SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment Number 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 16, 2000
SURGE COMPONENTS, INC.
(Exact name of registrant as specified in its charter)
New York 0-14188 11-2602030
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
1016 Grand Boulevard
Deer Park, New York 11729
(Address of principal executive offices) (Zip Code)
(631) 595-1818
(Registrant's telephone number, including area code)
Item 2. Acquisition or Disposition of Assets.
Effective November 16, 2000, we, Surge Components, Inc.,
acquired MailEncrypt.com, Inc., a Los Angeles, California based infrastructure
application service provider offering web-based, encrypted e-mail solutions. The
acquisition was in the form of a merger of MailEncrypt.com into Mail Acquisition
Corp., one of our wholly-owned subsidiaries which we formed for this
transaction. Mail Acquisition is a Delaware corporation which changed its name
to MailEncrypt, Inc. upon consummation of the merger.
The acquisition and merger was consummated pursuant to an
Agreement and Plan of Merger, dated as of November 13, 2000, between us, Mail
Acquisition, MailEncrypt.com and MailEncrypt.com's shareholders. Pursuant to the
merger agreement, we issued to the MailEncrypt.com shareholders a total of
182,139.79 shares of our Voting Redeemable Convertible Series B Preferred Stock.
Our board of directors authorized the Series B preferred stock
specifically in order to consummate this merger transaction. Holders of Series B
preferred stock are entitled to vote together with the holders of our common
stock. In any such vote, a holder of Series B preferred stock is entitled to 5.4
votes per share of Series B preferred stock. Holders of our common stock are
entitled to one vote per share of common stock. Further, shares of Series B
preferred stock will automatically convert into common stock upon either (a)
confirmation by The Nasdaq Stock Market, Inc. that the conversion does not
require further shareholder approval under the Nasdaq Marketplace Rules or (b)
shareholder approval of the conversion. The conversion will be at the rate of
ten shares of common stock for every one share of Series B preferred stock. We
intend to seek shareholder approval of the conversion as soon as possible. In
the event that we do not obtain shareholder approval of the conversion by March
15, 2001, the former shareholders of MailEncrypt.com have the right to purchase
MailEncrypt from us for the sole consideration of their Series B preferred stock
issued to them pursuant to the merger agreement. This Form 8-K should not be
read as a solicitation of proxies for such shareholder approval. Solicitation of
proxies for such shareholder approval can and will be made under a separate
proxy statement of our board of directors.
We have agreed to register for resale the 1,821,397 shares of
our common stock issuable upon conversion of the Series B preferred stock.
However, these 1,821,397 shares are subject to lock-up provisions which allow
for no sales prior to January 16, 2001 and limited sales during the following
four months, as specifically set forth in the merger agreement.
Item 5. Other Matters.
Investment Banking Agreement with Equilink Capital Partners, LLC
Effective November 24, 2000, we entered into an Investment
Banking Agreement with Equilink Capital Partners, LLC. Under the investment
banking agreement, we acknowledged past and continuing services provided to us
by Equilink and Equilink agreed to
2
perform additional services on our behalf in the future. Pursuant to the
investment banking agreement, we issued to Equilink (a) 900,000 shares of our
common stock, (b) 70,000 shares of our Non-Voting Redeemable Convertible Series
C Preferred Stock and (c) warrants to purchase an additional 2 million shares of
our common stock.
Our board of directors authorized the Series C preferred stock
specifically in order to give consideration under the investment banking
agreement. Holders of Series C preferred stock do not have any voting rights,
except regarding (a) the issuance of securities senior to the Series C preferred
stock as to the payment of dividends, (b) any amendment to our certificate of
incorporation which would adversely affect the rights of holders of Series C
preferred stock or (c) as otherwise specifically provided under New York law.
Holders of Series C preferred stock are entitled to dividends at the annual rate
of $.50 per share, cumulative from April 15, 2001 and payable semi-annually
commencing on June 30, 2001. Holders of Series C preferred stock also are
entitled to a liquidation preference of $5.00 per share in the event of our
liquidation or dissolution. Payment of such dividends and liquidation rights on
the Series C preferred stock are senior to the payment of dividends and
liquidation rights on our common stock. However, shares of Series C preferred
stock will automatically convert into our common stock upon either (i)
confirmation by The Nasdaq Stock Market, Inc. that the conversion does not
require shareholder approval under the Nasdaq Marketplace Rules or (ii)
shareholder approval of the conversion. The conversion will be at the rate of
ten shares of our common stock for every one share of Series C preferred stock.
We intend to seek shareholder approval of the conversion as soon as possible. If
we obtain shareholder approval of the conversion by April 15, 2001, the
automatic conversion into shares of our common stock will occur and no payment
of dividends on the Series C preferred stock will be required to be made.
The warrants issued to Equilink are exercisable only upon
approval by our shareholders of the issuance of the shares underlying the
Equilink warrants. The Equilink warrants will be exercisable for a five year
period expiring on November 24, 2005, at an exercise price of $3.00 per share.
We have agreed to register for resale (a) the 900,000 shares
of our common stock we have issued to Equilink under the investment banking
agreement, (b) the 700,000 shares of our common stock issuable upon conversion
of the Series C preferred stock and (c) the 2,000,000 shares of our common stock
issuable upon exercise of the Equilink warrants.
This Form 8-K should not be read as a solicitation of proxies
for shareholder approval of the conversion into shares of our common stock of
the shares of Series C preferred stock nor the issuance of shares of our common
stock upon exercise of the Equilink warrants. Solicitation of proxies for such
shareholder approval can and will be made under a separate proxy statement of
our board of directors.
Merger Agreement to Reorganize in Delaware
We have entered into an Agreement and Plan of Merger, dated as
of November 29, 2000, with one of our wholly-owned Delaware subsidiaries,
Superus Holdings, Inc., pursuant
3
to which we intend to merge into Superus and thereby become a Delaware
corporation. This merger agreement supersedes and terminates our earlier
agreement with Superus and simplifies the previously announced reorganization
transaction. Under this new reorganization agreement, we will merge with and
into Superus with each of our outstanding securities being exchanged for a
similar form of Superus security, on a one-for-one basis.
This Form 8-K should not be read as a solicitation of proxies
for shareholder approval of the reorganization transaction. Solicitation of
proxies for such shareholder approval can and will be made under a separate
proxy statement of our board of directors.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
The following financial statements of MailEncrypt.com, Inc.
accompany this Form 8-K/A Amendment Number 1:
Description Page(s)
- - ----------- -------
Independent Auditors' Report............................................................................... 6
Balance Sheets as of December 31, 1999, and September 30, 2000 (Unaudited)................................. 7
Statements of Operations for the Period From March 17, 1999 (Inception) to December 31, 1999, for the
Period From March 17, 1999 (Inception) to September 30, 1999 (Unaudited), for the Nine Months
Ended September 30, 2000 (Unaudited), and the Period From March 17, 1999 (Inception) to September 30,
2000 (Unaudited)........................................................................................ 8
Statements of Stockholders' Deficit for the Period From March 17, 1999 (Inception) to December 31, 1999,
and for the Nine Months Ended September 30, 2000 (Unaudited)............................................ 9
Statements of Cash Flows for the Period from March 17, 1999 (Inception) to December 31, 1999, for the
Period From March 17, 1999 (Inception) to September 30, 1999 (Unaudited), for the Nine Months
Ended September 30, 2000 (Unaudited), and the Period From March 17, 1999 (Inception) to
September 30, 2000 (Unaudited).......................................................................... 10
Notes to Financial Statements.............................................................................. 11-18
(b) Pro forma financial information.
The following pro forma financial information accompanies this
Form 8-K/A Amendment Number 1:
Description Page(s)
- - ----------- -------
Introduction to Pro Forma Financial Information............................................................ 19
Pro Forma Balance Sheet as of August 31, 2000 (Unaudited).................................................. 20-21
Pro Forma Statement of Operations for the Nine Months Ended August 31, 2000 (Unaudited).................... 22
Pro Forma Statement of Operations for the Year Ended November 30, 2000 (Unaudited)......................... 23
Notes to Pro Forma Financial Information................................................................... 24-25
4
(c) Exhibits.
Listed below are all exhibits to this Current Report on Form
8-K.
Exhibit
Number Description
- - ------- -------------
10.1 Merger Agreement and Plan of Reorganization, dated as of
November 13, 2000, among Surge Components, Inc., Mail
Acquisition Corp., MailEncrypt.com, Inc. and the shareholders
of MailEncrypt.com, Inc.*
10.2 Certificate of Amendment of Certificate of Incorporation of
Surge Components, Inc., with respect to the authorization of
the Voting Redeemable Convertible Series B Preferred Stock.*
10.3 Investment Banking Agreement, dated as of November 24, 2000,
between Surge Components, Inc. and Equilink Capital Partners,
Inc.*
10.4 Certificate of Amendment of Certificate of Incorporation of
Surge Components, Inc., with respect to the authorization of
the Non-Voting Redeemable Convertible Series C Preferred
Stock.*
10.5 Warrant certificate, evidencing warrants to purchase 2 million
shares of the common stock of Surge Components Inc.,
registered in the name of Equilink Capital Partners, Inc.*
10.6 Agreement and Plan of Merger, dated as of November 29, 2000,
between Surge Components, Inc. and Superus Holdings, Inc.*
- - ----------
* Previously filed.
5
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 through the date of this report. The Company requires future financings
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 /s/ McKennon, Wilson & Morgan LLP
February 16, 2000,
except for Note 5, which
the date is November 16, 2000
6
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Balance Sheets
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 40,182 $ 141,900
Restricted certificate of deposit -- 109,000
Other current assets -- 6,852
--------- ---------
Total current assets 40,182 257,752
Property and equipment, net of accumulated
depreciation of $1,074 at 1999 and $2,606
at 2000 8,120 73,814
Software license, net of accumulated amortization
of $0 at 1999 and $9,412 at 2000 -- 89,913
Deposits -- 7,919
--------- ---------
$ 48,302 $ 429,348
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,500 $ 22,448
Accrued interest -- 48,451
Due to officers 43,158 --
Convertible note payable -- 875,000
--------- ---------
Total current liabilities 56,658 945,899
--------- ---------
Commitments and contingencies (Note 5)
Stockholders' deficit:
Common stock, no par value, 5,000,000 shares authorized; 2,132,000 shares
issued and outstanding at 1999; 2,630,375 shares issued
and outstanding at 2000 102,675 357,881
Note receivable from officer -- (225,000)
Accumulated deficit (111,031) (649,382)
--------- ---------
Total stockholders' deficit (8,356) (516,501)
--------- ---------
$ 48,302 $ 429,348
========= =========
See accompanying notes to financial statements.
7
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statements of Operations
Period From Period From Period From
March 17, 1999 March 17, 1999 Nine Months March 17, 1999
(Inception) to (Inception) to Ended (Inception) to
December 31, 1999 September 30, 1999 September 30, 2000 September 30, 2000
-------------------- -------------------- ---------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
Net revenues $ -- $ -- $ -- $ --
Costs and expenses -
General and administrative
expenses 111,031 42,081 503,538 614,569
---------------- ---------------- --------------- -----------------
Operating loss (111,031) (42,081) (503,538) (614,569)
Other income (expense) -- -- (34,813) (34,813)
---------------- ---------------- --------------- -----------------
Net loss $ 111,031 $ 42,081 $ (538,351) $ (649,382)
================ ================ =============== =================
See accompanying notes to financial statements.
8
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 Nine Months Ended September 30, 2000 (unaudited)
Deficit
Accumulated
Common Stock During Note
------------------------------- Development Receivable
Shares Amount Stage From Officer Total
-------------- ------------ --------------- ---------------- ---------------
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) -- 6,018 -- -- 6,018
Net loss (unaudited) -- -- (538,351) -- (538,351)
--------------- ------------- --------------- ---------------- ---------------
Balances September 30, 2000
(unaudited) 2,630,375 $ 357,881 $ (649,382) $ (225,000) $ (516,501)
=============== ============= =============== ================ ===============
See accompanying notes to financial statements.
9
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Statements of Cash Flows
Period From Period From Period From
March 17, 1999 March 17, 1999 Nine Months March 17, 1999
(Inception) to (Inception) to Ended (Inception) to
December 31, 1999 September 30, 1999 September 30, 2000 September 30, 2000
-------------------- -------------------- ---------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net loss $ (111,031) $ (42,081) $ (538,351) $ (649,382)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 1,074 -- 10,945 12,019
Compensation expense on
non-employee options 2,675 -- 6,018 8,693
Changes in operating assets
and liabilities:
Other current assets -- -- (6,852) (6,852)
Deposits -- -- (7,919) (7,919)
Accounts payable 13,500 -- 8,948 22,448
Accrued interest -- -- 48,451 48,451
Due to officers 43,158 14,252 (43,158) --
------------- ------------- ------------- ------------
Net cash used in operating
activities (50,624) (27,829) (521,918) (572,542)
------------- ------------- ------------- ------------
Cash Flows From Investing Activities:
Acquisition of property and
equipment (9,194) -- (67,226) (76,420)
Acquisition of software license -- -- (99,326) (99,326)
------------- ------------- ------------- ------------
Net cash used in investing
activities (9,194) -- (166,552) (175,746)
------------- ------------- ------------- ------------
Cash Flows From Financing Activities:
Proceeds from the issuance of
common stock 100,000 50,000 -- 100,000
Exercise of stock options -- -- 24,188 24,188
Proceeds from the issuance of
convertible note payable -- -- 875,000 875,000
Acquisition of restricted
certificates of deposit -- -- (109,000) (109,000)
------------- ------------- ------------- ------------
Net cash provided by
financing activities 100,000 50,000 790,188 890,188
------------- ------------- ------------- ------------
Net increase in cash 40,182 22,171 101,718 141,900
Cash at beginning of period -- -- 40,182 --
------------- ------------- ------------- ------------
Cash at end of period $ 40,182 $ 22,171 $ 141,900 $ 141,900
============= ============= ============= ============
Non Cash Financing Activities -
Exercise of stock options by
officer for promissory note $ -- $ -- $ 225,000 $ 225,000
============= ============= ============= ============
Stock issued for short term loan $ -- $ 50,000 $ -- $ --
============= ============= ============= ============
See accompanying notes to financial statements.
10
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements
Organization
MailEncrypt.com, Inc. (the "Company") was originally incorporated on March 17,
1999, ("Inception") in the state of California under the name MailEncrypt.com,
Inc. The name was changed in September 1999 to MailEncrypt.com, Inc. The Company
develops web-based encrypted e-mail solutions for commercial use. Its
proprietary platform utilizes the world's leading, military-strength, 1,024-bit,
encryption protocol in order to deliver a comprehensive, easy-to-use, reliable
and scaleable service 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 the cancellation of the definitive
agreement dated February 16, 2000, and the execution and closing of a new
definitive agreement on November 16, 2000 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 operating revenues to date. In the course of its development of
its encryption technology, the Company has incurred, and will continue to incur,
losses for the foreseeable future. On November 16, 2000, the Company completed
its merger with Surge. Surge has funded the Company $875,000 during the nine
months ended September 30, 2000. The Company requires additional funding to
continue its product development, begin is sales and marketing plan and expand
administration. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with respect to these
matters are as follows:
o Generate cash flows from revenues from its products in the
near term using existing cash on hand at September 30, 2000.
o Seek additional financing through its parent, Surge.
Management plans to continue product development, commence
sales and marketing, and enhance general and administrative
functions.
o Seek licensing arrangements with third parties which generate
working capital for the Company.
11
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
There are no assurances that the Company will successfully launch its products
during late 2000, that funds will be available from Surge to execute the
Company's operating plan or that future collaborative arrangements will be
consummated. 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.
Property and Equipment
Property and equipment are recorded at cost and 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.
12
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
Software purchased for internal use is capitalized and amortized over a period
of three to five years.
Impairment of Long-Lived Assets
The Company's long-lived assets and certain identifiable intangibles are
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.
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
13
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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.
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 are considered 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 September 30, 2000, for the period from March
17, 1999 to September 30, 1999, and for the nine months ended September 30,
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 September 30,
2000, and the results of its operations and its cash flows for the period from
March 17, 1999 to September 30, 1999, and for the nine months ended September
30, 2000. The results of operations and cash flows for the nine months ended
September 30, 2000, are not necessarily indicative of the operations which may
result for the year ending December 31, 2000.
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
14
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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.
15
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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).
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 options, the Company valued the
options at $24,071 and recorded $2,675 and $6,018 of compensation expense during
the period from Inception to December 31, 1999 and the nine months ended
September 30, 2000, respectively.
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 was subject to lapsing repurchase rights in the event
the Company did 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
16
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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
During the period from Inception to December 31, 1999, the Company paid $12,000
to Blueprint Networks, Inc. ("Blueprint") for services. Blueprint is controlled
by two founders of MailEncrypt.com, Inc. During the first quarter 2000, the
Company 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. The Company
charged operations approximately $156,000 during the nine months ended September
30, 2000 for these agreements.
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.
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.
This agreement was terminated and on November 13, 2000, the parties executed a
new agreement intended to be tax-free. On November 16, 2000, the merger was
completed. Surge issued 182,140 shares of its Series B preferred stock
convertible into 1,821,400 shares of its common stock, upon shareholder
approval, in exchange for all issued and outstanding shares of the Company
(including options to acquire shares of the Company).
Convertible Note Payable to Surge
On February 16, 2000, the Company entered into a loan agreement (the "Note") to
borrow $750,000, payable September 15, 2000, together with interest at 10% per
annum, from Surge. On September 7, 2000, the Company borrowed an additional
$125,000, 10% convertible note payable to Surge, due April 16, 2001. On or about
that date, the Company renegotiated an amendment to extend the due date of the
$750,000 note until April 16, 2001.
17
MAILENCRYPT.COM, INC.
(A Development-Stage Company)
Notes to Financial Statements (Continued)
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 commenced on August 4, 2000,
upon completion of tenant improvements, and requires monthly payments of $7,450
in the first year. Subsequent monthly 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.
18
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The acquisition of MailEncrypt is tentative because the former
shareholders of MailEncrypt.com have the right to purchase MailEncrypt from
Surge for the sole consideration of their Series B preferred stock issued to
them, unless Surge obtains shareholder approval of the conversion of the Series
B preferred stock into common stock by March 15, 2001. If the approval of the
shareholders is not obtained by March 15, 2001 and the former MailEncrypt
shareholders do not exercise their right to purchase MailEncrypt from Surge,
then such former MailEncrypt shareholders will retain their Series B preferred
stock, subject to Surge's right to redeem the Series B preferred stock for
nominal consideration on or before February 13, 2002. Until this transaction is
finalized, the operations of MailEncrypt will not be consolidated with the
operations of Surge.
The following unaudited pro forma financial information has
been prepared based upon the historical consolidated financial statements of
Surge and its subsidiaries as at August 31, 2000 and for the year ended November
30, 1999 and the nine months ended August 31, 2000 and the historical financial
statements of MailEncrypt as at September 30, 2000 and for the year ended
December 31, 1999 and the nine months ended September 30, 2000. The pro forma
financial information reflect the MailEncrypt merger and certain other events
involving Surge which we described below and in the notes to the pro forma
financial information. The pro forma financial information should be read in
conjunction with the related notes which follows and the historical consolidated
financial statements of Surge as previously filed with the SEC and the financial
statements of MailEncrypt which are included elsewhere in the Form 8-K/A.
The accompanying unaudited pro forma condensed balance sheet
has been presented as if the transactions described below occurred as of August
31, 2000; and the accompanying unaudited pro forma condensed statement of
operations for the nine months ended August 31, 2000 and the accompanying
unaudited pro forma condensed statement of operations for the year ended
November 30, 1999 have been prepared as if the transactions and other events
occurred at the beginning of the year. These unaudited pro forma condensed
financial statements do not purport to be indicative of the results which would
actually have been obtained had the transactions and other events occurred as of
August 31, 1999 and as of the beginning of the respective periods presented.
The pro forma transactions are summarized as follows:
o The acquisition of MailEncrypt.com in exchange for 182,140
shares of our Series B preferred stock and the conversion of
such Series B preferred stock into a total of 1,821,400 shares
of our common stock, valued at $2.50 per share, assuming our
shareholders approve the issuance of such common stock to
allow for this conversion;
o The issuance of 100,000 shares of our common stock, valued at
$2.87 per share, to a finder upon completion of the
MailEncrypt merger;
o The issuance of 5,000 shares of our Series C preferred stock
and the conversion of such Series C preferred stock into
50,000 shares of our common stock; and
o The termination of our agreement to acquire the assets of
Global DataTel, Inc. and, in connection with the termination
settlement, our discharge of approximately $3.25 million of
$4.5 million of our outstanding advances to Global, plus
$118,000 of interest, and our establishment of a $1.25 million
reserve due to the lack of probability of our collecting such
remaining $1.25 million of advances to Global. In addition,
Surge's $500,000 Certificate of Deposit, pledged as collateral
for Global's outstanding loan, has been written off.
19
SURGE COMPONENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AUGUST 31, 2000
(unaudited)
Surge
-----------------------------------------------
Historical As Adjusted
Surge Adjustments Balance MailEncrypt
------------ ----------- ------------ ------------
ASSETS
Current assets:
Cash $ 3,089,604 $ (447,039)(1) $ 2,142,565 $ 250,900
(500,000)(2)
Notes receivable from
Global DataTel, Inc. 4,057,675 447,039(1)
(4,504,714)(2)
MailEncrypt.com,Inc 750,000 750,000
Marketable securities 2,261,380 2,261,380
Accounts receivable 5,025,003 5,025,003
Inventory 2,380,268 2,380,268
Prepaid expenses and taxes 160,492 160,492
Other current assets 185,116 (118,922)(2) 66,194 6,852
------------ ----------- ------------ ------------
Total current assets 17,909,538 (5,123,636) 12,785,902 257,752
Fixed assets, net 429,233 429,233 73,814
Software license, net 89,913
Loan costs, net 219,295 219,295
Investment in
MailEncrypt.com, Inc.
Goodwill, net
Deposits 2,985 2,985 7,919
Deferred tax asset 90,438 90,438
Other 108,158 108,158
------------ ----------- ------------ ------------
Total assets $ 18,759,647 $(5,123,636) $ 13,636,011 $ 429,398
============ =========== ============ ============
Pro Forma Adjustments
---------------------------
Consolidated
Debit Credit Pro Forma
---------- ------------ ------------
ASSETS
Current assets:
Cash $ 125,000(3)
$ 2,268,465
Notes receivable from0
Global DataTel, Inc.
MailEncrypt.com,Inc
$ 125,000(3) 875,000(3) 0
Marketable securities 2,261,380
Accounts receivable 5,025,003
Inventory 2,380,268
Prepaid expenses and taxes 160,492
Other current assets 44,000(3) 29,046
---------- ------------ ------------
Total current assets 125,000 1,044,000 12,124,654
Fixed assets, net 503,047
Software license, net 89,913
Loan costs, net 219,295
Investment in
MailEncrypt.com, Inc. 4,553,500(3)
430,500(3) 4,984,000(3)
Goodwill, net 2,637,750(3) 2,637,750
Deposits 10,904
Deferred tax asset 90,438
Other 108,158
---------- ------------ ------------
Total assets $7,746,750 $ 6,028,000 $ 15,784,159
========== ============ ============
(continued)
20
Historical
-----------------------------------------------
Historical As Adjusted
Surge Adjustments Balance MailEncrypt
------------ ----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings
Accounts payable $ 1,811,640 $ 1,811,640 $ 22,448
Accrued expenses and taxes 1,827,506 $(1,057,675) 769,831 48,451
Notes payable 7,000,000 7,000,000 875,000
Loan payable 238,378 238,378
------------ ----------- ------------ ------------
Total current liabilities and
total liabilities 10,877,524 (1,057,675) 9,819,849 945,899
------------ ----------- ------------ ------------
Shareholders' equity (deficit):
Preferred stock
Common stock and
additional paid-in capital 6,685,826 6,685,826 357,881
Stock option subscription
receivable from officer (225,000)
Retained earnings
(accumulated deficit) 1,327,554 (5,123,636) (2,738,407) (649,382)
1,057,675
Unrealized holding loss (131,257) (131,257)
Foreign currency translation
adjustment 0
------------ ----------- ------------ ------------
Total shareholders'
equity (deficit) 7,882,123 (4,065,961) 3,816,162 (516,501)
------------ ----------- ------------ ------------
Total liabilities and
shareholders' equity
(deficit) $ 18,759,647 $(5,123,636) $ 13,636,011 $ 429,398
============ =========== ============ ============
Pro Forma Adjustments
---------------------------
Consolidated
Debit Credit Pro Forma
---------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings
Accounts payable $ 1,834,088
Accrued expenses and taxes $ 44,000(3) 774,282
Notes payable 875,000(3) 7,000,000
Loan payable 238,378
---------- ------------ ------------
Total current liabilities and
total liabilities 919,000 9,846,748
---------- ------------ ------------
Shareholders' equity (deficit):
Preferred stock
Common stock and
additional paid-in capital 357,881(3)
430,500(3)
4,553,500(3) 11,669,826
Stock subscription
receivable from officer (225,000)
Retained earnings
(accumulated deficit) 2,637,750(3) 649,381(3)
(5,376,158)
Unrealized holding loss (131,257)
Foreign currency translation
adjustment 0
---------- ------------ ------------
Total shareholders'
equity (deficit) 2,995,631 5,633,381 5,937,411
---------- ------------ ------------
Total liabilities and
shareholders' equity
(deficit) $3,914,631 $ 5,633,381 $ 15,784,159
========== ============ ============
See notes to pro forma consolidated financial information.
21
SURGE COMPONENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED AUGUST 31, 2000
Surge
----------------------------------------------------
MailEncrypt
Historical Adjustments As Adjusted Historical
---------------- ----------------- ----------- -----------
Net sales $ 28,116,471 $ 28,116,471
Costs of goods sold 20,071,867 20,071,867
------------ ------------
Gross profit 8,044,604 8,044,604
Operating expenses:
General and administrative 3,381,561 $5,004,714(2) 8,386,275 $ 503,538
Selling and shipping 1,503,137 1,503,137
Depreciation and
amortization 512,434 512,434
------------ ------------ ------------ ------------
Total operating expenses 5,397,132 5,004,714 10,401,846 503,538
------------ ------------ ------------ ------------
Income (loss) from operations 2,647,472 5,004,714 (2,357,242) (503,538)
Other income (expense):
Investment income 432,243 (118,922)(2) 313,321 13,638
Interest expense (510,666) (510,666) (48,451)
------------ ------------ ------------ ------------
Income (loss) before income
taxes 2,569,049 (5,123,636) (2,554,587) (538,351)
Income taxes 1,057,675 (1,057,675)
------------ ------------ ------------ ------------
Net income (loss) $ 1,511,374 $(4,065,961) $ (2,554,587) $ (538,351)
============ ============ ============ ============
Weighted average shares
outstanding (5):
Basic 4,949,049
============
Diluted 7,316,291
============
Per share information:
Basic $ 0.31
============
Diluted $ 0.21
============
Pro Forma Adjustments
---------------------
Consolidated
Debit Credit Pro Forma
------ ------ -------------
Net sales
$ 28,116,471
Costs of goods sold 20,071,867
-------------
Gross profit 8,044,604
Operating expenses:
General and administrative 8,889,813
Selling and shipping 1,503,137
Depreciation and
amortization $ 659,437(3) 0 1,171,871
---------- --------- ------------
Total operating expenses 659,437 0 11,564,821
---------- --------- ------------
Income (loss) from operations 659,437 (3,520,217)
Other income (expense):
Investment income 44,000(3) 282,959
Interest expense $ 44,000(3)
(515,117)
---------- --------- ------------
Income (loss) before income
taxes 703,437 44,000 (3,752,375)
Income taxes
---------- --------- ------------
Net income (loss) $ 703,437 44,000 $ (3,752,375)
========== ========= ============
Weighted average shares
outstanding (9):
Basic 6,920,449
============
Diluted 6,920,449
============
Per share information:
Basic $ (0.54)
============
Diluted $ (0.54)
============
See notes to pro forma consolidated financial information.
22
SURGE COMPONENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1999
(Unaudited)
Historical Pro Forma Adjustments
------------------------------ -------------------------------- Consolidated
Surge MailEncrypt Debit Credit Pro Forma
-------------- ------------- -------------- ---------------- --------------
Net sales $ 12,147,025 $ 12,147,025
Costs of goods sold 9,068,308 9,068,308
-------------- ------------
Gross profit 3,078,717 3,078,717
Operating expenses:
General and administrative 2,071,834 $ 111,031 2,182,865
Selling and shipping 1,030,844 1,030,844
Depreciation and
amortization 49,254 879,250 928,504
-------------- ------------- -------------- ---------------- --------------
Total operating expenses 3,151,932 111,031 879,250 4,142,213
-------------- ------------- -------------- ---------------- --------------
Income (loss) from operations (73,215) (111,031) (879,250) (1,063,496)
Other income (expense):
Investment income 179,017 179,017
Interest expense
-------------- ------------- -------------- ---------------- --------------
Income (loss) before income
taxes 105,802 (111,031) (879,250) (884,479)
Income taxes 20,738 $ 20,738(4) 0
-------------- ------------- -------------- ---------------- --------------
Net income (loss) $ 85,064 $ (111,031) $ (879,250) $ 20,738 $ (884,479)
============== ============= ============= ================ ==============
Weighted average shares
outstanding (9):
Basic 4,858,024 6,829,424
============== ==============
Diluted 5,876,468 6,829,424
============== ==============
Per share information:
Basic $ 0.02 $ (0.13)
============== ==============
Diluted $ 0.01 $ (0.13)
============== ==============
See notes to pro forma consolidated financial information.
23
SURGE COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000 AND NOVEMBER 31,1999
Note 1 Reflects the advance of additional cash by Surge Components,
Inc. and subsidiaries ("Surge") to Global DataTel Inc.
("Global") after August 31, 2000.
Note 2 Reflects the write off of the Global Note advances including
the $1,250,000 Note which Surge has reserved 100%. In
addition, Surge's $500,000 Certificate of Deposit pledged as
collateral for Global's loan from Citibank which, at the
present time, Surge believes will be used to repay the
outstanding loan, has also been written off.
Note 3 Surge entered into the acquisition of MailEncrypt.com Inc.
("Mail") on November 16, 2000 with the issuance of 182,140
shares of its Series B Preferred Stock. These shares are
convertible into approximately 1,821,400 shares of the
company's common stock, subject to shareholder approval. The
pro forma financial statements reflects the acquisition of
MailEncrypt in exchange for 1,821,400 shares of Common Stock
valued at $2.50 per share, the estimated fair value of the
Surge's shares based on an average trading price near November
16,2000 aggregating approximately $4,553,500. Reflects the
costs incurred directly related to the acquisition of
MailEncrypt including the value of 150,000 shares valued at
$430,500, in connection with the investment banking agreement.
The acquisition price aggregated $4,984,000. Also reflects the
elimination of the investment account and the historical
equity accounts and records the allocation of purchase price
primarily to goodwill and in process research and development.
The value of Goodwill has been estimated by the company to be
approximately $2,637,500 and the balance of approximately
$2,637,500 was allocated to in-process research and
development. These allocations are preliminary and tentative
and are subject to change when Surge receives an outside
appraisal.
In-process research and development will be expensed at the
date of acquisition, and accordingly, has been included as a
reduction to retained earnings in the accompanying unaudited
pro forma consolidated pro forma balance sheet. The write off
of the in process research and development has been omitted
from the unaudited consolidated statements of operations as it
is non recurring in nature. In addition, certain related
fourth quarter activities related to a settlement with Global,
with significant negative impact on Surge's results of
operations are not presented in the pro forma information.
Goodwill will be amortized over a period of three years, and
accordingly, the accompanying pro forma statements of
operations for the nine months ended August 31, 2000 and the
year ended November 30, 1999 include adjustments to reflect
amortization totaling $659,437 and $879,250, respectively.
Accrued interest receivable and payable related to the
intercompany loans in the amount of $ 44,000 has been
eliminated in the unaudited consolidated financial statements.
24
Note 4 Reflects the reduction of income tax expense as a result of
the Mail acquisition.
Note 5 Summary of weighted shares outstanding:
Shares Outstanding
--------------------------------------
Year Ended Nine Months Ended
November 30, 1999 August 30, 2000
----------------- ---------------
Weighted average shares outstanding 4,858,024 4,949,049
Securities:
Conversion of Series B preferred
stock - MailEncrypt transaction 1,821,400 1,821,400
Shares to issued for services
related to MailEncrypt 150,000 150,000
------------- ------------
6,829,424 6,920,449
============= ============
In addition to the shares shown above, there are 15,634,169 shares of
Surge common stock issuable upon the exercise of outstanding options
(9,352,000 shares) and warrants (3,482,169 shares) and upon the
conversion of outstanding debt (2,800,000 shares).
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: January 30, 2001
Surge Components, Inc.
By: /s/ Ira Levy
----------------------------
Ira Levy, President
26