OBJECTING STOCKHOLDER") 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.
(a) The Objecting Stockholder 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
stockholders, 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 stockholder's name and residence address, (iii) the number
of shares as to which the stockholder dissents and (iv) a demand
for payment of the fair value of the stockholder's shares if the
GDIS Acquisition is consummated.
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(c) A Negative Vote is Not Sufficient. A stockholder 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 Stockholder that the GDIS
Acquisition has been authorized by the vote of Global's
stockholders.
(e) Together with the written demand or within one month thereafter,
the Objecting Stockholder 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 Stockholder
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 Stockholder 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
Stockholder 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
Stockholder 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 stock certificates. Every
advance payment or statement as to advance payment shall include
advice to the Objecting Stockholder 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 Stockholders.
(g) If, within 30 days after making such offer, the Objecting
Stockholder 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 Stockholder 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 Stockholder
shall be paid the amount demanded.
(j) Within 60 days after the final determination of the special
proceeding, Global shall pay to each Objecting Stockholder 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 Stockholders 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 stockholders,
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 1,821,000 shares of Class B Common Stock of Superus to
be issued pro rata to the stockholders of MailEncrypt.
The Merger Agreement has been unanimously approved by the Surge and
Mail Boards of Directors and provides that the Mail Merger will be completed if
the approvals of Surge's stockholders required therefore are obtained
(MailEncrypt's stockholders already approved the merger) including, but not
limited to, approval of Proposals 1and 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 stockholders 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,
and any required approvals . Surge must obtain the required vote of its
stockholders under this Proposal 3, as well as Proposals 1 and 2. The four
stockholders 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 right to receive an aggregate of
1,821,000 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 stockholders 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 stockholder 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
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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 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 agreed to grant 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 Stockholders,
Superus has filed a Certificate of Incorporation to create Class A Common Stock
and Class B Common Stock. Surge's stockholders 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 stockholders pursuant to this Proposal 3. A copy of the Superus
Certificate of Incorporation is attached hereto as Annex B hereto.
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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, of which this prospectus becomes a part, this prospectus will be
distributed to all MailEncrypt stockholders 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 stockholders 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 4,973,000, 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 stockholders, 77% by Global's
current stockholders and 6% by MailEncrypt's current stockholders, 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 3,482,000 Class B Warrants; 1,700,000 options to
purchase Class B Common Stock granted to Superus Management and approximately
2,000,000 Global employee options, Surge's, Global's and MailEncrypt's current
stockholders would each own approximately 34%, 58%, and 8% of Superus'
approximately 42 million then outstanding voting shares. As such, New Surge
stockholders 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 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."
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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
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; (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 Class B Common Stock and
Class B Warrants to be issued in connection with the Mail Merger being
authorized for trading on Nasdaq; (e) each party having performed all of its
agreements and satisfied all conditions contained in the Merger Agreement in all
material respects; (f) 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"); (g) the receipt of
certain legal opinions with respect to the tax consequences of the Mail Merger;
and (h) the receipt of final unaudited financial statements of MailEncrypt.
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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 stockholders.
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 March 31, 2000. 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 stockholders. The
Merger Agreement provides that MailEncrypt's stockholders (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
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 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, nor during the three-month period ended March
31, 2000.
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 and during the three-month
period ended March 31, 2000, 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."
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Liquidity and Capital Resources
From Inception (March 17, 1999) to March 31, 2000, MailEncrypt was
financed primarily through cash flows from financing activities. We had cash and
cash equivalents of $673,000 as of March 31, 2000.
Our operating activities used $51,000 and $141,000 from Inception to
December 31, 1999, and during the three-month period ended March 31, 2000,
respectively, principally related to the net loss offset by an increase in
accounts payable and amounts due to 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. Such activities
generated an additional $24,000 from the exercise of stock options during the
three-month period ended March 31, 2000. In addition, MailEncrypt issued notes
totaling $750,000 for cash to Surge. The note is payable on July 30, 2000,
together with interest at 10% per annum or convertible into common stock in the
event the merger is not completed. In the event the merger with Surge is
completed, the Note will be cancelled.
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.
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
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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 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
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.
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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.
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.
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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, 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
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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 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 May 4, 2000, MailEncrypt had four 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 STOCKHOLDERS VOTE "FOR" THE APPROVAL OF
THE MAIL MERGER AGREEMENT AND THE ISSUANCE OF THE SHARES OF CLASS B COMMON STOCK
TO THE MAILENCRYPT STOCKHOLDERS (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 stockholder 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 stockholders 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 Class A Common Stock may
be exchanged for one share of Class B Common Stock, will accelerate and become
immediately exercisable. An additional 1,500,000, 200,000, 200,000 and 300,000
Superus Options to purchase Class B Common Stock, respectively, were granted to
our recently appointed Chairman of the Board, Adam J. Epstein; the Chief
Executive Officer of New Surge and a member of the Superus Board, Ira Levy;
Superus' Vice President of Corporate Development, Craig Carlson; and
MailEncrypt's President, Mark Sefein. In addition, all Global employees as a
group hold options to purchase an aggregate of 740,000 shares of Global common
stock, including 350,000 options held by Mario Habib, a director of Superus and
President of eHOLA, which will be exercisable for an equal number of shares of
Class B Common Stock.
To understand the Superus Plan more fully, you should read the plan
which is attached to this proxy statement and prospectus as Annex E.
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.
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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.
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
an additional 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. Notwithstanding the foregoing, the
underlying shares of Class B Common Stock will be subject to certain escrow and
volume limitations described under Proposal 5 below. Mr. Levy's 200,000 Class B
Common Stock options vest 20% immediately and the remainder over 36 equal
monthly installments. Mr. Levy also holds options to purchase 175,000 shares of
our existing common stock at exercise prices between $1.25 and $2.69
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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;
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, subject to certain escrow and volume limitations
described under Proposal 5 below. Mr. Lubman also holds options to purchase
175,000 shares of our existing common stock at exercise prices between $1.25 and
$2.69 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 Craig Carlson, Vice President of Corporate Development of Superus,
held options to purchase 200,000 shares of Class B Common Stock of Superus at an
exercise price of $8.3125 per share. These options are exercisable with respect
to 17.5% of the shares underlying the same, immediately and the remainder over
42 equal monthly installments.
o Mario Habib, a director of Superus and President of eHOLA held
options to purchase 350,000 shares of Global at an exercise price of $7.12 per
share. Following the Recapitalization, these options will be exercisable for an
equal number of shares of Class B Common Stock at $7.12 per share.
o Mark Sefein, President of MailEncrypt as of May 1, 2000, was issued
options to purchase an aggregate of 300,000 shares of Class B Common Stock.
150,000 of such options will vest in 33 equal monthly installments beginning
August 2000 at an exercise price of $4.75 per share. The remaining 150,000
options will vest pending certain performance goals of MailEncrypt to be agreed
upon.
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. David Siegel and Mark Siegel,
directors of Surge held options to purchase 350,000 and 250,000 shares,
respectively, 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, to David Siegel and Mark
Siegel respectively, which have been granted to purchase Class B Common Stock of
Superus at $2.69 per share.
o all Global employees as a group, other than Mario Habib, as described
above, held options to purchase an aggregate of 390,000 shares of Global Common
Stock at a weighted average of $7.12 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.
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,
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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;
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;
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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.
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.
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.
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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
subject to certain escrow and volume limitations. 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. Superus is
attempting to retain independent members of its board of directors prior to the
Effective Date, two of whom will comprise the compensation committee.
All remaining options under the Superus Plan will be granted in a fair
manner and at appropriate times, dependent on new hires, such that the ratio of
options to shares does not become excessive. 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 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 stockholders. The option must not have a term in excess of ten years
(five years in the case of a stockholder 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 stockholders). 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
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for AMT purposes, a section 83(b) election may be needed by officers (see
discussion below), 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.
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 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
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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.
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 STOCKHOLDERS. SURGE, AS THE SOLE
STOCKHOLDER 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.
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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 J. 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 stockholders, 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. 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 stockholder 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 rather than Orbit. In addition, the higher exercise price was
increased to $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 Proposals 1, 2 and 5 are approved. In addition, in
order to further induce Surge management to remain employed, Ira Levy and Steven
Lubman agreed in the amendments to their employment agreements that if they
voluntarily left employment with New Surge they will forfeit their rights of
first refusal to purchase New Surge and their rights to an aggregate 19% warrant
coverage in a public underwriting. Furthermore, notwithstanding the immediate
exercisability of the 2,650,000 Management Options, all sales by management will
be subject to (a) certain reasonable volume limitations for the group that will
be mutually agreed to, and (b) an escrow if any member of Management exercised
more than 20% of his Management Options in the year 2000, the proceeds must be
put in a segregated escrow account and, other than withdrawals to pay his own
taxes on the sale of such shares, none of such excess funds will be released
from escrow prior to January 1, 2001. If any member of Management leaves
employment of New Surge prior to January 1, 2001, they will forfeit all proceeds
on shares in excess of 20%. All proceeds on shares up to 60% of the total
Management Options shall be released on January 1, 2001 provided the member of
Management is still employed by, or a member of the Board of Directors of New
Surge. The remaining 40% of options, shares or proceeds shall be subject to
forfeiture if the person leaves voluntarily prior to January 1, 2002.
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 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 stockholder
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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
MailEncrypt Merger, that there has since been a substantial increase in
stockholder value and that maintaining and maximizing stockholder 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, is addressed in the fairness opinion, namely that
the entire acquisition is fair and reasonable to Surge's minority stockholders.
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 stockholder value as a result of management's seeking out
and negotiating the GDIS Acquisition and the MailEncrypt Merger, the Company is
seeking ratification of the immediate exercisability of the Superus Options to
Surge management.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS 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 five directors.
Three of the five directors will not stand for election at the special meeting
to the Superus Board of Directors, but all will remain directors of New Surge.
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 or shortly after 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.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Adam J. Epstein 34 Chairman of the Board and Acting 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 eHOLA, Inc.
S.A.
</TABLE>
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 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 January 1999. 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
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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 $2.69 per
share, which vested immediately and expire on December 6, 2004. All of the
foregoing options shall be converted into options to purchase an equal number of
shares of Class A Common Stock at the same exercise prices upon stockholder
approval herein.
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 overall 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, subject to certain escrow and volume
limitations described in Proposal 5 above.
On March 8, 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 March 8, 2010.
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 stockholders 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.
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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
$100,000 during such years.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------------------------------------------------------
Other Annual Shares
Name and Salary Bonus Compensation Underlying
Principal Position Year ($) ($) ($)(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>
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% $1.46 9/1/04
</TABLE>
----------
(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
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<PAGE>
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 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 Stockholder 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,
subject to certain escrow and volume limitations described above in Proposal 5.
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>
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
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
149
<PAGE>
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, provided in all instances, Messrs. Levy and Lubman do
not voluntarily leave their employment with Surge.
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, 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 Surge Common Stock at $6.50 per share (which
shares are to be forfeited in exchange for the same number of Superus Class B
Common Stock exercisable at $6.50 per share under the Superus Plan after the
Recapitalization). 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.
Craig Carlson Employment Agreement
Surge has entered into a four-year employment agreement, effective as
of March 20, 2000, with Mr. Craig Carlson, as Vice President, Corporate
Development. Commencing the Effective Date of the Recapitalization, Mr. Carlson
shall hold such position solely with Superus. Mr. Carlson's base salary is
$150,000 per annum, subject to increase in certain circumstances. Additionally,
Mr. Carlson has received, in accordance with his employment agreement, options
to purchase 200,000 shares of Superus Class B Common Stock at $8.3125 per share
under the Superus Plan. Of such options, 35,000 become exercisable and vest six
months after the Effective Date of the Recapitalization, and the remaining
165,000 options vest ratably on a monthly basis as of the last day of the first
42 months following the date of grant, subject to continued employment with
Superus. The options shall be subject to acceleration of vesting and
exercisability in the event of termination of employment by Superus without
cause or involuntary termination after the expiration of six months from the
Effective Date (an acceleration of 25% of his unvested options), or change of
control of Superus (an acceleration of 75% of his unvested options), and the
options shall expire five years from date of grant.
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 stockholders
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).
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<PAGE>
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.
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 STOCKHOLDERS VOTE "FOR" THE ELECTION FOR
THE NOMINEES NAMED ABOVE (PROPOSAL 6).
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 years 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 stockholders.
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.
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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.
The following information concerns the only other officer of Superus or
the subsidiaries currently employed by Superus:
Craig Carlson, 32, joined Superus in March 2000 as Vice President of
Corporate Development, bringing a dynamic combination of Internet/technology
acumen, entrepreneurial success, and South American culture/experience to the
Company. Prior to joining Superus, Mr. Carlson was a Senior Product Developer at
Tickets.com, Inc. since June 1998, where, among other things, he designed,
tested, and built one of the Internet's most complex, and technically robust,
auction modules (that has since been accorded numerous industry accolades).
Prior thereto, he was the Founder and Managing Partner of SBC Partners, LLC, an
investment management firm that identified, planned, and developed recreational
facilities in Colombia. In addition, Mr. Carlson was a technical writer for
various information technology and industrial engineering consulting projects
during his tenure at CNA Companies, Inc. in Kirkland, WA. Mr. Carlson received a
Bachelor's Degree, cum laude, from Santa Clara University in 1987, and a
Master's in Business Administration Degree, Dean's Fellowship Recipient, from
University of California, Irvine.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF SURGE
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 Beneficial Ownership(2) Common Stock beneficially owned(3)
------------------- ----------------------- ----------------------------------
<S> <C> <C>
Ira Levy (1) 432,500(4) 7.5%
Adam J. Epstein (5) 400,000(6) 6.9%
Mario Habib (7) - - (7) 0%
Steven J. Lubman (1) 430,000(8) 7.5%
All directors and executive
officers as a group (4 persons) 1,229,166(9) 21.8%
</TABLE>
----------
(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
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<PAGE>
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 4,972,530 shares of Common Stock
issued and outstanding as of April 17, 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) The business address is c/o Superus Holdings, Inc., One Embarcadero Center,
San Francisco, California 94111.
(6) Includes options to purchase 400,000 shares of Class B Common Stock at $6.50
per share which are exercisable within the next 60 days, and does not include
options to purchase 1,100,000 shares of Class B 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.
(7) The business address is c/o Global DataTel, Inc., 3333 Congress Avenue,
Suite 404, Delray Beach, Florida 33745. If proposals 1 and 2 herein are
approved, Mario Habib will own approximately 572,800 shares of Class B Common
Stock, and options to purchase an additional 350,000 shares of Class B Common
Stock at $7.12 per share.
(8) 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 of Superus - 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.
(9) Includes 716,666 shares issuable upon exercise of currently exercisable
options.
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<PAGE>
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 March 31, 2000, as reported by the Nasdaq. 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) 21/2 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
FISCAL YEAR ENDING NOVEMBER 30, 2000:
FIRST QUARTER
(December 1, 1999 - February 29, 2000) 8 3/16 1 3/4
SECOND QUARTER
(March 1, 2000 - May 31, 2000) 10 3/8 3
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<PAGE>
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 29, 2000) 3 3/4 5/8
SECOND QUARTER
(March 1, 2000 - May 31, 2000) 5 3/8 1 1/4
On June 26, 2000, the last closing price of a Common Share and a Class
A Warrant on the Nasdaq SmallCap market system were $4 3/8 and $2 1/8,
respectively.
As of June 14, 2000, Surge had 91 and 33 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.
Global Common Stock
The Global Common Stock has had a limited market in the
Over-The-Counter Bulletin Board (OTCBB), under the Symbols "GCRI", GCRID,"GDIS",
"GDISD" and "GDISE". The following is a summary of the high and low bid for each
quarter (with the volume traded in that quarter) since commencement of trading
in February, 1997, as provided by NASDAQ Trading & Market Services:
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<PAGE>
Security Trading Period
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997:
SECOND QUARTER
(April 1, 1997 through June 30, 1997) $18.00 $1.25
THIRD QUARTER
(July 1, 1997 through September 30, 1997) 6.50 0.75
FOURTH QUARTER
(October 1, 1997, through December 31, 1997) 6.00 0.50
FISCAL YEAR ENDED DECEMBER 31, 1998:
FIRST QUARTER
(January 1, 1998, through March 31, 1998) 5.00 2.00
SECOND QUARTER
(April 1, 1998, through June 30, 1998) 2.875 1.125
THIRD QUARTER
(July 1, 1998, through September 30, 1998) 10.000 0.0625
FOURTH QUARTER
(October 1, 1998, through December 31, 1998) 20.00 1.00
FISCAL YEAR ENDED DECEMBER 31, 1999:
FIRST QUARTER
(January 1, 1999, through March 31, 1999) 13.125 5.8125
SECOND QUARTER
(April 1, 1999, through June 30, 1999) 17.375 5.6875
THIRD QUARTER
(July 1, 1999, through September 30, 1999) 11.00 5.00
FOURTH QUARTER 7.00 1.50
(October 1, 1999 through December 31, 1999)
</TABLE>
Global has approximately 519 shareholders of record as of April 17, 2000.
Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
Global has never declared or paid any dividends on its common stock and
does not anticipate paying any dividends on its common stock in the foreseeable
future.
156
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to approximately 4,900,000 shares of Class A
Common Stock which are being issued to the current stockholders of Surge common
stock, the 23,900,000 shares of Class B Common Stock being issued to the Global
stockholders, the 1,821,000 shares of Class B Common Stock being issued to the
stockholders 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 stockholders who
are deemed to be "affiliates" as such term is defined in the Securities Act.
This Prospectus also relates to the 3,482,000 Class B Common Stock Purchase
Warrants ("Class B Warrants") being issued (as well as any others which are
issuable) to the current warrantholders of Surge, as well as the exercise and
re-sale of the 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,
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.
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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
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.
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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."
INFORMATION ABOUT
STOCKHOLDER PROPOSALS
No person who intends to present a proposal for action at a forthcoming
stockholders' 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
stockholders, 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 stockholders, 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
stockholders (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, 1999 and for the years ended December 31, 1998
and 1999 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. (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
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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
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of May 31st, 2000 (the "Merger
Agreement"), between Surge Components, Inc., a New York corporation ("Surge"),
and Superus Holdings, Inc., a Delaware corporation ("Superus").
WHEREAS, Surge is a corporation duly organized and existing under the
laws of the State of New York, and as of the date hereof, Surge has authority to
issue 25,000,000 shares of Common Stock, par value $.001 per share (the "New
York Common Stock"), of which 4,972,530 shares are outstanding. Surge has
authority to issue 1,000,000 shares of Preferred Stock, of which 239,000 shares
are outstanding (the "New York Preferred Stock"). Surge has reserved 850,000
shares of New York Common Stock for issuance pursuant to Surge's stock incentive
plan under which options to purchase 716,000 shares are outstanding. In
addition, Surge has issued options to purchase 5,300,000 shares of Common Stock
to certain officers and directors of Surge (the "Orbit Options"), and warrants
to purchase 3,479,600 shares of Common Stock (the "Class A Warrants");
WHEREAS, on the date hereof Superus has authority to issue 10,000,000
shares of Preferred Stock, par value $.001 per share (the "Preferred Stock"),
15,000,000 shares of Class A Common Stock, par value $.001 per share (the "Class
A Common Stock"), none of which shares are issued and outstanding and none are
held in treasury, and 125,000,000 shares of Class B Common Stock, par value
$.001 per share (the "Class B Common Stock") (the Class A Common Stock and the
Class B Common Stock are sometimes referred to collectively as "Superus Common
Stock");
WHEREAS, The respective Boards of Directors of Surge and Superus have
determined that it is advisable and in the best interests of each of such
corporations that Surge merge with and into Superus upon the terms and subject
to the conditions set forth herein; and
WHEREAS, The respective Boards of Directors of Surge and Superus have
by resolutions duly adopted, approved this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
Section 1. Merger. Surge and all of its assets, including, but not
limited to, the stock of its subsidiaries shall be merged with and into Superus
(the "Merger"), and Superus shall be the surviving corporation (hereinafter
sometimes referred to as the "Surviving Corporation"). The Merger shall become
effective upon the date and time of filing the appropriate certificate of
merger, providing for the Merger, with the Secretary of State of the State of
New York and the appropriate certificate of merger, providing for the Merger,
with the Secretary of State of the State of Delaware, whichever later occurs
(the "Effective Time").
Section 2. Governing Documents. The Certificate of Incorporation of
Superus, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation without change or
amendment until thereafter amended in accordance with the provisions thereof and
applicable law. The By-Laws of Superus, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation without change
or amendment until thereafter amended in accordance with the provisions thereof,
the Certificate of Incorporation of the Surviving Corporation and applicable
law.
Section 3. Succession. At the Effective Time, the separate corporate
existence of Surge shall cease, and Superus shall succeed to all of the assets
and property (whether real, personal or mixed), rights, privileges, franchises,
immunities and powers of Surge , and Superus shall assume and be subject to all
of the duties, liabilities, obligations and restrictions of every kind and
description of Surge , including, without limitation, all outstanding
indebtedness of Surge , all in the manner and as more fully set forth in
Sections 251 and 252 of the Delaware General Corporation Law.
Section 4. Directors. The directors and the members of the various
committees of the Board of Directors of Superus immediately prior to the
Effective Time shall be the directors and members of such committees of the
Surviving Corporation at and after the Effective Time.
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Section 5. Officers. The officers of Superus immediately preceding the
Effective Time shall be the officers of the Surviving Corporation at and after
the Effective Time until their successors are duly elected and qualified.
Section 6. Further Assurances. From time to time, as and when required
by the Surviving Corporation or by its successors or assigns, there shall be
executed and delivered on behalf of Surge such deeds and other instruments, and
there shall be taken or caused to be taken by it all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or conform, of record or otherwise, in the Surviving Corporation, the
title to and possession of all property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Surge , and otherwise to carry
out the purposes of this Merger Agreement, and the officers and directors of the
Surviving Corporation are fully authorized, in the name and on behalf of Surge
or otherwise, to take any and all such action and to execute and deliver any and
all such deeds and other instruments.
Section 7. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder thereof:
(a) each share of New York Common Stock issued and outstanding
immediately prior to the Effective Time shall, except as provided in Section 8
hereof, be changed and converted into and shall be one fully paid and
non-assessable share of Class A Common Stock;
(b) each share of New York Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be automatically changed and
converted into and shall be one hundred (100) fully paid and non-assessable
shares of Class B Common Stock.
Section 8. Dissenting Stockholders. Notwithstanding the provisions of
Section 7(a) hereof, any outstanding shares of New York Common stock held by a
shareholder who shall have elected to dissent from the Merger and who shall have
exercised and perfected appraisal rights with respect to such shares in
accordance with Section 623 of the New York Business Corporation Law (a
"Dissenting Stockholder") shall not be converted into shares of Class A Common
Stock as a result of the Merger, but Dissenting Stockholders shall be entitled
to receive in lieu thereof only such consideration as shall be provided in such
Section 623, except that shares of New York Common Stock outstanding immediately
prior to the Effective Time and held by a Dissenting Stockholder who shall
thereafter withdraw his election to dissent from the Merger or lose his right to
dissent from the Merger as provided in such Section 623 shall be deemed
converted, as of the Effective Time, into such number of shares of Class A
Common Stock as such holder otherwise would have been entitled to receive as a
result of the Merger.
Section 9. Employee Option and Benefit Plans. Each option or other
right to purchase or otherwise acquire shares of New York Common Stock granted
under any employee option, stock purchase or other benefit plan of Surge
(collectively, the "Plans"), which is outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and become an option or right to
acquire (and Superus hereby assumes the obligation to deliver) the same number
of shares of Class A Common Stock, at the same price per share, and upon the
same terms, and subject to the same conditions, as set forth in the respective
Plan as in effect immediately prior to the Effective Time. The same number of
shares of Class A Common Stock shall be reserved for purposes of the Plans as is
equal to the number of shares of New York Common Stock so reserved immediately
prior to the Effective Time. Superus hereby assumes, as of the Effective Time,
(i) the Plans and all obligations of Surge under the Plans, including the
outstanding options, stock purchase rights or awards or portions thereof granted
pursuant to the Plans and the right to grant additional options and stock
purchase rights thereunder and (ii) all obligations of Surge under all other
benefit plans in effect as of the Effective Time with respect to which employee
rights or accrued benefits are outstanding as of the Effective Time.
Section 10.Warrants . At the Effective Time, the Class A Warrants will
be converted into and become an option or right to acquire (and Superus hereby
assumes the obligation to deliver) the same number of shares of Class B Common
Stock, at the same price per share, and upon the same terms, and subject to the
same conditions as set forth in the Class A Warrants.
Section 11. Notes. At the Effective Time, the $7 million of l2%
Convertible Promissory Notes due December 31, 2000 will be converted
automatically into shares of Class B Common Stock at a rate of $3.00 of
principal amount for each share and otherwise upon the same terms and subject to
the same conditions as set forth in the notes.
Section 12. Dividends and Distributions. In the event that any dividend
or other distribution shall hereafter be
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declared by the Board of Directors of Surge in respect of the outstanding shares
of New York Common Stock payable subsequent to the Effective Time, the
obligation to make payment of such dividend or other distribution shall, by
virtue of the Merger, become the obligation of the Surviving Corporation and
shall be satisfied in the manner specified in such declaration, except that, to
the extent such dividend or other distributions shall have been declared payable
in whole or in part in shares of New York Common Stock, the Surviving
Corporation shall issue, in place thereof, to the persons entitled thereto, the
identical number of shares of Class A Common Stock.
Section 13. Condition to the Merger. The consummation of the Merger and
the other transactions herein provided is subject to receipt prior to the
Effective Time of the requisite approval of the Merger by the holders of New
York Common Stock pursuant to the New York Business Corporation Law.
Section 14. Certificates. At and after the Effective time all of the
outstanding certificates which immediately prior thereto represented shares of
New York Common Stock, New York Preferred Stock or warrants, units or other
securities of Surge shall be deemed for all purposes to evidence ownership of
and to represent the shares of Superus Common Stock or warrants, units or other
securities of Superus, as the case may be, into which the shares of New York
Common Stock, or warrants, notes, options, units or other securities of Surge
represented by such certificates have been converted as herein provided and
shall be so registered on the books and records of the Surviving Corporation or
its transfer agent. The registered owner of any such outstanding certificate
shall, until such certificate shall have been surrendered for transfer or
otherwise accounted for to the Surviving Corporation or its transfer agent, have
and be entitled to exercise any voting and other rights with respect to, and to
receive any dividends and other distributions upon, the shares of Superus Common
Stock or warrants, notes, options, units, or other securities of Superus, as the
case may be, evidenced by such outstanding certificate, as above provided.
Section 15. Amendment. The parties hereto, by mutual consent of their
respective boards of directors, may amend, modify or supplement this Merger
Agreement prior to the Effective Time; provided, however, that no amendment,
modification or supplement may be made after the adoption of this Merger
Agreement by the Shareholders of Surge which changes this Merger Agreement in a
way which, in the judgment of the Board of Directors of Surge, would have a
material adverse effect on the Shareholders of Surge, unless such amendment,
modification or supplement is approved by such Shareholders.
Section 16. Termination. This Merger Agreement may be terminated, and
the Merger and the other transactions provided for herein may be abandoned, at
any time prior to the Effective Time, whether before or after approval of this
Merger Agreement by the Shareholders of Surge, by action of the Board of
Directors of Surge if:
(a) the condition specified in Section 13 hereof shall not have been
satisfied or waived; or
(b) the Board of Directors of Surge determines for any reason, in its
sole judgment and discretion, that the consummation of the Merger would be
inadvisable or not in the best interests of Surge and its Shareholders.
Section 17. Counterparts. This Merger Agreement may be executed in one
or more counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
Section 18. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Merger Agreement.
Section 19. New York Appointment. The Surviving Corporation hereby
agrees that it may be served with process in the State of New York in any action
or special proceeding for enforcement of any liability or obligation of Surge,
Superus or the Surviving Corporation arising from the Merger. The Surviving
Corporation appoints the Secretary of State of the State of New York as its
agent to accept service or process of any such suit or other proceeding and a
copy of such process shall be mailed by the Secretary of State of the State of
New York to the Surviving Corporation at 1016 Grand Avenue, Deer Park, New York
11729.
Section 20. Governing Law. This Merger Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware.
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IN WITNESS WHEREOF, Surge and Superus have caused this Merger Agreement
to be executed and delivered as of the date first above written.
SURGE COMPONENTS, INC.
By: /s/ Steven J. Lubman
-------------------------------
Steven J. Lubman
Vice- President
SUPERUS HOLDINGS, INC.
By: /s/ Adam Epstein
-------------------------------
Adam Epstein,
Chairman of the Board
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ANNEX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
of
SUPERUS HOLDINGS, INC.
(a Delaware corporation)
* * * * * *
Superus Holdings, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent, adopted resolutions proposing and declaring advisable the
filing of an Amended and Restated Certificate of Incorporation of the
Corporation, setting forth various amendments and provisions to the terms of the
capital stock of the Corporation and to the rights of stockholders, said Amended
and Restated Certificate of Incorporation replacing in its entirety the existing
Certificate of Incorporation, and said Amended and Restated Certificate of
Incorporation to be and read as follows:
ARTICLE FIRST: The name of the corporation is:
SUPERUS HOLDINGS, INC.
ARTICLE 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.
ARTICLE 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.
ARTICLE FOURTH:
Section 1. Authorization. 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 common 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 referred to as a class
of Common Stock.
The Class A Common Stock, when issued, shall be considered issued in
respect of Surge Components, Inc., and its affiliate organizations,
(collectively "New Surge") and the Class B Common Stock, when issued, shall be
considered issued in respect of the Internet operations (the "Internet
Operations") of Global DataTel, Inc, and MailEncrypt Inc., and of any other
subsidiary of the Corporation whose assets and operating are categorized by the
Board of Directors as "Internet Operations." The number of authorized shares of
any class or classes of capital stock of the Corporation may be increased or
decreased (but not below the number of shares then outstanding or underlying
certain convertible securities or otherwise reserved for issuance) by the
affirmative vote of the holders of a majority of the voting power of the class
of Common Stock so affected.
Section 2. Common Stock. The rights, privileges, preferences and
limitations of the shares of Common Stock are as follows:
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Section 2.1 Dividends. Subject to any preferences and relative,
participating, optional or other special rights of any outstanding class or
series of preferred stock of the Corporation and any qualifications or
restrictions on either class of Common Stock created thereby, dividends may be
declared in accordance with Delaware law, and paid upon either class of Common
Stock, upon the terms with respect to each such class, and subject to the
limitations provided for below in this Subsection 2.1, as the Board of Directors
may determine.
(a) Dividends on Class A Common Stock. Dividends on Class A
Common Stock may be declared and paid only out of the lesser of (i) the funds of
the Corporation legally available therefor and (ii) the Surge Components Group
Available Dividend Amount (as defined below).
(b) Dividends on Class B Common Stock. Dividends on Class B
Common Stock may be declared and paid only out of the lesser of (i) the funds of
the Corporation legally available therefor and (ii) the Internet Operations
Group Available Dividend Amount (as defined below).
(c) Discrimination in Dividends. The Board of Directors,
subject to the provisions of Subsections 2.1(a) and 2.1(b) above, may at any
time declare and pay dividends exclusively on Class A Common Stock, exclusively
on Class B Common Stock, or on both such classes, in equal or unequal amounts,
notwithstanding the relative amounts of the Available Dividend Amount with
respect to either Group, the amount of dividends previously declared on either
class, the respective voting or liquidation rights of either class or any other
factor.
(d) Stock Distributions. Except as permitted by Subsections
2.1(a) and 2.1(b) above, the Board of Directors may declare and pay dividends or
distributions of shares of Class A Common Stock or Class B Common Stock (or
Convertible Securities convertible into or exchangeable or exercisable for
shares of Class A Common Stock or Class B Common Stock) on shares of a class of
Common Stock or shares of a class or series of preferred stock of the
Corporation only as follows:
(i) dividends or distributions of shares of Class A
Common Stock (or Convertible Securities convertible
into or exchangeable or exercisable for shares of
Class A Common Stock) may be made only on shares of
Class A Common Stock or shares of preferred stock
attributed to the Class A Common Stock;
(ii) dividends or distributions of shares of Class B
Common Stock (or Convertible Securities convertible
into or exchangeable or exercisable for shares of
Class B Common Stock) may be made only on shares of
Class B Common Stock or shares of preferred stock
attributed to the Class B Common Stock;
(iii) dividends or distributions of shares of either class
of Common Stock (or Convertible Securities
convertible into or exchangeable or exercisable for
shares of a class of Common Stock) on shares of any
other class of Common Stock may be made at the
discretion of the Board of Directors, but only if
sufficient number of shares remain authorized for
issuance upon conversion, exercise or exchange, as
the case may be, thereunder.
Section 2.2 (a) Voting Rights. Except as otherwise specifically
provided by law, by the terms of any outstanding class or series of preferred
stock of the Corporation as may be designated from time to time or by any
provision of this Amended and Restated Certificate of Incorporation restricting
the power to vote on a specified matter to other stockholders, the entire voting
power of the stockholders of the Corporation shall be vested in the holders of
the Common Stock, who shall be entitled to vote on any matter on which the
holders of stock of the Corporation shall by law or by the provisions of the
Certificate of Incorporation or Bylaws of the Corporation be entitled to vote,
and both classes of Common Stock shall vote thereon together as a single class
on all matters brought to the stockholders. The voting rights of the Common
Stock shall be as follows:
(i) each outstanding share of Class A Common Stock shall
have one vote; and
(ii) each outstanding share of Class B Common Stock shall
have one vote.
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If any matter shall be presented to the holders of Common Stock which
adversely affects one particular Group, then such class shall be entitled to
vote separately as a class with respect to such matter. If either class of
Common Stock is entitled to vote as a separate class with respect to any matter,
each share of that class shall, for purposes of such vote, be entitled to one
vote on such matter. In addition to any provision of law or any provision of the
Certificate of Incorporation entitling the holders of the outstanding shares of
Class A Common Stock or Class B Common Stock to vote as a separate class, the
Board of Directors may condition the approval of any matter submitted to
stockholders on receipt of a separate vote of the holders of outstanding shares
of Class A Common Stock or Class B Common Stock, or on any other class or series
of stock.
Section 2.3 Liquidation Rights. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, after
payment or provision for payment of the debts and of other liabilities of the
Corporation and the full preferential amounts (including any accumulated and
unpaid dividends) to which the holders of any outstanding shares of preferred
stock of the Corporation are entitled (regardless of the Group to which such
shares of preferred stock were attributed), the holders of the Class A Common
Stock and Class B Common Stock shall be entitled to receive the assets, if any,
of the Corporation remaining for distribution to holders of Common Stock on a
per share pro rata basis. Neither the merger nor consolidation of the
Corporation into or with any other corporation, nor a sale, transfer or lease of
all or any part of the assets of the Corporation, shall, alone, be deemed a
liquidation or winding up of the Corporation or cause the dissolution of the
Corporation for purposes of this subsection.
If the Corporation shall in any manner subdivide (by stock split,
reclassification or otherwise) or combine (by reverse stock split,
reclassification or otherwise) the outstanding shares of Class A Common Stock or
Class B Common Stock, or declare a dividend in shares of either class to holders
of such class, the per share liquidation rights of either class of Common Stock
specified in the preceding paragraph, as adjusted from time to time, shall be
appropriately adjusted as determined by the Board of Directors in good faith, so
as to avoid dilution in the aggregate, relative liquidation rights of the shares
of any class of Common Stock.
Section 2.4 Conversion of the Class A Common Stock. For a period of six
(6) months following the effective date of the acquisition of issuance of the
Class B Common Stock, the Class A Common Stock is subject to voluntary
conversion, at the discretion of the holder thereof, into Class B Common Stock
at a conversion rate such that two (2) shares of Class A Common Stock shall be
convertible into one share of Class B Common Stock.
Section 2.5 Mandatory and Optional Conversion and Redemption of Common
Stock.
(a) Redemption and Right of Stockholders in Event of
Disposition of Either Group's Assets. In the event of the Disposition, in one
transaction or a series of related transactions, by the Corporation and/or its
subsidiaries of all or substantially all of the securities of the subsidiaries
of constituting a Group, or of the properties and assets attributed to either
particular Group or (the Group whose assets or securities are being disposed of
are herein referred to as the "Affected Group") to one or more persons or
entities (other than a Disposition (w) by the Corporation of all or
substantially all of its properties and assets in one transaction or a series of
related transactions in connection with the dissolution, liquidation or winding
up of the Corporation and the distribution of assets to stockholders as referred
to in Subsection 2.3, (x) of the properties, assets and operations attributed to
the Affected Group as contemplated by Subsections 2.5(c) and 2.5(d) or otherwise
to all holders of shares of affected class of Common Stock attributable to the
Affected Group (the "Affected Common Stock") divided among such holders on a pro
rata basis in accordance with the number of shares of Affected Common Stock
outstanding, (y) to any person or entity controlled (as determined by the Board
of Directors) by the Corporation or (z) in connection with a Related Business
Transaction in respect of the Affected Group), the Corporation shall, on or
prior to the 95th Trading Day after the date of consummation of such Disposition
(the "Disposition Date"), pay a dividend on the Affected Common Stock or redeem
some or all of Affected Common Stock or convert Affected Common Stock into the
other non-affected class of Common Stock (or another class or series of Common
Stock of the Corporation), all as provided by the following Subsections
2.5(a)(i) and 2.5(a)(ii) and, to the extent applicable, as the Board of
Directors shall have selected among such alternatives:
(i) provided that there are funds of the Corporation
legally available therefor:
(1) pay to the holders of the shares of Affected
Common Stock a dividend pro rata in
accordance with the number of shares of
Affected Common Stock held by each such
holder, as the Board of Directors shall have
declared subject to compliance with ARTICLE
FOURTH, Section 2.1, in cash and/or in
Common
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Stock, in other securities (other than a
dividend of shares of a class of Common
Stock) or other property having a Fair Value
as of the Disposition Date in the aggregate
equal to the Fair Value as of the
Disposition Date of the Net Proceeds of such
Disposition; or
(2) (A) subject to the last sentence of
this Subsection 2.5(a), if such
disposition involves all (not
merely substantially all) of the
properties and assets attributed to
the Affected Group, redeem or
exchange as of the Redemption Date,
all outstanding shares of Affected
Common Stock in exchange for, on a
pro rata basis, cash and/or for
securities (other than shares of a
class of Common Stock) or other
property having a Fair Value as of
the Disposition Date in the
aggregate equal to the Fair Value
as of the Disposition Date of the
Net Proceeds of such Disposition;
or
(B) subject to the last sentence of
this Subsection 2.5(a), if such
Disposition involves substantially
all (but not all) of the properties
and assets attributed to the
Affected Group, redeem or exchange
as of the Redemption Date, such
number of whole shares of Affected
Common Stock (which may be all, of
such shares outstanding) as have in
the aggregate an average Market
Value during the period of ten
consecutive Trading Days beginning
on the 26th Trading Day immediately
succeeding the Disposition Date
which is closest to the Fair Value
as of the Disposition Date of the
Net Proceeds of such Disposition,
in consideration for, on a pro rata
basis, cash and/or securities
(other than shares of a class of
Common Stock) or other property
having a Fair Value as of the
Disposition Date in the aggregate
equal to such Fair Value of the Net
Proceeds; or
(ii) declare that each outstanding share of Affected
Common Stock shall be converted as of the Conversion
Date into a number of fully paid and nonassessable
shares of the non-affected class of Common Stock (or,
if the non-affected class is not Publicly Traded at
such time and shares of another class or series of
common stock of the Corporation are then Publicly
Traded, then of such other class or series of the
common stock of the Corporation as has the largest
Market Capitalization as of the close of business on
the Trading Day immediately preceding the date of the
notice of such conversion equal) to 110% of the
ratio, expressed as a decimal fraction rounded to the
nearest five decimal places, of the average Market
Value of one share of Affected Common Stock over the
period of ten consecutive Trading Days beginning on
the 26th Trading Day immediately succeeding the
Disposition Date to the average Market Value of one
share of non-affected class of Common Stock (or such
other class or series of common stock) over the same
ten Trading Day period.
Notwithstanding the foregoing provisions of this subsection,
the Corporation shall redeem shares of a class of Common Stock as provided by
Subsection 2.5(a)(i)(2)(A) or (B) only to the extent of the Affected Group's
Available Dividend Amount as of the Redemption Date.
For purposes of this Section 2.5(a): (i) as of any date, "substantially
all of the properties and assets" attributed to the Affected Group shall mean a
portion of such properties and assets (w) that represents at least 80% of the
Fair Value of the properties and assets attributed to the Affected Group as of
such date, or (x) from which were
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derived at least 80% of the aggregate revenues for the immediately preceding
twelve fiscal quarterly periods of the Corporation (calculated on a pro forma
basis to include revenues derived from any of such properties and assets
acquired during such period) derived from the properties and assets attributed
to the Affected Group as of such date; (ii) in the case of a Disposition of the
properties and assets attributed to the Affected Group in a series of related
transactions, such Disposition shall not be deemed to have been consummated
until the consummation of the last of such transactions; and (iii) the Board of
Directors may pay any dividend or redemption price referred to in Section 2.5(a)
in cash, securities (other than shares of a class of Common Stock) or other
property, regardless of the form or nature of the proceeds of the Disposition.
(b) Actions Taken in Case of a Tax Event. In case of a Tax
Event, the Board of Directors, at its discretion, may at any time declare that
each outstanding share of either class of Common Stock shall be converted, as of
the Conversion Date, into such number of fully paid and non-assessable shares of
the other outstanding class of Common Stock, equal to the Market Value of the
class of Common Stock being converted over the 20 day Trading Day period prior
to discovery of the Tax Event, divided into the Market Value of the class being
converted into over the same Trading Day period.
In the event that there are not sufficient number of shares of
either class available for issuance upon conversion in the case of a Tax Event
as set forth in this Subsection 2.5(b), then the Board of Directors may, by
resolution and at its sole discretion and without shareholder approval, amend,
revise or restate ARTICLE FOURTH of this Amended and Restated Certificate of
Incorporation so as to (i) increase or decrease the number of shares of either
class of Common Stock authorized for issuance, (ii) increase the total number of
authorized shares of all classes of stock, (iii) create or designate such
additional classes of stock and/or (iv) take all such other actions as the Board
of Directors deems necessary, to issue stock under this Subsection 2.5(b) in
case of a Tax Event.
(c) Notice and Related Provisions
(i) Not later than the 30th Trading Day following
consummation of a Disposition referred to in Subsection 2.5(a), the Corporation
shall announce publicly by press release (1) the estimated Net Proceeds of such
Disposition, (2) the number of shares outstanding of the class of Common Stock
relating to the Group subject to such Disposition, and (3) the number of shares
of such Class of Affected Common Stock, into or for which Convertible Securities
were then convertible exchangeable or exercisable, and the conversion, exchange
or exercise price thereof.
(ii) The Corporation shall not be required to issue
or deliver fractional shares of any capital stock or of any other securities to
any holder of either class of Common Stock upon any conversion, redemption,
dividend or other distribution pursuant to the redemption or conversion
provisions herein. If more than one share of either class of Common Stock shall
be held at the same time by the same holder, the Corporation may aggregate the
number of shares of any capital stock that shall be issuable or any other
securities or property that shall be distributable to such holder upon any
conversion, redemption, dividend or other distribution (including any fractional
shares). If fractional shares of any capital stock or of any other securities
would be required to be issued or distributed to the holders of either class of
Common Stock, the Corporation shall, if such fractional shares are not issued or
distributed to the holder, pay cash in respect of such fractional shares in an
amount equal to the Fair Value thereof (without interest).
(iii) No adjustments in respect of dividends shall
be made upon the conversion or redemption of any shares of either class of
Common Stock; provided, however, that if the Conversion Date or Redemption Date,
as the case may be, with respect to any shares of either class of Common Stock
shall be subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of such class of
Common Stock at the close of business on such record date shall be entitled to
receive the dividend or other distribution payable on or with respect to such
shares on the date set for payment of such dividend or other distribution, in
each case without interest, notwithstanding the subsequent conversion or
redemption of such shares.
(iv) Before any holder of shares of either class of
Common Stock shall be entitled to receive any cash payment and/or certificates
or instruments representing shares of any capital stock and/or other securities
or property to be distributed to such holder with respect to such class of
Common Stock pursuant to Subsection 2.5(a) such holder shall surrender at such
place as the Corporation shall specify certificates for such shares of Common
Stock, properly endorsed or assigned for transfer (unless the Corporation shall
waive such requirement).
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The Corporation shall as soon as practicable after receipt of certificates
representing such shares of Common Stock deliver to the person for whose account
such shares of Common Stock were so surrendered, or to such person's nominee or
nominees, the cash and/ or the certificates or instruments representing the
number of whole shares of the kind of capital stock and/or other securities or
property to which such person shall be entitled as aforesaid, together with any
payment in respect of fractional shares, in each case without interest. If less
than all of the shares of either class of Common Stock represented by any one
certificate are to be redeemed, the Corporation shall issue and deliver a new
certificate for the shares of such class of Common Stock not redeemed.
(v) From and after any applicable Conversion Date or
Redemption Date, as the case may be, all rights of a holder of shares of either
class of Common Stock that were converted or redeemed shall cease except for the
right, upon surrender of the certificates representing such shares of Common
Stock as required by Subsection 2.5(c)(iv) above, to receive the cash and/or the
certificates or instruments representing shares of the kind and amount of
capital stock and/or other securities or property for which such shares were
converted or redeemed, together with any payment in respect of fractional shares
contemplated by Subsection 2.5(c)(ii) above (which shall be held by the
Corporation for the holder of such shares of Common Stock that were redeemed
until the receipt of certificates representing such shares of Common Stock as
provided above), and rights to dividends as provided in Subsection 2.5(c)(iii),
in each case without interest. No holder of a certificate that immediately prior
to the applicable Conversion Date or Redemption Date represented shares of a
class of Common Stock shall be entitled to receive any dividend or other
distribution or interest payment with respect to shares of any kind of capital
stock or other security or instrument for which such class of Common Stock was
converted or redeemed until the surrender as required by this Section of such
certificate in exchange for a certificate or certificates or instrument or
instruments representing such capital stock or other security. Subject to
applicable escheat and similar laws, upon such surrender, there shall be paid to
the holder the amount of any dividends or other distributions (without interest)
which theretofore became payable on any class or series of capital stock of the
Corporation as of a record date after the Conversion Date or Redemption Date,
but that were not paid by reason of the foregoing, with respect to the number of
whole shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a Conversion Date or
Redemption Date, the Corporation shall, however, be entitled to treat the
certificates for a class of Common Stock that have not yet been surrendered for
conversion or redemption as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock of the Corporation for which the
shares of such class of Common Stock represented by such certificates shall have
been converted or redeemed, notwithstanding the failure to surrender such
certificates.
(vi) The Board of Directors may establish such rules
and requirements to facilitate the effectuation of the transactions contemplated
by this ARTICLE FOURTH as the Board of Directors shall determine to be
appropriate.
(d) Application of the Provisions of ARTICLE FOURTH - Certain
Determinations by the Board of Directors. The Board of Directors shall make such
determinations with respect to the businesses, assets, properties and
liabilities to be attributed to the Groups, the application of the provisions of
the Certificate of Incorporation to transactions to be engaged in by the
Corporation and the voting powers, preferences and relative, participating,
optional and other special rights of the holders of either class of Common
Stock, and the qualifications and restrictions thereon, provided by the
Certificate of Incorporation as may be or become necessary or appropriate to the
exercise of such powers, preferences and relative, participating, optional and
other special rights, including, without limiting the foregoing, the
determinations referred to in this Section 2. A record of any such determination
shall be filed with the records of the actions of the Board of Directors.
(i) Upon any acquisition by the Corporation or its
subsidiaries of any assets or business, or any assumption of liabilities,
outside of the ordinary course of business of the Surge Components Group or the
Internet Operations Group, as the case may be, the Board of Directors shall
determine whether such assets, business and liabilities (or an interest therein)
shall be for the benefit of the Surge Components Group or the Internet
Operations Group or that an interest therein shall be partly for the benefit of
the Surge Components Group and partly for the benefit of the Internet Operations
Group and, accordingly, shall be attributed to the appropriate Group, as the
case may be.
(ii) Upon any issuance of any shares of any class or
series of preferred stock of the Corporation, the Board of Directors shall
attribute, based on the use of proceeds of such issuance of shares of preferred
stock in the business of the Surge Components Group or the Internet Operations
Group and any other relevant factors, the shares so issued entirely to the Surge
Components Group or entirely to the Internet Operations Group or partly to
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the Surge Components Group and partly to the Internet Operations Group in such
proportion as the Board of Directors shall determine.
(iii) Upon any redemption or repurchase by the
Corporation or any subsidiary thereof of shares of preferred stock of any class
or series or of other securities or debt obligations of the Corporation, the
Board of Directors may determine, based on the property used to redeem or
purchase such shares, other securities or debt obligations, which, if any, of
such shares, other securities or debt obligations redeemed or repurchased shall
be attributed to the Surge Components Group and which, if any, of such shares,
other securities or debt obligations shall be attributed to the Internet
Operations Group and, accordingly, how many of the shares of such class or
series of preferred stock or of such other securities, or how much of such debt
obligations, that remain outstanding, if any, are thereafter attributed to the
Surge Components Group or the Internet Operations Group.
(iv) Notwithstanding the foregoing provisions or any
other provision of the Certificate of Incorporation, at any time when there are
not outstanding both (1) one or more shares of Class A Common Stock or
Convertible Securities convertible into or exchangeable or exercisable for Class
A Common Stock and (2) one or more shares of Class B Common Stock or Convertible
Securities convertible into or exchangeable or exercisable for Class B Common
Stock, the Corporation need not (A) attribute any of the assets or liabilities
of the Corporation or any of its subsidiaries to the Surge Components Group or
the Internet Operations Group or (B) make any determination required in
connection therewith, nor shall the Board of Directors be required to make any
of the determinations otherwise required by this Article, and in such
circumstances the holders of the shares of Class A Common Stock and Class B
Common Stock outstanding, as the case may be, shall (unless otherwise
specifically provided by the Certificate of Incorporation) be entitled to all
the voting powers, preferences and relative, participating, optional and other
special rights of both classes of Common Stock without differentiation between
the Class A Common Stock and the Class B Common Stock.
(e) Board Determinations Binding. Subject to applicable law,
any determinations made in good faith by the Board of Directors of the
Corporation under any provision of this ARTICLE FOURTH otherwise in furtherance
of the application of this Section 2, shall be final and binding on all
stockholders. In absence of any specific Board determinations made, then the
Group whose assets or securities have been issued in connection with the
transaction, shall be the Group to whom such acquisition is attributed.
Section 3. 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 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.
ARTICLE FIFTH. As used in the Certificate of Incorporation, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice versa),
unless the context otherwise requires. As used in this Article FIFTH, a
"contribution" or "transfer" of assets or properties from one Group to another
shall refer to the reattribution of such assets or properties from the
contributing or transferring Group to the other Group and correlative phrases
shall have correlative meanings.
(a) "Available Dividend Amount" shall mean, as the context
requires, a reference to the Surge Components Group Available Dividend Amount or
the Internet Operations Group Available Dividend Amount.
(b) "Internet Operations Group" shall mean, as of any date:
(i) the interest of the Corporation on such date in
Global DataTel, Inc., MailEncrypt, Inc. and any other e-commerce or
Internet-related operation, any successor companies, and all of the businesses,
assets and liabilities of the such entities and any subsidiaries thereof;
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(ii) all assets and liabilities of the Corporation
and its subsidiaries attributed by the Board of Directors to the Internet
Operations Group, and all other assets of the Corporation not specifically
designated by the Board of Directors as Surge Components Group whether or not
such assets or liabilities are or were also assets and liabilities of the
Internet Operations Group companies;
(iii) all businesses, assets, properties and
liabilities transferred to the Internet Operations Group from the Surge
Components Group pursuant to transactions in the ordinary course of business of
the Internet Operations Group and the Surge Components Group or otherwise as the
Board of Directors may have directed as permitted by the Certificate of
Incorporation;
(iv) all properties and assets transferred to the
Internet Operations Group from the Surge Components Group in connection with an
increase in the Number of Internet Operations Designated Shares; and
(v) the interest of the Corporation or any of its
subsidiaries in any business or asset acquired and any liabilities assumed by
the Corporation or any of its subsidiaries outside of the ordinary course of
business and attributed to the Internet Operations Group, as determined by the
Board of Directors as contemplated by in this Certificate of Incorporation;
provided that from and after any transfer of any assets or
properties from the Internet Operations Group to the Surge Components Group, the
Internet Operations Group shall no longer include such assets or properties so
transferred.
(c) "Internet Operations Group Available Dividend Amount"
shall mean, on any date, either:
(i)(x) an amount equal to the fair market value of
the total assets attributed to the Internet Operations Group less the total
liabilities attributed to the Internet Operations Group (provided that preferred
stock shall not be treated as a liability), in each case, as of such date and
determined on a basis consistent with that applied in determining Superus
Holdings Earnings (Loss) Attributable to the Internet Operations Group, minus
(y) the aggregate par value of, or any greater amount determined in accordance
with applicable law to be capital in respect of, all outstanding shares of Class
B Common Stock and each class or series of preferred stock attributed in
accordance with the Certificate of Incorporation to the Internet Operations
Group, or
(ii) in case the total amount calculated pursuant to
clause (i)(x) above is not a positive number, an amount equal to Superus
Holdings Earnings (Loss) Attributable to the Internet Operations Group (if
positive) for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
Notwithstanding the foregoing provisions of this Subsection
(c), and consistent with ARTICLE FOURTH, at any time when there are not
outstanding both (A) one or more shares of Class A Common Stock or Convertible
Securities convertible into or exchangeable or exercisable for Class A Common
Stock and (B) one or more shares of Class B Common Stock or Convertible
Securities convertible into or exchangeable or exercisable for Class B Common
Stock, the Available Dividend Amount, on any calculation date during such time
period, with respect to the Class A Common Stock or the Class B Common Stock, as
the case may be (depending on which of such classes of Common Stock or
Convertible Securities convertible into or exchangeable or exercisable for such
class of Common Stock is outstanding), shall mean the amount available for the
payment of dividends on such Common Stock in accordance with law.
(d) "Convertible Securities" shall mean, as of any date, any
securities of the Corporation or of any subsidiary thereof (other than shares of
a class of Common Stock), including warrants and options, outstanding at such
time that by their terms are convertible into or exchangeable or exercisable for
or evidence the right to acquire any shares of either class of Common Stock,
whether convertible, exchangeable or exercisable at such time or a later time or
only upon the occurrence of certain events; provided that securities shall only
be Convertible Securities in respect of the number of shares of Common Stock
into or for which such securities are then convertible, exchangeable or
exercisable.
(e) "Disposition" shall mean a sale, transfer, assignment or
other disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of properties or assets (including stock, other
securities and goodwill).
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(f) "Fair Value" shall mean, (i) in the case of equity
securities or debt securities of a class or series that has previously been
Publicly Traded for a period of at least three months, the Market Value thereof
(if such Market Value, as so defined, can be determined); (ii) in the case of an
equity security or debt security that has not been Publicly Traded for at least
15 months or the Market Value of which cannot be determined, the fair value per
share of stock or per other unit of such security, on a fully distributed basis,
as determined by an independent investment banking firm experienced in the
valuation of securities selected in good faith by the Board of Directors, or, if
no such investment banking firm is, as determined in the good faith judgment of
the Board of Directors, available to make such determination, in good faith by
the Board of Directors; (iii) in the case of cash denominated in U.S. dollars,
the face amount thereof and in the case of cash denominated in other than U.S.
dollars, the face amount thereof converted into U.S. dollars at the rate
published in The Wall Street Journal on the date for the determination of Fair
Value or, if not so published, at such rate as shall be determined in good faith
by the Board of Directors based upon such information as the Board of Directors
shall in good faith determine to be appropriate; and (iv) in the case of
property other than securities or cash, the "Fair Value" thereof shall be
determined in good faith by the Board of Directors based upon such appraisals or
valuation reports of such independent experts as the Board of Directors shall in
good faith determine to be appropriate. Any such determination of Fair Value
shall be described in a statement filed with the records of the actions of the
Board of Directors.
(g) "Group" shall mean, as of any date, the Surge Components
Group or the Internet Operations Group, as the case may be.
(h) "Market Capitalization" of any class or series of capital
stock on any date shall mean the product of (i) the Market Value of one share of
such class or series of capital stock on such date and (ii) the number of shares
of such class or series of capital stock outstanding on such date.
(i) "Market Value" of a share of any class or series of
capital stock of the Corporation on any day shall mean the average of the high
and low reported sales prices regular way of a share of such class or series on
such Trading Day or, in case no such reported sale takes place on such Trading
Day, the average of the reported closing bid and asked prices regular way of a
share of such class or series on such Trading Day, in either case as reported on
the New York Stock Exchange Composite Tape or, if the shares of such class or
series are not listed or admitted to trading on such Exchange on such Trading
Day, on the principal national securities exchange in the United States on which
the shares of such class or series are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange on such
Trading Day, on the Nasdaq National Market or Nasdaq SmallCap Market or, if the
shares of such class or series are not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq National or SmallCap Market
on such Trading Day, the average of the closing bid and asked prices of a share
of such class or series in the over-the-counter market on such Trading Day
selected from time to time by the Corporation or, if such closing bid and asked
prices are not made available by any such New York Stock Exchange member firm on
such Trading Day, the Fair Value of a share of such class or series as set forth
in clause (ii) of the definition of Fair Value; provided that, for purposes of
determining the "Market Value" of a share of any class or series of capital
stock for any period, (i) the "Market Value" of a share of capital stock on any
day prior to any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution (other than any dividend or distribution
contemplated by clause (ii)(B) of this sentence) paid or to be paid with respect
to such capital stock shall be reduced by the Fair Value of the per share amount
of such dividend or distribution and (ii) the "Market Value" of any share of
capital stock on any day prior to (A) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of such class or series of capital stock occurring during
such period or (B) any "ex-dividend" date or any similar date occurring during
such period for any dividend or distribution with respect to such capital stock
to be made in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class or
series of capital stock shall be appropriately adjusted, as determined by the
Board of Directors, to reflect such subdivision, combination, dividend or
distribution.
(j) "Net Proceeds" shall mean, as of any date with respect to
any Disposition of any of the properties and assets attributed to the either
Group, as the case may be, an amount, if any, equal to what remains of the gross
proceeds of such Disposition after payment of, or reasonable provision is made
as determined by the Board of Directors for, (i) any taxes payable by the
Corporation (or which would have been payable but for the utilization of tax
benefits attributable to the other Group) in respect of such Disposition or in
respect of any resulting dividend or redemption (ii) any transaction costs,
including, without limitation, any legal, investment banking and accounting fees
and expenses and (iii) any liabilities (contingent or otherwise) of or
attributed to such Group, including, without limitation, any liabilities for
deferred taxes or any indemnity or guarantee obligations of the Corporation
incurred in connection with the Disposition or otherwise, and any liabilities
for future purchase price adjustments and any
B-9
<PAGE>
preferential amounts plus any accumulated and unpaid dividends in respect of the
preferred stock attributed to such Group. For purposes of this definition, any
properties and assets attributed to the Group, the properties and assets of
which are subject to such Disposition, remaining after such Disposition shall
constitute "reasonable provision" for such amount of taxes, costs and
liabilities (contingent or otherwise) as the Board of Directors determines can
be expected to be supported by such properties and assets.
(k) "Number of Internet Operations Designated Shares" shall
be, as of the date of effectiveness of the Amended and Restated Certificate of
Incorporation, zero; provided, however, that the "Number of Internet Operations
Designated Shares" shall from time to time thereafter be:
(i) adjusted, if before such adjustment such number
is greater than zero, as determined by the Board of Directors to be appropriate
to reflect equitably any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of the Class B Common Stock or
any dividend or other distribution of shares of Class B Common Stock to holders
of shares of Class B Common Stock or any reclassification of Class B Common
Stock;
(ii) decreased (but to not less than zero), if before
such adjustment such number is greater than zero, by action of the Board of
Directors by (1) the number of shares of Class B Common Stock issued or sold by
the Corporation that, immediately prior to such issuance or sale, were included
in the Number of Internet Operations Designated Shares, (2) the number of shares
of Class B Common Stock issued upon conversion, exchange or exercise of
Convertible Securities that, immediately prior to the issuance or sale of such
Convertible Securities, were included in the Number of Internet Operations
Designated Shares, (3) the number of shares of Internet Operations Stock issued
by the Corporation as a dividend or other distribution (including in connection
with any reclassification or exchange of shares) to holders of Class A Common
Stock, (4) the number of shares of Class B Common Stock issued upon the
conversion, exchange or exercise of any Convertible Securities issued by the
Corporation as a dividend or other distribution (including in connection with
any reclassification or exchange of shares) to holders of Class A Common Stock,
and (5) the number (rounded, if necessary, to the nearest whole number) equal to
the quotient of (A) the aggregate Fair Value as of the date of contribution of
properties or assets (including cash) transferred from the Internet Operations
Group to the Surge Components Group in consideration for a reduction in the
Number of Internet Operations Designated Shares divided by (B) the average
Market Value of one share of Class B Common Stock during the 20- Trading Day
period ending on the date immediately prior to the date of such transfer; and
(iii) increased by the number (rounded, if necessary,
to the nearest whole number) equal to the quotient of (A) the Fair Value of
properties or assets (including cash) theretofore attributed as provided by
ARTICLE FIFTH, Subsection (m) to the Class A Common Group that are contributed
to the Internet Operations Group in consideration of an increase in the Number
of Internet Operations Designated Shares divided by (B) the average Market Value
of one share of Class B Common Stock during the 20-Trading Day period ending on
the date immediately prior to the date of such contribution.
(l) "Surge Components Group" shall mean, as of any date:
(i) the interest of the Corporation or any of its
subsidiaries on such date in all of the businesses, assets, properties and
liabilities of the Corporation or any of its subsidiaries (and any successor
companies), other than any businesses, assets, properties and liabilities
attributed in accordance with this Article to the Internet Operations Group;
(ii) all businesses, assets, properties and
liabilities transferred to the Surge Components Group from the Internet
Operations Group, pursuant to transactions in the ordinary course of business of
the Surge Components Group and the Internet Operations Group or otherwise as the
Board of Directors may have directed as permitted by this Amended and Restated
Certificate of Incorporation;
(iii) all properties and assets transferred to the
Surge Components Group from the Internet Operations Group in connection with a
reduction of the Number of Internet Operations Designated Shares; and
(iv) the interest of the Corporation or any of its
subsidiaries in any business or asset acquired and any liabilities assumed by
the Corporation or any of its subsidiaries outside of the ordinary course of
business and attributed to the Surge Components Group, as determined by the
Board of Directors as contemplated by this Amended and Restated Certificate of
Incorporation.
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<PAGE>
provided that from and after any transfer of any assets or properties from the
Surge Components Group to the Internet Operations Group, the Surge Components
Group shall no longer include such assets or properties so transferred.
(m) "Surge Components Group Available Dividend Amount" shall
mean, on any date, either:
(x)(i) the amount equal to the fair market value of
the total assets attributed to the Surge Components Group less the total
liabilities attributed to the Surge Components Group (provided that preferred
stock shall not be treated as a liability), in each case, as of such date and
determined on a basis consistent with that applied in determining Superus
Holdings Earnings (Loss) Attributable to the Surge Components Group, minus (ii)
the aggregate par value of, or any greater amount determined in accordance with
applicable law to be capital in respect of, all outstanding shares of Class A
Common Stock and each class or series of preferred stock attributed in
accordance with the Certificate of Incorporation to the Surge Components Group,
or
(y) in case the total amount calculated pursuant to
clause (i) above is not a positive number, an amount equal to Superus Holdings
Earnings (Loss) Attributable to the Surge Components Group (if positive) for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Notwithstanding the foregoing provisions of this definition,
and consistent with this Amended and Restated Certificate of Incorporation, at
any time when there are not outstanding both (i) one or more shares of Class A
Common Stock or Convertible Securities convertible into or exchangeable or
exercisable for Class A Common Stock and (ii) one or more shares of Class B
Common Stock or Convertible Securities convertible into or exchangeable or
exercisable for Class B Common Stock, the Available Dividend Amount on any
calculation date during such time period, with respect to the Class A Common
Stock or the Class B Common Stock, as the case may be (depending on which of
such classes of Common Stock or Convertible Securities convertible into or
exchangeable or exercisable for such class of Common Stock is outstanding),
shall mean the amount available for the payment of dividends on such Common
Stock in accordance with law.
(n) "Superus Holdings Earnings (Loss) Attributable to the
Internet Operations Group" shall mean, for any period through any date, (i) the
net income or loss of the Internet Operations Group for such period determined
in accordance with generally accepted accounting principles in effect at such
time, reflecting income and expense of the Corporation attributed to the
Internet Operations Group on a basis substantially consistent with attributions
of income and expense made in the calculation of Superus Holdings Earnings
(Loss) Attributable to the Surge Components Group, including, without
limitation, corporate administrative costs, net interest and other financial
costs and income taxes, reduced (or increased, as the case may be) by (ii) the
aggregate amount of consolidated allowable tax benefits for federal income tax
purposes generated by the Internet Operations Group for such period which can
not be utilized by the Internet Operations Group but can be utilized by the
Corporation on a consolidated basis for such period to the extent such amount
was included in the calculation of net income or loss under clause (i) for such
period ("Excludable Internet Operations Tax Benefits").
(o) "Superus Holdings Earnings (Loss) Attributable to the
Surge Components Group" shall mean, for any period through any date, (i) the net
income or loss of the Surge Components Group for such period determined in
accordance with generally accepted accounting principles in effect at such time,
reflecting income and expense of the Corporation attributed to the Surge
Components Group on a basis substantially consistent with attributions of income
and expense made in the calculation of Superus Holdings Earnings (Loss)
Attributable to the Internet Operations Group, including, without limitation,
corporate administrative costs, net interest and other financial costs and
income taxes, increased by (ii) the amount reducing Superus Holdings Earnings
(Loss) Attributable to the Internet Operations Group for such period pursuant to
clause (ii) of Subparagraph (n) above.
(p) "Publicly Traded" with respect to any security shall mean
that such security is (i) registered under Section 12 of the Securities Exchange
Act of 1934, as amended (or any successor provision of law), and (ii) listed for
trading on the New York Stock Exchange or the American Stock Exchange (or any
national securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of law), that is
the successor to either such exchange) or listed on The Nasdaq Stock SmallCap
Market, or Nasdaq National Market System (or any successor market system).
B-11
<PAGE>
(q) "Redemption Date" shall mean the date fixed by the Board
of Directors as the effective date for a redemption of shares of either class of
Common Stock, as set forth in a notice to holders thereof in accordance with
Delaware law and this Certificate of Incorporation.
(r) "Related Business Transaction" means any Disposition of
all or substantially all the properties and assets attributed to either of the
Groups, as the case may be, in a transaction or series of related transactions
that result in the Corporation receiving in consideration of such properties and
assets primarily equity securities (including, without limitation, capital
stock, debt securities convertible into or exchangeable for equity securities or
interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity which (i) acquires such properties or assets
or succeeds (by merger, formation of a joint venture or otherwise) to the
business conducted with such properties or assets or controls such acquiror or
successor and (ii) is engaged primarily or proposes to engage primarily in one
or more businesses similar or complementary to the businesses conducted by such
Group prior to such Disposition, as determined by the Board of Directors.
(s) "Tax Event" shall mean the receipt by the Corporation of
an opinion of tax counsel to the Corporation experienced in such matters, who
shall not be an officer or employee of the Corporation or any of its affiliates,
that, as a result of any amendment to, or change in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein (including any announced proposed change by
an applicable legislative committee or the chair thereof in such laws or by an
administrative agency in such regulations), 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 (i) the Corporation or its stockholders is
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 (ii) 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 the Corporation. For purposes of
rendering such opinion, tax counsel shall assume that any legislative or
administrative proposals will be adopted or enacted as proposed.
(t) "Trading Day" shall mean each weekday other than any day
on which the relevant class of common stock of the Corporation is not traded on
any national securities exchange or on The Nasdaq Stock Market or in the
over-the-counter market.
ARTICLE SIXTH: The Board of Directors of the Corporation shall
expressly have the initial 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. The provisions of the By-Laws of the
Corporation may not be altered, amended or repealed in any respect unless such
alteration, amendment or repeal is approved by the affirmative vote of 66 2/3%
of the total voting power of all outstanding shares of capital stock of the
Corporation.
ARTICLE 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.
ARTICLE EIGHTH: The Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Amended and Restated
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. The provisions of this Amended and Restated Certificate of
Incorporation may not be altered, amended or repealed in any respect unless such
alteration, amendment or repeal is approved by the affirmative vote of 66 2/3%
of the total voting power of and outstanding shares of capital stock of the
Corporation.
ARTICLE 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.
B-12
<PAGE>
ARTICLE 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.
ARTICLE 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.
ARTICLE TWELFTH: Each person who at any time is or shall have
been a director or officer of the Corporation or any employee who acted on
behalf of such person or 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. Any such payment of expenses to any
director or officer for indemnification under this ARTICLE in advance of a final
disposition, shall be made only upon a receipt of an undertaking (if reasonably
required by the Board of Directors) by the director or officer to repay all
amounts advances if it should be ultimately determined that the director or
officer is not entitled to be so indemnified. 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.
ARTICLE THIRTEENTH: In the event that it is proposed that the
Corporation enter into a merger or consolidation with any other corporation, or
that the Corporation sell, lease or exchange all or substantially all of its
assets or business to such other corporation, the affirmative vote of the
holders of not less than 66 2/3% of the total voting power of all outstanding
shares of capital stock of the Corporation shall be required for the approval of
any such proposal.
SECOND: That thereafter, pursuant to Resolution of its Board
of Directors, the Stockholders of the Corporation, by unanimous written consent
in lieu of a special meeting pursuant to Section 228 and 242, of the General
Corporation Law of the State of Delaware, the necessary number of shares as
required by said Statute were voted in favor of the above amendments as set
forth in the foregoing Amended and Restated Certificate of Incorporation.
THIRD: That said amendments were adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
SUPERUS HOLDINGS, INC.
By: /s/
---------------------------------------
Adam J. Epstein, Chairman of the Board,
Acting Chief Executive Officer
B-13
<PAGE>
ANNEX C
ASSET PURCHASE AGREEMENT
BY AND AMONG
SURGE COMPONENTS, INC.,
GDIS ACQUISITION CORP.,
a wholly-owned Delaware subsidiary of Surge Components, Inc.,
as Buyer,
and
GLOBAL DATATEL, INC.,
as Seller
December 8, 1999
C-1
<PAGE>
EXHIBITS TO THE ASSET PURCHASE AGREEMENT
AMONG SURGE COMPONENTS, INC.,
GDIS ACQUISITION CORP. AND GLOBAL DATATEL, INC.
Exhibit No. Description
---------- -----------
3(b) Form of Escrow Agreement
3(d)(1) Form of Employment Agreement
3(d)(2) Form of Amendment to Levy and Lubman Employment Agreements
13(i) Form of Affiliate Agreement
14(f) Form of the Seller's Legal Opinion
14(s) Form of Non-Competition Agreement
16(c) Form of the Buyer's Legal Opinion
C-2
<PAGE>
SCHEDULES TO THE ASSET PURCHASE AGREEMENT
AMONG SURGE COMPONENTS, INC.,
GDIS ACQUISITION CORP. AND GLOBAL DATATEL, INC.
Schedule No. Description
------------ -----------
1 Assets of Seller
3(d)(i) Employment Agreements
3(h) Use of Proceeds
4(b) The Excluded Assets
5(a) Assumed Liabilities
7(a) Exceptions to Title
7(d) Seller Subsidiaries
7(e) SEC Documents
7(i) Legal Proceedings; Claims
7(j) Trade Names and Trademarks, etc.
7(k) Patents, etc.
7(l) Material Agreements, Contracts, Commitments,
Obligations and Understandings
7(m) Violations or Restrictions
7(n) Court Orders and Decrees
7(p) Governmental Licenses, Permits, Etc.
7(q) Environmental Claims
7(r) Employee Benefit Plans
7(u) The Seller's Undisclosed Liabilities and Conditions
7(v) Compliance with Laws
7(x) Changes Outside of Ordinary Course
7(z) Non-Cancelable Labor Contracts
7(aa) Customer Lists
7(cc) Insurance
7(dd) Right's of Third Parties
8(e) Surge Subsidiaries
8(g) Surge Taxes
8(i) Surge Conflicts
13(i) Affiliate Agreements
14(s) Non-Competition Agreements
C-3
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (the "Agreement") dated as of December 8, 1999
by and among Surge Components, Inc., a New York corporation ("Surge"), GDIS
Acquisition Corp., a Delaware subsidiary of Surge (the "Buyer") and Global
DataTel, Inc., a Nevada corporation (the "Seller").
W I T N E S S E T H:
WHEREAS, the Buyer is a wholly-owned subsidiary of Surge;
WHEREAS, Surge, the Buyer and the Seller have previously entered into a
Merger Agreement and Plan of Organization, dated as of October 8, 1999 (the
"Merger Agreement"), which the parties desire to terminate and replace with this
Agreement, leaving the loan documents executed pursuant to the Merger Agreement
in full force and effect;
WHEREAS, the Seller has been engaged in providing to large system Latin
American integration projects, and through eHola.com, a wholly-owned subsidiary,
is a Latin American ISP multilingual portal (the "Business"), which Business
shall cease as currently organized and be reconstituted as a new business of the
Buyer; and
WHEREAS, the Seller wishes to sell and the Buyer wishes to purchase all
of the tangible and intangible assets associated with the Business (the
"Assets"), and certain liabilities incurred by the Seller in the ordinary course
of its Business (the "Assumed Liabilities" as defined below).
NOW, THEREFORE, in consideration of the foregoing and the terms,
conditions, representations, warranties and mutual covenants appearing in this
Agreement, the parties hereto hereby agree as follows:
Section 1. Sale and Purchase of Assets.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, at the Closing (as hereinafter defined) effective as of the Effective
Date (as hereinafter defined), the Seller shall sell, assign, transfer and
deliver to the Buyer, and the Buyer shall purchase, acquire, accept and take
possession of all of the Seller's right, title and interest in and to all of the
Assets and Assumed Liabilities of the Seller (the "Acquisition") described in
the Schedules attached to this Agreement, except for the Excluded Assets
described in Section 4 below.
(b) The Buyer shall not assume, accept or undertake nor be responsible
for any obligations, commitments, duties, debts, or liabilities of any kind or
nature whatsoever, other than the Assumed Liabilities as defined below in
Section 5, whether or not relating in any way to the operation of the Business
whether known or unknown, absolute, accrued, contingent or otherwise, or whether
due or to become due, arising out of events, transactions, or facts occurring on
or prior to the Effective Date.
Section 2. Purchase Price. In full consideration for the sale,
transfer, conveyance, assignment and delivery of the Assets by the Seller to the
Buyer and in reliance upon the representations and warranties made herein by the
Seller and for other consideration set forth herein, the Buyer hereby agrees to
pay to the Seller at the Closing (as hereinafter defined) a purchase price (the
"Purchase Price") of 239,000 shares of Surge's Series A Redeemable Convertible
Preferred Stock, $.001 par value ("Surge Class A Preferred Stock"). The common
share exchange ratio shall be one hundred (100) shares of Seller's common stock
for one (1) share of Surge Class A Preferred Stock. Following approval of
Surge's stockholders, as described in Section 3(e) below, each share of Surge
Class A Preferred Stock will automatically be converted into and shall vote on
an as converted basis for 100 shares of Surge's Class B Common Stock.
Surge's existing Common Stock, $.001 par value, shall be redesignated
as "Class A Common Stock". The Class A Common Stock shall have the same rights
and preferences and otherwise be the same as the existing Common Stock,
C-4
<PAGE>
except that the holders of each two shares of Class A Common Stock issued and
outstanding after the Effective Date, subject to the terms and conditions of
this Agreement, shall have the right to receive and become exchangeable for, one
share of Class B Common Stock following the Effective Date. Other than the
exchange ratio between the Class A and Class B Common Stock, the two classes
shall be treated on a pari passu basis and have the same rights and preferences
of each other, with each having one vote per share and sharing proportionately
to their respective number of shares in dividends declared by Surge and in the
assets of Surge upon liquidation or dissolution. It is expected that Surge's
stockholders will approve a forward stock split as part of the recapitalization
on the Effective Date. For purposes of this Agreement, all share and per share
amounts on or after the Effective Date give pro forma effect to such proposed
stock split. The Class B Common Stock when issued in exchange for the Surge
Class A Preferred Stock shall be a tracking stock, intended to be separately
listed on NASDAQ. The Surge Class A Preferred Stock and when issued, the Class B
Common Stock shall represent only the assets of the Seller which are being
purchased by the Buyer and the Business and financial condition of the Buyer
after the Closing Date.
Section 3. Description of Components of Purchase Price, Terms of the
Acquisition and Securities of Surge, Buyer and Seller.
(a) Payment of Purchase Price to the Seller at Closing.
Upon the completion by the parties of their respective closing
conditions under this Agreement (unless waived in writing by the parties
hereto), the Buyer shall pay to the Seller the Purchase Price, payable in stock
as described below, in exchange for delivery of the Assets at the Closing.
(b) Purchase Price and other Securities to be Held in Escrow.
At the Closing, Buyer shall deposit all 239,000 shares of Surge Class A
Preferred Stock with the Escrow Agent in accordance with the form of Escrow
Agreement attached as Exhibit 3(b). All of the shares held by the Escrow Agent,
and any interest or dividends thereon, are referred to herein as the "Escrow
Shares." The Escrow Shares shall be made available to Seller upon the completion
of the Post-Closing audit and due diligence conditions defined as Post-Closing
Compliance in Section 6(b) below. Upon shareholder approval, the Class B Common
Stock shall have the same voting rights as the Class A Common Stock
(c) [Intentionally left blank]
(d) Employment Agreements; Non-Competition Agreements.
In addition to the purchase and sale of the Assets as described above,
prior to the Effective Date, each of the persons listed on Schedule 3(d)(i)
shall have executed and delivered Employment Agreements with the Buyer in the
form annexed hereto as Exhibit 3(d)(1); and Ira Levy and Steven Lubman each
shall enter into an amendment to their Employment Agreements with Surge in the
form annexed hereto as Exhibit 3(d)(2) and in accordance with the letter
agreements dated October 8, 1999 executed by Messrs. Levy and Lubman with Surge
and the Seller.
(e) Effective Date of the Sale.
The parties hereto agree that the Closing of the Acquisition shall be
conditioned upon Surge and the Seller subsequently obtaining the required vote
of their Shareholders at special meetings of shareholders (the "Special
Meetings"), which shall be deemed the "Effective Date." The parties to this
Agreement hereby agree to file with the Securities and Exchange Commission (the
"SEC"), a joint proxy statement/prospectus to Seller's and Surge's shareholders
as soon as possible following the Closing and use their best efforts to have it
declared effective by the SEC promptly and thereafter hold the Special Meeting
as soon as legally permitted to do so.
(f) Treatment of Outstanding Surge Securities.
C-5
<PAGE>
(i) At the Effective Date, each two issued and outstanding
shares of Surge Common Stock, designated as Class A Common Stock shall be
convertible by the holders, at their sole discretion, into one share of Class B
Common Stock.
(ii) At the Effective Date, each unexercised Class A Common
Stock Warrant (the "Class A Warrants") of Surge, exercisable at $5.00 per share,
callable when the Class A Common Stock trades at or above $7.00 per share and
expiring on July 31, 2003 issued and outstanding at the Effective Date, subject
to the terms and conditions of this Agreement, shall be exercisable at $5.00 per
warrant for one share of Class B Common Stock and shall be callable if Class B
Common Stock trades at or above $7.00 per share.
(iii) each option to purchase shares of Surge Common Stock
(the "Company Options") issued pursuant to Surge's 1995 Employee Stock Option
Plan, as amended (the "Company Plan"), but exclusive of the 5,300,000 options
granted in December 1998 in connection with the terminated merger with Orbit
Network Inc. (the "Orbit Options"), all of which issued and outstanding Company
Options are set forth on Schedule 3(f)(ii) hereto shall, at the Effective Date,
except the Orbit Options as set forth below, maintain the same terms and
conditions and in addition each two options shall be exercisable for one share
of Class B Common Stock.
(iv) The above-mentioned 5,300,000 Orbit Options shall become
fully vested and exercisable at the Effective Date, conditioned upon shareholder
approval, to acquire an aggregate of 5,300,000 registered shares of Class B
Common Stock at $2.00 per option. All shares of Class B Common Stock issuable
upon exercise of the Orbit Options shall be registered with the SEC on a Form
S-8 Registration Statement at or before the Effective Date. As soon as
practicable following the Effective Date, but in no event later than three (3)
days following the Effective Date, Surge shall deliver to holders of Orbit
Options, amended option agreements representing the right to acquire shares of
Class B Common Stock and otherwise on the same terms and conditions as contained
in the outstanding Orbit Options. Surge shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Class B
Common Stock for delivery upon exercise of the Orbit Options in accordance with
this Section 3(f).
(g) Treatment of Seller Securities
(i) each 100 issued and outstanding shares of Common Stock,
$.001 par value, of Seller ("Seller's Common Stock") shall be converted into the
right to receive one share of Surge Class A Preferred Stock, $.001 par value.
Each stock certificate of Seller evidencing ownership of any such shares of
Seller's Common Stock shall continue to evidence ownership of such shares of
Common Stock;
(ii) no fraction of a share of Surge Class A Preferred Stock
(or underlying Class B Common Stock) will be issued, but in lieu thereof, each
holder of shares of Seller's Common Stock who would otherwise be entitled to a
fraction of a share of Surge Class A Preferred Stock (after aggregating all
fractional shares of Surge Class A Preferred 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 a share of Surge
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 Surge 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; and
(iii) Seller has outstanding employee stock options to
purchase 2,000,000 shares of Seller's Common Stock which are held by employees
of Seller and its subsidiaries. These options are non-transferable other than to
other employees of Seller and its subsidiaries and may not otherwise be assigned
or hypothecated. These 2,000,000 Seller options shall be converted on the same
100 for 1 ratio set forth in subsection (1) above, into options to acquire Surge
Class A Preferred Stock. All other options, warrants or other rights
(collectively "Rights") to purchase Seller's Common
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Stock outstanding on the date hereof shall be terminated as of the Effective
Date. Surge shall assume no obligations of the Seller arising with respect to
the Rights not exercised prior to the Effective Date other than the 2,000,000
employee options described above.
(h) Bridge Loan, Re-Payment of Loan and Future Cash Realized.
(i) (A) The Seller has received a loan ("Bridge Loan")
from Surge in the amount of $1,000,000 and evidenced by a subordinated
convertible promissory note (the "Note") dated as of October 8, 1999. The Note
is payable on June 1, 2000, however, pursuant to a letter dated December 1,
1999, Surge terminated the October 8, 1999 Merger Agreement and demanded
repayment of the Note by January 1, 2000.
(B) The Bridge Loan is secured by a pledge (the
"Pledge") by the Seller's President of the Seller's Common Stock pursuant to a
Pledge Agreement dated as of October 8, 1999.
(C) The Bridge Loan is also secured by a Security
Agreement from the Seller to Surge dated as of December 3, 1999, and evidenced
by the filing of UCC-1 financing statements.
(ii) Immediately following the execution of this Agreement,
Surge will attempt to raise up to $5 million (the "Private Placement") based on
the proposed acquisition of Seller. It is hereby agreed by Seller and Surge that
the minimum proceeds of such offering shall be $1 million. As soon as $1 million
in cleared funds is raised, Surge shall be entitled to remove such funds from
escrow in satisfaction of the Bridge Loan. The balance of the net proceeds,
after payment of offering expenses, will be used in accordance with the attached
Schedule 3(h). The Private Placement will also provide that as long as the
Private Placement has not been terminated by Surge as of January 1, 2000 and
Surge has not yet been repaid the $1 million Bridge Loan, it will not seek to
enforce the rights and remedies and seek repayment of the Bridge Loan.
(iii) In the event that the Bridge Loan has not been repaid
and Surge is not otherwise seeking to enforce its rights and remedies, Surge
shall be entitled to proceeds from the exercise of up to 3,479,600 outstanding
Class A Warrants exercisable at $5.00 per share, as follows:
Surge will receive up to the first one million
($1,000,000) dollars (or such proportionately lesser amount if a portion of
Bridge Loan has been repaid) plus accrued interest of any proceeds realized and
thereafter Surge shall receive, on a pro rata basis with the Buyer, 28% of any
net proceeds received, with the Buyer retaining 72% of any net proceeds
received.
Surge shall have no obligations to fund the operations
of Buyer or make any loans to Buyer other than the above-described payment of
proceeds from Class A Warrant exercises. Surge will, however, cooperate with and
assist the Board of Directors of Buyer in their efforts to seek financing for
Buyer.
(iv) In the event that this Agreement is terminated or the
Acquisition is not completed for any reason as set forth in Section 20 herein,
or the Bridge Loan has not been repaid by January 1, 2000, the Bridge Loan shall
be repaid by the Seller in accordance with terms and conditions of the Note. In
the event that the Note is not repaid in accordance with its terms, Surge shall
have all rights and remedies of a secured creditor under the Uniform Commercial
Code and shall be entitled to such other rights and remedies set forth in the
Pledge Agreement, the Security Agreement and Registration Rights Agreement.
(i) Surrender of Certificates.
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(i) Exchange Agent. Prior to the Effective Date, Surge shall
designate a bank or trust company reasonably acceptable to the Seller to act as
exchange agent (the "Exchange Agent") in the exchange (the "Exchange"). Surge
and Seller shall jointly pay all charges and expenses of Exchange Agent. The
Exchange Agent will be entrusted with exchanging the Seller's Common Stock for
Surge's Class A Preferred Stock and Class B Common Stock.
(ii) Surge to Provide Class B Common Stock. Upon the execution
of this Agreement and the necessary filing(s) with the Secretary of State of New
York, Surge shall deposit into an escrow account with the Exchange Agent for the
benefit of the Seller's shareholders the aggregate number of shares of Surge
Class A Preferred Stock (together with any dividends or distributions with
respect thereto and cash to be paid pursuant to subsection g(iii) with respect
to any fraction of a share of Surge Class A Preferred Stock) issuable pursuant
to subsection 2 above in exchange for the shares of Seller's Common Stock. Upon
the Effective Date and the conversion of the Class A Preferred Stock for Class B
Common Stock, the Exchange Agent shall, pursuant to irrevocable instructions,
deliver the aggregate number of shares of Class B Common Stock contemplated to
be issued pursuant hereto out of such escrow account. The escrow account shall
not be used for any other purpose.
(iii) Exchange Procedures. Promptly after the Effective Date,
the Exchange Agent shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Date represented outstanding shares of Seller's Common Stock which,
pursuant to the Exchange, were exchanged for Surge Class A Preferred Stock
issued by Surge, pursuant to subsection 3(g), a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Surge may
reasonably specify), and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Surge Class
A Preferred Stock. Upon surrender of a Certificate to the Exchange Agent or to
such other agent or agents as may be appointed by Surge, together with such
letter of transmittal, duly completed and validly executed in accordance with
the instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Class B Common Stock, plus cash in lieu of fractional shares of Class
B Common Stock, in accordance with subsection g(iii) above and the Certificate
so surrendered shall forthwith be owned in the name of Surge. The Exchange Agent
shall not be entitled to vote or exercise any rights of ownership with respect
to the Class B Common Stock held by it from time to time hereunder, except that
it shall receive and hold all dividends or other distributions paid or
distributed with respect thereto for the account of persons entitled thereto.
Until so surrendered, each outstanding Certificate that, prior to the Effective
Date, represented shares of Seller's Common Stock will be deemed from and after
the Effective Date, for all corporate purposes, to represent solely (i)
ownership of the number of full shares of Class B Common Stock into which such
Seller's securities shall have been so exchanged, and (ii) the right to receive
an amount in cash in lieu of the issuance of any fractional shares in accordance
with subsection g(iii) above.
(j) Distributions With Respect to Unexchanged Shares.
No dividends or other distributions declared or made after the
Effective Date with respect to Class B Common Stock with a record date after the
Effective Date will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Class B Common Stock represented thereby until the
holder of record of such Seller's Common Stock Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Class B Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Date theretofore paid
with respect to such whole shares of Class B Common Stock.
(k) No Liability.
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Notwithstanding anything to the contrary in this Section 3(k), none of
the Exchange Agent, Surge or any party hereto shall be liable to a holder of
Seller's securities or Surge securities for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(l) No Further Ownership Rights in Class B Common Stock.
All shares of Class B Common Stock issued in exchange for shares of
Seller's Common Stock in accordance with the terms hereof (including any cash
paid in respect thereof) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Seller's Common Stock,
and there shall be no further registration of transfers on the records of Surge
of shares of Seller's Common Stock which were outstanding immediately prior to
the Effective Date. If, after the Effective Date, Certificates are presented to
the Seller for any reason, they shall be transferred to Surge.
(m) Lost, Stolen or Destroyed Certificates.
In the event any certificates evidencing shares of Seller's Common
Stock shall have been lost, stolen or destroyed, Seller shall issue in exchange
for such lost, stolen or destroyed certificates, upon receiving notice from the
holder thereof at least five (5) days before the Effective Date and upon the
making of an affidavit in such form as is acceptable to the Seller and the
Exchange Agent of that fact by such holder, new shares of Seller's Common Stock;
provided, however, the Seller, as a condition precedent to the issuance thereof,
shall require the owner of such lost, stolen or destroyed certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made with respect to the certificates alleged to have been
lost, stolen or destroyed. Subsequent to the issuance of new shares of Seller's
Common Stock, such shares shall be surrendered to the Exchange Agent in
accordance with subsection (i)(iii).
(n) Taking of Necessary Action; Further Action.
If, at any time after the Effective Date, any such further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Buyer with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of the Seller, the officers and directors of
the Seller and the Buyer are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
(o) Surge Board of Directors.
The directors of Surge immediately prior to the Effective Date shall be
the directors of Surge following the Effective Date, each to hold office for a
term of three (3) years and otherwise in accordance with the Certificate of
Incorporation and Bylaws of Surge. In addition, during such three (3) year
period the Seller shall have the right to appoint one member of the Board of
Directors of Surge. The officers of Surge and the Seller immediately prior to
the Effective Date shall remain the respective officers of the companies, each
to hold office for a term of three (3) years and in accordance with the Bylaws
of Surge and the Seller, respectively.
(p) Dissenting Shares
(i) Notwithstanding any provision of this Agreement to the
contrary, any shares of Seller's Common Stock held by a holder who has demanded
and perfected appraisal or dissenters' rights for such shares in accordance with
Nevada Law and who, as of the Effective Date, has not effectively withdrawn or
lost such appraisal or dissenters' rights ("Dissenting Shares"), shall not be
exchanged for Class B Common Stock pursuant to subsection (g)(i), but the holder
thereof shall only be entitled to such rights as are granted by Nevada Law.
(ii) Notwithstanding the provisions of subsection (i) above,
if any holder of shares of Seller's Common Stock who demands appraisal of such
shares under Nevada Law shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to appraisal, then, as of the later of the
Effective Date and the occurrence of such event, such holder's shares shall be
exchanged for Class B Common Stock and cash in lieu of fractional shares as
provided
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in subsection (g)(iii), without interest thereon, upon surrender of the
certificate representing such shares pursuant to subsection (i)(iii).
(iii) The Seller shall give Surge (i) prompt notice of any
written demands for appraisal of any shares of the Seller's Common Stock,
withdrawals of such demands, and any other instruments served pursuant to Nevada
Law and received by the Seller, and (ii) the opportunity to participate in all
negotiations and proceedings with respect to demands for appraisal under Nevada
Law. The Seller and Buyer shall not, except with the prior written consent of
Surge voluntarily make any payment with respect to any demands for appraisal of
capital stock of the Seller or offer to settle or settle any such demands.
Section 4. Excluded Assets.
Notwithstanding anything to the contrary contained in Section 1 hereof,
Seller is not selling and Buyer is not purchasing any of the following, all of
which shall be retained by the Seller (collectively, the "Excluded Assets").
(a) Seller's minute books, tax returns and other corporate documents
and employment records;
(b) any of the assets listed in Schedule 4(b) attached hereto.
(c) Surge and Buyer shall allow Seller and its representatives and
professional advisers access to all business records of the Business that relate
to conduct of the Business prior to Closing. Such access shall be related to a
bona fide business interest of the Seller, and shall be conducted during normal
business hours following forty-eight (48) hour advance notice of the need to
review such records. Seller may also make and retain copies of any such business
records it determines appropriate either before or after the Effective Date.
Section 5. Assumed Liabilities. At the Effective Date, Buyer shall
assume and thereafter pay when due and discharge, defend, indemnify and hold
Seller harmless (in accordance with Section 9 of this Agreement) with respect to
accounts payable not more than ninety (90) days old, and certain other
obligations incurred in the ordinary course of business, which will be accrued
as of the Effective Date and set forth on Schedule 5(a) attached hereto (the
"Assumed Liabilities"). It is understood and agreed by the parties hereto that
the Assets will be sold, conveyed, transferred and assigned to the Buyer at the
Closing free and clear of all liens, charges and encumbrances whatsoever,
excepting only the Assumed Liabilities, statutory liens, Surge's security
interest and any prior security interest concerning the Assets. It is further
understood and agreed by the parties hereto that except for the Assumed
Liabilities in Schedule 5(a), the Buyer does not assume, accept or undertake any
obligations, commitments, duties, debts or liabilities of any kind whatsoever
(the "Obligations"), or otherwise (including, without limitation, any corporate
sales of other business of Seller).
Section 6. Closing.
(a) The closing of the Acquisition provided for in Section 1 of this
Agreement (the "Closing") shall take place at the offices of Snow Becker Krauss
P.C. at 605 Third Avenue, New York, New York 10158, simultaneous with the
execution of this Agreement. The day on which the Closing occurs is sometimes
hereinafter referred to as the "Closing Date."
(b) Notwithstanding the Closing described in subsection 6(a) above,
until such time as each of the conditions set forth in Sections 7(g), 13(c),
14(i) and 14(p) are satisfied and all Schedules and Exhibits to this Agreement
are prepared and agreed to (collectively referred to herein as "Post-Closing
Compliance"), this Agreement may be terminated by either the Seller or Surge
without any penalty.
Section 7. Representations and Warranties of the Seller. The Seller
warrants and represents to the Buyer and Surge as follows:
(a) Title.
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Except as set forth in Schedule 7(a) of this Agreement, the Seller
owns, and at the Closing shall have, good, valid, insurable and marketable title
to the Assets and full right to transfer title to the Assets free and clear of
all liens, mortgages, charges, liabilities, claims, security interests or
encumbrances of every type whatsoever, except the Assumed Liabilities, statutory
liens and liabilities created by Buyer.
Except as set forth in Schedule 7(a) of this Agreement, the sale,
conveyance, transfer and delivery of the Assets by the Seller to the Buyer
pursuant to this Agreement will transfer full legal and equitable right, title
and interest in the Assets to the Buyer, free and clear of all liens, mortgages,
charges, claims, liabilities, security interests and encumbrances of any nature
whatsoever, except the Assumed Liabilities, statutory liens and liabilities
created by Buyer.
(b) Capacity; Organization; Existence.
The Seller has full capacity to enter into and perform under this
Agreement, and all other agreements to be entered into in connection with the
transactions contemplated hereby (the "Other Agreements") and to consummate such
transactions; and no other consent or joinder of any other persons or
corporations is required exclusive of the Seller's shareholders as set forth in
Section 13(c) below. This Agreement has been, and each of the Other Agreements
executed by the Seller hereunder will at the Closing, be duly authorized,
executed and delivered by the Seller. This Agreement constitutes, and each of
the Other Agreements executed by the Seller will constitute, the legal, valid
and binding obligations of the Seller enforceable in accordance with their
respective terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights generally or by general equitable principles. The Seller is duly
organized and validly existing under the laws of the State of Nevada. The Seller
has full corporate power and authority to conduct its business as it is now
being conducted and is duly qualified to do business in each jurisdiction where
the nature of the property owned or leased, or the nature of the business
conducted by the Seller requires such qualification. The Seller has all
necessary licenses and authority to operate its business as now being conducted.
(c) Seller Capital Structure.
The authorized stock of Seller consists of 50,000,000 shares of
Seller's Common Stock, and 1,000,000 shares of Preferred Stock, $.001 par value.
As of the date of this Agreement, 23,450,000 shares of Seller's Common Stock
have been issued and are outstanding, and no shares of Preferred Stock have been
issued. Seller has reserved (i) no shares of Seller's Common Stock for issuance
pursuant to Seller's 1998 Employee Stock Option Plan, of which as of December 1,
1999 options to purchase 2,000,000 shares were outstanding, all of which shall
be canceled no later than the Effective Date, and no shares remained available
for future grants. As of the date hereof, no shares of Seller's Common Stock are
issuable upon the exercise of outstanding warrants. Other than as set forth in
this Section 7(c), there are no options, warrants, calls, rights, commitments or
agreements of any character to which the Seller is a party or by which it is
bound, obligating Seller to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Seller or obligating the Seller to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement. The
Seller's Common Stock, issued and outstanding is duly authorized, validly
issued, fully paid and non-assessable.
(d) Subsidiaries.
Except as set forth on Schedule 7(d) hereto, the Seller does not have
and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
(e) SEC Documents; Seller Financial Statements.
(i) Except as set forth on Schedule 7(e), Seller has filed
with the SEC all forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by it under
each of the
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Securities Act of 1933, as amended (the "Act") and the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and the respective rules and
regulations thereunder, all of which complied in all material respects with all
applicable requirements of the appropriate act and rules and regulations
thereunder, except as noted in the comment letter from the Staff of the SEC
dated November 26, 1999 (the "SEC Comment Letter"). In any event, Seller has
represented to Buyer that immediately following the execution of this Agreement,
Seller will withdraw its Form 10 Registration Statement from the SEC and
de-register its securities under the Exchange Act. Seller has furnished or made
available or will make available to Surge true and correct copies of all forms,
statements, reports and documents filed by Seller with the SEC since January 1,
1999, including, without limitation, Seller's General Form For Registration of
Securities on Form 10 filed on July 26, 1999, including the audited financial
statements for the years ended December 31, 1997 and 1998, plus the unaudited
financial statements for the period ended September 30, 1999 (all of the
foregoing being collectively referred to as the "Seller SEC Documents"). As of
their respective filing dates, the Seller SEC Documents complied in all material
respects with the requirements of the Act and the Exchange Act, and the
applicable rules and regulations of the SEC thereunder, as the case may be,
except as noted in the SEC Comment Letter, and none of the Seller SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading.
Since September 30, 1999, Seller has not suffered any Material
Adverse Effect (as defined in Section 14(j) below) with respect to its business
(financial or otherwise), and Seller has conducted its business only in the
ordinary course and there has not been any declaration, setting aside or payment
of any dividend or other distribution with respect to Seller's Common Stock or
any repurchase, redemption or other acquisition by Seller of any other
securities of Seller. Except as set forth on Schedule 7(e)(i) attached hereto,
the financial statements of Seller, including the notes thereto, included in the
Seller SEC Documents (the "Seller Financial Statements") comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements, as permitted by SEC rules
for such form) and present fairly the consolidated financial position of Seller
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, recurring audit
adjustments which will not be material in amount or significance) and, except as
required to be filed pursuant to subsection (f)(i) below, do not include or omit
to state any fact which renders the Seller Financial Statements hereunder
misleading. There has been no change in Seller accounting policies except as
described in the notes to the Seller Financial Statements.
(ii) Except as and to the extent shown or provided for in the
Seller Financial Statements or notes and schedules thereto or as disclosed in
any of the Schedules to this Agreement or such current liabilities as may have
been incurred since September 30, 1999 in the ordinary course of business, to
the extent quantified and reflected as a liability on the Seller's books and
records, the Seller and its subsidiaries as at the date hereof have no
liabilities or obligations (whether known or unknown, accrued, absolute,
contingent or otherwise ) which might be or become a charge against the assets
or liabilities of the Seller except as specifically provided pursuant to the
terms of the agreement or understanding to which such liability or obligation
relates; as of September 30, 1999, there was no asset used by the Seller in its
operations that has not been reflected in the Seller Financial Statements, and
except as set forth in the Seller Financial Statements, no assets have been
acquired by the Seller since such date except in the ordinary course of
business.
(iii) Except as disclosed in the Seller Financial Statements,
there has been no decrease in stockholders' equity as compared with the amount
shown for such stockholders' equity as at September 30, 1999 and no material
adverse changes in the financial position of the Seller and its Subsidiaries,
taken as a whole, since September 30, 1999.
(f) Updated Seller Financial Statements.
(i) As soon as practicable following the date of this
Agreement, but no later than seven (7) days prior to the filing of Surge's proxy
statement with the SEC for the special meeting to approve the Acquisition,
Seller shall cause to be delivered to Surge, Seller's unaudited consolidated
balance sheet as of the last day (the "Balance Sheet Date") of a
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month within 45 days of the delivery of such financial statements (e.g. October
31, 1999 until December 15, 1999) and the related unaudited statements of
operations and cash flows for the period commencing January 1, 1999 and ending
on the Balance Sheet Date as well as any and all audited and unaudited financial
statements not previously filed with the SEC which are required to be filed in
accordance with GAAP and the SEC's rules and regulations (collectively, the
"Updated Seller Financials"). At such time as Updated Seller Financials are
delivered, Seller will represent and warrant to the Buyer and Surge that Updated
Seller Financials are correct in all material respects and have been prepared in
accordance with GAAP applied on a basis consistent throughout the periods
indicated and consistent with each other. Updated Seller Financials will present
fairly the financial condition and operating results of Seller as of the dates
and during the periods indicated therein.
(ii) The Updated Seller Financial Statements shall be subject
to review by Surge and its accountants and consultants. The Updated Seller
Financial Statements delivered prior to the Closing shall be accompanied by the
Seller's auditors review statement. The Seller shall be responsible for the fees
and expenses of the auditors for their services in connection with the Updated
Seller Financial Statements. Surge shall be responsible for the fees of its own
accountants in reviewing, but not preparing, the Updated Seller Financial
Statements. Surge and/or its designees shall be permitted to participate in the
review process, to observe all aspects of the review and to collaborate with the
auditors in the preparation of the Updated Seller Financial Statements.
(iii) Following delivery of the Updated Seller Financial
Statements to Surge, Surge shall be authorized to provide its designees with an
opportunity to review the auditors work papers related to the financial
statements and to discuss the same with the auditors' representatives. Surge
shall have fifteen (15) days to review the Updated Seller Financial Statements
and to give notice to the Seller of any disagreement regarding such statements
(an "Objection Notice"). Absent such objection Notice, the Updated Seller
Financial Statements as delivered shall be final and binding on the parties
hereto.
(iv) If Surge files an Objection Notice in a timely manner and
the parties are able to resolve such objections, the Updated Financial
Statements (including any adjustments), as the case may be, as modified to
resolve such objections, shall be binding on the parties hereto. If they are
unable to reach agreement as to all differences within fifteen (15) days after
the Seller's receipt of the Objection Notice, then the unresolved differences
shall be resolved as provided in Section 24(m) hereof.
(g) Electronic Bulletin Board Listing.
Seller's capital stock has traded on NASD's Over-the-Counter Electronic
Bulletin Board, with a listing application pending with the AMEX and as soon as
practicable following the execution of this Agreement will make applications to
be de-listed for trading on the OTCBB, withdraw any pending application with
AMEX, and withdraw its Exchange Act registration from the SEC.
(h) Year 2000 Compliance.
The Seller shall demonstrate to Surge's satisfaction that it has taken
reasonable steps to ensure that the Seller's primary computing system and
software (i) will operate without substantial errors relating to date data,
including any error relating to, or the product of, date data which represents
or references different centuries or more than one century; (ii) will be capable
of correctly processing, providing, receiving, and displaying accurate date
data, and exchanging accurate date data with all products with which it is
currently exchanging date data; (iii) will not abnormally end, corrupt data, or
produce incorrect or invalid results as a result of date data, including date
data which represents or references different centuries or more than one century
or as a result of multi-century date calculations, sequencing, or comparisons;
(iv) will be capable of date data century recognition and calculations which
accommodate same century and multi-century formulas and date values and date
data interface values that reflect the century; (v) will correctly recognize
leap years, including the year 2000, and will handle all dates in leap years
appropriately; and (vi) will properly interpret, as to century, all date data
currently stored or accessible to it.
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(i) Legal Proceedings; Claims.
Except as set forth in Schedule 7(i) of this Agreement, the Seller is
not a party to any pending litigation, arbitration or administrative proceeding
or investigation, with respect to or relating to the Assets or the Business and,
to the Seller's best knowledge and belief, no litigation, arbitration or
administrative proceeding or investigation that would have a material adverse
effect on the Assets or the Business is threatened. Except as set forth in
Schedule 7(i) of this Agreement, there are no warranties or other claims
relating to any products sold by the Seller.
(j) Trade Names and Trademarks, etc.
With respect to the Business, the Seller owns or has the right to use
the trade names, and trademarks set forth on Schedule 7(j). The Seller has not
granted, and will not grant prior to the Closing, licenses or other rights to
use such trade names and trademarks. Except as disclosed in Schedule 7(j), no
other trade names or trademarks are owned or used by the Seller in relation to
the Business. To the Seller's best knowledge and belief, the operation of the
Business does not infringe on the trade names, trademarks or any other
intellectual property rights of any third party. No claim has been made that
there is any such infringement. To the Seller's best knowledge and belief, no
trade name or trademarks of any person infringes the trade names or trademarks
which relate to the Business.
(k) Patents, etc.
The Seller owns the inventions, letters patent, applications for
letters patent and patent license rights, inventions, processes, designs,
formulas, trade secrets, know-how and other industrial property rights
(collectively "Patents") necessary for the conduct of the Business, specified as
belonging to it in Schedule 7(k). The Patents have been duly issued and have not
been canceled, abandoned or otherwise terminated. The Seller is not in default
under any of the licenses or agreements.
(l) Description of Material Contracts.
Schedule 7(l) contains a complete and correct list as of the date
hereof of all agreements, contracts and commitments, obligations and
understandings which are not set forth in any other Schedule delivered
hereunder, of the following types, written or oral (the "Material Agreements")
which relate to the Business and to which the Seller is a party or by which it
or any of its properties are bound, as of the date hereof:
(i) mortgages, indentures, security agreements and other
agreements and instruments relating to the borrowing of money or extension of
credit; (ii) employment and consulting agreements with annual compensation in
excess of $40,000; (iii) collective bargaining agreements; (iv) bonus and
incentive, profit-sharing, compensation, stock purchase and stock option,
pension, retirement, deferred compensation, hospitalization and other life,
health or disability insurance, holiday, sick leave, severance, vacation,
tuition reimbursement, personal loan and product purchase discount, policy
manuals, or other plans, agreements, trusts, funds or arrangements for the
benefit of employees (whether or not legally binding); (v) sales agency,
manufacturer's representative or distributorship agreements; (vi) agreements,
orders or commitments for the purchase by the Seller of materials, supplies or
finished products exceeding $10,000 in the aggregate from any one person; (vii)
agreements, orders or commitments for the sale of products or services exceeding
$25,000; (viii) agreements or commitments for capital expenditures in excess of
$10,000 for any single project (it being warranted that the commitment for all
undisclosed contracts for such agreements or commitments does not exceed $10,000
in the aggregate); (ix) agreements relating to research; (x) agreements relating
to the payment of royalties, license or similar fees; (xi) brokerage or finder's
agreements; (xii) joint venture agreements; and (xiii) other agreements,
contracts and commitments that individually or in the aggregate for any one
party involve any expenditure by the Seller of more than $10,000. All of the
Material Agreements constitute valid and legally binding obligations of the
parties thereto, enforceable in accordance with their respective terms, except
as such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting creditors' rights generally or by general
equitable principles, are in full force and effect and, except as otherwise
specified in Schedule 7(l), are validly assignable to the Buyer without the
consent of any party so that, after the assignment thereof to the Buyer pursuant
hereto, the Buyer will be entitled to
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the full benefits thereof. There is not under any Material Agreement any
existing default, or event which, after notice or lapse of time, or both, would
constitute a default or result in a right to accelerate or loss of rights under
any Material Agreement. The Seller has not received any notice of termination of
any Material Agreement. True and complete copies of all of the Material
Agreements have been delivered to the Buyer.
No agreement, contract, commitment, obligation or undertaking
listed on Schedule 7(l) to which the Seller is a party or by which any of its
properties are bound, except as specifically set forth in Schedule 7(l),
contains any provision which materially adversely affects or in the future may
(so far as the Seller can now foresee) materially adversely affect the Assets.
(m) Default; Violations or Restrictions.
The Seller is not in default under, nor has any event occurred which,
with the lapse of time or action by a third party, could result in a default
under any outstanding note, indenture, mortgage, contract or agreement to which
it is bound, relating to the Assets. Except as disclosed in Schedule 7(m), the
execution, delivery and performance of this Agreement and of any agreement to be
executed and delivered by the Seller pursuant hereto, and the consummation of
any of the transactions contemplated hereby or thereby will not (or with the
giving of notice or the lapse of time or both would) violate any provision of or
result in the breach of, modification of, acceleration of the maturity of
obligations under, or constitute a default, or give rise to any right of
termination, cancellation or acceleration or otherwise be in conflict with or
result in a loss of contractual benefits to the Seller, as such relates to the
Assets, under any law, order, writ, injunction, decree, statute, rule or
regulation of any court, governmental agency or arbitration tribunal or any of
the terms, conditions or provisions of any contract, lease, note, bond,
mortgage, deed of trust, indenture, license, security agreement, agreement or
other instrument or obligation by which the Seller is a party or by which it may
be bound, or require any consent, approval or notice under the laws of any such
document or instrument; or result in the creation or imposition of any lien,
claim, restriction, charge or encumbrance upon the Assets.
(n) Court Orders and Decrees.
Except as set forth on Schedule 7(n), the officers of the Seller have
not received written or oral notice that there is outstanding, pending, or
threatened any order, writ, injunction or decree of any court, governmental
agency or arbitration tribunal against or affecting the Assets.
(o) Approvals and Authorizations.
The Seller has obtained all necessary consents, approvals or
authorizations in connection with the transactions contemplated hereby that are
required by law or otherwise in order to make this Agreement binding upon the
Seller, except for shareholder approval provided for in Section 13(c) below and
those consents, approvals or authorizations which individually or in the
aggregate would not have a materially adverse effect on the Assets or the
Business.
(p) Governmental Licenses.
Schedule 7(p) attached hereto contains a correct and complete list of
all governmental and administrative consents, permits, appointments, approvals,
licenses, certificates and franchises which are required in connection with the
Seller's execution, delivery or performance of this Agreement, all of which have
been obtained and are in full force and effect. The Seller has not received any
notice of any violation with respect to any such consent, permit, license or
other regulatory order that remain unabated. Except as set forth on Schedule
7(p), the Seller is in compliance with all Laws and Environmental Laws material
to the Business, their properties or operation as presently conducted.
(q) Hazardous Material and Nuisance.
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Except as disclosed on Schedule 7(q) attached hereto, there are no
known claims or potential claims which may exist against the Seller relating to
the Business and/or the Assets, for, with respect to, or as direct or indirect
result of, the presence on or under, or the escape, seepage, leakage, spillage,
discharge, or emission discharging, from the real property of the Seller of any
"Hazardous Material," including, without limitation, any losses, liabilities,
damages, injuries, costs, expenses, reasonable fees of counsel or claims
asserted or arising under the Comprehensive Environmental Response, Compensation
and Liabilities Act ("CERCLA"), any so-called "Super Fund" or "Super Lien" law
or any other applicable federal, state or local statute, law, ordinance, code,
rule, regulation, order or decree now or at any time hereafter in effect,
regulating, relating to or imposing liability or standards of conduct concerning
any Hazardous Material.
(r) Employee Benefit Plans.
Except as disclosed on Schedule 7(r) attached hereto, there is not now
nor, since the Seller has owned the Business, has there ever been any "Employee
Benefit Plan" (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), or any other profit sharing,
deferred compensation, bonus, stock option, stock purchase, pension or other
compensation plan, or any other plan or arrangement to benefit employees
maintained or contributed to by the Seller or any person, firm or corporation
(an "Affiliate") which are members of a "controlled group of corporations"
(within the meaning of Section 414(b) of the Code, except that 50% will be
substituted for 80% in Section 1563(a) of the Code) with the Seller and in which
any of the employees of the Seller or any Affiliate participates or is eligible
to participate. No funding deficiency exists or has existed with respect to any
Employee Benefit Plan covering any present or former employee of the Seller or
any Affiliate which may cause or result in a lien upon any of the Assets.
(s) Absence of Certain Business Practices.
Neither the Seller, nor to its best knowledge and belief, any of its
officers, employees or agents acting on its behalf, nor any other person acting
on its behalf, has, directly or indirectly, within the past three (3) years
given or agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other person who is or may be in a position to help or
hinder the Business (or assist the Seller in connection with any actual or
proposed transaction) that (i) might subject the Seller to any damage or penalty
in any civil, criminal or governmental litigation or proceeding, or (ii) if not
given in the past would have had an adverse effect on the assets, business or
operation of the Business and if not continued in the future, would adversely
affect the Assets, the Business or its operations or prospects.
(t) Brokers.
The Seller has not entered into and will not enter into any agreement,
arrangement or understanding with any person or firm which will result in an
obligation of the Buyer or Surge to pay any finder's fee, brokerage commission,
or similar payment in connection with the transactions contemplated by this
Agreement.
(u) Absence of Undisclosed Liabilities and Conditions.
Except as and to the extent reflected or reserved against on the face
of the Financial Statements, or as set forth on Schedule 7(u) attached hereto,
as of the Closing Date, the Business had no debts, liabilities or obligations
(whether due or to become due, absolute, accrued, contingent or otherwise) of
any nature whatsoever, including, without limitation, any foreign or domestic
tax liabilities or deferred tax liabilities incurred in respect of or measured
by the Business' income, or its period prior to the Closing or any other debts,
liabilities or obligations relating to or arising out of any act, transaction,
circumstance or state of facts which occurred or existed on or before the
Closing Date, whether or not then known, due or payable. The Financial
Statements do not include any assets or liabilities of any entity other than the
Seller nor any expense of any entity other than the Seller. The Seller has no
knowledge of any currently existing facts that materially adversely affect or
are likely in the future to materially adversely affect the Assets.
(v) Compliance With Laws.
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Except as disclosed on Schedule 7(v), the operations and activities of
the Business concerning the Assets have previously and continue to comply in all
respects with all applicable Federal, state and local laws, statutes, codes,
ordinances, rules, regulations, permits, judgments, orders, writs, awards,
decrees or injunctions (collectively, the "Laws"), as in effect on or before the
date of this Agreement, including, without limitation, all Laws relating to seed
labeling and all rules and regulations of the Occupational Safety and Health
Administration. Neither the ownership nor use of the Assets nor the conduct of
the Business as presently conducted conflicts with the rights of any other
person, firm or corporation or violates, or with or without the giving of notice
or the passage of time, or both, will violate, conflict with or result in a
default, right to accelerate or loss of rights under, any terms or provisions of
the Seller's Certificate of Incorporation or Bylaws as presently in effect, or
any lien, encumbrance, mortgage, deed of trust, lease, license, agreement,
understanding (hereinafter collectively referred to as "Liens"), or Laws to
which the Seller is a party or by which it or the Assets may be bound or
affected. The Seller has not received any notice or communication from any third
party asserting a failure to comply with any Laws, except for the SEC Comment
Letter, nor has the Seller received any notice that any authority or third party
intends to seek enforcement against it to compel compliance with any such Laws.
(w) Taxes.
As of the Closing Date, all taxes, including, without limitation,
income, property, sales, use, franchise, added value, employees' income
withholding and social security taxes, imposed by any governmental entity
whatsoever, which are due or payable by the Seller in connection with the
Business, and all interest and penalties thereon, have been paid in full, all
tax returns required to be filed in connection therewith have been timely filed
and all deposits required by law to be made by the Seller with respect to
employee's withholding taxes have been duly made. The Seller has not been
delinquent in the payment of any tax, assessment or governmental charge or
deposit and has no tax deficiency or claim outstanding, proposed or assessed
against it. Except for amounts accrued, but not payable as of the Effective
Date, (i) the Seller is not liable for the payment of any taxes relating to the
Assets or the operation of the Business, and (ii) the Buyer shall have no
liability for any taxes related to the ownership or operation of the Assets or
the Business prior to the Effective Date or in connection with the sale of the
Assets in this transaction. The Seller does not know of any tax deficiency or
claim outstanding, proposed, or assessed against it with respect to any taxes,
including, without limitation, income, property, sales, use, franchise,
valued-added, employees' income withholding, and social security taxes imposed
by the United States or by an foreign country or by any state, municipality,
subdivision, or instrumentality of the United States or of any foreign country,
or by any other taxing authority that could have a material effect on the Buyer,
the Assets, or the Business, or result in the imposition of a tax lien upon any
of the Assets.
(x) Absence of Changes or Events.
Without limiting the foregoing, since the Balance Sheet Date and
through the Closing Date, there has been no material adverse change in the
Business. Except as set forth in Schedule 7(x) attached hereto, since the
Balance Sheet Date, the Seller has conducted its business only in the ordinary
course and has not:
(i) Incurred any obligation or liability, except current
liabilities for trade or business obligations incurred in the ordinary course of
business and consistent with its prior practice, none of which liabilities
materially and adversely affects the Assets or the Business;
(ii) Mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction on any of the Assets;
(iii) Except for the sale of Inventory, in the ordinary course
of business, sold, transferred, leased to others or otherwise disposed of any of
the Assets;
(iv) Received any notice of termination of any agreement or
suffered any damage, destruction or loss which has had or, with the passage of
time, could have a materially adverse effect on the Assets or the Business;
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(v) Made any change in its pricing, advertising or personnel
practices inconsistent with its prior practice and prudent business practices
prevailing in the industry;
(vi) Suffered any change, event or condition which, has had or
may have a materially adverse effect on the Assets, the Business or the
operations or prospects thereof;
(vii) Entered into any transaction, contract or commitment
other than in the ordinary course of business which had a material adverse
effect on the Assets or the Business; or
(viii) Instituted, settled or agreed to settle any litigation,
action or proceeding before any court or governmental body relating to the
Seller, the Assets or the Business.
(y) Accounts Receivable; Inventory.
(i) The Accounts Receivable of the Seller are valid subsisting
claims for the aggregate amounts thereof reflected in the Seller Financial
Statements net of the reserves or allowances for doubtful receivables reflected
in the Seller Financial Statements or thereafter in the Seller's books and
records uniformly maintained in accordance with the Seller Financial Statements,
accounted for in accordance with generally accepted accounting principles, and
the Seller knows of no reason that would make such Accounts Receivable, taken as
a whole, not collectible.
(ii) The Inventory of the Seller (a) has been purchased in the
ordinary course of business, (b) has been fully paid for unless otherwise
reflected in the Financial Statements, (c) is marketable or adequate provision
for obsolescence has been provided, and (d) the Seller knows no reason that
would make such Inventory, taken as a whole, not marketable.
(z) Labor Relations.
The Seller, in connection with the Business, is not (i) a party to any
collective bargaining agreement relating to any of its employees and its
employees have not recognized, are not required to recognize, and have not
received a demand for recognition by, any collective bargaining representative,
(ii) a party to any contract with and has no liability to any of its employees,
agents, consultants, officers, sales representatives, distributors or dealers
that is not cancelable by the Seller without penalty on not more than thirty
(30) days' notice, except as set forth on Schedule 7(z) attached hereto, (iii)
subject to any strike or work stoppage in effect or threatened against the
Business nor has any strike or work stoppage been authorized by any order, writ,
injunction or decree of any court or federal, state, municipal or other
governmental agency or instrumentality.
(aa) Customer Lists.
All agreements, arrangements or commitments with or respecting any
customer of the Seller to which the Seller is a party or is bound are described
on Schedule (aa) previously delivered to the Seller, except for those not
involving a consideration of at least $10,000 per annum.
(bb) Books and Records.
The books and records of the Seller are, in all material respects,
complete and correct and have been maintained in accordance with standard
business practice.
(cc) Insurance.
Schedule 7(cc) contains a correct and complete description of all
policies of insurance by or on behalf of the Seller in which the Seller is named
as an insured party, beneficiary or loss payable payee. The Seller has at all
times prior to the date hereof maintained and will at all times prior to the
Closing Date maintain such insurance coverage. There is
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no default notice of cancellation or non-renewal with respect to any material
provision contained in any such policy. Schedule 7(cc) contains a correct and
complete description of all outstanding insurance claims in excess of $5,000
made by or against the Seller for damage to or loss of property or income which
have been referred to insurers or which the Seller believes to be covered by
commercial insurance within the five years preceding the Effective Date.
(dd) Rights of Third Parties.
Other than as disclosed in Schedule 7(dd), or specifically provided for
in this Agreement, the Seller has not entered into any leases, licenses,
easements or other agreements, recorded or unrecorded, granting rights to third
parties in any real or personal property of the Seller, and no person or other
corporation has any right to possession, use or occupancy of any of the property
of the Seller.
(ee) Relationships with Vendors and Customers.
The Seller has no knowledge of any present conditions or state of facts
or circumstances which would materially adversely affect the Business after the
Closing Date. The Seller's relationships with its customers, clients and vendors
are satisfactory, and the Seller has no knowledge of any facts or circumstances
which might materially alter, negate, impair or in any way materially adversely
affect the continuity of any such relationships. The Seller has no knowledge of
any material outstanding claims of any of its customers or clients presently
outstanding, pending or threatened against them. The Seller has no knowledge of
any present condition or state of facts or circumstances which would prevent the
Business from being carried on by the Buyer after the Closing Date in
essentially the same manner as it is presently being carried on.
(ff) Accuracy.
No representation, warranty, covenant or statement by the Seller in
this Agreement, the Schedules attached hereto and the certificates or other
documents furnished or to be furnished to the Buyer pursuant hereto, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state a material fact required to be stated herein or therein or necessary to
make the statements contained herein or therein, in light of the circumstances
under which they were made, not false or materially misleading.
Section 8. Representations and Warranties of the Buyer and Surge. Each
of the Buyer and Surge, jointly and severally, warrants and represents to the
Seller as follows:
(a) Authority.
Subject only to the requisite approval of (a) the amendment of the
Certificate of Incorporation changing the name of Surge, (b) the amendment of
Surge's Certificate of Incorporation authorizing the requisite number of shares
of Surge Class A and Class B Common Stock and Surge Class A Preferred Stock, (c)
the issuance of the requisite number of shares of Class B Common Stock and Surge
Class A Preferred Stock, (d) the election of directors and officers of Surge and
Buyer immediately prior to the Effective Date and for a minimum term of three
(3) years, (e) the Acquisition, and (f) this Agreement by Surge's stockholders
(and by Seller's stockholders with respect to the election of its officers and
directors, and approval of the Acquisition and this Agreement, and any filings
to be made in Nevada or Delaware), Surge and Buyer have all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Surge and Buyer, subject only to the approval of
the Acquisition and this Agreement by Surge's stockholders. Each of Surge's and
Buyer's Board of Directors has unanimously approved, subject to Post-Closing
Compliance, the Acquisition and this Agreement. This Agreement has been duly
executed and delivered by Surge and the Buyer and constitutes the valid and
binding obligations of Surge and the Buyer, enforceable in accordance with its
terms except (a) as limited by applicable bankruptcy, insolvency,
reorganization,
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moratorium and other laws of general application affecting enforcement of
creditors' rights generally, and (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
(b) Organization.
(i) The Buyer is a corporation to be formed under the laws of
the State of Delaware, and will be duly organized, validly existing and in good
standing and will have corporate power and authority to carry on its business as
will be conducted as supplemented by the Business, and to own, lease or operate
the properties and assets now used by it in connection therewith and the Assets.
(ii) Surge is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York, and Surge has
corporate power and authority to carry on its business as now conducted and to
own, lease or operate the properties and assets now used by it in connection
therewith. Surge is duly qualified and in good standing to do business in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties make such qualification necessary. All of the outstanding Surge
Common Stock and Class A Warrants (collectively "Surge Securities") are validly
issued, fully paid and nonassessable.
(c) Consents and Approvals.
No governmental license, permit or authorization, and no registration
or filing with any court, governmental authority or regulatory agency, is
required in connection with the Buyer's and Surge's execution, delivery or
performance of this Agreement.
The Buyer and Surge each shall execute, deliver and perform its
obligations under this Agreement and no consent or other approval or any other
party is required to be obtained by the Buyer or Surge in connection with the
transactions contemplated hereby.
(d) Surge and Buyer Capital Structures.
(i) The authorized securities of Surge consists of 25,000,000
shares of Surge Common Stock, $.001 par value and 1,000,000 shares of Preferred
Stock, $.001 par value. As of November 26, 1999, 4,858,920 shares of Surge
Common Stock have been issued and are outstanding, 5,733,000 shares of Surge
Common Stock are issuable upon exercise of outstanding Employee Stock Options,
including 5,300,000 Orbit Options described in Section 3(f)(iii) above, and
3,479,600 shares of Surge Common Stock are issuable upon exercise of outstanding
Class A Warrants described in Section 3(f)(ii) above. No shares of Surge Common
Stock are subject to outstanding convertible debt securities. All outstanding
shares of Surge Common Stock are duly authorized, validly issued, fully paid and
non- assessable and are not subject to preemptive rights created by statute, the
Certificate of Incorporation or Bylaws of Surge or any agreement to which Surge
is a party or by which it is bound. Other than as set forth on Schedule 8(d),
there are no options, warrants, calls, rights, commitments or agreements of any
character to which Surge is a party or by which it is bound, obligating Surge to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of Surge or
obligating Surge to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement.
(ii) The authorized stock of Buyer shall consist of 1,000
Shares of Common Stock, par value $.001 per share. As of the Effective Date, 100
shares of Buyer's Common Stock shall be issued and outstanding and will all be
owned by Surge. As of the date hereof, no Shares of Buyer Common Stock are
issuable upon exercise of Warrants or Options. There are no options, convertible
securities, warrants, calls, rights, commitments or agreements of any character
to which the Buyer is a party or by which it is bound, obligating the Buyer to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Buyer or
obligating the Buyer to grant, extend or enter into any such option, convertible
security, warrant, call, right, commitment or agreement.
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(e) Subsidiaries.
Except as set forth on Schedule 8(e) hereto, Surge does not have and
has never had any subsidiaries or affiliated companies and does not otherwise
own and has never otherwise owned any shares of capital stock or any interest
in, or control, directly or indirectly, any other corporation, partnership,
association, joint venture or other business entity.
(f) SEC Documents; Surge Financial Statements.
Surge has filed with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it under each of the Act and the Exchange Act, and the respective
rules and regulations thereunder, all of which complied in all material respects
with all applicable requirements of the appropriate act and rules and
regulations thereunder. Surge has furnished or made available or will make
available to the Seller true and correct copies of all forms, statements,
reports and documents filed by Surge with the SEC since November 1, 1997,
including, without limitation, Surge's Annual Report on Form 10-KSB for the
years ended November 30, 1997 and 1998, and quarterly periods since that time
(all of the foregoing being collectively referred to as the "Surge SEC
Documents"). As of their respective filing dates, Surge SEC Documents complied
in all material respects with the requirements of the Act and the Exchange Act,
and the applicable rules and regulations of the SEC thereunder, as the case may
be, and none of the SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they were made, not misleading. Since August 31, 1999, Surge has not
suffered any Material Adverse Effect (as defined in Section 14(j) below) with
respect to its business (financial or otherwise), and Surge has conducted its
business only in the ordinary course and there has not been any declaration,
setting aside or payment of any dividend or other distribution with respect to
Surge Common Stock or any repurchase, redemption or other acquisition by Surge
of any Surge Common Stock. The financial statements of Surge, including the
notes thereto, included in Surge SEC Documents (the "Surge Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a basis consistent throughout the
periods indicated and consistent with each other (except as may be indicated in
the notes thereto or, in the case of unaudited statements, as permitted by SEC
rules) and present fairly the consolidated financial position of Surge at the
dates thereof and of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments which will not be material in amount or significance). There has
been no change in Surge's accounting policies, except as described in the notes
to Surge's Financial Statements and do not include or omit to state any fact
which renders Surge's Financial Statements hereunder misleading.
(g) Taxes.
All federal, state and other returns and reports required to be filed
by Surge have been duly filed by Surge and except as set forth on Schedule 8(g)
hereto, all taxes and other assessments and levies (including all interest and
penalties) including, without limitation, income, franchise, real estate, sales,
gross receipts, use and services taxes, and employment and employee withholding
taxes, owed by Surge have been paid in full by Surge. Except as set forth on
Schedule 8(g), all such taxes and other assessments and levies which Surge is
required by law to withhold, collect or deposit have been duly withheld and
collected and deposited with the proper governmental authorities or segregated
and set aside for such payment, and if so segregated and set aside, shall be so
paid by Surge as required by law.
(h) Litigation.
Except as set forth on in the Surge SEC Documents, or as otherwise
disclosed to the Seller, there is no material action, suit or proceeding of any
nature pending or to the best of Surge's knowledge threatened against Surge, its
properties or any of its officers or directors, in their respective capacities
as such.
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(i) No Conflict; Required Filings and Consents.
(i) Except as set forth on Schedule 8(i) hereto, the execution
and delivery of this Agreement by Surge does not, and the performance of this
Agreement by Surge and the consummation by Surge of the transactions
contemplated hereby will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of Surge, (ii) conflict with or violate any federal,
foreign, state or provincial law, rule, regulation, order, judgment or decree
(collectively, "Laws") applicable to Surge or any of its subsidiaries or by
which its or any of their respective properties are bound or affected, or (iii)
result in any breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or impair Surge's or any of
its subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien on any of the properties or
assets of Surge or any of its subsidiaries pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Surge or any of its subsidiaries is a
party or by which Surge or any of its subsidiaries or its or any of their
respective properties are bound or affected, except in the case of clauses (ii)
and (iii) for any such conflicts, violations, breaches, defaults or other
occurrences that do not have a Material Adverse Effect, as defined in Section
14(j) below.
(ii) The execution and delivery of this Agreement by Surge
does not, and the performance of this Agreement by Surge will not, require any
consent, approval, authorization or permit of, or filing with notification to,
any domestic or foreign governmental or regulatory authority except (i) for the
applicable requirements, if any, of the Act, the Exchange Act, state securities
laws ("Blue Sky Laws"), the legal requirements of any foreign jurisdiction
requiring notification in connection with the Acquisition and the transactions
contemplated hereby and the filing and recordation of appropriate documents as
required by Delaware Law and the Laws of the States of New York and Nevada, and
(ii) where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, either (A) would not prevent
or materially delay consummation of the Acquisition or otherwise prevent or
materially delay Surge from performing its obligations under this Agreement, or
(B) do not have a Material Adverse Effect.
(j) Legal Proceedings.
Neither Surge nor the Buyer is a party to or affected by any pending
litigation, arbitration or any governmental proceeding or investigation
(exclusive of the SEC's Formal Order of Investigation of Seller) that would in
any manner affect its entering into this Agreement or performing the
transactions contemplated hereby or that might result in any material and
adverse change in the financial condition, business or properties of the Buyer
or Surge and to the best of their respective knowledge no such litigation,
arbitration, proceeding or investigation is threatened.
(k) Accuracy.
No representation, warranty, covenant or statement by the Buyer or
Surge in this Agreement, any Exhibit attached hereto, the Schedules and the
certificates or other documents furnished or to be furnished to the Seller
pursuant hereto (including the Schedules, if any, provided for in this Section 8
and Exhibits thereto), contains or will contain any untrue statement of a
material fact, or omits or will omit to state a material fact required to be
stated herein or therein or necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made, not false or
materially misleading.
(l) Binding Obligation.
This Agreement, and any other agreement required to be delivered by the
Buyer or Surge pursuant to this Agreement, has been duly executed and delivered
by the Buyer and Surge and constitutes the legal, valid and binding obligation
of the Buyer and Surge, enforceable against the Buyer and Surge in accordance
with its terms, except to the extent that such enforceability may be limited by
general principles of equity or bankruptcy, insolvency and other similar laws
affecting the enforcement of creditors' rights generally. All action of the
Board of Directors of the Buyer and Surge
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and all other corporate action necessary to authorize the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly taken.
(m) Brokers; Finders.
No agent, broker, investment banker, person or firm acting on behalf of
the Buyer or Surge or any firm or corporation affiliated with the Buyer or Surge
or under their authority is or will be entitled to any brokers' or finders' fee
or any other commission or similar fee directly or indirectly from the Seller or
any person or entity affiliated with the Seller in connection with any of the
transactions contemplated hereby.
Section 9. Survival of Representations and Warranties; Indemnification.
(a) Survival of Representations and Warranties.
All representations and warranties made by the Seller or the Buyer and
Surge in this Agreement, including, without limitation, all representations and
warranties made in any Exhibit or Schedule hereto or certificate delivered
hereunder, shall survive the Closing until and through the first anniversary of
the Effective Date (the "Survival Date") provided, however, that all
representations and warranties made by the Seller in Sections 7(e),(f), 7(l),
7(q), 7(r) and 7(w) hereof shall survive the Effective Date until and through
one (1) year after the expiration of the applicable statute of limitations (the
"Extended Survival Date").
(b) Indemnification by Seller.
The Seller hereby agrees to indemnify, defend and hold harmless the
Buyer and Surge from and against all liabilities, losses, costs or damages
whatsoever (including expenses and reasonable fees of legal counsel)
(collectively, "Damages"), arising out of or from or are based upon (i) the
inaccuracy in any material respect of any representation or warranty contained
in Section 7 made by the Seller; (ii) the non-performance by the Seller in any
material respect of any covenant, agreement or obligation to be performed by the
Seller under this Agreement; (iii) the non-compliance of the provisions of any
applicable bulk transfer laws in connection with the sale of the Assets to the
Buyer; (iv) any liability relating to the Business prior to the Closing Date;
(v) any legal proceedings, including, but not limited to, any litigation brought
by the U.S. Securities and Exchange Commission and/or any criminal agency; (vi)
any potential environmental claim; (vii) any liability relating to the Seller's
Employee Benefit Plans, set forth on Schedule 7(k), prior to the Closing Date;
and (viii) any liability relating to the Seller's termination of employees of
the Business.
(c) Indemnification by Buyer and Surge.
The Buyer and Surge hereby agree to indemnify, defend and hold harmless
the Seller from and against all Damages arising out of or from or that are based
upon (i) the inaccuracy in any material respect of any representation or
warranty contained in Section 8 made by the Buyer and Surge; (ii) the
non-performance by the Buyer and Surge in any material respect of any covenant,
agreement or obligation to be performed by the Buyer and Surge under this
Agreement; and (iii) any liabilities arising out of the operations of the
Business by Buyer and Surge after the Closing Date.
(d) Defense of Claims.
Whenever any claim shall arise for indemnification hereunder, the party
entitled to indemnification hereunder (the "Indemnitee") shall notify the
indemnifying party (the "Indemnitor") in writing within 30 days after the
Indemnitee has actual knowledge of the facts constituting the basis for such
claim (the "Notice of Claim"). The Notice of Claim shall specify all facts known
to the Indemnitee giving rise to such indemnification claim and the amount or an
estimate of the amount of the liability arising therefrom.
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If the facts giving rise to any such indemnification shall involve any
actual, threatened or possible claim or demand by any person against the
Indemnitee, the Indemnitor shall be entitled (without prejudice to the right of
the Indemnitee to participate at its expense through co-counsel of its own
choosing) to contest or defend such claim at its expense and through counsel of
its own choosing if the Indemnitor gives written notice of its intention to do
so to the Indemnitee within 10 days after receipt of the Notice of Claim;
provided that Indemnitor diligently prosecutes or defends such claim.
The Indemnitee shall not settle any claim which would give rise to
liability on the part of the Indemnitor under the indemnity contained in this
Section without the written consent of the Indemnitor, which consent shall not
unreasonably be withheld. If a firm offer is made to settle a claim or
litigation defended by the Indemnitee and the Indemnitor refuses to accept such
offer within 20 days after receipt of written notice from the Indemnitee of the
terms of such offer, then, in such event, the Indemnitee shall continue to
contest or defend such claim and shall be indemnified pursuant to the terms
hereof. Provided, however, that in the event the Indemnitor refuses to accept
such offer to settle a claim as described above and the Indemnitee continues to
contest or defend such claim, the indemnification provided for herein shall be
deemed to include the value of management's time spent in connection with the
defense of such claim. If a firm offer is made to settle a claim or litigation
and the Indemnitor notifies the Indemnitee in writing that the Indemnitor
desires to accept and agree to such settlement, but the Indemnitee elects not to
accept or agree to it, the Indemnitee may continue to contest or defend such
claim or litigation and, in such event, the total maximum liability of the
Indemnitor to indemnify or otherwise reimburse the Indemnitee hereunder with
respect to such claim or litigation shall be limited to and shall not exceed the
amount of such settlement offer, plus reasonable out-of-pocket costs and
expenses (including reasonable attorneys' fees and disbursements) to the date of
notice that the Indemnitor desires to accept such settlement.
Notwithstanding any provision of this Agreement to the contrary, no
claim for indemnification pursuant to this Section 9 by the Indemnitee shall be
asserted or claimed except to the extent of damages exceeding, in the aggregate,
the sum of $50,000.
Section 10. Covenants of the Seller. The Seller hereby covenants and
agrees:
(a) Further Assurances.
The Seller hereby agrees that from time to time at the reasonable
request of the Buyer or Surge, and without further consideration, to execute and
deliver such additional instruments and to take such other action as the Buyer
or Surge may reasonably require to convey, assign, transfer and deliver the
Assets and otherwise to carry out the terms of this Agreement.
(b) Access to Information; Confidentiality.
(i) Subsequent to the date hereof and prior to the Effective
Date, the Seller will continue to give to the Buyer, Surge, their counsel,
accountants, and other representatives, full and free access to all properties,
books, contracts, commitments and records of the Seller relating to the Assets
so that the Buyer and Surge may have full opportunity to make such investigation
as they shall desire. No information or knowledge obtained either independently
or as a result of any such investigation of the Seller shall diminish or
otherwise affect the representations and warranties of the Seller; provided that
Buyer and Surge covenant and agree to notify Seller of any misrepresentation or
breach of warranty of which either becomes aware as a result of any such
investigation.
(ii) From and after the date of this Agreement until the
Effective Date or the termination of this Agreement, the Seller and its
representatives will maintain the confidentiality of all documents and
information of a confidential nature disclosed to Seller in the course of its
negotiations and the Buyer's and Surge's due diligence review and will in no
event use any such confidential information for any purpose other than for the
evaluation of the transactions contemplated herein and in the event of
termination of this Agreement will destroy all copies of documentation that
Surge or Buyer may have delivered to Seller and will not use any confidential
information from the Buyer or Surge for its own benefit.
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(c) Closing Documents.
The Seller shall execute and deliver all instruments and documents
required under Section 14 as a condition subsequent to the Closing hereof and
take all action required to carry out the terms of this Agreement and to
consummate the transactions contemplated hereby.
(d) Conduct of Business.
From the date of this Agreement to the Effective Date, except as
expressly disclosed in the Schedules to this Agreement, the Seller shall conduct
its operations as engaged in at the date of this Agreement according to its
ordinary course of business, shall maintain its records and books of account in
a manner that fairly and currently reflects its financial condition and results
of operations and shall not engage in any transactions other than as
contemplated by this Agreement.
Section 11. Covenants of the Buyer and Surge. The Buyer and Surge
hereby covenant and warrant as follows:
(a) Due Diligence.
Seller and Surge undertake to complete due diligence as soon as
practicable following the date of this Agreement, but no later than January 31,
2000, unless otherwise mutually agreed to. Following delivery of due diligence
documents to the other party, the receiving party shall be afforded the
opportunity to review such documents and discuss the same with the disclosing
party's appropriate representatives. The receiving party shall have fifteen (15)
days to review documents received and to give notice to the disclosing party if
the response is inadequate. Absent such objecting notice the disclosures shall
be deemed to be acceptable to the receiving party.
(b) Noninterference.
The Buyer and Surge shall not take or omit to take any action that (i)
if taken or omitted on or before the date of this Agreement, would make untrue
any of the representations and warranties contained in Section 8 of this
Agreement, or (ii) would interfere with the Buyer's or Surge's ability to
perform or would prevent performance of any of its obligations under this
Agreement or any of the other agreements or instruments provided for herein.
(c) Closing Documents.
The Buyer and Surge shall execute and deliver all instruments and
documents required under Section 17 as a condition subsequent to the Closing
hereof and take all action required to carry out the terms of this Agreement and
to consummate the transactions contemplated hereby.
(d) Confidentiality.
From and after the date of this Agreement until the Effective Date or
the termination of this Agreement, the Buyer and Surge and their respective
employees and representatives will maintain the confidentiality of all documents
and information of a confidential nature disclosed to either of them in the
course of their negotiations and the Buyer's and Surge's due diligence review of
Seller and will in no event use any such confidential information for any
purpose other than for the evaluation of the transactions contemplated herein
and in the event of termination of this Agreement will
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destroy all copies of documentation which Seller may have delivered to Surge or
Buyer and will not use any confidential information from the Seller for their
own benefit.
(e) Name Change.
Surge shall execute and file with the Secretary of State of the State
of New York within 3 days following the Effective Date, a Certificate of
Amendment of the Certificate of Incorporation changing its name; Surge shall
deliver a copy of the filing receipt in connection with such name change to
Seller and Seller's counsel.
(f) Employees.
All Employees of the Seller employed in connection with the Business
shall be terminated effective as of the Closing Date. The Seller shall pay all
such employees all compensation earned by them through the Effective Date on or
before five (5) business days after the Effective Date. The Buyer shall use its
best efforts to hire all of the Seller's employees subject to each such employee
complying with customary Surge employee practices.
Section 12. Conduct of Business Pending The Acquisition
(a) Conduct of Business by Surge, Seller and Buyer Pending the
Acquisition.
Except as otherwise contemplated by this Agreement, after the date
hereof and prior to the Effective Date or earlier termination of this Agreement,
unless the parties shall otherwise agree in writing, Surge, the Seller and the
Buyer shall each :
(i) conduct its business in the ordinary and usual course of
business and consistent with past practice;
(ii) not (i) amend or propose to amend its Certificate of
Incorporation or Bylaws, (ii) split, combine or reclassify its outstanding
capital stock or declare, set aside or pay any dividend or distribution payable
in cash, stock, property or otherwise, (iii) spin-off any assets or businesses,
(iv) engage in any transaction for the purpose of effecting a recapitalization
of any party or subsidiary, or (v) engage in any transaction or series of
related transactions which has a similar effect to any of the foregoing;
(iii) not issue, sell, pledge or dispose of, or agree to
issue, sell, pledge or dispose of, any additional shares of, or any options,
warrants or rights of any kind to acquire any shares of Surge's capital stock of
any class or any debt or equity securities convertible into or exchangeable for
such capital stock or amend or modify the terms and conditions of any of the
foregoing, except that in the ordinary course of its business and consistent
with its past practices, Surge may issue shares upon exercise of outstanding
options or warrants and will notify Seller of any such exercise or conversion
promptly;
(iv) not (i) incur or become contingently liable with respect
to any indebtedness for borrowed money, except in the ordinary course of
business, (ii) redeem, purchase, acquire or offer to purchase or acquire any
shares of its capital stock, other than as required by the governing terms of
such securities, (iii) take or fail to take any action which action or failure
to take action would cause Surge or its shareholders (except to the extent that
any shareholders receive cash in lieu of fractional shares) to recognize gain or
loss for federal income tax purposes as a result of the consummation of the
Acquisition, (iv) make any acquisition of any assets (except in the ordinary
course of business) or businesses, (v) sell any assets (except in the ordinary
course of business) or businesses, or (vi) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(v) use all reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its present officers
and key employees, and preserve the goodwill and business relationships with
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suppliers, distributors, customers, and others having business relationships
with Surge or the Seller and not engage in any action, directly or indirectly,
with the intent to impact adversely the transactions contemplated by this
Agreement;
(vi) not enter into or amend any employment, severance,
special pay arrangement with respect to termination of employment or other
similar arrangements or agreements with any directors or officers;
(vii) not increase the rate of remuneration payable to any of
its directors or officers, except in the customary and usual course of business
and consistent with past practices, or agree to do so;
(viii) not adopt, enter into or amend any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred compensation,
health care, employment or other employee benefit plan, agreement, trust, fund
or arrangement for the benefit or welfare of any employee or retiree, except in
the ordinary and usual course of business, consistent with past practices or as
required to comply with changes in applicable law;
(ix) file with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it pursuant to the Exchange Act; and
(x) maintain with financially responsible insurance companies
insurance on its tangible assets and its businesses in such amounts and against
such risks and losses as are consistent with past practice.
(b) Certain Actions.
Except with respect to this Agreement and the transactions contemplated
hereby, Surge, Seller and the Buyer shall not, directly or indirectly, solicit
any Acquisition Proposal. "Acquisition Proposal" shall mean any tender offer or
exchange offer or any proposal for a merger, acquisition of all of the stock or
assets of, or other business combination involving the acquisition of, such
party or any of its subsidiaries, or the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, such party or any of its
subsidiaries. Surge, Seller and the Buyer shall not, directly or indirectly,
furnish to any third party any non-public information that it is not legally
obligated to furnish, negotiate with respect to, or enter into any agreement
with respect to, any Acquisition Proposal, but may communicate information about
such an Acquisition Proposal to its stockholders if and to the extent that it is
required to do so in order to comply with its legal obligations. Surge, Seller
and the Buyer, as applicable, shall promptly advise the other parties hereto
following the receipt of any Acquisition Proposal and the details thereof, and
advise such other parties hereto of any developments with respect to such
Acquisition Proposal promptly upon the occurrence thereof. Surge, Seller and the
Buyer shall (a) immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any person or entity conducted
heretofore with respect to any of the foregoing, and (b) direct and use its
reasonable efforts to cause all of its investment bankers, financial advisors,
attorneys, accountants, consultants or other representatives not to engage in
any of the foregoing.
Section 13 - Additional Agreements
(a) Issuance of Surge Securities, Registration.
(i) The Surge Class A Preferred Stock and Surge Class B Common
Stock (including all shares issuable upon conversion of the Surge Class A
Preferred Stock and Class A Warrants) to be issued pursuant to this Agreement
and the Acquisition will be registered on an S-4 (or such successor form)
registration statement on or before the Effective Date.
(ii) The Orbit Options described in Section 3(f)(iv),
including all shares issuable upon exercise of all of such options will be
registered at the same time as well as the Employee Option Pool described in
Section 13(o) below on an S-8 (or such successor form) registration statement,
immediately following the Effective Date.
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(b) Nasdaq Compliance.
Surge shall use its best efforts to obtain a written ruling from The
Nasdaq Stock Market, Inc. ("Nasdaq") that Marketplace Rule 4330(f) will not
apply to the Acquisition. In the event that such rule does apply, the Seller
shall comply with all applicable requirements for initial inclusion of the Class
B Common Stock on the NASDAQ Small Cap Market or AMEX as a condition to
Post-Closing Compliance.
(c) Stockholders' Meetings.
Subject to applicable law, each of Surge and the Seller, through their
respective Boards of Directors, shall, in accordance with applicable law and
subject to the fiduciary duties of their respective Boards of Directors under
applicable law as determined by such directors in good faith after consultation
with and based upon the advice of outside counsel: (a) jointly prepare a joint
Proxy Statement/Prospectus for use in connection with obtaining the requisite
stockholder approvals and the issuance of the Surge Securities pursuant to the
Acquisition; (b) duly call, give notice of, convene and hold a special meeting
(the "Special Meeting") of its respective stockholders as soon as practicable
for the purpose (in the case of Seller), of approving as required by Nevada
Business Corporation Law, the Acquisition, this Agreement and the transactions
contemplated hereby (the "Seller Shareholder Approval") or in the case of Surge,
of approving as required by the New York Law the Acquisition, this Agreement
(including the transactions contemplated hereby), the Certificate of Amendment
to the Certificate of Incorporation and the authorization and issuance of Class
B Common Stock in connection with the Acquisition (the "Surge Stockholder
Approval" and together with Seller Shareholder Approval, the "Stockholder
Approvals"); and (c) include in the Proxy Statement/Prospectus for use in
connection with the Special Meeting of each of Surge and the Seller the
recommendation of their respective Boards of Directors that stockholders vote in
favor of Surge Stockholder Approval or the Seller Stockholder Approval, as the
case may be. Surge and the Seller will use commercially reasonable efforts to
cause the Special Meetings to occur as soon as practicable after the date
hereof.
(d) Access to Surge/Seller Information.
Subject to any applicable contractual confidentiality obligations
(which Surge and the Seller shall use their best efforts to cause to be waived),
Company and Seller shall afford each other and their respective accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Date to (a) all of their
respective properties, books, contracts, agreements and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of Company and the Seller, as
applicable, as may be reasonably requested.
(e) Confidentiality.
Each of the parties hereto hereby agrees to maintain the
confidentiality of the information obtained in any investigation pursuant to
Section 13(d), or pursuant to the negotiation of this Agreement, in accordance
with the provisions of the Confidentiality Agreement between Surge and the
Seller dated as of September 23, 1999.
(f) Public Disclosure.
No disclosure (whether or not in response to an inquiry) of the
existence or nature of this Agreement shall be made by any party hereto unless
approved in writing by duly authorized officers of both Surge and the Seller
prior to release, provided that such approval shall not be unreasonably withheld
and subject in any event to Surge's and Seller's obligations to comply with
applicable securities laws and NASDAQ or such other stock market regulations as
applicable, in order to satisfy the listing and disclosure requirements of all
such exchanges or markets where Surge's securities are listed.
(g) Reasonable Efforts/Consents.
Subject to the terms and conditions provided in this Agreement, each of
the parties hereto shall use its reasonable efforts to take promptly, or cause
to be taken, all actions, and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated
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hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement.
(h) Notification of Certain Matters.
Seller shall give prompt notice to Surge, and Surge shall give prompt
notice to the Seller, of (a) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which is likely to cause any representation or
warranty of the Seller, Surge or the Buyer, respectively, contained in this
Agreement to be untrue or inaccurate in any material respect at or prior to the
Effective Date except as contemplated by this Agreement (including the schedules
of the Seller hereto), and (b) any failure of the Seller, Surge or the Buyer, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 13(h) shall not limit or
otherwise affect any remedies available to the party receiving such notice.
(i) Affiliate Agreement.
Schedule 13(i) hereto sets forth those persons who, in the Seller's
reasonable judgment, are "affiliates" of the Seller within the meaning of Rule
145 (each such person an "Affiliate") promulgated under the Act ("Rule 145").
The Seller shall provide Surge such information and documents as Surge shall
reasonably request for purposes of reviewing such list. The Seller has delivered
or shall cause to be delivered to Surge prior to the Closing Date from the
Seller's Affiliates an executed affiliate agreement substantially in the form
attached hereto as Exhibit 13(i) (the "Affiliate Agreement"). Surge shall be
entitled to place appropriate legends on the certificates evidencing any Surge
Class A Preferred Stock and Class B Common Stock to be received by Affiliates of
the Seller pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Surge Securities consistent
with the terms of such Affiliate Agreement.
(j) Blue Sky Laws.
Surge shall take such steps as may be necessary to comply with the
securities and Blue Sky Laws of all jurisdictions which are applicable to the
issuance of the Surge Securities pursuant hereto. The Seller shall use its best
efforts to assist Surge as may be necessary to comply with the securities and
Blue Sky Laws of all jurisdictions which are applicable in connection with the
issuance of Surge Securities pursuant hereto.
(k) Corrections to the Proxy Statement/Prospectus.
Prior to the date of the Stockholder Approvals, each of Surge, the
Seller and the Buyer shall correct promptly any information provided by it to be
used specifically in the Proxy Statement/Prospectus or relating to it and
incorporated by reference into the Proxy Statement/Prospectus that shall have
become false or misleading in any material respect and shall take all steps
necessary to make any requisite filings and have declared effective or cleared
any amendment or supplement to the Proxy Statement/Prospectus so as to correct
the same and to cause the Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of the Seller and Surge, in each case to the
extent required by applicable law.
(l) Shareholder Rights Protection Plan.
At or prior to the Effective Date, Surge shall amend its Shareholder
Protection Rights Plan, as provided therein, to exclude the Acquisition.
(m) Indemnification and Insurance.
(i) Surge and the Seller agree that all rights to
indemnification existing in favor of the present or former directors, officers
and employees of the Seller (as such) or any of its subsidiaries or present or
former directors of the Seller or any of its subsidiaries serving or who served
at the Seller's or any of its subsidiaries' request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other
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enterprise, as provided in the Seller's Certificate of Incorporation or Bylaws,
or the Certificate of Incorporation or Bylaws (or similar governing documents)
of any of the Seller's subsidiaries and any indemnification agreements as in
effect as of the date hereof with respect to matters occurring at or prior to
the Effective Date shall survive the Acquisition and shall continue in full
force and effect and without modification (other than modifications which would
enlarge the indemnification rights) for a period of not less than the statute of
limitations applicable to such matters, and Surge shall comply fully with its
obligations hereunder and thereunder.
(ii) The officers and directors of Surge and the Buyer after
the Effective Date shall amend the Seller's liability insurance to have Surge
assume the payment of all premiums for such insurance and to include the
officers and directors of Seller set forth on Schedule 13(m) hereto.
Notwithstanding the foregoing, Seller shall have obtained directors' and
officers' liability insurance, reasonably satisfactory to Surge, to cover all
claims made for matters which arise before the Effective Date.
(iii) In the event Surge or the Buyer or any of their
respective successors or assigns (i) consolidates with or merges into any other
entity and is not the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers all or substantially all of its
properties and assets to any person or entity, proper provisions shall be made
so that the successors and assigns of Surge or the Buyer, as appropriate, assume
the obligations set forth in this Section 13(m).
(n) Change in Name.
Simultaneously with the Acquisition, Surge shall amend its Certificate
of Incorporation to change its name to one mutually acceptable to Seller and
Surge. Prior to such name change, Surge shall take such actions and execute,
deliver and file such documents as are necessary to effect the name change,
including, but not limited to, obtaining approval from Surge's Board of
Directors and stockholders, filing a certificate of amendment to Surge's
Certificate of Incorporation with the Secretary of State of the State of New
York, obtaining a new trading symbol and making the requisite filings with
and/or obtaining the requisite approvals from the SEC and the Nasdaq Stock
Market or AMEX.
(o) Employee Option Pool.
Subject to Surge Stockholder Approval, Surge shall establish after the
Acquisition an employee option pool representing not more than twenty percent
(20%) of Surge's outstanding Class A Common Stock, which shall be managed by the
Compensation Committee of Surge which shall grant all Stock Options to Surge
Employees. The Surge Common Stock underlying the options issued under said stock
option plan shall be registered for resale as soon as possible following the
Effective Date on a Form S-8 Registration Statement filed with the SEC.
Section 14. Conditions Precedent to the Buyer's and Surge's
Obligations. The obligations of the Buyer and Surge under this Agreement are
subject to the following conditions (any of which may be waived in writing in
whole or in part by the Buyer or Surge) both at the Closing and Effective Dates:
(a) Representations and Warranties True.
There shall not have been any breach of the representations,
warranties, covenants and agreements of the Seller contained in this Agreement
or the Schedules hereto and all such representations and warranties shall be
true at all times, except to the extent that any such representation or warranty
is expressly stated to be true as of time other than the Closing and Effective
Date.
(b) Agreements and Covenants.
The Seller shall have performed and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to be
performed or complied with by it. All documents and instruments required in
connection with this Agreement shall be reasonably satisfactory in form and
substance to the Buyer and Surge.
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(c) Officer's Certificate.
The Buyer shall have received certificates signed by the Seller,
certifying that the conditions specified in subsections (a) and (b) above have
been fulfilled.
(d) No Material Adverse Change.
The Buyer shall have received certificates signed by the Seller,
certifying that there has been no material adverse change in the Assets since
the Balance Sheet Date.
(e) Consents.
The Seller shall have obtained and delivered to the Buyer any required
consents or approvals of any other third parties whose consent is required to
the transactions contemplated hereunder.
(f) Legal Opinion.
The Buyer shall have received a written opinion of counsel for the
Seller dated as of the Closing Date and Effective Date in the form of Exhibit
14(f) hereto.
(g) Bill of Sale.
The Buyer shall have received a bill of sale or bills of sale and
documentation and such other good and sufficient instruments of transfer and
conveyance as, in the reasonable opinion of counsel to the Buyer, shall be
effective to vest in the Buyer good and valid title to the Assets, as herein
provided.
(h) Fairness Opinion.
Surge shall have received from a recognized investment banking or
valuation firm reasonably acceptable to Seller an opinion to the effect that the
Acquisition is appropriate for Surge and its public shareholders from a
financial point of view, and such opinion shall not have been withdrawn or
modified in any material adverse respect as of the Effective Date. Surge shall
not be obligated to incur any expense in obtaining such fairness opinion until
the repayment of the Bridge Loan described in Section 3(h) above and the
delivery of Updated Seller Financials described in Section 7(f) above.
(i) Nasdaq Compliance.
Surge and Seller will have to comply with Nasdaq Marketplace Rule
4330(f), and Surge will have to comply with all applicable requirements for
initial inclusion of the post-merger Surge Class A Common Stock and Class B
Common Stock under the Nasdaq Marketplace Rules (or on the AMEX, if applicable).
To the extent that operation of the Nasdaq Marketplace Rules (or AMEX listing
rules, if applicable) preclude meeting any particular requirements until the
Acquisition is consummated, the Seller shall demonstrate to Surge's satisfaction
that the post-Acquisition Surge and the Surge Class A Common Stock and Class B
Common Stock will meet all such applicable requirements.
(j) Representations and Warranties.
The representations and warranties of the Seller contained in this
Agreement shall be true and correct in all material respects on and as of the
date made and the Closing Date, except for changes contemplated by this
Agreement (including the schedules of the Seller) and except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date), with the same force
and effect as if made on and as of the Closing Date and Effective Date, except,
in all such cases, for such breaches, inaccuracies or omissions of such
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representations and warranties which have neither had nor reasonably would be
expected to have a Material Adverse Effect on the Seller; and Surge and the
Buyer shall have received a certificate to such effect signed on behalf of the
Seller by the President of the Seller. "Material Adverse Effect" on a party
shall mean an event, change or occurrence which, individually or together with
any other event, change or occurrence, has a material adverse impact on (i) the
financial position, business, or results of operations of such party and its
subsidiaries, taken as a whole, or (ii) the ability of such party to perform its
obligations under this Agreement or to consummate the Acquisition or the other
transactions contemplated by this Agreement, provided that "Material Adverse
Effect" shall not be deemed to include the impact of (1) changes in laws of
general applicability or interpretations thereof by courts or governmental
authorities, (2) changes in GAAP, (3) actions and omissions of a party (or any
of its subsidiaries) taken with the prior written consent of the other party in
contemplation of the transactions contemplated hereby, and (4) the direct
effects of compliance with this Agreement on the operating performance of the
parties, including expenses incurred by the parties in consummating the
transactions contemplated by this Agreement;
(k) Agreements and Covenants.
The Seller shall have performed or complied in all material respects
with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Closing Date and Effective Date, and
Surge and the Buyer shall have received a certificate to such effect signed by
the President of the Seller;
(l) Comfort Letters.
Surge shall have received "comfort" letters from Infante Lago &
Company, independent public accountants for the Seller (or such other
independent accounting firm reasonably acceptable to Surge), dated the effective
date of the Proxy Statement/Prospectus and the Effective Date (or such other
date reasonably acceptable to Surge) with respect to certain financial
statements and other financial information included in the Proxy
Statement/Prospectus in customary form;
(m) Updated Financial Statements.
Surge shall have received from the Seller Updated Seller Financial
Statements described in Section 7(f) above, in form and substance satisfactory
to Surge;
(n) Affiliate Agreements.
Each of the parties identified by the Seller as being one of its
Affiliates shall have delivered an executed Affiliate Agreement in substantially
the form of Exhibit 13(i) which shall be in full force and effect;
(o) Employment Agreements.
Each of the persons listed on Schedule 3(d)(i) hereto shall have
executed and delivered to Surge employment agreements in substantially the form
of Exhibit 3(d)(1) attached hereto or Surge shall have assumed the existing
employment agreements of all executive officers of Seller;
(p) Due Diligence.
Surge shall have concluded its due diligence of the Seller with
results, in the sole discretion of the Board of Directors of Surge, satisfactory
to it; and
(q) Additional Certificates.
Seller shall have furnished to Surge such additional certificates,
opinions and other documents as Surge may have reasonably requested as to any of
the conditions set forth in this Section 14(q).
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(r) Certificates, etc.
The Buyer shall have received originals or certified copies, reasonably
satisfactory in form and substance to the Buyer, of all such corporate documents
of the Seller as the Buyer shall reasonably require, including without
limitation the following:
(i) the Certificate of Incorporation of the Seller and all
amendments thereto and restatements thereof certified as of a recent date by the
Secretary of State of the State of Nevada;
(ii) the By-laws of the Seller and all amendments thereto and
restatements thereof certified as of the Closing Date by an officer of the
Seller;
(iii) certificate of existence of the Secretary of State of
the State of Nevada, certifying as of a recent date that the Seller exists under
the laws of its state of incorporation;
(iv) The Buyer shall have received certified resolutions of
the Seller's Board of Directors authorizing the execution and delivery of this
Agreement, the transactions contemplated by this Agreement and of the
performance of the obligations of the Seller under this Agreement and such other
instruments and agreements, and evidencing the authority of each person
executing this Agreement and such other instruments and agreements on behalf of
each of them to do so, certified as of a recent date by each Secretary or
another officer of the Seller and Surge, as the Seller and Surge may reasonably
request; and
(v) The Buyer shall have received a Certificate of Incumbency
identifying the officers and directors of the Seller immediately before the
Closing Date and the Effective Date.
(s) Non-Competition Agreements.
The Buyer shall have received from each of the persons no longer
employed by the Seller and listed on Schedule 14(s), a Non-Competition Agreement
in the form of Exhibit 14(s) attached hereto. Such Agreement shall be reasonably
satisfactory in form and substance to counsel for the Buyer.
(t) Other Documents.
The Buyer shall have received all documents required to be delivered to
the Buyer under any other provision of this Agreement.
(u) Escrow Agreement.
Delivery to Surge of the Escrow Agreement anticipated by Section 3(b),
executed by all parties thereto.
Section 15. Condition of Assets.
Except as otherwise provided herein, the Fixed Assets will be sold "as
is, where is and with all faults."
Section 16. Risk of Loss; Damage to or Destruction of Assets.
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Seller assumes all risks and liability for damage or injury occurring
to the Assets by fire, storm, accident, or other casualty until the Effective
Date has been consummated. If the Assets sustain major or material damage during
the period from and after the date hereof and prior to the Effective Date caused
by fire or other casualty, either Seller or Buyer may respectively elect to
terminate this Agreement by written notice to the other within fifteen (15) days
after notice of such event, or at Effective Date, whichever is earlier. If
neither Seller nor Buyer so elects pursuant to this Section 16 to terminate its
obligations under this Agreement, the Effective Date will take place as provided
herein without abatement of the Purchase Price and Seller will have no
obligation of repair or replacement.
Section 17. Conditions Precedent to the Seller's Obligations.
The obligations of the Seller to consummate the Acquisition and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing Date and Effective Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Seller:
(a) Representations and Warranties True.
The representations and warranties of Surge and the Buyer contained in
this Agreement shall be true and correct in all material respects on and as of
the date made, the Closing Date and Effective Date, except for changes
contemplated by this Agreement and except for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), with the same force and effect as if
made on and as of the Closing Date and Effective Date.
(b) Agreements and Covenants.
Surge and the Buyer shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by them on or prior to the Closing Date and Effective
Date, and the Seller shall have received a certificate to such effect signed by
the Chief Executive Officer or President of each of Surge and the Buyer;
(c) Compliance Certificates.
The Seller shall have received certificates dated the Closing Date and
the Effective Date and signed by the Buyer and Surge, certifying that the
conditions specified in subsections (a) and (b) above have been fulfilled.
(d) Legal Opinion.
The Seller shall have received a legal opinion from Snow Becker Krauss
P.C., counsel to Surge and the Buyer, in substantially the form attached hereto
as Exhibit 17(d);
(e) Comfort Letters.
The Seller shall have received "comfort" letters from Seligson &
Giannattasio, independent public accountants for Surge, dated the effective date
of the Proxy Statement/Prospectus and the Effective Date (or such other date
reasonably acceptable to the Seller) with respect to certain financial
statements and other financial information included in the Proxy
Statement/Prospectus in customary form;
(f) No Material Adverse Change.
Since December 1, 1998, no event shall have occurred that would
constitute a Material Adverse Effect to Surge;
(g) Nasdaq SmallCap Listing.
Surge's capital stock shall be listed for trading on the Nasdaq
SmallCap Market or AMEX and the Class B Common Stock to be issued in connection
with the Acquisition shall have been authorized for listing on the Nasdaq
SmallCap Market or AMEX upon official notice of issuance.
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(h) Employment Agreements.
Surge shall have executed and delivered to Ira Levy and Steven Lubman
amended employment agreements substantially in the form of Exhibit 3(d)(2)
attached hereto and in accordance with the provisions of a letter agreement
dated October 8, 1999, and Surge shall have assumed any existing employment
agreements to which the Seller is a party;
(i) Due Diligence.
The Seller shall have conducted its due diligence of Surge and the
Buyer with results, in the sole discretion of the Board of Directors of the
Seller, satisfactory to it;
(j) Additional Certificates.
Surge and the Buyer shall have furnished to the Seller such additional
certificates, opinions and other documents as the Seller may have reasonably
requested as to any of the conditions set forth in this Section 17(j).
(k) Payment of Purchase Price.
At the Closing, the Seller shall have received the Purchase Price as
set forth in Section 2 hereof.
(l) Board Resolutions.
The Seller shall have received copies of the minutes and resolutions of
the Board of Directors of the Buyer and Surge showing the authorization and
approval by such Boards of the execution and delivery by the Buyer and Surge to
the Seller of this Agreement and the agreements and instruments provided for
herein and of the performance of the obligations of the Buyer and Surge under
this Agreement and such other instruments and agreements, and evidencing the
authority of each person executing this Agreement and such other instruments and
agreements on behalf of each of them to do so, certified as of a recent date by
each Secretary or another officer of the Buyer and Surge, as the Seller may
reasonably request.
(m) Certificate of Incumbency.
The Seller shall have received a certificate of incumbency identifying
the officers and directors of the Buyer and Surge immediately before the Closing
Date and the Effective Date.
(n) Other Documents.
The Seller shall have received all documents required to be delivered
to the Seller under any other provision of this Agreement.
(o) Escrow Agreement.
Delivery to Seller of the Escrow Agreement anticipated by Section 3(b),
executed by all parties thereto.
(p) Fairness Opinion.
Seller shall have received from a recognized investment banking or
valuation firm reasonably acceptable to Surge an opinion to the effect that the
Acquisition is appropriate for Seller and its public shareholders from a
financial point of view, and such opinion shall not have been withdrawn or
modified in any material adverse respect as of the Effective Date.
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Section 18. Conditions Precedent to Obligations of Both Seller and
Buyer.
The obligations of both the Seller and the Buyer to complete this
transaction shall be subject to the fulfillment at or prior to the Effective
Date of the following conditions:
(a) No Injunctions.
No action or proceeding shall have been instituted or threatened by any
public authority or private person prior to the Effective Date before any court
or administrative body to restrain, enjoin or otherwise prevent the consummation
of this transaction or to recover any damages or obtain other relief as a result
of this transaction.
(b) Consents.
Any consent to the transaction considered by the Seller, Surge or the
Buyer to be necessary or advisable under any agreement or contract, the
withholding of which might have, in the judgment of the Seller, Surge or the
Buyer, a material adverse effect on the financial condition of the Business,
shall have been obtained.
Section 19. Status of Schedules and Exhibits as of Signature Date.
(a) The parties each acknowledge and agree that as of the date this
Agreement is executed and delivered, none of the Schedules or Exhibits to this
Agreement have been prepared, delivered, reviewed, or approved by the parties or
their respective counsel. In addition to and without in any way limiting, any
other express and implied condition precedent to the obligations of any of the
parties under this Agreement, the obligations of each of the parties under this
Agreement are hereby made subject to and contingent upon the following:
(i) The preparation, delivery, and approval by the parties of
all of the Schedules described in this Agreement;
(ii) The preparation, delivery, and approval by the parties of
all of the Exhibits to this Agreement; and
(iii) All other express and implied conditions precedent to
the obligations of the parties under this Agreement shall have been satisfied or
waived at or prior to the Effective Date.
(b) In addition, notwithstanding any other term, condition, covenant,
or provision of this Agreement or of any Other Agreement, the parties have not
made, and shall not be deemed to have made by their execution and delivery of
this Agreement, any representation or warranty with respect to any:
(i) Schedule described in this Agreement;
(ii) Exhibit to this Agreement;
(iii) Document or state of facts pertaining to any Schedule or
Exhibit to this Agreement; or
(iv) The intended contents to any document or state of facts
pertaining to any Schedule or Exhibit to this Agreement.
Any representations or warranties with respect to those matters or
items shall be made (unless waived or amended) only as of the Effective Date,
and only with respect to the Schedules and Exhibits attached to this Agreement
as of the Effective Date.
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Section 20. Termination, Amendment and Waiver
(a) Termination. This Agreement may be terminated and the Acquisition
abandoned at any time prior to the Effective Date, whether before or after the
Stockholder Approvals are obtained:
(i) by mutual consent of the Seller and Surge;
(ii) by Surge or the Seller if (i) the Effective Date has not
occurred by March 31, 2000 (provided that the right to terminate this Agreement
under this clause 20(a)(ii) shall not be available to any party whose willful
failure to fulfill any obligation hereunder has been the cause of, or resulted
in, the failure of the Effective Date to occur on or before such date); (ii)
there shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Acquisition; (iii) there shall be any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Acquisition by any governmental entity that would make consummation of the
Acquisition illegal; or (iv) if any of the conditions precedent to the Effective
Date set forth in this Agreement have not been met and have not been waived in
writing by the party whose consent is required.
(iii) by Surge or the Seller if there shall be any action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the Acquisition, by any governmental entity, which
would: (i) prohibit Surge's or the Seller's ownership or operation of any
portion of the business of the Seller or Surge; or (ii) compel Surge or the
Seller to dispose of or hold separate, as a result of the Acquisition, any
material portion of the business or assets of the Seller or Surge;
(iv) by Surge if it is not in material breach of its
obligations under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of the Seller and as a result of such breach the conditions set forth
in Section 14(a) or Section 14(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by the Seller
within ten (10) days after the giving of written notice by Surge of such breach
through the exercise of the Seller's reasonable best efforts, then for so long
as the Seller continues to exercise such reasonable best efforts Surge may not
terminate this Agreement under this Section 20(a)(iv) unless such breach is not
cured within ten (10) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(v) by the Seller if it is not in material breach of its
obligations under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement on
the part of Surge or the Buyer and as a result of such breach the conditions set
forth in Section 17(a) or Section 17(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Surge or the
Buyer within ten (10) days after the giving of written notice by the Seller of
such breach through the exercise of Surge's or the Buyer's reasonable best
efforts, then for so long as Surge or the Buyer continues to exercise such
reasonable best efforts the Seller may not terminate this Agreement under this
Section 20(a)(v) unless such breach is not cured within ten (10) days (but no
cure period shall be required for a breach which by its nature cannot be cured);
(vi) by Surge if the Seller fails to recommend to its
shareholders through its Board of Directors the approval of the transactions
contemplated by this Agreement, or withdraws such recommendations, or if the
required approvals of the shareholders of the Seller contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of shareholders duly convened
therefor or at any adjournment thereof,
(vii) by the Seller if Surge fails to recommend to its
stockholders through its Board of Directors the approval of the transactions
contemplated by this Agreement, or withdraws such recommendation, or if the
required approvals of the stockholders of the Surge contemplated by this
Agreement shall not have been obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of stockholders duly convened
therefor or at any adjournment thereof, or
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(viii) by Surge or the Seller upon execution prior to the
Effective Date of a definitive agreement in connection with an Acquisition
Proposal as contemplated in Section 12(b).
Where action is taken to terminate this Agreement pursuant to this
Section 20(a), it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
(b) Automatic Termination.
Anything to the contrary notwithstanding, this Agreement will be
automatically terminated if Surge does not receive the appropriate approval (as
required by New York law) of its stockholders for any or all of the following:
To amend its Certificate of Incorporation to change Surge's name to a
name mutually acceptable to Seller;
To authorize the registered number of shares of Class A Common Stock,
Class B Common Stock and Class A Preferred Stock;
To issue the requisite number of shares of Class B Common Stock;
The Acquisition; and/or
This Agreement.
(c) Effect of Termination.
In the event of termination of this Agreement as provided in Section
20(a), this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of Surge, the Buyer or the Seller, or their
respective officers, directors or stockholders, provided that each party shall
remain liable for any breaches of this Agreement prior to its termination; and
provided further that, the provisions of this Section 20(c) and Sections 13(e),
13(f), 13(m), 23 and 24 of this Agreement shall remain in full force and effect
and survive any termination of this Agreement.
(d) Amendment.
Except as is otherwise required by applicable law, this Agreement may
be amended by the parties hereto at any time only by execution of an instrument
in writing signed on behalf of each of the parties hereto.
(e) Extension, Waiver.
At any time prior to the Effective Date, Surge and the Buyer, on the
one hand, and the Seller, on the other, may, to the extent legally allowed, (a)
extend the time for the performance of any of the obligations of the other party
hereto, (b) waive any inaccuracies in the representations and warranties made to
such party contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party at any time or
times to require performance of any provision hereof shall in no manner affect
the right of such party at a later time to enforce the same or any other
provision of this Agreement. No waiver of any condition or of the breach of any
term in this Agreement in one or more instances shall be deemed to be or
construed as a further or continuing waiver of such condition or breach or a
waiver of any other condition or of the breach of any other term of this
Agreement.
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Section 21. Bulk Sale Act. The Seller and the Buyer agree to waive
compliance with all applicable State Bulk Sales Acts and the rules and
regulations promulgated thereunder. However, the Seller shall indemnify and hold
harmless the Buyer for any losses or expenses incurred by the Buyer as a result
of such waiver of compliance with such Bulk Sales Acts.
Section 22. Orderly Transfer. The Seller shall, and hereby agrees to,
cooperate with the Buyer and Surge in all reasonable ways, at no direct or
indirect cost to the Seller, in effecting any orderly transfer to the Buyer of
the Assets to be acquired by the Buyer hereunder.
Section 23. Expenses. Each party hereto shall pay its own expenses and
fees incidental to the preparation of this Agreement, the carrying out of the
provisions of this Agreement and the consummation of the transactions
contemplated hereby, except as hereinafter described. Notwithstanding the
foregoing, the costs of the fairness opinions for both Seller and Surge and the
Joint Proxy Statement/Prospectus shall be divided in half between the Seller and
Surge.
Section 24. General Provisions
(a) Notices.
All notices and other communications hereunder shall be in writing,
shall be effective when received, and shall in any event be deemed to have been
received (a) when delivered, if delivered personally or by commercial delivery
service, (b) five (5) business days after deposit with U.S. Mail, if mailed by
registered or certified mail (return receipt requested), (c) one (1) business
day after the business day of deposit with Federal Express or similar nationally
recognized overnight courier for next day delivery (or, two (2) business days
after such deposit if deposited for second business day delivery), if delivered
by such means, or (d) one (1) business day after delivery by facsimile
transmission with copy by U.S. Mail, if sent via facsimile plus mail copy (with
acknowledgment of complete transmission), to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to the Seller, to:
Global DataTel, Inc.
3333 Congress Avenue, Suite 404
Delray Beach, FL 33445
Attention: Richard Baker, President
Telephone: (561) 276-8260
Facsimile No.: (561) 276-7960
with a copy to:
Sonnenblick Parker & Selvers, P.C.
4400 Route 9
South Freehold, NJ 07728
Attention: Gerald Silvers, Esq.
Telephone: (732) 431-1234
Facsimile: (732) 431-3994
if to Surge or the Buyer, to:
Surge Components, Inc.
1016 Grand Avenue
Deer Park, New York 11729-0125
Attention: Ira Levy, President
Telephone No.: (516) 595-1818
Facsimile No.: (516) 242-6932
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with a copy to:
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Attention: Elliot Lutzker, Esq.
Telephone No.: (212) 455-0322
Facsimile No.: (212) 949-7052
(b) Interpretation.
The words "include," "includes" and "including" when used herein shall
be deemed in each case to be followed by the words "without limitation." The
word "agreement" when used herein shall be deemed in each case to mean any
contract, commitment or other agreement, whether oral or written, that is
legally binding. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When reference is made herein to "the business
of" an entity, such reference shall be deemed to include the business of all
direct and indirect subsidiaries of such entity. Reference to the subsidiaries
of an entity shall be deemed to include all direct and indirect subsidiaries of
such entity.
(c) Counterparts.
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other party, it being understood that all parties need not sign
the same counterpart.
(d) Entire Agreement.
This Agreement, the Schedules and Exhibits hereto, and the documents
and instruments and other agreements among the parties hereto referenced herein:
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, including but not limited to, the Merger Agreement and Plan or
Reorganization dated as of October 8, 1999, and (b) are not intended to confer
upon any other person any rights or remedies hereunder.
(e) Severability.
In the event that any provision of this Agreement or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
(f) Other Remedies.
Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
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(g) Specific Performance.
The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
(h) Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof, provided that
issues involving the corporate governance of any of the parties hereto shall be
governed by their respective jurisdictions of incorporation. Each of the parties
hereto agrees that process may be served upon them in any manner authorized by
the laws of the State of New York, and that such process may be served outside
the state of New York, for such persons and waives and covenants not to assert
or plead any objection which they might otherwise have to such jurisdiction and
such process.
(i) Rules of Construction.
The parties hereto agree that they have been represented by counsel
during the negotiation and execution of this Agreement and, therefore, waive the
application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against the
party drafting such agreement or document.
(j) Assignment.
No party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written approval of the
other parties hereto. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
(k) Absence of Third Party Beneficiary Rights.
No provisions of this Agreement are intended, nor shall be interpreted,
to provide or create any third party beneficiary rights or any other rights of
any kind in any client, customer, affiliate, partner of any party hereto or any
other person or entity unless specifically provided otherwise herein.
(l) Mediation and Arbitration.
If any dispute, controversy or claim arises in connection with the
performance or breach of this Agreement between the parties, a party hereto may,
upon written notice to the other parties, request facilitated negotiations. Such
negotiations shall be assisted by a neutral facilitator acceptable to all
parties and shall require the best efforts of the parties to discuss with each
other in good faith their respective positions and, respecting their different
interests, to finally resolve such dispute.
A party may disclose any facts to the other parties or to the
facilitator which such party believes, in good faith, to be necessary to resolve
the dispute. All such disclosures shall be deemed in furtherance of settlement
efforts and thus confidential. Except as agreed to by all parties, the
facilitator shall keep confidential all information disclosed during the
negotiations. The facilitator shall not act as a witness for either party in any
subsequent arbitration between the parties.
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Such facilitated negotiations shall conclude within sixty days from receipt of
the written notice, unless extended by mutual consent of the parties. The costs
incurred by each party in such negotiations shall be borne by it. Any fees or
expenses of the facilitator shall be borne equally by all parties.
If any dispute, controversy or claim arises in connection with the
performance or breach of this Agreement which cannot be resolved by facilitated
negotiations, then such dispute, controversy or claim shall be settled by
arbitration in accordance with the laws of the State of New York and then
current Commercial Arbitration Rules of the American Arbitration Association,
except that no pre-hearing discovery will be permitted unless specifically
authorized by the arbitration panel. The confidentiality provisions applicable
to facilitated negotiations shall also apply to arbitration.
The award issued by the arbitration panel may be confirmed in a
judgment by any federal or state court of competent jurisdiction. All reasonable
costs of both parties, as determined by the arbitration panel, including (i) the
fees and expenses of the American Arbitration Association and of the arbitration
panel, and (ii) the costs, including reasonable attorneys' fees, incurred to
confirm the award in court, shall be borne entirely by the non-prevailing party
(to be designated by the arbitration panel in the award) and may not be
allocated between the parties by the arbitration panel.
(m) Disclosure.
Disclosure on one schedule, attachment or document provided pursuant to
any paragraph or subparagraph of this Agreement shall be deemed disclosure under
any other applicable paragraph or subparagraph of this Agreement.
C-42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Acquisition
Agreement and Plan of Reorganization to be signed by their duly authorized
respective officers, all as of the date first written above.
SELLER:
GLOBAL DATATEL, INC.
By: /s/ Richard Baker
---------------------------------------
Richard Baker, President
SURGE COMPONENTS, INC.
By: /s/ Ira Levy
---------------------------------------
Ira Levy, President
BUYER:
GDIS ACQUISITION CORP.
By: /s/ Ira Levy
---------------------------------------
Ira Levy, President
C-43
<PAGE>
ANNEX D
MERGER AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
MAILENCRYPT.COM, INC.
MAIL ACQUISITION CORPORATION
AND
SURGE COMPONENTS, INC.
Dated February 16, 2000
D-1
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.1 Administrative Services Agreement
1.5(b)(iii) Form of Amendment to the Employment Agreements of Ira Levy and Steven Lubman
1.7(a) Form of Promissory Note
5.1 Form of Registration Rights Agreement
5.10 Form of Affiliate Agreement
6.2(c) Form of Opinion of Bryan Cave LLP
6.2(e)(1) and (2) Form of Employment Agreements
6.3(c) Form of Opinion of Snow Becker Krauss P.C.
</TABLE>
D-2
<PAGE>
SCHEDULES
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
Schedule 1.6(d)(iii) Options Issued and Outstanding under the 1995 Employee Stock Option Plan of Surge
Components, Inc. ("Parent")
Schedule 2.3 Options, Warrants, etc. Issued and Outstanding of MailEncrypt.com, Inc. (the "Company")
Schedule 2.4 Subsidiaries of Company
Schedule 2.6 Outstanding Taxes, Assessments and Levies of Company
Schedule 2.7 Litigation and Proceedings Against Company
Schedule 2.8 Conflicts, Required Filings and Consents of Company
Schedule 3.4 Subsidiaries of Parent
Schedule 3.6 Outstanding Taxes, Assessments and Levies of Parent
Schedule 3.8 Conflicts, Required Filings and Consents of Parent
Schedule 4.1(h) Allowable Option Grants
Schedule 5.10 List of Affiliates
Schedule 5.14 Officers and Directors Added to Liability Insurance Coverage
Schedule 6.2(e) Persons Subject to Employment Agreements
Schedule 7.5 Interests of Company Shareholders
</TABLE>
D-3
<PAGE>
MERGER AGREEMENT AND PLAN OF REORGANIZATION
This MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is
made and entered into as of February 16, 2000, by and among Surge Components,
Inc., a New York corporation ("Parent"), Mail Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub"),
MailEncrypt.com, Inc., a California corporation (the "Company") and the
shareholders and optionholders of the Company listed on the signature page
hereto (the "Shareholders"). Unless the context clearly requires otherwise, the
term "Parent" as used herein shall include the Parent and its wholly owned
subsidiary, Challenge/Surge, Inc.
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger
Sub believe it is in the best interests of each company and their respective
stockholders that Parent acquire the Company through the statutory merger of the
Company with and into Merger Sub (the "Merger") and, in furtherance thereof,
have approved the Merger and the transactions contemplated hereby upon the terms
and subject to the conditions set forth herein.
B. Pursuant to the Merger and subject to the terms and conditions of
this Agreement, Parent, through Merger Sub, shall acquire, at the Effective Time
(as defined below) from the Shareholders all of the then issued and outstanding
shares of capital stock and derivative securities of the Company (the "Company
Securities") in exchange for shares of common stock and derivative securities of
Parent.
C. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
E. The parties intend the Merger to be effected through a three part
process: there will be (i) the execution of this agreement on or before February
17, 2000 (the "Signing"); (ii) upon the satisfaction of certain conditions,
including the Parent's shareholders' approval of a reorganization, as described
herein (the "Reorganization"), on or before July 30, 2000, (the date on which
shareholder's approval is obtained, the "Approval Date") there will be filed the
appropriate merger certificates with the States of California and Delaware,
which will be deemed the Effective Time, as herein defined; and, (iii) there
will be a conversion of the Shareholders' common stock of the Company into the
Parent's Class B Common Stock, at the rate set forth herein.
NOW, THEREFORE, in consideration of the covenants, promises and
representations and warranties set forth herein, and for other good and valuable
consideration, intending to be legally bound hereby, the parties agree as
follows:
ARTICLE 1 - THE MERGER
1.1 The Merger.
At the Effective Time (as defined in Section 1.2), and subject to and
upon the terms and conditions of this Agreement and the applicable provisions of
the Delaware General Corporation Law ("Delaware Law") and the California General
Corporation Law ("California Law"), the Company shall be merged with and into
the Merger Sub, the separate corporate existence of the Company shall cease and
the Merger Sub shall continue as the surviving corporation and as a wholly-owned
subsidiary of Parent. The Merger Sub as the surviving Delaware corporation with
the operating business of the Company after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation ." The operations of the Surviving
Corporation after the Reorganization shall be in accordance with the terms and
conditions of an Administrative Services Agreement, the form of which is
attached as Exhibit 1.1.
D-4
<PAGE>
1.2 Closing Date; Effective Time.
Unless this Agreement is earlier terminated pursuant to Section 7.1,
the closing of the Merger (the "Closing") will take place as promptly as
practicable, but no later than five (5) business days, following satisfaction or
waiver of the conditions set forth in Article 6, which shall be at the offices
of Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158-0125,
unless another place or time is agreed to by Parent and the Company. The date
upon which the Closing actually occurs is herein referred to as the "Closing
Date".
As promptly as practicable following the Approval Date, the parties
hereto shall cause the Merger to be consummated by filing the Certificate of
Merger (or like instrument) with the Secretary of State of the State of Delaware
(the "Certificate of Merger"), in accordance with the relevant provisions of
applicable law and such other certificates of merger or other documents as shall
be necessary to file in the State of California by the Company (the time of
acceptance by the Secretary of State of the State of Delaware of such filing
being referred to herein as the "Effective Time").
1.3 Effect of the Merger
At the Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of Delaware Law and California Law. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time all
the property, rights, privileges, powers and franchises of the Company and
Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities
and duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) The Certificate of Incorporation of the Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law and such Certificate of Incorporation, provided, however, that the Merger
Sub agrees that as of the Effective Time it will change its name to MailEncrypt,
Inc.
(b) The By-laws of the Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by law and such By-laws.
1.5 Directors and Officers.
(a) Surviving Corporation . The initial directors of the Surviving
Corporation will be Adam Epstein, Michael Patchen, David Bird and Tom Taulli,
each to hold office until replaced or otherwise in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation. The
officers of the Company immediately prior to the Effective Time, with the
exception of Adam Epstein, shall be the officers of the Surviving Corporation,
each to hold office for a term of one (1) year and in accordance with the Bylaws
of the Surviving Corporation.
(b) Parent
(i) Directors and Committees. Prior to the Approval Date the
Board of Directors of Parent shall have taken all corporate action necessary to
cause the Board of Directors of Parent to consist of seven (7) persons effective
as of the Approval Date, each to serve for a term of three (3) years from the
date thereof and until successor directors have been duly elected and have taken
office, one director, initially Ira Levy, shall be the nominee of New Surge, one
director, initially Mario Habib, will be the nominee of Global DataTel, Inc.
("Global") (pursuant to an Asset Purchase Agreement between the Parent, and
Global DataTel, Inc., dated December 8, 1999, the "Global Acquisition") and one
director, initially, Adam Epstein, shall be the nominee of the Surviving
Corporation. All other members of the Board of Directors shall be non-officers
of the Parent and the subsidiaries and unanimously nominated by the Board of
Directors. In addition, prior to the Signing, the Board of Directors of Parent
shall have taken all corporate action necessary to appoint Adam Epstein,
effective as of the Signing, Chairman of the Board of Directors of the Parent,
provided, however, that such
D-5
<PAGE>
appointment will not entitle Adam Epstein to contractually bind the Parent
without the consent of the Parent's Board of Directors.
(ii) Officers. Prior to the Approval Date, and subject to the
terms and conditions of this Agreement, the Board of Directors of Parent shall
have taken all corporate action necessary to cause each of the following persons
to serve as officers of the Parent in the office appearing next to such person's
name effective as of the Approval Date until the Board of Directors of Parent
shall have elected and appointed a replacement officer: Adam Epstein, CEO and
Chairman of the Board of Directors; Ira Levy, Executive Vice President and
Steven J. Lubman, Secretary.
(iii) Spin Off. As part of the Reorganization envisioned
hereby, the Parent, as approved by the Parent's Board of Directors, will
reincorporate in Delaware and create a new wholly-owned Delaware subsidiary
("New Surge") and will transfer, effective as of the Approval Date, the current
operations of the Parent into New Surge. The Board of Directors of New Surge
will be the same Board of Directors as presently serve as directors of the
Parent. After this transfer, the Parent will become a public holding company.
Effective as of the Approval Date Ira Levy and Steven Lubman will enter into
amended employment agreements in substantially the form set forth as Exhibit 1.5
(b)(iii).
1.6 Conversion of Shares.
At the Effective Time, by virtue of the Merger, or otherwise at such
time and subject to such conditions as are set forth herein, and without any
action on the part of Parent, the Company, Merger Sub or any holder of any
Company Securities:
(a) All of the shares of common stock of the Company (including options
to purchase Common Stock, which, for such purposes, shall be treated on an as
exercised basis) will be exchanged for an aggregate of 1,821,400 shares of the
Parent's Class B Common Stock, $.001 par value. The common share exchange ratio
shall be 1.4754447 shares of the Company's common stock (including options to
purchase common stock) for one (1) share of Class B Common Stock.
(b) Effective as of the Approval Date, the Parent's existing Common
Stock, $.001 par value, shall be redesignated as "Class A Common Stock". The
Class A Common Stock shall have the same rights and preferences and otherwise be
the same as the existing Common Stock, except that the holders of each two
shares of Class A Common Stock issued and outstanding after the Approval Date
shall have the right to receive and such shares shall become exchangeable, at
the option of the holder, for one share of Class B Common Stock. Other than the
exchange ratio between the Class A and Class B Common Stock, the two classes
shall be treated on a pari passu basis and have the same rights and preferences
of each other, with each having one vote per share and sharing proportionately
to their respective number of shares in dividends declared by Parent and in the
assets of Parent upon liquidation or dissolution.
It is expected that Parent's stockholders will approve the
Reorganization as of the Approval Date. For purposes of this Agreement, all
share and per share amounts on or after the Approval Date give pro forma effect
to such proposed Reorganization. The Class B Common Stock when issued in
exchange for the Company's common stock shall be a tracking stock, intended to
be separately listed on the Nasdaq National Market, if possible. The Parent's
Class A Common Stock, when issued in exchange for the existing Common Stock
shall also be a tracking stock, intended to be separately listed on the Nasdaq
National Market, if possible. The Class A Common Stock following the
Reorganization shall represent only the assets of the business and financial
condition of the Parent as it exists as of the Effective Time, prior to the
transfer to New Surge.
(c) Effective Date of the Merger.
The parties hereto agree that the Merger shall be conditioned upon the
Parent obtaining the required vote of its Shareholders at a special meeting of
shareholders (the "Special Meeting"). The parties to this Agreement hereby agree
to file with the Securities and Exchange Commission (the "SEC"), a proxy
statement/prospectus (the "Proxy Statement/Prospectus") to the Parent's
shareholders as soon as possible following the Closing Date and use their best
D-6
<PAGE>
efforts to have it declared effective by the SEC promptly and thereafter hold
the Special Meeting as soon as legally permitted to do so.
(d) Treatment of Outstanding Securities of the Parent.
(i) Upon Stockholder Approval, each two issued and outstanding
shares of the Parent Common Stock, which shall be designated as Class A Common
Stock, shall be convertible by the holders, at their sole discretion, into one
share of Class B Common Stock.
(ii) At the Approval Date, each unexercised Class A Common
Stock Warrant (the "Class A Warrants") of the Parent issued and outstanding at
the Effective Date, exercisable at $5.00 per share, callable when the Class A
Common Stock trades at or above $7.50 per share and expiring on July 31, 2003,
shall be redesignated as a Class B Common Stock Purchase Warrant exercisable at
$5.00 per each such redesignated Warrant for one share of Class B Common Stock
and shall be callable if the Class B Common Stock trades at or above $7.50 per
share for twenty (20) consecutive trading days.
(iii) Each option to purchase shares of Parent Common Stock
(the "Parent Options") issued pursuant to Parent's 1995 Employee Stock Option
Plan, as amended (the "Parent Plan"), but not the 5,300,000 options granted in
December 1998 in connection with the terminated merger with Orbit Network Inc.
(the "Orbit Options"), all of which issued and outstanding Parent Options are
set forth on Schedule 1.6(d)(iii) hereto shall, at the Approval Date, except the
Orbit Options as set forth below, maintain the same terms and conditions and in
addition each two options shall be exercisable for one share of Class B Common
Stock.
(iv) The above-mentioned 5,300,000 Orbit Options shall become
fully vested and exercisable at the Approval Date, conditioned upon shareholder
approval, to acquire an aggregate of 5,300,000 registered shares of Class B
Common Stock at $2.00 per option. All shares of Class B Common Stock issuable
upon exercise of the Orbit Options shall be registered with the SEC on a Form
S-8 Registration Statement before the Approval Date. As soon as practicable
following the Approval Date, but in no event later than three (3) days following
the Approval Date, Parent shall deliver to holders of Orbit Options, amended
option agreements representing the right to acquire shares of Class B Common
Stock and otherwise on the same terms and conditions, other than as set forth in
the first sentence of this Paragraph, as contained in the outstanding Orbit
Options. Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Class B Common Stock for delivery upon
exercise of the Orbit Options in accordance with this Section 1.6(e).
(v) Notwithstanding anything to the contrary herein,
effective as of the Approval Date, the 1,500,000 stock options granted to Adam
Epstein pursuant to his employment agreement with Parent, effective as of the
Closing Date, shall be exercisable in accordance with the vesting schedule and
for the exercise price set forth in the option agreement applicable thereto, in
each case without adjustment, for 1,500,000 shares of Class B Common Stock.
Promptly following the Approval Date, Parent shall amend Mr. Epstein's stock
option agreement to reflect the foregoing.
(e) Treatment of Company Securities
(i) Each 1.4754447 issued and outstanding shares of Common
Stock, no par value, of the Company ("the Company Common Stock"), including
outstanding options therefor, shall be exchanged into the right to receive one
share of Class B Common Stock, $.001 par value, or a total of 1,821,400 shares
of Class B Common Stock; and
(ii) At the Closing, the outstanding options to purchase
Company Common Stock will be assumed and converted into a right to receive Class
B Common Stock, in an amount equal to the shares that such option holder would
have been entitled to receive if the option had been exercised in full
immediately prior to the Closing. Promptly following the Approval Date, each
such option holder shall receive an option agreement reflecting the terms of
such holder's option to acquire Class B Common Stock, which terms shall be the
same as those in effect prior to the Closing, except for appropriate adjustment
to the number of shares and exercise price in accordance with the conversion
ratio hereunder.
D-7
<PAGE>
1.7 Initial Investment
(a) Upon Signing, the Parent will loan $750,000 to the Company (the
"Initial Investment"). This loan will be evidenced by a promissory note in the
form attached as Exhibit 1.7(a). The Parent will allocate to the Company or the
Surviving Corporation an additional $1,750,000 from the first public financing
of the Parent or from any private financing of the Parent in excess of
$12,000,000. Notwithstanding anything to the contrary, the Parent's obligation
to make the Initial Investment (other than the initial $750,000 installment,
which shall be made at Signing) shall be conditioned upon raising the funds
through private offerings of 12% convertible promissory notes due December 31,
2000 on a "best efforts" basis. The Parent will have no obligation to make the
Initial Investment with funds from other sources.
(b) In the event that Parent Shareholder Approval is not obtained by
July 30, 2000 and the Company elects its right to terminate the Merger pursuant
to Section 7.1 hereto, the Initial Investment and any other sums loaned or
invested in the Surviving Corporation pursuant to this Section 1.7 shall
automatically convert into common stock of the Company at an aggregate pre-money
valuation of all of the capital stock of the Company of $15 million.
(c) Following the Closing, the Surviving Corporation will be entitled
to received proceeds from the exercise of the Parent's Class A Common Stock
Warrants as follows: for every $100,000 received from the exercise, Parent and
then New Surge shall receive 28% of the net proceeds from the exercise, with the
remaining 72% of the net proceeds being divided by the Company and Global
DataTel, Inc. in amounts to be mutually agreed upon by management of the Company
and Global DataTel, Inc., provided that the Company shall receive no less that
$1.5 million of such proceeds assuming the exercise of all of the Warrants.
(d) Notwithstanding anything to the contrary in this Section 1.7, the
parties hereto acknowledge that this Section 1.7 is not intended to restrict the
ability of the Board of Directors of the Parent from providing the Surviving
Corporation with more or less funds, or devising alternative financing
arrangements based upon the future business needs of the Parent or the Surviving
Corporation.
1.8 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Securities held by a holder who has demanded and perfected
appraisal or dissenters' rights for such shares in accordance with California
Law and who, as of the Effective Time, has not effectively withdrawn or lost
such appraisal or dissenters' rights ("Dissenting Shares"), shall not be
exchanged for Parent Securities pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection 1.8(a), if any holder
of shares of Company Securities who demands appraisal of such shares under
California Law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be,
pursuant to the Merger, exchanged for Parent Securities and cash in lieu of
fractional shares as provided in Section 1.6, without interest thereon, upon
surrender of the certificate representing such shares pursuant to Section 1.9.
(c) The Company shall give Parent (i) prompt notice of any written
demands for appraisal of any shares of Company Common Stock, withdrawals of such
demands, and any other instruments served pursuant to California Law and
received by the Company in connection therewith, and (ii) the opportunity to
participate in all negotiations and proceedings with respect to demands for
appraisal under California Law. The Company and Surviving Corporation shall not,
except with the prior written consent of Parent, voluntarily make any payment
with respect to any demands for appraisal of capital stock of the Company or
offer to settle or settle any such demands.
D-8
<PAGE>
1.9 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Parent shall designate
a bank or trust company reasonably acceptable to the Company to act as exchange
agent (the "Exchange Agent") in the Merger. Parent shall pay all charges and
expenses of Exchange Agent. The Exchange Agent will be entrusted with exchanging
the Company Common Stock with the Class B Common Stock, as detailed below.
(b) Parent to Provide Parent Securities. As of the Effective Time,
Parent shall deposit into an escrow account with the Exchange Agent for the
benefit of the Company's shareholders the aggregate number of shares of Class B
Common Stock issuable pursuant to Section 1.6 in exchange for the outstanding
shares of Company Common Stock.
(c) Exchange Procedures. Promptly after the Effective Time,
certificates representing the Company Common Stock (the "Certificates" or,
individually, "Certificate") will be surrendered to the Exchange Agent. Upon
surrender of a Certificate to the Exchange Agent or to such other agent or
agents as may be appointed by Parent, the holder of such Certificate shall be
entitled to certificates representing the number of whole shares of Class B
Common Stock and the Certificate so surrendered shall forthwith be owned in the
name of Merger Sub. Until so surrendered, each outstanding Certificate that,
prior to the Effective Time, represented shares of Company Common Stock will be
deemed from and after the Effective Time, for all corporate purposes, to
represent solely ownership of the number of full shares of Parent Securities
into which such Company Stock shall have been so exchanged.
(d) No Liability. Notwithstanding anything to the contrary in this
Section 1.9, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of Parent Securities or Company Securities
for any amount properly paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
1.10 No Further Ownership Rights in Company Common Stock.
All shares of Class B Common Stock issued pursuant to the Merger in
exchange for shares of Company Common Stock in accordance with the terms hereof
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock.
1.11 Lost, Stolen or Destroyed Certificates.
In the event any certificates evidencing shares of Company Common Stock
shall have been lost, stolen or destroyed, the Company shall issue in exchange
for such lost, stolen or destroyed certificates, upon receiving notice from the
holder thereof at least five (5) days before the Effective Time and upon the
making of an affidavit in such form as is acceptable to the Company and the
Exchange Agent of that fact by such holder, new shares of Company Common Stock;
provided, however, that Company, as a condition precedent to the issuance
thereof, shall require the owner of such lost, stolen or destroyed certificates
to deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made with respect to the certificates alleged to have been
lost, stolen or destroyed. Subsequent to the issuance of new shares of Company
Common Stock, such shares shall be surrendered to the Exchange Agent in
accordance with Section 1.9.
1.12 Tax and Accounting Consequences.
It is intended by the parties hereto that the Merger shall constitute a
tax-free reorganization within the meaning of Section 368(a)(1)(B) the Code.
1.13 Taking of Necessary Action; Further Action.
If, at any time after the Effective Time, any such further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Merger
Sub, the officers and directors of the Company and Merger Sub are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action.
D-9
<PAGE>
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SHAREHOLDERS
The Company hereby represents and warrants, jointly and severally with
the Shareholders (Provided that the Shareholders make such representations and
warranties severally in accordance with Section 7.6 hereof), to Parent and
Merger Sub, as follows:
2.1 Organization, Standing and Power.
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. The Company has the
corporate power to own its properties and to carry on its business as now being
conducted. The Company has made available true and correct copy of its Articles
of Incorporation and Bylaws, each as amended to date, to Parent.
2.2 Authority.
The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of the
Merger and this Agreement by the Company's shareholders. The Company's Board of
Directors has unanimously approved the Merger and this Agreement. This Agreement
has been duly executed and delivered by the Company and constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, and (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
2.3 Company Capital Structure.
The authorized securities of the Company consists of 5,000,000 shares
of Company Common Stock, no par value and no shares of Preferred Stock. As of
February 7, 2000, 2,630,375 shares of Company Common Stock have been issued and
are outstanding. No shares of Company Common Stock are subject to outstanding
convertible debt securities. All outstanding shares of Company Common Stock are
duly authorized, validly issued, fully paid and non-assessable and are not
subject to preemptive rights created by statute, the Articles of Incorporation
or By-laws of the Company or any agreement to which the Company is a party or by
which it is bound. Other than as set forth on Schedule 2.3 hereto, there are no
options, warrants, calls, rights, commitments or agreements of any character to
which the Company is a party or by which it is bound, obligating the Company to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Company or
obligating the Company to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement.
2.4 Subsidiaries.
Except as set forth on Schedule 2.4 hereto, the Company does not have
and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity.
2.5 Company Financial Statements.
As soon as practicable following the date of this Agreement, the
Company shall cause to be delivered to Parent and Merger Sub the Company's
unaudited balance sheet as of December 31, 1999, and the related unaudited
statements of operations and cash flows for the two-year period (or such shorter
time as the Company has been in existence) then ended (collectively, the
"Company Financials"). At such time as the Company Financials are delivered, the
Company will
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represent and warrant to Parent and Merger Sub that the Company Financials
are correct in all material respects and have been prepared in accordance with
GAAP applied on a basis consistent throughout the periods indicated and
consistent with each other. The Company Financials will present fairly the
financial condition and operating results of the Company as of the date and
during the period indicated therein.
2.6 Taxes.
All federal, state and other returns and reports required to be filed
by the Company have been duly filed by the Company and except as set forth on
Schedule 2.6 hereto, all material taxes and other assessments and levies
(including all interest and penalties) including, without limitation, income,
franchise, real estate, sales, gross receipts, use and services taxes, and
employment and employee withholding taxes, owed by the Company have been paid in
full by the Company unless being contested in good faith. Except as set forth on
Schedule 2.6, all such taxes and other assessments and levies which the Company
is required by law to have withheld, collected or deposited have been duly
withheld and collected and deposited with the proper governmental authorities or
segregated and set aside for such payment, and if so segregated and set aside,
shall be so paid by the Company as required by law.
2.7 Litigation.
Except as set forth on in Schedule 2.7 hereto, or as otherwise
disclosed to the Parent, there is no material action, suit or proceeding of any
nature pending or to the best of the Company's knowledge threatened against the
Company, its properties or any of its officers or directors, in their respective
capacities as such.
2.8 No Conflict; Required Filings and Consents.
(a) Except as set forth on Schedule 2.8 hereto, the execution and
delivery of this Agreement by the Company does not, and the performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not, (i) conflict with or violate the Articles of
Incorporation or By-laws of the Company, (ii) conflict with or violate any
federal, foreign, state or provincial law, rule, regulation, order, judgment or
decree (collectively, "Laws") applicable to the Company or any of its
subsidiaries or by which its or any of their respective properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair the Company's or any of its subsidiaries' rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien on any of the properties or assets of the Company or any of
its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or its or any of their respective properties
are bound or affected, except in the case of clauses (ii) and (iii) for any such
conflicts, violations, breaches, defaults or other occurrences that do not have
a Material Adverse Effect, as defined in Section 6.2(a) below.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with notification to,
any domestic or foreign governmental or regulatory authority except (i) for the
applicable requirements, if any, of the Securities Act of 1933, as amended (the
"Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
state securities laws ("Blue Sky Laws"), the pre-merger notification
requirements of the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the legal requirements of any foreign jurisdiction
requiring notification in connection with the Merger and the transactions
contemplated hereby and the filing and recordation of appropriate merger or
other documents as required by Delaware Law and California Law, and (ii) where
the failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, either (A) would not prevent or materially
delay consummation of the Merger or otherwise prevent or materially delay the
Company from performing its obligations under this Agreement, or (B) do not have
a Material Adverse Effect.
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2.9 Year 2000 Compliance.
The Company has taken reasonable steps to ensure that the Company's
primary computing system and software (i) will operate without substantial
errors relating to date data, including any error relating to, or the product
of, date data which represents or references different centuries or more than
one century; (ii) will be capable of correctly processing, providing, receiving,
and displaying accurate date data, and exchanging accurate date data with all
products with which it is currently exchanging date data; (iii) will not
abnormally end, corrupt data, or produce incorrect or invalid results as a
result of date data, including date data which represents or references
different centuries or more than one century or as a result of multi-century
date calculations, sequencing, or comparisons; (iv) will be capable of date data
century recognition and calculations which accommodate same century and
multi-century formulas and date values and date data interface values that
reflect the century; (v) will correctly recognize leap years, including the year
2000, and will handle all dates in leap years appropriately; and (vi) will
properly interpret, as to century, all date data currently stored or accessible
to it.
2.10 Status of Material Contracts
The Company is not in default of, nor is in anticipatory breach of any
of its material contracts with third parties, nor does the Company have any
reason to believe that it will be so in the future.
2.11 Ownership of Property, Indemnification
The Company owns, and at the Closing shall have, good, valid and
marketable title or valid license to any property, including intellectual
property, that it uses in the operation of its business, free any clear of all
mortgages, liens, pledges, charges or encumbrances, except (i) the lien of
current taxes no yet due and payable and (ii) such imperfections of title, liens
and easements as do not and would not reasonably be expected to have a Material
Adverse Effect on the Company. With regard to any licenses to use property,
including intellectual property, the Company has valid and enforceable license
agreements with the third party owners of the property, and none of such
intellectual property infringes upon the proprietary rights of any third party.
In this regard, the Company agrees to indemnify and hold harmless the Parent,
the Merger Sub and the Surviving Corporation from any liabilities, damages or
expenses (including attorneys' fees) that it might incur by reason of a breach
of this warranty.
2.12 ERISA Plans
The Company does not have any plans that would be covered by the
federal ERISA law.
2.13 Restrictions on Business Activities
To the Company's knowledge, there is no agreement, judgment,
injunction, order or decree binding upon the Company which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any current or future business practice of the Company to compete with any other
person or the conduct of business by the Company as currently conducted or as
proposed to be conducted by the Company.
2.14 Governmental Authorization; Compliance with Laws
The Company has obtained each federal, state, county, local or foreign
governmental consent, license, permit, grant, or other authorization of any
applicable governmental entity or other regulatory agency, (i) pursuant to which
the Company currently operates or holds any interest in any of its properties or
(ii) that is required for the operation of the Company's business or the holding
of any such interest ((i) and (ii) herein collectively referred to as the
"Company Authorizations"), and all of such Company Authorizations are in full
force and effect, except where the failure to obtain or have any such Company
Authorizations could not reasonably be expected to have a Material Adverse
Effect on the Company. The Company is in material compliance with all applicable
laws, statutes, orders, rules and regulations of any applicable governmental
entity or other regulatory agency relating to the Company except where the
failure to do so would not have a Material Adverse Effect and the Company has
not received notice of any violations of any of the above.
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ARTICLE 3 - REPRESENTATIONS AND
WARRANTIES OF PARENT AND MERGER SUB
Parent, Merger Sub and each subsidiary other than Merger Sub (the
"Subsidiaries") represent and warrant to the Company as follows:
3.1 Organization, Standing and Power.
Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. Merger Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. GDIS Acquisition Corp. ("GDIS") is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each of Parent, Merger Sub and GDIS has the corporate power to own its
properties and to carry on its business as now being conducted. Parent, Merger
Sub and GDIS have each made available true and correct copies of its
Certificates of Incorporation and By-Laws, each as amended, to date.
3.2 Authority.
Subject only to the requisite stockholders' approval of (a) the
amendment of the Certificate of Incorporation changing the name of Parent, (b)
the amendment of Parent's Certificate of Incorporation authorizing the requisite
number of shares of Parent Common Stock, (c) the issuance of the requisite
number of shares of Parent Common Stock, (d) the election of directors and
officers of Parent and Surviving Corporation as outlined in Section 1.5 hereof,
immediately prior to the Effective Time and for a minimum term of three (3)
years, (e) the Merger, (f) this Agreement, (g) the adoption of the Company's
employee stock option plan by the Parent, and (h) the re-incorporation of the
Parent in Delaware, Parent and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub, subject
only to the approval of the Merger and this Agreement by Parent's stockholders.
Each of Parent's and Merger Sub's Board of Directors has unanimously approved
the Merger and this Agreement. This Agreement has been duly executed and
delivered by Parent and Merger Sub and constitutes the valid and binding
obligations of Parent and Merger Sub, enforceable in accordance with its terms
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, and (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.
3.3 Parent and Merger Sub Capital Structure.
(a) The authorized stock of Parent consists of 25,000,000 shares of
Parent Common Stock, $.001 par value and 1,000,000, shares of Preferred Stock,
$.001 par value. As of the date of this Agreement, approximately 4,860,000
shares of Parent Common Stock and 239,000 shares of Preferred Stock are issued
and outstanding. All such shares of stock have been duly authorized and have
been validly issued and are fully paid and non-assessable. Parent has reserved
(i) 850,000 shares of Parent Common Stock for issuance pursuant to Parent's 1995
Employee Stock Option Plan as amended, of which as of December 31, 1999 options
to purchase 707,000 shares were outstanding and 143,000 shares remained
available for future grants. Upon the Approval Date, an additional 5,300,000
Class B Common Shares shall be issuable upon exercise of outstanding Orbit
Options, described in Section 1.6(e) above, and 3,479,600 Class B Common Shares
shall be issuable upon exercise of outstanding Class A Warrants, described in
Section 1.6(e) above. No shares of Parent Securities are subject to outstanding
convertible debt securities other than Class B Common Shares issuable upon
conversion of the12% Convertible Promissory Notes due December 31, 2000, at the
current rate of $3.00 per share. Other than as set forth in this Section 3.3,
there are no options, warrants, calls, rights, commitments or agreements of any
character to which Parent is a party or by which it is bound, obligating Parent
to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of Parent or
obligating Parent to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement.
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(b) The Parent Class B Common Stock, when issued in accordance with the
terms and provisions of this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable.
(c) The authorized stock of Merger Sub consists of 3,000 Shares of
Common Stock, par value $.01 per share. As of the date of this Agreement 3,000
shares of Merger Sub's Common Stock have been issued and are outstanding and are
all owned by Parent. Such shares have been duly authorized, validly issued and
are fully paid and non-assessable. As of the date hereof, no Shares of Merger
Sub Common Stock are issuable upon exercise of warrants or options. Other than
as set forth in this Section 3.3, there are no options, convertible securities,
warrants, calls, rights, commitments or agreements of any character to which the
Merger Sub is a party or by which it is bound, obligating the Merger Sub to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Merger Sub
or obligating the Merger Sub to grant, extend or enter into any such option,
convertible security, warrant, call, right, commitment or agreement.
3.4 Subsidiaries.
Except as set forth on Schedule 3.4 hereto, the Parent does not have
and has never had any subsidiaries or affiliated companies and does not
otherwise own and has never otherwise owned any shares of capital stock or any
interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. Merger Sub has
no material liabilities.
3.5 SEC Documents; Parent Financial Statements.
(a) Parent has filed with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it under each of the Act and the Exchange Act, and the respective
rules and regulations thereunder, all of which complied in all material respects
with all applicable requirements of the appropriate act and rules and
regulations thereunder. Parent has furnished or made available or will make
available to the Company true and correct copies of all forms, statements,
reports and documents filed by Parent with the SEC since December 1, 1997 ( the
"Parent SEC Documents"). As of their respective filing dates, the Parent SEC
Documents complied in all material respects with the requirements of the Act and
the Exchange Act, and the applicable rules and regulations of the SEC
thereunder, as the case may be, and none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. Since
August 31, 1999, Parent has not suffered any Material Adverse Effect (as defined
in Section 6.2(a) below) with respect to its business (financial or otherwise),
and Parent has conducted its business only in the ordinary course and there has
not been any declaration, setting aside or payment of any dividend or other
distribution with respect to Parent Common Stock or any repurchase, redemption
or other acquisition by Parent of any other securities of Parent. The financial
statements of Parent, including the notes thereto, included in the Parent SEC
Documents (the "Parent Financial Statements") comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements, as permitted by SEC rules for such form)
and present fairly the consolidated financial position of Parent at the dates
thereof and of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring audit
adjustments which will not be material in amount or significance) and do not
include or omit to state any fact which renders the Parent Financial Statements
hereunder misleading. There has been no change in Parent accounting policies
except as described in the notes to the Parent Financial Statements.
(b) Except as and to the extent shown or provided for in the Parent
Financial Statements or notes and schedules thereto or as disclosed in any of
the Schedules to this Agreement or such current liabilities as may have been
incurred since August 31, 1999 in the ordinary course of business, to the extent
quantified and reflected as a liability on the Parent's books and records, the
Parent and its subsidiaries as at the date hereof have no liabilities or
obligations (whether known or unknown, accrued, absolute, contingent or
otherwise ) which might be or become a charge against the assets or liabilities
of the Parent except as specifically provided pursuant to the terms of the
agreement or understanding
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to which such liability or obligation relates; as of August 31, 1999, there was
no asset used by the Parent in its operations that has not been reflected in the
Parent Financial Statements, and except as set forth in the Parent Financial
Statements, no assets have been acquired by the Parent since such date except in
the ordinary course of business.
(c) Except as disclosed in the Parent Financial Statement, there has
been no decrease in stockholders' equity as compared with the amount shown for
such stockholders' equity as at August 31, 1999 and no material adverse changes
in the financial position of the Parent and its Subsidiaries, taken as a whole,
since August 31, 1999.
3.6 Taxes.
All federal, state and other returns and reports required to be filed
by Parent have been duly filed by Parent and except as set forth on Schedule 3.6
hereto, all material taxes and other assessments and levies (including all
interest and penalties) including, without limitation, income, franchise, real
estate, sales, gross receipts, use and services taxes, and employment and
employee withholding taxes, owed by Parent have been paid in full by Parent
unless being contested in good faith. Except as set forth on Schedule 3.6, all
such taxes and other assessments and levies which Parent is required by law to
have withheld, collected or deposited have been duly withheld and collected and
deposited with the proper governmental authorities or segregated and set aside
for such payment, and if so segregated and set aside, shall be so paid by Parent
as required by law.
3.7 Litigation.
There is no action, suit or proceeding of any nature pending or to the
best of Parent's knowledge threatened against Parent or any of its subsidiaries,
their respective properties or any of their respective officers or directors, in
their respective capacities as such.
3.8 No Conflict; Required Filings and Consents.
(a) Except as set forth on Schedule 3.8 hereto, the execution and
delivery of this Agreement by the Parent and Merger Sub does not, and the
performance of this Agreement by the Parent and Merger Sub and the consummation
by the Parent and Merger Sub of the transactions contemplated hereby will not,
(i) conflict with or violate the Certificate of Incorporation or By-laws of the
Parent or Merger Sub, (ii) conflict with or violate any Laws applicable to the
Parent or any of its subsidiaries or by which they or any of their respective
properties are bound or affected, or (iii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or impair the Parent's or any of its subsidiaries' rights or
alter the rights or obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien on any of the properties or assets of the Parent or any
of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Parent or any of its subsidiaries is a party or by which the Parent
or any of its subsidiaries or its or any of their respective properties are
bound or affected, except in the case of clauses (ii) and (iii) for any such
conflicts, violations, breaches, defaults or other occurrences that do not have
a Material Adverse Effect, as defined in Section 6.2 below.
(b) The execution and delivery of this Agreement and the consummation
of the Merger contemplated thereby, by the Parent and Merger Sub do not, and the
performance of this Agreement by the Parent and Merger Sub will not, require any
consent, approval, authorization or permit of, or filing with notification to,
any domestic or foreign governmental or regulatory authority except (i) for the
applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws, the pre-merger notification requirements of the HSR Act, the legal
requirements of any foreign jurisdiction requiring notification in connection
with the Merger and the transactions contemplated hereby and the filing and
recordation of appropriate merger or other documents as required by the laws of
the states of Delaware, New York and California, and (ii) where the failure to
obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, either (A) would not prevent or materially delay
consummation of the Merger or otherwise prevent or materially delay the Parent
or Merger Sub from performing its obligations under this Agreement, or (B) do
not have a Material Adverse Effect (as defined below).
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3.9 Year 2000 Compliance.
The Parent has taken reasonable steps to ensure that the Parent's
primary computing system and software (i) will operate without substantial
errors relating to date data, including any error relating to, or the product
of, date data which represents or references different centuries or more than
one century; (ii) will be capable of correctly processing, providing, receiving,
and displaying accurate date data, and exchanging accurate date data with all
products with which it is currently exchanging date data; (iii) will not
abnormally end, corrupt data, or produce incorrect or invalid results as a
result of date data, including date data which represents or references
different centuries or more than one century or as a result of multi-century
date calculations, sequencing, or comparisons; (iv) will be capable of date data
century recognition and calculations which accommodate same century and
multi-century formulas and date values and date data interface values that
reflect the century; (v) will correctly recognize leap years, including the year
2000, and will handle all dates in leap years appropriately; and (vi) will
properly interpret, as to century, all date data currently stored or accessible
to it.
3.10 Status of Material Contracts
Neither the Parent, the Merger Sub nor GDIS is not in default of, nor
is in anticipatory breach of any of its material contracts with third parties,
not has any reason to believe that it will be so in the future.
3.11 Ownership of Property, Indemnification
The Parent owns, and at the Closing shall have, good, valid and
marketable title, or valid license, to any property, including intellectual
property, that it uses in the operation of its business, free any clear of all
mortgages, liens, pledges, charges or encumbrances, except (i) the lien of
current taxes no yet due and payable and (ii) such imperfections of title, liens
and easements as do not and would not reasonably be expected to have a Material
Adverse Effect on the Parent. With regard to any licenses to use property,
including intellectual property, the Parent has valid and enforceable license
agreements with the third party owners of the property and none of such
intellectual property infringes upon the proprietary rights of any third party.
In this regard, the Parent agrees to indemnify and hold harmless the Company,
the Shareholders and the Surviving Corporation from any liabilities, damages or
expenses (including attorney's fees) that it might incur by reason of a breach
of this warranty.
3.12 ERISA Plans
The Parent has a Section 401(k) plan that covers all employees who have
worked at least one year, but has no other plans that would be covered by ERISA.
3.13 Restrictions on Business Activities
To the Parent's knowledge, there is no agreement, judgment, injunction,
order or decree binding upon the Parent which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any current
or future business practice of the Parent to compete with any other person or
the conduct of business by the Parent as currently conducted or as proposed to
be conducted by the Parent.
3.14 Brokers' and Finder' Fees.
Morgan Stanley Dean Witter will be entitled to a fee of 100,000 shares
of Parent's Class A Common Stock at the Effective Time, but neither Parent nor
Merger Sub, directly or indirectly, will incur any other liability or finder's
fee, or agent's commissions or any similar changes in connection with this
Agreement or any transaction contemplated hereby.
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3.15 Governmental Authorization; Compliance with Laws
The Parent, Merger Sub and GDIS have obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant, or other
authorization of any applicable governmental entity or other regulatory agency,
(i) pursuant to which the Parent, Merger Sub and GDIS currently operate or hold
any interest in any of its properties or (ii) that is required for the operation
of the Parent, Merger Sub and GDIS's business or the holding of any such
interest ((i) and (ii) herein collectively referred to as the "Parent, Merger
Sub and GDIS Authorizations"), and all of such Parent, Merger Sub and GDIS
Authorizations are in full force and effect, except where the failure to obtain
or have any such Parent, Merger Sub and GDIS Authorizations could not reasonably
be expected to have a Material Adverse Effect on the Parent, Merger Sub and
GDIS. The Parent, Merger Sub and GDIS are each in material compliance with all
applicable laws, statutes, orders, rules and regulations of any applicable
governmental entity or other regulatory agency relating to the Parent, Merger
Sub and GDIS except where the failure to do so would not have a Material Adverse
Effect and the Parent, Merger Sub and GDIS have not received notice of any
violations of any of the above.
ARTICLE 4 - CONDUCT OF BUSINESS PENDING THE APPROVAL DATE
4.1 Conduct of Business by the Company, Parent and Merger Sub
Pending the Approval Date.
Except as otherwise contemplated by this Agreement, after the date
hereof and prior to the Approval Date or earlier termination of this Agreement,
unless the parties shall otherwise agree in writing, the Company, the Parent,
the Merger Sub and the Parent's other subsidiaries shall each:
(a) conduct its business in the ordinary and usual course of business
and consistent with past practice;
(b) not (i) amend or propose to amend its Certificate of Incorporation
or By-laws, (ii) split, combine or reclassify its outstanding capital stock or
declare, set aside or pay any dividend or distribution payable in cash, stock,
property or otherwise, (iii) spin-off any assets or businesses, (iv) engage in
any transaction for the purpose of effecting a recapitalization of any party or
subsidiary, or (v) engage in any transaction or series of related transactions
which has a similar effect to any of the foregoing;
(c) not issue, sell, pledge or dispose of, or agree to issue, sell,
pledge or dispose of, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of capital stock of any class or any
debt or equity securities convertible into or exchangeable for such capital
stock or amend or modify the terms and conditions of any of the foregoing,
except that nothing herein will prevent the Parent from performing its
obligations pursuant to the Global Acquisition, or either party granting
employee stock options consistent with past practices;
(d) not (i) incur or become contingently liable with respect to any
indebtedness for borrowed money, except in the ordinary course of business, (ii)
redeem, purchase, acquire or offer to purchase or acquire any shares of its
capital stock, other than as required by the governing terms of such securities,
(iii) take or fail to take any action which action or failure to take action
would cause the Company or its shareholders (except to the extent that any
shareholders receive cash in lieu of fractional shares) to recognize gain or
loss for federal income tax purposes as a result of the consummation of the
Merger, (iv) make any acquisition of any assets (except in the ordinary course
of business) or businesses, (v) sell any assets (except in the ordinary course
of business) or businesses, or (vi) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(e) use all reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its present officers
and key employees, and preserve the goodwill and business relationships with
suppliers, distributors, customers, and others having business relationships
with the Company or the Parent and not engage in any action, directly or
indirectly, with the intent to impact adversely the transactions contemplated by
this Agreement;
(f) not enter into or amend any employment, severance, special pay
arrangement with respect to termination of employment or other similar
arrangements or agreements with any directors or officers other than as
envisioned by the Global Acquisition;
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(g) not increase the rate of remuneration payable to any of its
directors or officers, except in the customary and usual course of business and
consistent with past practices, or agree to do so;
(h) not adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation, health
care, employment or other employee benefit plan, agreement, trust, fund or
arrangement for the benefit or welfare of any employee or retiree, except in the
ordinary and usual course of business, consistent with past practices or as
required to comply with changes in applicable law and except as contemplated on
Schedule 4.1(h) hereto;
(i) file with the SEC all forms, statements, reports and documents
(including all exhibits, amendments and supplements thereto) required to be
filed by it pursuant to the Exchange Act; and
(j) maintain with financially responsible insurance companies insurance
on its tangible assets and its businesses in such amounts and against such risks
and losses as are consistent with past practice.
4.2 Certain Actions.
Except with respect to this Agreement and the transactions contemplated
hereby, the Company, Parent and Merger Sub shall not, directly or indirectly,
solicit any Acquisition Proposal. "Acquisition Proposal" shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of the
stock or assets of, or other business combination involving the acquisition of,
such party or any of its subsidiaries, or the acquisition of a substantial
equity interest in, or a substantial portion of the assets of, such party or any
of its subsidiaries. The Company, Parent and Merger Sub shall not, directly or
indirectly, furnish to any third party any non-public information that it is not
legally obligated to furnish, negotiate with respect to, or enter into any
agreement with respect to, any Acquisition Proposal, but may communicate
information about such an Acquisition Proposal to its stockholders if and to the
extent that it is required to do so in order to comply with its legal
obligations. The Company, Parent and Merger Sub, as applicable, shall promptly
advise the other parties hereto following the receipt of any Acquisition
Proposal and the details thereof, and advise such other parties hereto of any
developments with respect to such Acquisition Proposal promptly upon the
occurrence thereof. The Company, Parent and Merger Sub shall (a) immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any person or entity conducted heretofore with respect to any
of the foregoing, and (b) direct and use its reasonable efforts to cause all of
its investment bankers, financial advisors, attorneys, accountants, consultants
or other representatives not to engage in any of the foregoing. Notwithstanding
anything to the contrary herein, this Section 4.2 shall not prohibit the Global
Acquisition.
ARTICLE 5 - ADDITIONAL AGREEMENTS
5.1 Issuance of Parent Common Stock, Registration.
(a) The Parent Common Stock (including all shares issuable upon
exercise of the Class A Warrants) to be issued pursuant to the Merger will be
registered on an S-4 (or such successor form) registration statement as set
forth in the registration rights agreement (the "Registration Rights Agreement")
attached hereto as Exhibit 5.1. The parties intend, and Parent will take
reasonable steps to ensure, that such registration statement will register the
sale of Parent Common Stock held by "affiliates" (as defined under the
Securities Act) of Parent.
(b) Notwithstanding any registration of the shares under Section
5.1(a), the Shareholders agree that they will not sell their shares of Class B
Common Stock for a period of nine months from the Approval Date (the "Lock Up"),
provided, however, an aggregate of 214,290 shares (the allocation of which will
be determined by the Shareholders) will be exempt from the Lock Up and will be
tradeable, subject to any restrictions under the Securities Act of 1933, and the
Lock Up will automatically expire if, at any time during the nine month period
the closing sale price of the Class B Common Stock, as reported by Nasdaq, shall
be not less than twenty dollars ($20) for twenty (20) consecutive trading days.
All such shares will be tradeable, subject to any restrictions under the
Securities Act of 1933, after the expiration of the nine months period from the
Approval Date.
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5.2 Nasdaq Compliance.
Parent shall use its best efforts to obtain a written ruling from The
Nasdaq Stock Market, Inc. ("Nasdaq") that Marketplace Rule 4330(f) will not
apply to the Merger. In the event that such rule does not apply, the Parent
shall comply with all applicable requirements for initial inclusion on the
Nasdaq National Market or Small Cap Market as a condition to Closing.
5.3 Stockholders' Meetings.
Subject to applicable law, each of the Company and Parent, through its
respective Boards of Directors, shall, in accordance with applicable law and
subject to the fiduciary duties of their respective Boards of Directors under
applicable law as determined by such directors in good faith after consultation
with and based upon the advice of outside counsel: (a) jointly prepare the Proxy
Statement/Prospectus for use in connection with obtaining the requisite
stockholder approvals and the issuance of the Class B Common Stock pursuant to
the Merger; (b) duly call, give notice of, convene and hold a special meeting
(the "Special Meeting") of its respective stockholders, or obtain their
stockholders' unanimous consent, as soon as practicable for the purpose (in the
case of the Company) of approving as required by California Law, the Merger,
this Agreement and the transactions contemplated hereby (the "Company
Shareholder Approval") or (in the case of Parent) of approving as required by
the New York Business Corporation Law, the Merger, this Agreement (including the
transactions contemplated hereby), the re-incorporation in the State of
Delaware, the Certificate of Amendment to the Certificate of Incorporation and
the authorization and issuance of Class B Company Stock in connection with the
Merger, the Global Acquisition, the adoption by the Parent of a new or amended
employee stock option plan and the re-naming of the Parent (the "Parent
Stockholder Approval" and together with the Company Shareholder Approval, the
"Stockholder Approvals"); and (c) include in the Proxy Statement/Prospectus for
use in connection with the Special Meeting of Parent the recommendation of its
Board of Directors that stockholders vote in favor of the Parent Stockholder
Approval. The Parent will use commercially reasonable efforts to cause the
Special Meeting to occur as soon as practicable after the date hereof.
5.4 Access to Parent/Company Information.
Subject to any applicable contractual confidentiality obligations
(which the Company and Parent shall use their best efforts to cause to be
waived), Company and Parent shall afford each other and their respective
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of their
respective properties, books, contracts, agreements and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of Company and Parent, as applicable, as
may be reasonably requested. In addition, Parent shall make available to the
Company, promptly upon receipt thereof, the due diligence materials and analyses
received and/or prepared by Parent in connection with the transactions
contemplated by the Global Acquisition.
5.5 Confidentiality.
Each of the parties hereto hereby agrees to maintain the
confidentiality of the information obtained in any investigation pursuant to
Section 5.4, or pursuant to the negotiation of this Agreement, in accordance
with the provisions of the Confidentiality Agreement between Parent and the
Company dated as of January 10, 2000.
5.6 Public Disclosure
No disclosure (whether or not in response to an inquiry) of the
existence or nature of this Agreement shall be made by any party hereto unless
approved in writing by duly authorized officers of both Parent and the Company,
or of any third parties identified in such disclosure, prior to release,
provided that such approval shall not be unreasonably withheld and subject in
any event to Company's and Parent's obligations to comply with applicable
securities laws and
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NASDAQ or such other stock market regulations as applicable, in order to satisfy
the listing and disclosure requirements of all such exchanges or markets where
the Parent's securities are listed.
5.7 Reasonable Efforts/Consents.
Subject to the terms and conditions provided in this Agreement, each of
the parties hereto shall use its reasonable efforts to take promptly, or cause
to be taken, all actions, and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings and to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to the
parties hereto the benefits contemplated by this Agreement.
5.8 Notification of Certain Matters.
The Company shall give prompt notice to Parent, and Parent shall give
prompt notice to the Company, of (a) the occurrence or non-occurrence of any
event, the occurrence or non-occurrence of which is likely to cause any
representation or warranty of the Company, Parent or Merger Sub, respectively,
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time except as contemplated by this Agreement
(including the schedules of the Company attached hereto), and (b) any failure of
the Company, Parent or Merger Sub, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.8 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.9 Nasdaq Listing
Parent's capital stock is trading on Nasdaq's Small Cap Market and
Parent shall use all reasonable efforts to obtain a Nasdaq National Market
listing for its Class A Common Stock and Class B Common Stock promptly following
the Closing.
5.10 Affiliate Agreement.
Schedule 5.10 hereto sets forth those persons who, in the Company's
reasonable judgment, are "affiliates" of the Company within the meaning of Rule
145 (each such person an "Affiliate") promulgated under the Act ("Rule 145").
The Company shall provide Parent such information and documents as Parent shall
reasonably request for purposes of reviewing such list. The Company has
delivered or shall cause to be delivered to Parent prior to the Approval Date
from the Company's Affiliates an executed affiliate agreement substantially in
the form attached hereto as Exhibit 5.10 (the "Affiliate Agreement"). Parent
shall be entitled to place appropriate legends on the certificates evidencing
any Class B Common Stock to be received by Affiliates of the Company pursuant to
the terms of this Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for Parent Common Stock and Parent Securities consistent
with the terms of such Affiliate Agreement.
5.11 Blue Sky Laws.
Parent shall take such steps as may be necessary to comply with the
securities and Blue Sky Laws of all jurisdictions which are applicable to the
issuance of the Parent Securities pursuant hereto. The Company shall use its
best efforts to assist Parent as may be necessary to comply with the securities
and Blue Sky Laws of all jurisdictions which are applicable in connection with
the issuance of Parent Securities pursuant hereto.
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5.12 Corrections to the Proxy Statement/Prospectus.
Prior to the date of the Stockholder Approvals, each of the Company,
Parent and Merger Sub shall correct promptly any information provided by it to
be used specifically in the Proxy Statement/Prospectus or relating to it and
incorporated by reference into the Proxy Statement/Prospectus that shall have
become false or misleading in any material respect and shall take all steps
necessary to make any requisite filings and have declared effective or cleared
any amendment or supplement to the Proxy Statement/Prospectus so as to correct
the same and to cause the Proxy Statement/Prospectus as so corrected to be
disseminated to the stockholders of the Company and Parent, in each case to the
extent required by applicable law. Notwithstanding anything to the contrary
herein, the Proxy Statement/Prospectus shall not include any information with
respect to any party or its affiliates, without the prior approval of such
inclusion by such party, unless required by applicable law. Neither party nor
its affiliates (the "Indemnified Party") shall assume any liability for, and the
other party (the "Indemnifying Party") shall indemnify and hold harmless the
Indemnified Party, their officers, directors, employees, advisors and agents and
each person who controls (within the definition of such term in the Securities
Act and the Exchange Act) the Indemnified Party from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation, attorney's fees and other related costs) arising out of or based
upon any untrue or allegedly untrue statement of a material fact contained in
any disclosure hereunder or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent that the
same are caused by or contained in information provided by the Indemnifying
Party for inclusion in the Proxy Statement/Prospectus.
5.13 Shareholder Rights Protection Plan.
At or prior to the Effective Time the Parent shall terminate its
Shareholder Rights Protection Plan, as provided therein.
5.14 Indemnification and Insurance.
(a) Parent and the Company agree that all rights to indemnification
existing in favor of the present or former directors, officers and employees of
the Company (as such) or any of its subsidiaries or present or former directors
of the Company or any of its subsidiaries serving or who served at the Company's
or any of its subsidiaries' request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, as provided in the Company's Articles of Incorporation or
By-laws, or the Certificate of Incorporation or By- laws (or similar governing
documents) of any of the Company's subsidiaries and any indemnification
agreements as in effect as of the date hereof with respect to matters occurring
at or prior to the Effective Time shall survive the Merger and shall continue in
full force and effect and without modification (other than modifications which
would enlarge the indemnification rights) for a period of not less than the
statute of limitations applicable to such matters, and the Surviving Corporation
shall comply fully with its obligations hereunder and thereunder.
(b) The officers and directors of Parent and the Surviving Corporation
promptly after such person is elected as an officer or director shall amend the
Parent's liability insurance to include the officers and directors of the Parent
and Surviving Corporation set forth on Schedule 5.14 hereto.
(c) In the event the Surviving Corporation or Parent or any of their
respective successors or assigns (i) consolidates with or merges into any other
entity and is not the continuing or surviving corporation or entity of such
consolidation or merger, or (ii) transfers all or substantially all of its
properties and assets to any person or entity, proper provisions shall be made
so that the successors and assigns of the Surviving Corporation or Parent, as
appropriate, assume the obligations set forth in this Section 5.14.
5.15 Chage in Name, Re-Incorporation.
Promptly after the Approval Date, Parent shall re-incorporate in the
State of Delaware and change its name to Superus Holdings, Inc. or a derivative
thereof. Prior to such name change, Parent shall take such actions and execute,
deliver and file such documents as are necessary to effect the name change,
including, but not limited to, obtaining approval from Parent's Board of
Directors and filing such name change on a doing business certificate with
Nasdaq.
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5.16 The Company's Employee Stock Option Plan
The Parent will take such action as is appropriate to amend its
existing Employee Stock Option Plan or adopt a new Employee Stock Option Plan,
including, but not limited to, obtaining approval from Parent's Board of
Directors prior to the Signing and including such new or amended Employee Stock
Option Plan in the Proxy Statement/Prospectus to the stockholders. The Parent
will promptly, after receiving the necessary approvals, file a Form S-8,
registering the shares under the new or amended Plan. Such new or amended
Employee Stock Option Plan shall contain such terms and provisions as are
necessary to permit the issuance of stock options thereunder to Adam Epstein in
accordance with the terms and conditions of the stock option agreement attached
to Mr. Epstein's employment agreement with the Parent.
5.17 Epstein Shares
The Parent's Board of Directors, promptly following the Signing and
prior to the Effective Time, will approve the Class B Common Stock issued to
Adam Epstein in a form that is sufficient under Section 16(b) of the Exchange
Act and Rule 16b-3 thereunder to exempt the acquisition by Mr. Epstein of those
securities from Section 16(b) and Rule 16b-3.
ARTICLE 6 - CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each party to this Agreement to effect
the Merger shall be subject to the satisfaction at or prior to the Effective
Time of the following conditions, any of which may be deferred, in writing by
both parties and/or waived:
(a) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect;
(b) Tax Opinions. Parent and the Company shall each have received
substantially identical written opinions from the other party's counsel, Bryan
Cave LLP and Snow Becker Krauss P.C., respectively, in form and substance
reasonably satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The parties to
this Agreement agree to make and to use reasonable efforts to cause their
stockholders to make reasonable representations as requested by such counsel for
the purpose of rendering such opinions;
(c) Regulatory Approvals and Third Party Consents. All governmental and
third party consents, orders and approvals legally required for the consummation
of the Merger and the transactions contemplated hereby, including, without
limitation, approval by the SEC and any applicable state securities divisions,
shall have been obtained and be in effect at the Effective Time;
(d) Registration Rights Agreement. The Registration Rights Agreement
attached hereto as Exhibit 5.1 shall have been executed by Parent substantially
in the form as attached hereto;
(e) Audited Financial Statements. The parties shall have completed and
received audited financial statements of the other party for the period, for the
Company, ending December 31, 1999 and, for the Parent the fiscal years ended
November 30, 1998 and 1999.
6.2 Additional Conditions to the Obligations of Parent and
Merger Sub.
The obligations of Parent and Merger Sub to consummate the Merger and
the transactions contemplated by this Agreement shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by Parent:
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(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct in all
material respects on and as of the date made and the Closing Date, except for
changes contemplated by this Agreement (including the schedules of the Company)
and except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such date),
with the same force and effect as if made on and as of the Effective Time,
except, in all such cases, for such breaches, inaccuracies or omissions of such
representations and warranties which have neither had nor reasonably would be
expected to have a Material Adverse Effect on the Company or Parent; and Parent
and Merger Sub shall have received a certificate to such effect signed on behalf
of the Company by the President of the Company. "Material Adverse Effect" on a
party shall mean an event, change or occurrence which, individually or together
with any other event, change or occurrence, has a material adverse impact on (i)
the financial position, business, or results of operations of such party and its
subsidiaries, taken as a whole, or (ii) the ability of such party to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided that "Material Adverse
Effect" shall not be deemed to include the impact of (1) changes in laws of
general applicability or interpretations thereof by courts or governmental
authorities, (2) changes in GAAP, (3) actions and omissions of a party (or any
of its subsidiaries) taken with the prior written consent of the other party in
contemplation of the transactions contemplated hereby, and (4) the direct
effects of compliance with this Agreement on the operating performance of the
parties, including expenses incurred by the parties in consummating the
transactions contemplated by this Agreement;
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time, and Parent and Merger Sub shall have received a certificate to
such effect signed by the President of the Company;
(c) Legal Opinion. Parent shall have received a legal opinion from
Bryan Cave LLP, legal counsel to the Company, in substantially the form attached
hereto as Exhibit 6.2(c);
(d) Material Adverse Change. Since December 30, 1999, no event shall
have occurred that would constitute a Material Adverse Effect to the Company;
(e) Employment Agreements. Each of the persons listed on Schedule
6.2(e) hereto shall have executed and delivered to Parent employment agreements
in substantially the form of Exhibit 6.2(e)(1) or (2) attached hereto;
(f) Due Diligence. Parent shall have conducted its due diligence of
Company with results, in the sole discretion of the Board of Directors of
Parent, satisfactory to it;
(g) Additional Certificates. The Company shall have furnished to Parent
such additional certificates, opinions and other documents as Parent may have
reasonably requested as to any of the conditions set forth in this Section 6.2;
(h) Review of Financial Statements. The Parent and its accountants
shall have completed a review of the audited financial statements of the Company
and believe them to be, in the reasonable opinion of the Parent's accountants,
to have been prepared in accordance with generally accepted accounting
principles and suitable or readily adaptable for incorporation in the
registrations statements, prospectuses and annual reports to be filed by Parent
with the Securities and Exchange Commission;
(i) Company Stockholder Approval. The Stockholders' approval of the
Company shall have been obtained; and
(j) Blueprint License. The Company shall have entered into a perpetual,
royalty-free license, acceptable to the Parent, with Blueprint Networks, Inc.,
to license the Web-based encrypted e-mail software, including the "Diesel"
software kernel (the "Kernel"), needed to operate its business (the
"Diesel/Encryption Application"). In addition, the Company or the Surviving
Corporation shall have entered into an agreement or other arrangement,
acceptable to the
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Parent, whereby (i) Blueprint Networks, Inc. will "break-out" the
Diesel/Encryption Application from the Kernel, (ii) upon such "break-out," the
Company or the Surviving Corporation will purchase the Diesel/Encryption
Application, and (iii) the Company or the Surviving Corporation will have an
option to purchase the Kernel.
6.3 Additional Conditions to Obligations of the Company.
The obligations of the Company to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing, or such time as specified herein, of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company:
(a) Representations and Warranties. The representations and warranties
of Parent, Merger Sub and the Parent's other subsidiaries contained in this
Agreement shall be true and correct in all material respects on and as of the
date made and the Effective Time, except for changes contemplated by this
Agreement and except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date), with the same force and effect as if made on and as of the Effective
Time, except, in all such cases, for such breaches, inaccuracies or omissions of
such representations and warranties which have neither had nor reasonably would
be expected to have a Material Adverse Effect on Parent or any of its
subsidiaries; and the Company shall have received a certificate to such effect
signed on behalf of Parent and Merger Sub by the Chief Executive Officer or
President of each of Parent and Merger Sub;
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Effective Time, and the Company shall have received a certificate to such
effect signed by the Chief Executive Officer or President of each of Parent and
Merger Sub;
(c) Legal Opinion. The Company shall have received a legal opinion from
Snow Becker Krauss, P.C., counsel to Parent and Merger Sub, in substantially the
form attached hereto as Exhibit 6.3(c);
(d) Material Adverse Change. Since August 31, 1999, no event shall have
occurred that would constitute a Material Adverse Effect to Parent or any of its
subsidiaries;
(e) Employment Agreements. Parent shall have executed and delivered to
each of the persons listed on Schedule 6.2(e) hereto employment agreements
substantially in the form of Exhibit 6.2(e)(1) or (2) attached hereto, and
Parent shall have assumed any existing employment agreements to which the
Company is a party;
(f) Due Diligence. The Company shall have conducted its due diligence
of Parent and its subsidiaries with results, in the sole discretion of the Board
of Directors of the Company, satisfactory to it;
(g) Administrative Services Agreement. The Administrative Services
Agreement attached hereto as Exhibit 1.1 shall have been executed by Parent and
Merger Sub substantially in the form as attached hereto;
(h) Additional Certificates. Parent and Merger Sub shall have furnished
to the Company such additional certificates, opinions and other documents as the
Company may have reasonably requested as to any of the conditions set forth in
this Section 6.3; and
(i) Global Representations. On or prior to the Approval Date, the
Company shall have received from Parent an affirmation of representations and
warranties providing that, effective upon Stockholder Approval, Parent shall be
deemed to have made to the Company each of the representations and warranties
contained in Section 7 of the Asset Purchase Agreement between the Parent, GDIS
and Global DataTel, Inc., dated December 8, 1999, as if each such representation
and warranty were set forth in this Agreement.
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6.4. Conditions to Obligations of Each Party to Be Completed Prior
to or Upon the Approval Date.
(a) Comfort Letters. Parent shall have received "comfort" letters from
McKennon, Wilson & Morgan LLP, independent certified public accountants for the
Company and the Company shall have received "comfort" letters from Seligson &
Giannattasio, LLP, independent certified public accountants for the Parent,
dated the Approval Date, the effective date of the Proxy Statement/Prospectus
and the Closing Date (or such other date reasonably acceptable to Parent) with
respect to certain financial statements and other financial information included
in the Proxy Statement/Prospectus in customary form;
(b) Affiliate Agreements. Each of the parties identified by the Company
as being one of its Affiliates shall have delivered an executed Affiliate
Agreement which shall be in full force and effect;
(c) Nasdaq Listing. Parent's Class A and Class B Common Stock shall be
listed for trading on the Nasdaq SmallCap Market or National Market System and
the Parent Common Stock to be issued in connection with the Merger shall have
been authorized for listing on the Nasdaq SmallCap Market or National Market
System upon official notice of issuance.
(d) Nasdaq Compliance. Parent will comply with Nasdaq Marketplace Rule
4330(f), and the Parent will comply with all applicable requirements for initial
inclusion of the post-Merger Parent Common Stock under the Nasdaq Marketplace
Rules. To the extent that operation of the Nasdaq Marketplace Rules preclude
meeting any particular requirements until the Approval Date, Parent shall
demonstrate to the Company's satisfaction that the post-Merger Parent and the
Parent Common Stock will meet all such applicable requirements;
(e) Parent Fairness Opinion. The Parent shall have received from a
nationally recognized investment banking or valuation firm reasonably acceptable
to the Parent an opinion to the effect that the Merger is appropriate for the
Parent and its public shareholders from a financial point of view, and such
opinion shall not have been withdrawn or modified in any material adverse
respect as of the Effective Time;
(f) Parent Shareholder Approval. Parent Stockholder Approval of the
Parent's Shareholders shall have been obtained prior to July 30, 2000.
(g) Registered Class B Common Stock. The shares of Class B Common Stock
shall have been registered and be, subject only to contractual lock-up
provisions, eligible for immediate sale by the holders thereof.
(h) Waiver. Notwithstanding anything to the contrary herein, any party
may waive compliance of the other party to any condition contained in this
Section 6.4, if such waiver is made by a writing executed by the party and
delivered to the other parties hereto, provided, however, a single or partial
waiver of any condition will not be deemed a waiver of any other part of such
condition or any other condition.
ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER
7.1 Termination.
This Agreement may be terminated and the Merger abandoned at any time
prior to the Approval Date:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if (i) the Effective Time has not occurred
by March 15, 2000 or the Approval Date by July 30, 2000 (provided that the right
to terminate this Agreement under this clause 7. 1 (b)(i) shall not be available
to any party whose willful or reckless failure to fulfill any obligation
hereunder has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date); (ii) there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; (iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
entity that would make
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consummation of the Merger illegal; or (iv) if any of the conditions precedent
to Closing set forth in this Agreement have not been met and have not been
waived in writing by the party whose consent is required.
(c) by Parent or the Company if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger, by any governmental entity, which would: (i) prohibit
Parent's or the Company's ownership or operation of any material portion of the
business of the Company or Parent; or (ii) compel Parent or the Company to
dispose of or hold separate, as a result of the Merger, any material portion of
the business or assets of the Company or Parent;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and as a result of such breach the conditions set forth in Section
6.2(a) or Section 6.2(b), as the case may be, would not then be satisfied;
provided, however, that if such breach is curable by the Company within ten (10)
days after the giving of written notice by Parent of such breach through the
exercise of the Company's reasonable best efforts, then for so long as the
Company continues to exercise such reasonable best efforts Parent may not
terminate this Agreement under this Section 7. 1 (d) unless such breach is not
cured within ten (10) days (but no cure period shall be required for a breach
which by its nature cannot be cured);
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and as a result of such breach the conditions set forth in
Section 6.3(a) or Section 6.3(b), as the case may be, would not then be
satisfied; provided, however, that if such breach is curable by Parent or Merger
Sub within ten (10) days after the giving of written notice by the Company of
such breach through the exercise of Parent's or Merger Sub's reasonable best
efforts, then for so long as Parent or Merger Sub continues to exercise such
reasonable best efforts the Company may not terminate this Agreement under this
Section 7. 1 (e) unless such breach is not cured within ten (10) days (but no
cure period shall be required for a breach which by its nature cannot be cured);
(f) by Parent if the Company fails to obtain the unanimous consent of
the Company's shareholders approving the transactions contemplated by this
Agreement,
(g) by the Company if Parent fails to recommend to its stockholders
through its Board of Directors the approval of the transactions contemplated by
this Agreement, or withdraws such recommendation, or if the required approvals
of the stockholders of the Parent contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote upon a vote
taken at a meeting of stockholders duly convened therefor or at any adjournment
thereof,
(h) By Parent or the Company, if it is not in initial breach of its
obligations under this Agreement and any of the conditions set forth in Section
6.4 have not been satisfied, or
(i) By the Parent or the Company if the Global Acquisition is
terminated, including, but not limited to, the failure of the Parent's
shareholders or the shareholders of Global DataTel, Inc. to approve such
acquisition.
Where action is taken to terminate this Agreement pursuant to this
Section 7.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and, except as set forth herein, there shall be no liability or obligation on
the part of Parent, Merger Sub or the Company, or their respective officers,
directors or stockholders, provided that each party shall remain liable for any
breaches of this Agreement prior to its termination; and provided further that,
the provisions of this Section 7.2 and Sections 5.5, 5.6 and 5.14 and Article 8
of this Agreement shall remain in full force and effect and survive any
termination of this Agreement.
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7.3 Amendment. Except as is otherwise required by applicable law, this
Agreement may be amended by the parties hereto at any time only by execution of
an instrument in writing signed on behalf of each of the parties hereto.
7.4 Extension, Waiver.
At any time prior to the Effective Time, Parent and Merger Sub, on the
one hand, and the Company, on the other, may, to the extent legally allowed, (a)
extend the time for the performance of any of the obligations of the other party
hereto, (b) waive any inaccuracies in the representations and warranties made to
such party contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party at any time or
times to require performance of any provision hereof shall in no manner affect
the right of such party at a later time to enforce the same or any other
provision of this Agreement. No waiver of any condition or of the breach of any
term in this Agreement in one or more instances shall be deemed to be or
construed as a further or continuing waiver of such condition or breach or a
waiver of any other condition or of the breach of any other term of this
Agreement.
7.5 Limitation on Shareholders' Liability. Notwithstanding any other
provision herein to the contrary, in no event shall the aggregate liability for
any Shareholder for a breach of a representation or warranty contained in
Article 2 of this Agreement exceed the product of such Shareholder's percentage
interest in the Company, as reflected in Schedule 7.5, and $15,000,000.
ARTICLE 8 - GENERAL PROVISIONS
8.1 Survival of Representations and Warranties.
The representations and warranties set forth in Article 2 and Article 3
shall survive for a period of one year beyond the Effective Time. This Section
8.1 shall not limit any covenant or agreement of the parties hereto which by its
terms contemplates performance after the Effective Time.
8.2 Notices.
All notices and other communications hereunder shall be in writing,
shall be effective when received, and shall in any event be deemed to have been
received (a) when delivered, if delivered personally or by commercial delivery
service, (b) five (5) business days after deposit with U.S. Mail, if mailed by
registered or certified mail (return receipt requested), (c) one (1) business
day after the business day of deposit with Federal Express or similar nationally
recognized overnight courier for next day delivery (or, two (2) business days
after such deposit if deposited for second business day delivery), if delivered
by such means, or (d) one (1) business day after delivery by facsimile
transmission with copy by U.S. Mail, if sent via facsimile plus mail copy (with
acknowledgment of complete transmission), to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to the Company, to:
MailEncrypt.com, Inc.
1550 Veteran Avenue
Los Angeles, CA 90024
Attention: Adam Epstein, President
Telephone: (310) 210-9605
Facsimile No.: (310) 477-7996
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with a copy to:
Bryan Cave LLP
120 Broadway
Suite 300
Santa Monica, CA 90401
Attention: David G. Andersen, Esq.
Telephone: (310) 576-2161
Facsimile: (310) 576-2200
if to Parent or Merger Sub, to:
Surge Components, Inc.
1016 Grand Avenue
Deer Park, New York 11729-0125
Attention: Ira Levy, President
Telephone No.: (516) 595-1818
Facsimile No.: (516) 242-6932
with a copy to:
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158
Attention: Elliot Lutzker, Esq.
Telephone No.: (212) 455-0322
Facsimile No.: (212) 949-7052
8.3 Interpretation.
The words "include," "includes" and "including" when used herein shall
be deemed in each case to be followed by the words "without limitation." The
word "agreement" when used herein shall be deemed in each case to mean any
contract, commitment or other agreement, whether oral or written, that is
legally binding. The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. When reference is made herein to "the business
of" an entity, such reference shall be deemed to include the business of all
direct and indirect subsidiaries of such entity. Reference to the subsidiaries
of an entity shall be deemed to include all direct and indirect subsidiaries of
such entity.
8.4 Counterparts.
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other party, it being understood that all parties need not sign
the same counterpart.
8.5 Entire Agreement.
This Agreement, the Schedules and Exhibits hereto, and the documents
and instruments and other agreements among the parties hereto referenced herein:
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) are not intended to confer upon any other person any rights or
remedies hereunder.
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8.6 Severability.
In the event that any provision of this Agreement or the application
thereof, becomes or is declared by a court of competent jurisdiction to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
8.7 Other Remedies.
Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
8.8 Specific Performance.
The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
8.9 Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof, provided that
issues involving the corporate governance of any of the parties hereto shall be
governed by their respective jurisdictions of incorporation. Each of the parties
hereto agrees that process may be served upon them in any manner authorized by
the laws of the State of New York, and that such process may be served outside
the state of New York, for such persons and waives and covenants not to assert
or plead any objection which they might otherwise have to such jurisdiction and
such process.
8.10 Rules of Construction.
The parties hereto agree that they have been represented by counsel
during the negotiation and execution of this Agreement and, therefore, waive the
application of any law, regulation, holding or rule of construction providing
that ambiguities in an agreement or other document will be construed against the
party drafting such agreement or document.
8.11 Assignment.
No party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written approval of the
other parties hereto. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.12 Absence of Third Party Beneficiary Rights.
No provisions of this Agreement are intended, nor shall be interpreted,
to provide or create any third party beneficiary rights or any other rights of
any kind in any client, customer, affiliate, partner of any party hereto or any
other person or entity unless specifically provided otherwise herein.
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<PAGE>
8.13 Mediation and Arbitration.
If any dispute, controversy or claim arises in connection with the
performance or breach of this Agreement between the parties, a party hereto may,
upon written notice to the other parties, request facilitated negotiations. Such
negotiations shall be assisted by a neutral facilitator acceptable to all
parties and shall require the best efforts of the parties to discuss with each
other in good faith their respective positions and, respecting their different
interests, to finally resolve such dispute.
A party may disclose any facts to the other parties or to the
facilitator which such party believes, in good faith, to be necessary to resolve
the dispute. All such disclosures shall be deemed in furtherance of settlement
efforts and thus confidential. Except as agreed to by all parties, the
facilitator shall keep confidential all information disclosed during the
negotiations. The facilitator shall not act as a witness for either party in any
subsequent arbitration between the parties. Such facilitated negotiations shall
conclude within sixty days from receipt of the written notice, unless extended
by mutual consent of the parties. The costs incurred by each party in such
negotiations shall be borne by it. Any fees or expenses of the facilitator shall
be borne equally by all parties.
If any dispute, controversy or claim arises in connection with the
performance or breach of this Agreement which cannot be resolved by facilitated
negotiations, then such dispute, controversy or claim shall be settled by
arbitration in accordance with the laws of the State of New York and the then
current Commercial Arbitration Rules of the American Arbitration Association,
except that no pre-hearing discovery will be permitted unless specifically
authorized by the arbitration panel. The confidentiality provisions applicable
to facilitated negotiations shall also apply to arbitration.
The award issued by the arbitration panel may be confirmed in a
judgment by any federal or state court of competent jurisdiction. All reasonable
costs of both parties, as determined by the arbitration panel, including (i) the
fees and expenses of the American Arbitration Association and of the arbitration
panel, and (ii) the costs, including reasonable attorneys' fees, incurred to
confirm the award in court, shall be borne entirely by the non-prevailing party
(to be designated by the arbitration panel in the award) and may not be
allocated between the parties by the arbitration panel.
8.14 Disclosure.
Disclosure on one schedule, attachment or document provided pursuant to
any paragraph or subparagraph of this Agreement shall be deemed disclosure under
any other applicable paragraph or subparagraph of this Agreement.
THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement and Plan of Reorganization to be signed by their duly authorized
respective officers, all as of the date first written above.
SURGE COMPONENTS, INC.
By: /s/Ira Levy
-------------------------------------
Ira Levy
President
MAIL ACQUISITION
CORPORATION
By: /s/Ira Levy
-------------------------------------
Ira Levy
President
MAILENCRYPT.COM, INC.
By: /s/Adam Epstein
-------------------------------------
Adam Epstein
President and Chief Executive Officer
SHAREHOLDERS
/s/Thomas Taulli /s/Adam Epstein
--------------------------------- -------------------------------------
Thomas Taulli Adam Epstein
/s/Michael Patchen /s/ David Bird
--------------------------------- -------------------------------------
Michael Patchen David Bird
/s/Chris Harano
---------------------------------
Chris Harano
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<PAGE>
ANNEX E
SUPERUS HOLDINGS, INC.
2000 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of Superus Holdings, Inc.'s, (the
"Company") business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options and Stock Appreciation Rights, as
determined by the Administrator at the time of grant. Stock Purchase Rights may
also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 hereof.
(f) "Common Stock" means either the Class A or the Class B Common Stock
of the Company.
(g) "Company" means Superus Holdings, Inc., a Delaware corporation.
(h) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the Company.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless re-employment upon expiration of such leave is guaranteed by statute or
contract. If re-employment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
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(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option or stock appreciation right granted
pursuant to the Plan.
(r) "Option Agreement" means a written or electronic agreement between
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. All Option Agreements shall be subject to the terms and conditions
of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 2000 Stock Incentive Plan.
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Exchange Act.
(z) "Service Provider" means an Employee, Director or Consultant.
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(aa) "Share" means a share of the Class A or Class B Common Stock, as
adjusted in accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the
Plan, the maximum aggregate number of Shares which may be subject to option and
sold under the Plan is 15,000,000 Shares, to be allocated between Class A Common
Stock and Class B Common Stock in the sole discretion of the Administrator;
provided, however, that at no time shall the total number of Shares issuable
upon exercise of all outstanding Options and the total number of Shares provided
for under any stock bonus or similar plan of the Company exceed the applicable
percentage as calculated in accordance with the conditions and exclusions set
forth in Section 260.140.45 of the California Code of Regulations, based on the
Shares of the Company which are outstanding at the time the calculation is made.
The Shares may be authorized but unissued shares of Common Stock, or Shares that
have been previously granted as Options or Stock Purchase Rights, but which have
been reacquired or otherwise reverted to the Plan.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Administrator. The Plan shall be administered by the Board or a
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
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(vi) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted
to Service Providers. Incentive Stock Options may be granted only to Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the Board.
It shall continue in effect for a term of 10 years, unless sooner terminated
under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the applicable
Option Agreement; provided, however, that the term shall be no more than 10
years from the date of grant thereof. Any Stock Appreciation Rights issued in
tandem with any Incentive Stock Option or Nonstatutory Stock Option may be
exercised at any time during the term of the Option; provided, however, any
Stock Appreciation Rights issued to an officer or director of the Company may
not be exercised for a period of six months from the date of grant except in the
case of the death or disability of the Optionee.
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8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant
of such option, owns stock representing more than 10% of the voting power of all
classes of stock of the Company or any parent or Subsidiary, the exercise price
shall be no less than 110% of the Fair market Value per Share on the date of
grant.
(B) granted to any Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service provider, who, at the time
of grant of such option, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or any parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair market Value per Share on
the date of grant.
(B) granted to any Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
hereunder shall be exercisable according to the terms hereof at such times and
under such conditions as determined by the Administrator and set forth in the
Option Agreement. Except in the case of Options granted to Officers, Directors
and Consultants, Options shall become exercisable at a rate of no less than 20%
per year over five years from the date the Options are granted. Unless the
Administrator provides otherwise, vesting of Options granted hereunder shall be
tolled during any unpaid leave of absence. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights
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as a stockholder shall exist with respect to the Shares, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
Shares promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of the Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three months following the Optionee's termination. If, on
the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for 12 months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for 12 months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Stock Appreciation Rights. The Administrator shall in its
discretion determine from time to time the terms and conditions of Stock
Appreciation Rights to be granted, which terms shall be set forth in a written
stock option agreement evidencing the Stock Appreciation granted in tandem with
the Incentive Stock Option or Nonstatutory Stock Option. The exercise of a Stock
Appreciation Right granted in tandem with an Incentive Stock Option or
Nonstatutory Stock Option shall be deemed to cancel such number of shares
subject to the unexercised Option as were subject to the exercised Stock
Appreciation Right. The Administrator has the discretion to alter the terms of
the Stock Appreciation Rights if necessary to comply with Federal or state
securities law. Amounts to be paid by the Company in connection with a Stock
Appreciation Right may, in the Administrator's discretion, be made in cash,
Common Stock or a combination thereof.
(f) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
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11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations or equivalent Statute of any other state of residence. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the certificate representing the shares of Restricted Stock, together
with stock powers executed by the purchaser in favor of the Company, will be
held by the Company until the restricted period has expired. Thereafter the
purchaser shall have rights equivalent to those of a stockholder and shall be a
stockholder when his or her purchase is entered upon the records of the duly
authorized transfer agent of the Company. No adjustment shall be made for a
dividend or other right for which the record date is prior to the date the Stock
Purchase Right is exercised, except as provided in Section 12 of the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan, but as to
which no Options or Stock Purchase Rights have yet been granted, or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until 15
days prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option or Stock Purchase Right would not
otherwise be exercisable. In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock
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Purchase Right shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option or
Stock Purchase Right will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of 15
days from the date of such notice, and the Option or Stock Purchase Right shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant of an
Option or Stock Purchase Right shall, for all purposes, be the date on which the
Administrator makes the determination granting such Option or Stock Purchase
Right, or such other date as is determined by the Administrator. Notice of the
determination shall be given to each Service Provider to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
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(b) Investment Representations. As a condition to the exercise of an
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan, shall at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within 12 months after the date the Plan is adopted.
Such stockholder approval shall be obtained in the degree and manner required
under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to each
Optionee and to each individual who acquires Shares pursuant to the Plan, not
less frequently than annually during the period such Optionee or purchaser has
one or more Options or Stock Purchase Rights outstanding, and, in the case of an
individual who acquires Shares pursuant to the Plan, during the period such
individual owns such Shares, copies of annual financial statements. The Company
shall not be required to provide such statements to key employees whose duties
in connection with the Company assure their access to equivalent information.
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ANNEX F
SURGE STOCKHOLDER DISSENTER'S RIGHTS
Rights of Dissenting Owners Under the New York Business Corporation Law for
Surge Components, Inc. Stockholders:
Section 910. Right of stockholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A stockholder of a domestic corporation shall, subject to and by
complying with section 623 (Procedure to enforce stockholder'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 stockholder 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 stockholder 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 stockholder 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 stockholder; or
(iii) Notwithstanding subclause (ii) of this clause, to a
stockholder 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 stockholders entitled to receive notice of the meeting of stockholders 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 stockholder
approval under section 909 (Sale, lease, exchange or other disposition of
assets) other than a transaction wholly for cash where the stockholders'
approval thereof is conditioned upon the dissolution of the corporation and the
distribution of substantially all of its net assets to the stockholders in
accordance with their respective interests within one year after the date of
such transaction.
(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
stockholder whose shares have not been acquired in the exchange or to a
stockholder 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
stockholders entitled to receive notice of the meeting of stockholders 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 stockholder 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.
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(3) (Added, L 1997) Any stockholder, 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 stockholder's right to receive payment for
shares
(a) A stockholder 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 stockholders 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 stockholder 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 stockholders without a meeting.
(b) Within ten days after the stockholders' authorization date, which
term as used in this section means the date on which the stockholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite stockholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
stockholder who filed written objection or from whom written objection was not
required, excepting any stockholder 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
stockholder 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
stockholder 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 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 stockholder 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 stockholder shall
cease to have any of the rights of a stockholder 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 stockholder 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 stockholder 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 stockholder is not entitled to receive payment for his shares, or the
stockholder 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 stockholder 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
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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 stockholder 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 stockholder
or other person who submitted them on his behalf. Any stockholder 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 stockholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
stockholders 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 stockholders' 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
stockholder 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 stockholder 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 stockholder 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
stockholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the stockholder 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
stockholders' 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 stockholders 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 stockholder 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 stockholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the stockholders' authorization for or consent to the
proposed corporate action the stockholders 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 stockholder 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 stockholder or stockholders 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
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the corporation is located to determine the rights of dissenting stockholders
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 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 stockholder 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 stockholders, 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 stockholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting stockholder 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
stockholder, 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 stockholder 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 stockholders' authorization date.
In fixing the fair value of the shares, the court shall consider the nature of
the transaction giving rise to the stockholder's right to receive payment for
shares and its effects on the corporation and its stockholders, 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 stockholder 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 stockholder 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 stockholder 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.
(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 stockholders 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
stockholders 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
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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 stockholder 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 stockholder
under this section at a time when the corporation is insolvent or when such
payment would make it insolvent. In such event, the dissenting stockholder
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 stockholders, 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 stockholder 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 stockholder 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.
(k) The enforcement by a stockholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
stockholder 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 stockholder 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 stockholder under this section shall be given
in the manner provided in section 605 (Notice of meetings of stockholders).
(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 SHAREHOLDERS DISSENTERS' 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.
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.
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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.
(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
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(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.
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.
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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;
(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.- 1. 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
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.
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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
(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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ANNEX H
FAIRNESS OPINION OF HOULIHAN SMITH & COMPANY, INC.
TO SURGE COMPONENTS, INC.
April 26, 2000
Members of the Board of Directors
Surge Components, Inc. d/b/a Superus Holdings
1016 Grand Blvd.
Deer Park, NY 11729
Members of the Board:
We understand that Surge Components, Inc. d/b/a Superus Holdings ("Surge" or the
"Company"), a New York corporation, has closed on the purchase of all of the
assets of Global DataTel, Inc., Inc., a Nevada Corporation ("Global") including
all of its wholly-owned subsidiaries. In consideration, the Shareholders of
Global received 239,000 shares of Surge Series A Redeemable Convertible
Preferred Stock, being held in escrow pending completion of final audits,
regulatory and other approvals and this fairness opinion. Following approval of
Surge's and Global's stockholders each share of Surge's Series A Redeemable
Preferred Stock will automatically convert into 100 shares of Superus' Class B
Common Stock.
We have been informed that Surge has also signed a Definitive Merger Agreement
with MailEncrypt.com, Inc. ("MailEncrypt"), a California corporation. The Merger
Agreement provides for the acquisition of MailEncrypt through the statutory
merger of MailEncrypt with and into a wholly owned subsidiary of Surge, Mail
Acquisition Corp, (the "Mail Merger"). The sole consideration for the Mail
Merger is the issuance of 1,821,400 shares of Class B Common Stock of Surge to
be issued to the shareholders of MailEncrypt.
In addition to these transactions, Shareholders will be voting on a
Recapitalization Proposal where Surge Components, Inc. will transfer all of its
assets, subject to its liabilities, to a wholly-owned subsidiary. Surge will
then merge with and into Superus Holdings, which will become the public parent
holding company. 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 the existing
electronic components business (Surge), and the Class B Common Stock is intended
to reflect separately the operating results of the Internet related businesses
(currently Global and MailEncrypt).
Additional proposals for shareholder approval include the ratification of
adoption of the Superus 2000 Stock Incentive Plan, the approval of accelerated
vesting of Superus incentive stock options issued to Surge Management, the
election of Directors of Superus, and the ratification of appointment of
auditors of Surge. We will refer to all of these proposals as the
"Recapitalization Plan." It is anticipated that the Recapitalization Plan will
qualify as a "tax-free" reorganization pursuant to Section 368 of the Internal
Revenue Code.
We understand that after the final approval and completion of the
Recapitalization Plan it is the intention of management to list both classes of
Superus Common Stock and the Class A Common Stock Warrants on the NASDAQ
National Market.
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We have been informed that before the S-4 Registration Statement is declared
effective by the Securities and Exchange Commission ("SEC"), Global must clear
all comments and have its previously filed Form 10-SB declared effective and be
current with all of its SEC reporting requirements.
You have requested our opinion as investment bankers as to whether the
Recapitalization Plan is fair, from a financial point of view, to Surge
Components, Inc. and its stockholders as of the date hereof (the "Opinion"). For
the purposes of the Opinion set forth herein, we have, among other things:
1. Reviewed the S-4 Registration Statement of Surge Components, Inc.,
subject to completion as filed with the SEC on March 17, 2000 and
a draft amendment to the Registration Statement which will include
this Opinion as an exhibit. The Registration Statement contains
the Proxy Statement of Surge and the notice to Surge shareholders
of a special meeting of the shareholders and the Prospectus of
Surge.
2. Reviewed the financial terms of the transactions as provided in
the Merger Agreement and Plan of Reorganization for the
acquisition of MailEncrypt dated February 16, 2000 and the Asset
Purchase Agreement for the acquisition of the assets of Global
DataTel, Inc. dated December 8, 1999.
3. Reviewed relevant SEC filings for both Surge Components, Inc. and
Global DataTel, Inc. including 8-Ks, 10- QSBs, and 10-KSBs.
4. Reviewed various corporate records of Surge including Articles of
Incorporation, By-laws, and other key corporate documents.
5. Reviewed audited and unaudited interim financial statements of
Surge, Global and MailEncrypt, as filed in various SEC documents.
6. Reviewed detailed financial projections for Surge, Global and
MailEncrypt. These documents included several detailed operating
assumptions.
7. Performed a discounted cash flow analysis of Surge, Global and
MailEncrypt to estimate valuation ranges for each company.
8. Questioned Surge management and counsel about possible alternative
strategies that were considered to enhance shareholder value for
the Company, other than the Recapitalization Plan as currently
contemplated.
9. Analyzed the historical trading price and volumes of Surge and
Global stock as quoted on the NASDAQ Small Cap Market for Surge
and OTC Bulletin Board and National Quotation Bureau ("NQB") Pink
Sheets for Global.
10. Compared Surge, Global and MailEncrypt from a financial point of
view with certain other guideline public companies in the their
respective industries that we deemed to be relevant. Houlihan
focused on general financial ratios as well as equity and asset
valuation ratios.
11. Conducted such other studies, analyses, inquiries and
investigations as Houlihan deemed appropriate.
In arriving at our Opinion we have considered such factors as we have deemed
relevant including, but not limited to: (1) the relative valuations implied by
the financial terms of the Recapitalization Plan, (2) the current trading prices
and differences in current liquidity of the stock of Surge and Global traded on
the NASDAQ SmallCap Market and the NQB Pink Sheets, respectively; (3) the
historical financial operating characteristics of Surge, Global and MailEncrypt,
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(4) the conditions of closing of the Transactions, (5) other alternatives
available to Surge to enhance shareholder value, (6) the changes in corporate
governance and basic capital structure as proposed in the Recapitalization Plan,
(7) the financial impacts of the accelerated exercisability and terms of the
incentive stock options awarded to Surge management as compensation for closing
the Recapitalization Plan, (8) the risks associated with the combined operations
and complex tracking stock capital structure going forward, (9) the upside
potential of the combined companies and (10) other due diligence findings
related to the transaction.
During our review, we relied upon and assumed, without independent verification,
the accuracy, completeness and reasonableness of the financial and other
information provided, and have further relied upon the assurances of Surge
management and their counsel that they are unaware of any facts that would make
the information provided to us to be incomplete or misleading for the purposes
of this Opinion. We have further relied upon the accuracy of publicly available
financial data. We have not assumed responsibility for any independent
verification of this information nor have we assumed any obligation to verify
this information. The management of Surge informed us that the forecasts
provided represent their best current judgment, at the date of the Opinion, as
to the future financial performance of the Company, on a stand-alone basis. We
assume no responsibility for and express no view as to the forecasts or the
assumptions on which they were based. We did not perform an independent
evaluation or appraisal of the assets of Surge, Global or MailEncrypt.
Furthermore, we have requested and received a representations letter from Surge
management indicating that they have read this Opinion letter and that they
believe that it is accurate and does not omit any material facts or assumptions.
Our Opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. We disclaim any obligation to advise the Board of Surge
or any person of any change in any fact or matter affecting our Opinion, which
may come or be brought to our attention after the date of this Opinion.
Our Opinion does not constitute a recommendation to the Board of Surge to
proceed with the Recapitalization Plan or to the shareholders of Surge or Global
to vote for the proposals in the Recapitalization Plan. This Opinion relates
solely to the question of fairness to Surge stockholders, from a financial point
of view, as to the terms of the Recapitalization Plan as currently proposed.
Further, we express no opinion herein as to the structure, terms or effect of
any other aspect of the Recapitalization Plan, including, without limitation,
any effects resulting from environmental issue(s), the application of any
bankruptcy proceeding, fraudulent conveyance, or other international, federal or
state insolvency law, or of any pending or threatened litigation affecting any
of the involved corporations.
We are also expressing no opinion as to the income tax consequences of the
Recapitalization Plan. Our Opinion does not address the relative merits of the
Recapitalization Plan, nor does it address the Board's decision to proceed with
the Plan.
It is understood that this Opinion may be included in its entirety in a filing
with the SEC. For purposes of this filing, no summary of or excerpt from this
Opinion may be used, and no published reference to this Opinion letter may be
made without our prior express written approval, which shall not be unreasonably
withheld. Notwithstanding this restriction, however, this report may be shared
with professional advisors and / or consultants on a need -to-know basis.
Houlihan, a National Association of Securities Dealers member, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Houlihan will receive a
non-contingent fee from Surge relating to its services in providing this
Opinion. In an engagement letter signed March 22, 2000, Surge has agreed to
indemnify Houlihan with respect to Houlihan's services as follows:
If Houlihan or any person or entity associated with Houlihan becomes
involved in any way in any legal or administrative proceeding related
to the services performed hereunder or the report, Surge will
indemnify, defend and hold Houlihan and any such person and / or entity
harmless from all damage and expenses (including reasonable attorney's
fees and expenses and court costs) incurred in connection therewith,
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except to the extent that a court having jurisdiction shall have
determined in a final judgement that such loss, claim, damage or
liability resulted primarily from the gross negligence, bad faith,
willful misfeasance, or reckless disregard of the obligations or duties
of Houlihan hereunder.
Based on the foregoing and such other factors as we deem relevant, we are of the
opinion that the Recapitalization Plan as defined and described above is fair,
from a financial point of view to the stockholders of Surge Components, Inc. as
of the date hereof.
Very truly yours,
HOULIHAN SMITH & COMPANY, INC.
D. Grey Merryman, CFA
Vice President
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ANNEX I
FAIRNESS OPINION OF CAPITALINK, L.C. TO GLOBAL STOCKHOLDERS
CAPITALINK, L.C.
As of December 8, 1999
Board of Directors
Global Datatel, Inc.
3333 Congress Avenue
Suite 404
Delray Beach, FL 33445
Members of the Board:
We understand that there is an Asset Purchase Agreement, dated as of
December 8, 1999 and revised subsequent thereto (the "Asset Purchase
Agreement"), by and among Surge Components, Inc. ("Surge"), GDIS Acquisition
Corp. ("GDIS"), a subsidiary of Surge, and Global DataTel, Inc. ("Global"),
pursuant to which Global shall sell, assign, transfer and deliver to GDIS, and
GDIS shall purchase, acquire, accept and take possession of all of Global's
right, title and interest in and to all of the assets and certain assumed
liabilities of Global as set forth in the schedules attached to the Asset
Purchase Agreement, in exchange for the following (hereafter, the "Purchase
Consideration"):
239,000 shares of Surge Series A Redeemable Convertible Preferred Stock ("Surge
Class A Preferred"). The Surge Class A Preferred shall be convertible into, for
each share of the Surge Class A Preferred, 100 shares of Surge Class B Common
Stock (following Surge shareholder approval).
The transaction described in the preceding two paragraphs is referred
to as the "Proposed Transaction."
We understand that the existing Surge Common Stock shall be
redesignated as Class A Common Stock, and that such Class A Common Stock shall
have the same rights and preferences and otherwise be the same as the existing
Common Stock except that the holders of each two shares of Class A Common Stock
issued and outstanding at the effective date of shareholder approval and Nasdaq
listing of the Surge Class B Common Stock, shall have the right to receive and
become exchangeable for one share of Surge Class B Common Stock for a six-month
period.
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Global of the Purchase Consideration. We
have not been requested to opine as to, and our opinion does not in any manner
address, the underlying business decision of Global to proceed with or effect
the Proposed Transaction. In addition, we have not been requested to explore any
alternatives to the Proposed Transaction.
In arriving at our opinion, we, among other things: (i) reviewed the
Asset Purchase Agreement; (ii) reviewed the draft Proxy Statement/Registration
Statement on Form S-4 to be filed with the Securities and Exchange Commission;
(iii) reviewed publicly available financial information and other data with
respect to Global, including the General Registration of Securities on Form
10-SB, dated July 26, 1999 and the amendments thereto dated September 24, 1999,
October 4, 1999, and October 12, 1999, the Current Reports on Form 8-K, dated
November 3, 1999 and January 10, 2000, and the Quarterly Report on Form 10-QSB
for the period ended September 30, 1999; (iv) reviewed publicly available
financial information and other data with respect to Surge, including the Annual
Reports for the fiscal years ended November 30, 1999 and 1998, the Quarterly
Report on Form 10-QSB for the period ended August 31, 1999, and the Current
Reports on Form 8-K, dated October 22, 1999 and December 17, 1999; (v) reviewed
certain other relevant financial and operating data relating to Global and Surge
made available from published sources and from the internal
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records of the respective companies; (vi) considered the historical financial
results and present financial condition of Global and Surge with those of other
companies that we deemed relevant; (vii) reviewed and analyzed the financial
terms of certain transactions that we deemed comparable to the Proposed
Transaction; (viii) reviewed certain publicly available information concerning
the trading of, and the trading market for, the common stock of each of Global
and Surge; (ix) reviewed and analyzed certain publicly available information
concerning the trading of, and the trading market for, companies that we
believed to be comparable to each of Global and Surge; (x) reviewed and
discussed with representatives of the managements of Global and Surge certain
financial and operating information furnished to us and presented in each of the
respective companies' public filings, including revised Global financial
statements that were provided to us but not yet filed as part of the Global
public filings; (xi) inquired about and discussed the Proposed Transaction with
Global management; and (xii) performed such other analyses and examinations as
were deemed appropriate.
In arriving at our opinion, we relied upon and assumed the accuracy and
completeness of all of the financial and other information that was used without
assuming any responsibility for any independent verification of any such
information and further relied upon the assurances of Global's and Surge's
management that they were not aware of any facts or circumstances that would
make any such information inaccurate or misleading. In arriving at our opinion,
we did not make a physical inspection of the properties and facilities of either
Global or Surge, and have not made or obtained any evaluations or appraisals of
the assets and liabilities (contingent or otherwise) of either Global or Surge.
We assumed that the Proposed Transaction will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations. In addition, upon
the advice of the management of Global and its legal advisors, we assumed that
the Proposed Transaction will not cause any adverse tax affect to either Global
or Surge based on the provisions of Section 368 of the Internal Revenue Code of
1986, as amended. Our opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, December 8,
1999. Accordingly, although subsequent developments may affect our opinion, we
did not assume any obligation to update, review or reaffirm our opinion.
We have also assumed, with your consent, that the Proposed Transaction
will be consummated in accordance with the terms described in the Asset Purchase
Agreement, without any further amendments thereto, and without waiver by Global
of any of the conditions to any obligations thereunder.
In connection with our services, we have previously received a retainer
and will receive the balance of our fee for rendering this opinion. In addition,
Global has agreed to indemnify us for certain liabilities that may arise out of
the rendering this opinion. This opinion is not intended to be and does not
constitute a recommendation to any shareholder of Global as to how such
shareholder should vote, if required to, with respect to the Proposed
Transaction.
Our opinion is for the use and benefit of the Board of Directors of
Global and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction and may not be used by Global for any
other purpose or reproduced, disseminated, quoted or referred to by Global at
any time, in any manner or for any purpose, without the prior written consent of
Capitalink, except that this opinion, may be reproduced in full in, and
references to the opinion and to Capitalink and its relationship with Global may
be included in any proxy statement relating to the Proposed Transaction that
Global files with the U.S. Securities and Exchange Commission and distributes to
holders of Global's common stock in connection with the Proposed Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Purchase Consideration is fair, from a financial
point of view, to the shareholders of Global.
Very truly yours,
CAPITALINK, L.C.
I-2
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
Index to Financial Statements
for the Years Ended November 30, 1999 and 1998,
and Three Months Ended February 29, 2000 and February 28, 1999 (Unaudited)
Independent Auditors' Report F - 2
Consolidated Balance Sheets 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 - 26
Global DataTel, Inc and Subsidiaries
Index to Financial Statements
for the Year Ended December 31, 1999
and Three Months Ended March 31, 2000 (Unaudited)
Independent Auditors' Report F - 27
Consolidated Balance Sheets F - 28 - 29
Condolidated Statements of Operations
and Comprehensive Income F - 30
Consolidated Statements of Shareholders' Deficiency F - 31
Consolidated Statements of Cash Flows F - 32 - 33
Notes to Consolidated Financial Statements F - 34 - 48
MailEncrypt.com, Inc
Index to Financial Statements for the
period March 17, 1999 (inception) To December 31, 1999
and Three Months Ended March 31, 2000
Independent Auditors' Report F - 49
Balance Sheets as of December 31, 1999 and March 31, 2000 (unaudited) F - 50
Statement of Operations for the Period from March 17, 1999 (Inception)
to December 31, 1999, and for the three months ended March 31,
2000 (unaudited) F - 51
Statement of Stockhoders' Deficit for the Period from March 17, 1999
(Inception) to December 31, 1999, and for the three months ended
March 31, 2000 (unaudited) F - 52
Statement of Cash Flows for the Period from March 17, 1999 (Inception)
to December 31, 1999, and for the three months ended March 31,
2000 (unaudited) F - 53
Notes to Financial Statements F - 54 - 59
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 SHEETS
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS (Note 4)
------
Current assets:
Cash $ 5,716,090 $ 159,612
Note receivable - Global DataTel, Inc. 2,165,876 1,000,000
Note receivable - MailEncrypt.com, Inc. 750,000 --
Marketable securities 2,233,406 2,232,294
Accounts receivable (net of allowance for
doubtful accounts of $22,634) 2,485,514 2,251,640
Inventory 1,318,459 1,442,067
Prepaid expenses and taxes 60,042 201,153
Other current assets 122,698 82,187
----------- ----------
Total current assets 14,852,085 7,368,953
----------- ----------
Fixed assets - net of accumulated depreciation
of $195,823 and $183,290 329,991 321,406
----------- -----------
Other assets:
Deferred acquisition costs 132,728 63,687
Loan costs - net of accumulated amortization
of $97,317 486,583 --
Security deposits 2,985 2,985
Deferred tax asset 91,373 89,223
----------- -----------
Total other assets 713,669 155,895
----------- -----------
Total assets $15,895,745 $ 7,846,254
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
February 29, November 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,268,746 $1,283,067
Accrued expenses and taxes 1,523,891 408,941
Debenture payable 5,933,272 --
----------- ----------
Total current liabilities 8,725,909 1,692,008
----------- ----------
Stockholders' equity:
Preferred stock - $.001 par value, 1,000,000
authorized; 269,000 shares Series A Preferred
Stock authorized, 239,000 issued and held in
escrow account by Surge in name of Global
DataTel, Inc. as of February 29, 2000, none
issued at November 30, 1999 -- --
Common stock - $.001 par value,
25,000,000 shares authorized,
4,932,558 and 4,858,958 shares issued
and outstanding, respectively 4,933 4,859
Additional paid-in capital 6,533,029 6,386,063
Unrealized holding loss (88,336) (52,856)
Retained deficit 720,210 (183,820)
----------- -----------
Total stockholders' equity 7,169,836 6,154,246
----------- -----------
Total liabilities and stockholders' equity $15,895,745 $7,846,254
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Year Ended
February 29, February 28, November 30,
2000 1999 1999 1998
------------ ------------ ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $7,890,922 $2,224,966 $12,254,241 $8,925,948
Less returns and allowances 37,888 19,063 107,216 198,299
---------- ---------- ----------- ----------
Net sales 7,853,034 2,205,903 12,147,025 8,727,649
Cost of goods sold 5,173,939 1,628,287 9,068,308 6,514,813
Inventory reserve (Note 8) -- -- -- 215,293
---------- ---------- ----------- ----------
Gross profit 2,679,095 577,616 3,078,717 1,997,543
---------- ---------- ----------- ----------
Operating expenses:
General and administrative
expenses 717,514 464,811 2,071,834 1,759,685
Selling and shipping expenses 458,685 250,429 1,030,844 874,362
Depreciation 109,850 11,085 49,254 45,090
---------- ---------- ----------- ----------
Total operating expenses 1,286,049 726,325 3,151,932 2,679,137
---------- ----------- ---------- ----------
Income (loss) from operations 1,393,046 (148,709) (73,215) (681,594)
---------- ---------- ----------- ----------
Other income (expenses):
Investment income 92,554 52,989 216,774 293,898
Interest expense (77,416) (996) -- (34,936)
Loss on disposal of assets -- -- (37,757) (7,936)
---------- ---------- ----------- ----------
Total other income (expenses) 15,138 51,993 179,017 251,026
---------- ---------- ----------- ----------
Income (loss) before income taxes 1,408,184 (96,716) 105,802 (430,568)
Income taxes (benefit) (Note 9) 504,154 1,903 20,738 (156,402)
---------- ---------- ----------- ----------
Net income (loss) 904,030 (98,619) 85,064 (274,166)
Other comprehensive (loss) income:
Unrealized holding (loss) gain on securities
arising during the period (35,480) (138,155) (188,319) 59,483
Reclassification adjustment - loss
on sale of securities, net of taxes of $14,714 -- -- 23,044 --
---------- ---------- ----------- ----------
Total comprehensive loss $ 868,550 $ (236,774) $ (80,211) $ (214,683)
========== ========== =========== ==========
Weighted average shares outstanding
Basic 4,888,535 4,855,169 4,858,024 4,836,835
Diluted 6,729,992 4,855,169 5,876,468 4,836,835
Earnings (loss) per share
Basic $ .18 $ (.02) $ .02 $ (.06)
Diluted $ .13 $ (.02) $ .01 $ (.06)
</TABLE>
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 AND
THREE MONTHS ENDED FEBRUARY 29, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Additional Unrealized Retained Total
Preferred Stock Common Stock Paid-In Holding Earnings Stockholders'
Shares Amount Shares Amount Capital Gain (Deficit) Equity
------ ------ ------ ------ ------- ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 1, 1997 -- $ -- 4,823,958 $4,824 $6,335,862 $ 75,980 $ 5,282 $6,421,948
Proceeds of issuance of stock -- -- 18,000 18 13,614 -- -- 13,632
Proceeds from exercise of options -- -- 11,000 11 20,232 -- -- 20,243
Net unrealized gain in
marketable securities -- -- -- -- -- 59,483 -- 59,483
Net loss for the period -- -- -- -- -- -- (274,166) (274,166)
------ ------- --------- ------ ---------- --------- --------- ----------
Balance - November 30, 1998 -- -- 4,852,958 4,853 6,369,708 135,463 (268,884) 6,241,140
Proceeds of issuance of A Warrants -- -- -- -- 8,736 -- -- 8,736
Proceeds from exercise of options -- -- 6,000 6 7,619 -- -- 7,625
Net unrealized loss in marketable
securities -- -- -- -- -- (188,319) -- (188,319)
Net income for the period -- -- -- -- -- -- 85,064 85,064
------ ------- --------- ------ ---------- --------- --------- ----------
Balance - November 30, 1999 -- $ -- 4,858,958 4,859 6,386,063 (52,856) (183,820) 6,154,246
Proceeds from exercise of options -- -- 73,600 74 146,966 -- -- 147,040
Net income for the period -- -- -- -- -- -- 904,030 904,030
Net unrealized loss in
marketable securities -- -- -- -- -- (35,480) -- (35,480)
------ ------- --------- ------ ---------- --------- --------- ----------
Balance - February 29, 2000 -- $ -- 4,932,558 $4,933 $6,533,029 $(88,336) $720,210 $7,169,836
====== ======= ========= ====== ========== ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
February 29, February 28, November 30,
2000 1999 1999 1998
------------ ------------ ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 904,030 $ (98,619) $ 85,064 $ (274,166)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation 109,850 11,085 49,254 45,090
Deferred income taxes (2,150) (458) (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 (233,874) 21,071 (1,068,584) 354,570
Inventory 123,608 144,136 (282,956) 69,830
Other current assets 100,600 21,736 (82,657) (103,737)
Accounts payable (14,322) (427,398) 177,767 145,227
Accrued expenses and taxes 1,114,950 (191,296) 100,981 12,769
---------- ---------- --------- ---------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES 2,102,692 (519,743) (977,656) 168,092
----------- ---------- --------- ---------
INVESTING ACTIVITIES
Deferred acquisition costs (69,041) -- -- --
Purchase of marketable securities (36,591) (53,682) (196,298) (961,075)
Acquisition of fixed assets (21,118) (22,075) (45,873) (253,870)
Net advances to Global DataTel, Inc. (1,165,876) -- (1,000,000) --
Net advances to MailEncrypt.com, Inc. (750,000) -- -- --
Sale of marketable securities -- -- 975,856 --
----------- ---------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,042,626) (75,757) (266,315) (1,214,945)
----------- ---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F - 7
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
February 29, February 28, November 30,
2000 1999 1999 1998
------------ ------------ ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net borrowings under
letter-of-credit agreement $ -- $ -- $ -- $ (495,495)
Proceeds from issuance of warrants -- -- 8,736 13,632
Proceeds from exercise of stock options 147,040 7,500 7,625 20,243
Proceeds from debenture payable 5,933,272 -- -- --
Loan costs (583,900) -- -- --
----------- --------- ---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,496,412 7,500 16,361 (461,620)
----------- --------- ---------- -----------
NET CHANGE IN CASH 5,556,478 (588,000) (1,227,610) (1,508,473)
CASH AT BEGINNING OF PERIOD 159,612 1,387,222 1,387,222 2,895,695
----------- --------- ---------- -----------
CASH AT END OF PERIOD $5,716,090 $ 799,222 $ 159,612 $ 1,387,222
========== ========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 1,000 $ 800 $ 11,618 $ 2,062
========== ========== ========== ===========
Interest paid $ 4,191 $ 996 $ -- $ 34,936
========== ========== ========== ===========
</TABLE>
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.
In March 2000, the Company formed Superus Holdings, Inc. ("Superus"), a Delaware
corporation, as a wholly owned subsidiary of the Company. The Company is
currently doing business under the assumed name Superus Holdings.
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 is as follows:
February 29, 2000 November 30, 1999
(Unaudited)
Aggregate cost $2,321,742 $2,285,150
Gross unrealized loss (88,336) (52,856)
---------- ----------
$2,233,406 $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 and 2000, there were no sales of these securities.
F - 9
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------------
Inventories
Inventories, which consist solely of goods held for resale, are stated at the
lower of cost (first-in, first-out method) or market. The Company measures
inventory and cost of goods sold for interim financial statements by use of a
historically developed gross profit percentage. Annually, the Company adjusts
the inventory to reflect the results of a physical count. No material
adjustments were made to adjust to the physical count for the years ended
November 30, 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:
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 February 29, 2000 and November 30, 1999, the
Company's uninsured cash balances totaled $5,316,090 and $54,763, respectively.
The Company performs periodic reviews of the relative credit rating of its bank
to lower its risk. The Company believes that concentration with regards to
accounts receivable is limited due to its large customer base.
F - 10
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------------
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.
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.
F - 11
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
---------------------------------------------------------------
Earnings (Loss) Per Share
Earnings per share for the three months ended February 29, 2000 and February 28,
1999 and 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 three months ended February 28, 1999 and for the year ended
November 30, 1998 and, accordingly, common stock equivalents are excluded as the
effect would be anti-dilutive.
Interim Reporting - Information pertaining to the three months ended February
29, 2000 and February 28, 1999 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
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.
F - 12
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
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 and subsequently to $6,250,000 (Note 17).
NOTE 4 - NOTE RECEIVABLE - MAILENCRYPT.COM, INC.
------------------------------------------------
In February 2000, the Company entered into an agreement with MailEncrypt.com,
Inc. ("Mail") whereby the Company loaned $750,000 to Mail. The note bears
interest at the rate of 10% per annum and is due July 30, 2000. Upon completion
of the acquisition of Mail by the Company, the note and all accrued interest
shall automatically be forgiven. In the event the acquisition of Mail is
terminated, the note is convertible into the common stock of Mail at an agreed
upon valuation of $15,000,000.
NOTE 5 - FIXED ASSETS
---------------------
Fixed assets consist of the following:
February 29, 2000 November 30, 1999
(Unaudited)
Furniture and fixtures $ 85,093 $ 85,093
Leasehold improvements 250,719 250,719
Computer equipment 190,002 168,884
-------- --------
525,814 504,696
Less - accumulated depreciation 195,823 183,290
-------- --------
Total fixed assets $329,991 $321,406
======== ========
Depreciation expense for the years ended November 30, 1999 and 1998 was $49,254
and $45,090, respectively.
F - 13
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 6 - 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 7 - 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.
NOTE 8 - 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 - 14
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 9 - 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 ("Series A Preferred"). 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. 239,000 shares of
the Series A Preferred Stock have been issued and held in escrow by Surge in the
name of Global.
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 February 29, 2000, 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.
F - 15
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------------------
Stock option incentive plan activity is summarized as follows:
Weighted Average
Shares Exercise Price
------ --------------
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
Granted 209,000 $2.69
Exercised (62,700) $1.47
Canceled --
----------
Options outstanding February 29, 2000 636,300 $1.94
==========
Options exercisable November 30, 1998 250,500 $1.45
==========
Options exercisable November 30, 1999 437,750 $1.54
==========
Options exercisable February 29, 2000 502,550 $1.82
==========
Exercise prices for options outstanding as of February 29, 2000 ranged from
$1.25 to $3.20. The weighted-average remaining contractual life of these
options is approximately five years.
F - 16
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 9 - 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.
F - 17
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
-----------------------------------------
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.
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 10 - 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.
F - 18
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 11 - 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:
February 29, 2000 November 30, 1999
(Unaudited)
Deferred tax asset:
Inventory reserves $91,424 $89,274
Deferred tax liability:
Fixed assets 51 51
------- -------
Net deferred tax asset $91,373 $89,223
======= =======
The Company's income tax expense consists of the following:
Three Months Ended Year Ended
February 29, February 28, November 30,
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Current:
Federal $436,879 $ -- $ 12,611 $ (70,934)
States 69,425 2,361 9,319 3,959
-------- --------- --------- ---------
$506,304 $ 2,361 $ 21,930 $ (66,975)
======== ========= ========= =========
Deferred:
Federal $ (1,652) $ (352) $ (915) $ (64,515)
States (498) (106) (277) (24,912)
-------- --------- --------- ---------
$ (2,150) $ (458) $ (1,192) $ (89,427)
======== ========= ========= =========
Provision for income
taxes (benefit) $504,154 $ 1,903 $ 20,738 $(156,402)
======== ========= ========= =========
F - 19
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 11 - INCOME TAXES (Continued)
----------------------------------
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:
Three Months Ended Year Ended
February 29, February 28, November 30,
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
U.S. Federal income tax
statutory rate 34% (34)% 34% (34)%
State income tax, net of Federal
income tax (benefit) 5 2 6 (6)
Nontaxable dividends (1) (15) (18) (11)
Tax (benefit) from lower tax brackets -- 19 (19) 19
Sale of previously reserved inventory -- -- 17 --
Benefits derived from operating losses -- 30 -- --
Other (2) -- -- (4)
---- ---- ---- ----
Effective tax rate 36% 2% 20% (36)%
==== ==== ==== ====
F - 20
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 12 - 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:
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.
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.
F - 21
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 12 - RELATED PARTY TRANSACTIONS (Continued)
------------------------------------------------
Employment Agreements (Continued)
On February 16, 2000, the Company entered into an employment agreement with Adam
Epstein. The agreement, which names Mr. Epstein as Chairman of the Board and
acting Chief Executive Officer, calls for a base salary of $200,000 per annum,
subject to increase in certain circumstances. Pursuant to the agreement, Mr.
Epstein also received 5 years options to purchase 1,500,000 shares of Superus
Class B Common Stock, 300,000 of which are immediately exercisable and the
balance exercisable ratably on a monthly basis over 36 months.
In February 2000, the two founders of Mail each entered into one-year employment
agreements with Superus which are to be followed by six-month consulting
agreements. They have, in turn, licensed to the Company the software language
they developed specifically for Mail.
NOTE 13 - 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.
NOTE 14 - 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
F - 22
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 15 - 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 16 - 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 - 23
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 17 - 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"), which are being
held in escrow by Surge. Following approval of the acquisition by the
shareholders of the Company and Global and a recapitalization of the Company
including its merger with and into Superus, each share of the Series A Preferred
will automatically convert into 100 shares of Superus' Class B Common Stock,
which is intended to be a tracking stock reflecting Global's assets and includes
other Internet operations. 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 Superus Class B Common Stock for
a period of six months following the effective date of the issuance of the 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 February 2000, the Company entered into a merger agreement to purchase
MailEncrypt.com, Inc. ("Mail") in exchange for 1,821,400 shares of the Superus
Class B Common Stock. The acquisition is subject to shareholder approval and the
satisfaction of conditions precedent.
F - 24
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 17 - SUBSEQUENT EVENTS (Continued)
---------------------------------------
Private Placement Offering
As of February 29, 2000, the Company had raised $5,933,272 through the sale of
convertible promissory notes in a private placement offering ("Private
Placement") pursuant to Regulation D under 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 substantially all proceeds from
the Private Placement, other than the repayment of $1,000,000 to the Company,
will be used to fund the activities of Global and Mail. 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 Superus 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. In March 2000, the Company completed the Private
Placement and received gross proceeds of $7,000,000.
Subordinated Convertible Promissory Note
In February 2000, the Company replaced the previous note receivable with Global
with a Subordinated Convertible Promissory Note ("Convertible Note") totaling up
to $6,250,000. Through February 29, 2000, $2,165,876 has been loaned to Global,
and the remaining $4,084,124 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
F - 25
<PAGE>
SURGE COMPONENTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
NOTE 17 - SUBSEQUENT EVENTS (Continued)
---------------------------------------
Subordinated Convertible Promissory Note (Continued)
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 pledge
of certain shares of stock owned by the President of Global.
Proposed Reorganization
Subject to shareholder approval and the approval of the Global acquisition, the
Company intends to transfer all assets and liabilities of Surge Components, Inc.
and Challenge/Surge, Inc. to a newly-formed wholly-owned subsidiary. Surge
Components, Inc. would then merge into Superus, which would become the parent
company.
Superus Stock Option Plan
In February 2000, Superus adopted, and the Company as sole shareholder ratified,
the Superus 2000 Stock Incentive Plan (the "Superus Plan"). The Superus Plan
provides for the grant of options to qualified employees, independent
contractors, consultants and other individuals to purchase an aggregate of 15
million shares of common stock. Options have been granted pursuant to the
Superus Plan to purchase an aggregate of 4,350,000 shares of Class B Common
Stock. Upon shareholder approval of the Global acquisition and recapitalization,
the Company's management will relinquish all contractual rights and entitlement
to the 5,300,000 options granted by Surge in December 1998.
Bonus Pool
On March 24, 2000, the Company setup a bonus pool for certain of its employees,
totaling 10% of the pretax income for the quarter ended February 29, 2000.
F - 26
<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, 1999, and
the related consolidated statements of operations and comprehensive income,
cash flows and changes in shareholders' deficiency for the two years 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 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 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, 1999, and the results of
their operations and their cash flows for the two years ended 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 15 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
April 16, 2000
F-27
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
March 31, December 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
Current assets:
Cash $ 37,380 $ 173,579
Accounts receivable, net of allowance
for doubtful accounts of $141,216 and
$363,718, respectively 3,380,345 3,030,984
Inventories 712,380 948,724
Prepaid expenses and taxes 1,710,672 604,301
---------- ----------
Total current assets 5,840,777 4,757,588
---------- ----------
Property, plant and equipment, net of
accumulated depreciation of $396,904
and $384,272, respectively 488,049 500,681
----------- ----------
Other assets:
Goodwill, net of accumulated amortization
of $82,116 and $66,720, respectively 1,149,628 1,165,024
Deferred acquisition costs 2,060,000 2,000,000
Other assets 83,041 174,931
----------- ----------
Total other assets 3,292,669 3,339,955
----------- ----------
Total assets $9,621,495 $8,598,224
========== ==========
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2 0 0 0 1 9 9 9
------- -------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short term borrowings, banks $ 881,992 $ 707,029
Note payable - Surge Components, Inc. 2,806,251 1,000,000
Deferred revenues 169,210 40,441
Accounts payable 3,905,548 2,948,700
Accrued expenses 1,429,332 1,359,764
Notes payable to shareholders -- 661,667
----------- -----------
Total current liabilities 9,192,333 6,717,601
Mortgage payable - bank 73,724 72,921
----------- -----------
Total liabilities 9,266,057 6,790,522
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock 25,000,000 shares
authorized, par value $.001, none issued -- --
Common stock, 50,000,000 shares authorized
par value $.001, 23,772,924 and 23,280,124
issued and outstanding respectively 23,773 23,280
Paid in capital 11,703,295 11,703,788
Accumulated deficit (11,407,635) (10,019,715)
Accumulated other comprehensive income 36,005 100,349
----------- -----------
Total stockholders' equity 355,438 1,807,702
----------- -----------
Total liabilities and stockholders' equity $ 9,621,495 $ 8,598,224
=========== ===========
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
2 0 0 0 1 9 9 9 1 9 9 9 1 9 9 8
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $2,530,385 $6,502,012 $13,836,785 $1,862,339
Costs of goods sold 1,581,735 4,843,247 8,411,701 728,140
----------- ------------ ------------- -----------
Gross profit 948,650 1,658,765 5,425,084 1,134,199
----------- ------------ ------------- -----------
Selling, general, and administrative expenses 1,312,286 425,004 3,659,896 757,429
Payroll and related expenses 911,918 294,000 3,541,784 1,383,821
Interest expense, net 112,366 86,085 686,004 18,663
----------- ------------ ------------- -----------
Total expenses 2,336,570 805,089 7,887,684 2,159,913
----------- ------------ ------------- -----------
(Loss) income before provisions for income taxes (1,387,920) 853,676 (2,462,600) (1,025,714)
Provision for income taxes -- 240,000 193,152 134,839
----------- ------------ ------------- -----------
(Loss) income from continuing operations (1,387,920) 613,676 (2,655,752) (1,160,553)
----------- ------------ ------------- -----------
Discontinued operations:
Loss from operations from subsidiary sold -- -- -- (625,473)
Loss on sale of subsidiary -- -- -- (1,910,431)
----------- ------------ ------------- -----------
Loss from discontinued operations -- -- -- (2,535,904)
----------- ------------ ------------- -----------
Net (loss) income (1,387,920) 613,676 (2,655,752) (3,696,457)
Other comprehensive income (loss):
Foreign currency translation, net of tax (64,344) 8,039 138,701 (38,352)
----------- ------------ ------------- -----------
Comprehensive (loss) income $(1,452,264) $ 621,715 $ (2,517,051) $(3,734,809)
=========== ============ ============= ===========
(Loss) income per share - Basic and diluted
(Loss) income per share from
continuing operations $ (.06) $ .03 $ (.12) $ (.17)
Loss per share from discontinued operations -- -- -- (.37)
----------- ------------ ------------- -----------
Net (loss) income per share - Basic and diluted $ (.06) $ .03 $ (.12) $ (.54)
=========== ============ ============== ===========
Weighted average shares outstanding
Basic 23,296,551 22,240,798 22,352,926 6,836,755
Diluted 23,296,551 22,240,798 22,352,926 6,836,755
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THREE MONTHS ENDED
MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Share Amount
------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 4,500,000 $4,500 7,162 $ 7
Rescinded preferred (4,500,000) (4,500) -- --
Shares issued for services -- -- 1,198,500 1,199
Shares issued for cash -- -- 2,870,000 2,870
Shares tendered by stockholders -- -- (3,518,525) (3,519)
Shares issued to purchase subsidiaries 105,000 105 8,622,986 8,623
Foreign currency translation -- -- -- --
Net loss for the period -- -- -- --
---------- ------ ---------- -------
Balance at December 31, 1998 105,000 $ 105 9,180,123 $ 9,180
Conversion of preferred shares (105,000) (105) 13,000,001 13,000
Shares issued for cash -- -- 100,000 100
Shares issued for investment banking fees -- -- 1,000,000 1,000
Foreign currency translation -- -- -- --
Net loss for the period -- -- -- --
---------- ------ ---------- -------
Balance at December 31, 1999 -- -- 23,280,124 23,280
Exercise of stock options -- -- 492,800 493
Foreign currency translation -- -- -- --
Net loss for the period -- -- -- --
---------- ------ ---------- -------
Balance at March 31, 2000 -- $ -- 23,772,924 $23,773
========== ====== ========== =======
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Foreign
Additional Currency
Paid-in Accumulated Translation
Capital Deficit Adjustments Total
------- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 5,821,448 $ (3,667,506) $ -- $2,158,449
Rescinded preferred (271,895) -- -- (276,395)
Shares issued for services 198,001 -- -- 199,200
Shares issued for cash 571,130 -- -- 574,000
Shares tendered by stockholders 3,519 -- -- --
Shares issued to purchase subsidiaries 3,095,580 -- -- 3,104,308
Foreign currency translation -- -- (38,352) (38,352)
Net loss for the period -- (3,696,457) -- (3,696,457)
--------- ------------ -------- ----------
Balance at December 31, 1998 $ 9,417,783 $ (7,363,963) $(38,352) $2,024,753
Conversion of preferred shares (12,895) -- -- --
Shares issued for cash 299,900 -- -- 300,000
Shares issued for investment banking fees 1,999,000 -- -- 2,000,000
Foreign currency translation -- -- 138,701 138,701
Net loss for the period -- (2,655,752) -- (2,655,752)
---------- ------------ -------- ----------
Balance at December 31, 1999 11,703,788 (10,019,715) 100,349 1,807,702
Exercise of stock options (493) -- -- --
Foreign currency translation -- -- (64,344) (64,344)
Net loss for the period -- (1,387,920) -- (1,387,920)
----------- ------------ -------- -----------
Balance at March 31, 2000 $11,703,295 $(11,407,635) $ 36,005 $ 355,438
=========== ============ ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
2 0 0 0 1 9 9 9 1 9 9 9 1 9 9 8
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(1,387,920) $ 613,676 $(2,655,752) $(3,696,457)
Adjustment to reconcile net (loss) income to net
cash (used) provided by operations
Other losses, net -- -- -- 276,395
Loss on sale of division -- -- -- 1,910,431
Depreciation and amortization 28,028 27,927 136,527 37,425
Provision for bad debt expense (222,502) -- 26,162 (249,295)
Changes in operating assets and liabilities:
Accounts receivable (126,859) (2,080,011) (137,478) 378,098
Inventories 236,344 (247,744) 178,887 (70,981)
Other assets (1,014,481) (1,015,947) 350,297 124,446
Accounts payable and accrued expenses 1,026,416 1,543,210 975,541 725,880
Deferred revenues 128,769 92,225 (368,640) 171,722
----------- ----------- ----------- -----------
Net cash used in operating activities (1,332,205) (1,066,664) (1,494,456) (392,336)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets -- -- (53,036) (2,601)
Deferred acquisition costs (60,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (60,000) -- (53,036) (2,601)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of notes payable 1,982,017 783,790 684,314 (395,044)
Net advances from stockholders (661,667) -- 464,380 388,009
Proceeds from issuance of common stock -- 300,000 300,000 574,000
----------- ----------- ----------- -----------
Net cash flows provided by financing activities 1,320,350 1,083,790 1,448,694 566,965
----------- ----------- ----------- -----------
Foreign currency effect on cash (64,344) 38,352 138,701 (38,352)
----------- ----------- ----------- -----------
Net change in cash (136,199) 55,478 39,903 133,676
Cash at beginning of year 173,579 133,676 133,676 --
----------- ----------- ----------- -----------
Cash at end of year $ 37,380 $ 189,154 $ 173,579 $ 133,676
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
2 0 0 0 1 9 9 9 1 9 9 9 1 9 9 8
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest $112,366 $86,085 $ 661,004 $ 18,663
======== ======= ========== ===========
Income taxes $ -- $ -- $ 193,152 $ 134,839
======== ======= ========== ===========
Non-cash investing and financing transactions:
Preferred shares issued to purchase subsidiaries $ -- $ -- $ -- $ 105
Common shares issued for services -- -- -- 199,200
Common shares issued to purchase subsidiaries -- -- -- 2,654,455
-------- ------- ---------- -----------
$ -- $ -- $ -- $2,853,760
======== ======= ========== ==========
Common shares issued for investment banking fees $ -- $ -- $2,000,000 $ --
======== ======= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<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. Prior
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.
During 1999, MES, DLR and Micro were merged into Casa. The combined entity then
changed its name to Global Datatel de Colombia, Inc. ("GDC"). In addition, the
Company commenced internet operations as an Internet service/content provider
through its wholly-owned subsidiaries of ehola.com SA and ehola.com, Inc.
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-34
<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 hardware packages are
recognized when the installation is substantially completed and operational.
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. As of
December 31, 1999, no one customer accounted for more than five percent of
outstanding accounts receivable. 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-35
<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 December 31, 1999 and 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 for the three months ended March 31,
2000 and, accordingly, common stock equivalents are excluded as the effect would
be anti-dilutive.
F-36
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------------------------------
Income Taxes - The Company and its U.S. subsidiaries 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, 1999. 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. The Company
also has approximately $1,300,000 in net operating losses subsequent to the
change in ownership, which may be used to offset income through 2019. A
valuation allowance has been provided against the benefits available from these
net operating losses due to the uncertainty regarding its realization.
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.
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-37
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------------------------------
Prior Period Adjustment - During 1999, certain errors were detected in the
previously reported goodwill resulting from the 1998 acquisitions of ICR and
MES. An adjustment of approximately $948,000 was made to reduce goodwill at the
beginning of the year. A corresponding adjustment was made to reduce the
previously reported amortization expense in 1998 by approximately $11,000. As
the result of current and previous losses, there is no resulting change in the
income tax provision for 1998.
Interim Reporting - Information pertaining to the three months ended March 31,
2000 and 1999 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.
Reclassifications - Certain prior year information has been reclassified to
conform to the current year's presentations.
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 transaction has been recorded as a reverse
acquisition.
F-38
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
------------------------------------------
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 did not make the payments as required by the purchase agreement and
is in default on the remaining obligation. In March 2000, the remaining payments
under the agreement were placed in escrow while the parties negotiate a
settlement.
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. In March 2000, the
remaining payments under the agreement were made.
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. In
March 2000, the remaining payments under the agreement were made.
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 sheets as
of December 31, 1999 and 1998. The realization of a major portion of the assets
in the accompanying balance sheet as of December 31, 1999 and 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.
F-39
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
------------------------------------------
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 $ (314,056)
Net loss per share $ (.01)
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
The Company's property, plant, and equipment consist of the following:
March 31, December 31,
2 0 0 0 1999
------- ----
(Unaudited)
Land $ 73,807 $ 73,807
Buildings 184,653 184,653
Office equipment 185,597 185,597
EDP equipment 440,896 440,896
-------- --------
Total property, plant, and equipment 884,953 884,953
Less: accumulated depreciation 396,904 384,272
-------- --------
Property, plant and equipment, net $488,049 $500,681
======== ========
Depreciation expense for the year ended December 31, 1999 and 1998 was $74,940
and $84,469, 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).
F-40
<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, 1999 approximated $450,000.
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, 1999, the balance owed on this line of credit was approximately
$94,711.
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, 1999
approximated $1,200,000 for Casa, $600,000 for DLR, and $150,000 for Micro.
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.
F-41
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 - 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 9).
NOTE 9 - 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. In February 2000,
the Note was canceled and replaced with a new note totaling up to $6,250,000.
F-42
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - 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.
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, 1999, the minimum lease obligation for leases that management
can determine to have a minimum obligation is as follows:
Year
2000 $ 48,396
2001 44,796
--------
Total $ 93,192
========
F-43
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - 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.
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.
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.
Additional 1999 Common Stock Issuances - On February 5, 1999 the Company
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, and the Form D was timely filed with the Securities and Exchange
Commission.
In December 1999, the Company issued 1,000,000 shares for investment banking
services provided in connection with the Company's acquisition by Surge
Components, Inc.
Stock Options - In April 1999, the Company entered into an option agreement with
a consultant, in partial payment for 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.
F-44
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - CAPITAL STRUCTURE (Continued)
---------------------------------------
1999 Incentive and Non-Qualified Stock Options Plan
In 1999, the Company adopted the 1999 Incentive and Non-Qualified Stock Option
Plan ("Option Plan"). The plan provides for the grant of options to employees of
the Company and its subsidiaries to purchase an aggregate of 2,650,000 common
shares.
Option Plan activity is summarized as follows:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding - January 1, 1999 -- --
Granted 1,000,000 $ 7.12
Exercised -- --
----------
Options outstanding - December 31, 1999 1,000,000 $ 7.12
==========
Options exercisable - December 31, 1999 1,000,000 $ 7.12
==========
In March 2000, the Company granted options to purchase 550,000 shares of the
Company's Common Stock to an officer of the Company. The options are exercisable
for a three year period at an exercise price of $.52 per share. The options were
exercised in March 2000 using the cashless method into 492,800 shares of the
Company's common stock.
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 December 31, 1999
would have been $(7,683,907) and $(.37) 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.
F-45
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - CAPITAL STRUCTURE (Continued)
---------------------------------------
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 94.34% for awards granted in 1999; risk free
interest rate of 6.75%; and expected lives of 3 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.
NOTE 12 - 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, 1999 1998
---- ----
Revenues from unrelated entities:
United States $ 577,630 $ 594,126
Colombia 13,259,155 1,268,213
------------ ------------
Total revenues $ 13,836,785 $ 1,862,339
============ ============
Operating loss:
United States $ (869,396) $ (527,102)
Colombia (1,593,204) (498,612)
------------ ------------
Total operating loss $ (2,462,600) $ (1,025,714)
============ ============
Assets:
United States $ 3,676,877 $ 4,902,609
Colombia 5,777,347 7,989,580
------------ ------------
Total identifiable assets 9,454,224 12,892,189
Less: Corporate eliminations 2,856,000 4,284,608
------------ ------------
Total assets $ 6,598,224 $ 8,607,581
============ ============
F-46
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS (Continued)
--------------------------------------------------------------------------
The Company has only one significant supplier, IBM de Colombia, which accounted
for approximately 60% of the total purchases made during 1999 and 1998.
NOTE 13 - 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 14 - 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.
NOTE 15 - 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.
F-47
<PAGE>
GLOBAL DATATEL, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - 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.
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-48
<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' deficit 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 /s/ McKennon, Wilson & Morgan LLP
----------------------------------
F-49
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,182 $ 673,172
Other current assets - 326
---------- ----------
Total current assets 40,182 673,498
Equipment, net of accumulated depreciation of $1,074
and $1,840, respectively 8,120 7,354
---------- ----------
$ 48,302 $ 680,852
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,500 $ 42,372
Accrued interest - 9,041
Due to officers 43,158 82,900
Convertible note payable - 750,000
---------- ----------
Total current liabilities 56,658 884,313
---------- ----------
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 5,000,000 shares
authorized; 2,630,375 shares issued and outstanding 102,675 353,869
Deficit accumulated during development stage (111,031) (332,330)
Note receivable from officer - (225,000)
---------- ----------
Total stockholders' deficit (8,356) (203,461)
---------- ----------
$ 48,302 $ 680,852
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
March 17, 1999 Three Months
(Inception) to Ended
December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
<S> <C> <C>
Net revenues $ - $ -
Costs and expenses-
General and administrative expenses 111,031 213,442
------------------ ------------------
Operating loss (111,031) (213,442)
Other income (expense) - (7,857)
------------------ ------------------
Loss before income taxes (111,031) (221,299)
Income taxes - -
------------------ ------------------
Net loss $ (111,031) $ (221,299)
================== ==================
Basic and diluted net loss per share: $ (.06) $ (.09)
================== ==================
Basic and diluted weighted average number
of common shares outstanding 1,952,000 2,540,000
================== ==================
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statements of Stockholders' Deficit
For the Period from March 17, 1999 (Inception)
Through December 31, 1999, and for
the Three Months Ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During Note
------------ Development Receivable
Shares Amount Stage From Officer Total
-------------- ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Common stock issued on March 17, 1999
(Inception) to founders at $0.00 for
intangible property 1,900,000 $ - $ - $ - $ -
Common stock issued 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)
----------- ---------- ------------- --------- ---------
Balances at December 31, 1999 2,132,000 102,675 (111,031) - (8,356)
Exercise of stock options January 2000 for $0.50
per share for note (unaudited) 450,000 225,000 - (225,000) -
Exercise of stock options February 2000 for
$0.50 per share for cash (unaudited) 48,375 24,188 - - 24,188
Compensation expense on non-employee options
(unaudited) - 2,006 - - 2,006
Net loss (unaudited) - - (221,299) - (221,299)
----------- ---------- ------------- --------- ---------
Balances March 31, 2000 (unaudited) 2,630,375 $ 353,869 $ (332,330) $(225,000) $(203,461)
=========== ========== ============= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
March 17, 1999 Three Months
(Inception) to Ended
December 31, 1999 March 31, 2000
----------------- --------------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (111,031) $ (221,299)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,074 766
Compensation expense on non-employee options 2,675 2,006
Changes in operating assets and liabilities:
Other current assets - (326)
Accounts payable 13,500 28,872
Accrued interest - 9,041
Due to officers 43,158 39,742
---------- -----------
Net cash used in operating activities (50,624) (141,198)
---------- -----------
Cash Flows From Investing Activities-
Purchase of equipment (9,194) -
---------- -----------
Cash Flows From Financing Activities:
Proceeds from the issuance of common stock 100,000 -
Exercise of stock options - 24,188
Proceeds from the issuance of convertible note payable - 750,000
---------- -----------
Net cash provided by financing activities 100,000 774,188
---------- -----------
Net increase in cash 40,182 632,990
Cash at beginning of period - 40,182
---------- -----------
Cash at end of period $ 40,182 $ 673,172
========== ===========
Non Cash Financing Activities-
Exercise of stock options by officer for promissory note $ - $ 225,000
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements
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.
F-54
<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.
F-55
<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. Convertible notes payable to
Surge is considered a related party in nature and, accordingly, a market for
such instrument may not exist.
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.
Unaudited Interim Financial Statements
The interim financial data as of March 31, 2000, and for the three months ended
March 31, 2000, is unaudited; however, in the opinion of management, the interim
data includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position as of March 31,
2000, and the results of its operations and its cash flows for the three months
ended March 31, 2000. The results of operations and cash flows for the three
months ended March 31, 2000, are not necessarily indicative of the operations
which may result for the year ending December 31, 2000.
F-56
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal quarters or fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes standards for the
accounting and reporting of derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts. Under SFAS
No. 133, entities are required to carry all derivative instruments at fair value
on their balance sheets. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging activity and the underlying
purpose for it. The Company does not believe that the adoption of SFAS No. 133
will have a significant impact on the Company's consolidated financial
statements or related disclosures.
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 to such employee.
Such options were exercised on January 5, 2000 through the issuance of a note
totaling $225,000 (see below).
F-57
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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 per 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 and $2,006 of compensation expense in
1999 and 2000, respectively. The balance will be charged to expense in the
remaining period in 2000.
On January 5, 2000, a key employee holding 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 Note 4 for discussion of
terms of this note payable.
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 and $42,250 (unaudited) at March
31, 2000. On February 16, 2000 the employment agreement was terminated.
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 agreements, which
consist of 12 months of employment followed by a six-month consulting period,
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.
In connection with the exercise of options to purchase 450,000 shares of common
stock by a key employee on January 5, 2000, the Company accepted a note totaling
$225,000 payable, together with interest at 5.8% per annum on January 5, 2005.
The note is secured by the 450,000 shares of the Company's common stock.
F-58
<PAGE>
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
Note 5 - Subsequent Events
Merger Agreement
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.
Convertible Note Payable to Surge
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.
Lease Agreement
On March 30, 2000, the Company entered into a lease agreement with a five-year
term for a 3,239 square-foot facility. The lease commences upon completion of
tenant improvements, which is anticipated to be July 1, 2000, and requires
monthly payments of $7,450 in the first year. All remaining payments are
increased by $0.07 per square foot annually. In accordance with the terms of the
lease the Company obtained an irrevocable standby letter of credit with a bank
for a term of one year in the amount of $109,000 as a security deposit. The
landlord is named as the beneficiary of such letter of credit.
F-59
<PAGE>
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 Stockholders 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
Superus:
[ ] 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. stockholders:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. The approval of the merger of MailEncrypt.com Inc. into a wholly-owned
subsidiary of Superus, and issuance of Class B Common Stock to all of
MailEncrypt.com, Inc.'s stockholders.
[ ] 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
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.
<PAGE>
[ ] 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.
The undersigned acknowledges receipt of a copy of the Notice of Special
Meeting dated ________ __, 2000 relating to the special meeting.
---------------------------------------------
---------------------------------------------
---------------------------------------------
Signature(s) of Stockholders(s)
The signature(s) hereon should correspond exactly with the name(s) of
the stockholder(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.
<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 MARIO HABIB 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 Stockholders of the Company to be
held on _________ __, 2000 any adjournments thereof, as follows:
1. The approval of the acquisition by Superus Holdings, Inc. of the Asset
Purchase Agreement of the Company and issuance of Class B Common Stock to all of
Global DataTel, Inc. stockholders:
[ ] 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 Stockholders(s)
The signature(s) hereon should correspond exactly with the name(s) of
the stockholder(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.
<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
stockholders 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
Exhibit No. Description
----------- -----------
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)
*2.1(a) Amendment to Asset Purchase Agreement, dated as of June 2,
2000, by and among Surge Components, Inc., GDIS Acquisition
Corp. and Global DataTel, Inc.
2.2 Merger Agreement and Plan of Reorganization, by and among
MailEncrypt.com, Inc., MailEncrypt.com Stockholders, 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. (8)
*3.1(d) Form of Amended and Restated Certificate of Incorporation of
Superus Holdings, Inc.
II-1
<PAGE>
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)
*4.3(a) Specimen Certificate of Class A Common Stock, par value,
$.001 per share.
*4.3(b) Specimen Certificate of Class B Common Stock, par value
$.001 per share.
4.4 Specimen of Class A Warrant Certificate. (2)
*4.5 Specimen of Class B Warrant Certificate.
4.6 Form of 12% Convertible Promissory Notes issued in December
1999 Private Note Offering. (7)
4.7 Stockholder 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. (10)
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. (8)
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. (9)
8.1 Opinion of Snow Becker Krauss P.C. regarding legality of tax
matters. (9)
9.1 Stock Purchase Agreement dated March 1992 by and between Ira
H. Levy and Steven J. Lubman. (2)
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. (9)
10.11 Amendment No. 2 to Employment Agreement between the Company
and Steven Lubman. (9)
10.12 Employment Agreement between the Company and Adam J.
Epstein, dated February 16, 2000. (8)
10.13 Superus 2000 Stock Incentive Plan. (9)
10.14 Pledge Agreement, dated as of June 2, 2000, by and among
Global DataTel, Inc., and Surge Components, Inc., relating
to pledge of assets of Global DataTel, Inc. (10)
10.15 Bill of Sale, dated as of June 5, 2000, by and among Global
DataTel, Inc., Surge Components, Inc, and GDIS Acquisition
Corp. (10)
*10.16 Second Amended and Restated Pledge Agreement, dated as of
May 31, 2000 by and among Richard Baker, Global DataTel,
Inc., and Surge Components, Inc. relating to 1,000,000
Global Common Shares pledged by Mr. Baker.
*11.1 Computation of Earnings Per Share of Surge Components, Inc.
*11.2 Computation of Earnings Per Share of Global DataTel, Inc.
15.1 letter re: Unaudited Interim Financial Information.
21.1 Subsidiaries of the Company. (8)
*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)
II-2
<PAGE>
-------------------
* Filed with this 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.
(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.
(8) Previously filed on March 17, 2000 with original filing of this
Registration Statement.
(9) Previously filed on May 8, 2000, along with Amendment No. 1 to this
Registration Statement.
(10) Incorporated by reference from the Company's Current Report on Form 8-K for
June 2, 2000.
II-3
<PAGE>
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.
(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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment to the Registration Statement be signed on its behalf
by the undersigned, hereunto duly authorized, in the City of Deer Park, State of
New York, on June 29, 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 June 29, 2000
Adam J. Epstein Acting Chief Executive Officer
(Principal Executive Officer)
/s/ Ira Levy
----------------------------- President and Director June 29, 2000
Ira Levy
/s/ Steven J. Lubman
----------------------------- Secretary and Director June 29, 2000
Steven J. Lubman (Principal Financial Officer)
/s/ Mark Siegel
----------------------------- Director June 29, 2000
Mark Siegel
/s/ David Siegel
----------------------------- Director June 29, 2000
David Siegel
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit Page No.
---------- --------------- --------
<S> <C> <C>
2.1(a) Amendment to Asset Purchase Agreement, dated as of June 2, 2000,
by and among Surge Components, Inc., GDIS Acquisition Corp.
and Global DataTel, Inc.
2.3 Agreement and Plan of Merger by and among the Company, Superus
Holdings, Inc. and Surge Acquisition Corp.
3.1(d) Form of Amended and Restated Certificate of Incorporation of Superus
Holdings, Inc.
3.2(b) By-Laws of Superus Holdings, Inc.
4.3(a) Specimen Certificate of Class A Common Stock, par value $.001
per share.
4.3(b) Specimen Certificate of Class B Common Stock, par value $.001
per share.
4.5 Specimen of Class B Warrant Certificate.
10.16 Second Amended and Restated Pledge Agreement, dated as of May 31,
2000 by and among Richard Baker, Global DataTel, Inc., and
Surge Components, Inc. relating to 1,000,000 Global Common
Shares pledged by Mr. Baker.
11.1 Computation of Earnings Per Share for Surge Components, Inc.
11.2 Computation of Earnings Per Share for Global DataTel, Inc.
23.1 Consent of Seligson & Giannattasio, LLP.
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)
</TABLE>
