U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SRM Networks, Inc.,
-------------------
(Exact name of registrant as specified in its charter)
Nevada 7373 95-4868120
------ ---- ----------
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number Identification No.)
incorporation or
organization)
1241 North Central Avenue, Suite 7, Glendale, California 91202
-------------------------------------------------------- -----
(Address of registrant's principal executive offices) (Zip Code)
(818) 243-1181
--------------
(Registrant's Telephone Number, Including Area Code)
Michael J. Muellerleile
Stepp Law Group
1301 Dove Street, Suite 460
Newport Beach, California 92660
949.660.9700
Facsimile 949.660.9010
(Name, Address and Telephone Number of Agent for Service)
Approximate date of proposed sale to the public: From time to time after this
registration statement becomes effective.
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(c)
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. [ ] _______
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. [ ] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=============================== ================= ==================== ======================= ===============
Title of each class Amount Proposed maximum Proposed maximum Amount of
of securities to be offering price aggregate registration
to be registered registered per share offering price fee
------------------------------- ----------------- -------------------- ----------------------- ---------------
Common Stock, $.001 par value 3,000,000 $0.05 $150,000 $39.60
=============================== ================= ==================== ======================= ===============
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 of 1933, as amended, or until this registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
1
Preliminary Prospectus
SRM Networks, Inc.,
a Nevada corporation
3,000,000 Shares of Common Stock
We are an Internet solutions company that specializes in website
hosting and development services. We are offering for sale 3,000,000
shares of our common stock in a self-underwritten offering directly to
the public. We are offering the shares without any underwriting
discounts or commissions. The purchase price is $0.05 per share. If all
of the shares offered by us are purchased, the proceeds to us will be
$150,000. We may receive less than $150,000 if all of the offered
shares are not purchased.
This is our initial public offering and no public market currently
exists for shares of our common stock. We have not applied for listing
or quotation on any public market. We do not expect a liquid market to
develop for several years, if at all.
After the offering, our management will own 45% of the issued and
outstanding shares of common stock if all of the offered shares are
sold. Investors may not revoke their subscription. The funds that are
raised in this offering will not be deposited in an escrow account and
will be available for immediate utilization by our management.
See "Risk Factors" on Pages 4 to 9 for factors to be considered before
investing in the shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed
upon the adequacy or accuracy of the prospectus. Any representation to
the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed.
We will not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
The date of this prospectus is September 28, 2001.
Subject to completion.
2
TABLE OF CONTENTS
Prospectus Summary ............................................................4
Risk Factors...................................................................4
Use of Proceeds................................................................9
Determination of Offering Price................................................9
Dilution.......................................................................9
Selling Security Holders......................................................10
Plan of Distribution..........................................................10
Legal Proceedings.............................................................10
Directors, Executive Officers, Promoters and Control Persons..................11
Security Ownership of Certain Beneficial Owners and Management................11
Description of Securities.....................................................11
Interest of Named Experts and Counsel.........................................13
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities....................................................13
Organization Within Last Five Years...........................................13
Description of Business.......................................................13
Management' Discussion and Analysis of Financial Condition
and Results of Operations.....................................................16
Description of Property.......................................................16
Certain Relationships and Related Transactions................................17
Market for Common Equity and Related Stockholder Matters......................17
Executive Compensation .......................................................18
Financial Statements..........................................................18
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................................28
Legal Matters.................................................................28
Experts.......................................................................28
Additional Information........................................................28
Indemnification of Directors and Officers.....................................29
Other Expenses of Issuance and Distribution...................................29
Recent Sales of Unregistered Securities.......................................29
Exhibits......................................................................30
Undertakings..................................................................30
Signatures....................................................................31
Outside Back Cover Page
Dealer Prospectus Delivery Obligation
Until _______, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers'
obligations to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
3
Prospectus Summary
------------------
Our Business: Our principal business address is 1241
North Central Avenue, Suite 7, Glendale,
California 91202; our telephone number
(818) 243-1181.
We are an Internet solutions company
that specializes in website hosting and
development services. Website hosting
encompasses a broad range of possible
services, including basic services, such
as simply posting a customer's website
on the Internet using the hosting
company's computer hardware and
software, and enhanced services such as
enabling financial transactions over the
Internet, email, audio and video
capabilities. Enhanced services may be
developed internally by the web hosting
company or purchased from external
sources and resold by the web hosting
company.
We offer, on a resale basis, a range of
basic and enhanced web hosting services
to businesses wishing to place their
website on the Internet. These
businesses often decide to use a web
hosting company in order to avoid the
financial cost, time and expertise
requirements of hosting the website and
obtaining enhanced services themselves.
We focus on meeting the needs of small
and medium-sized businesses and
individuals who are establishing a
commercial or informational presence on
the Internet.
Our state of organization: We were incorporated in Nevada on June
8, 2001.
Number of shares being offered: We are offering for sale 3,000,000
shares of our common stock. We will sell
the shares we are registering only to
those individuals who have received a
copy of the prospectus. Investors will
experience dilution of 40% or $0.02 per
share if all of the offered shares are
sold.
Number of shares outstanding 2,500,000 shares of our common stock
after the offering: are currently issued and outstanding.
After the offering, 5,500,000
shares of our common stock will be
issued and outstanding.
Estimated use of We will receive $150,000 if all of
proceeds: the offered shares are sold. We
intend to use any proceeds from such
sale for marketing expenses and for
working capital.
RISK FACTORS
In addition to the other information in this prospectus, the following risk
factors should be considered carefully in evaluating our business before
purchasing any of our shares of common stock. A purchase of our common stock is
speculative in nature and involves a lot of risks. No purchase of our common
stock should be made by any person who is not in a position to lose the entire
amount of his investment.
Risks related to our business
-----------------------------
We have a limited operating history upon which an evaluation of our prospects
can be made.
We were incorporated in June 2001. Our lack of operating history makes an
evaluation of our business and prospects very difficult. Our prospects must be
considered speculative, considering the risks, expenses, and difficulties
frequently encountered in the establishment of a new business. We cannot be
certain that our business will be successful or that we will generate
significant revenues.
4
We have incurred a net loss since inception and expect to incur net losses for
the foreseeable future.
As of June 30, 2001, our losses since inception were approximately $2,135. We
expect to incur significant operating and capital expenditures and, as a result,
we expect significant net losses in the future. We will need to generate
significant revenues to achieve and maintain profitability. We may not be able
to generate sufficient revenues to achieve profitable operations.
Our ability to succeed is uncertain because we currently have limited sources of
revenue and minimal marketing activities due to the lack of significant
revenues. Therefore, investors may lose all or part of their investment, if we
do not raise funds in this offering or generate revenues.
We have not yet engaged in any significant marketing of the products and
services. Our marketing activities are significantly limited and, to fund more
sophisticated marketing activities, we need to raise funds in this offering or
generate revenues. Our inability to raise sufficient funds in this offering or
generate revenues may significantly hinder our ability to conduct marketing
activities.
We are heavily dependent on the services of one provider for Internet access and
hosting services, which we resell under our name.
Our provider may experience disruptions of service or have limited capacity,
which could disrupt our services. In the event of an extended disruption, we may
not be able to replace or supplement these services on a timely basis or at all.
Because we rely on third-party Internet service provider companies for our
backbone connections to the Internet, we face limitations on our ability to
serve our subscribers, including the following:
o we do not control decisions regarding availability of service at any
particular time;
o we may not be able to deploy new technologies because our providers may
not be able to support that technology; and
o we may not be able to negotiate favorable interconnectivity agreements
with other Internet service providers.
The Internet industry is experiencing consolidation that may intensify
competition, which may make it more difficult for us to generate revenues.
The Internet industry has recently experienced substantial consolidation and a
proliferation of strategic transactions. We expect this consolidation and
strategic partnering to continue. Acquisitions or strategic partnerships could
harm us in a number of ways, including:
o competitors could acquire or partner with companies with which we have
strategic partnerships and discontinue our strategic partnerships,
resulting in the loss of distribution opportunities for our services;
o our competitors could merge with each other or third-parties with
significant resources and experience, thereby increasing their ability
to compete with our services; and
o a competitor could acquire or partner with one of our key suppliers.
Any of these factors could materially adversely affect our operations and,
consequently, our business, operating results and financial condition. We cannot
guaranty that we will be able either to develop services comparable or superior
to services offered by our current or future competitors or to adapt to new
technologies, evolving industry standards and changes in customer requirements.
Increased competition, particularly online competition, may result in price
reductions, reduced margins and loss of market share, any or all of which could
harm our business.
5
We anticipate that we may need to raise additional capital to market our
products and services. Our failure to raise additional capital will
significantly affect our ability to fund our proposed marketing activities.
To market our products and services, we may be required to raise additional
funds. We do not know if we will be able to acquire additional financing at
commercially reasonable rates. We anticipate that we will spend a lot of funds
on the marketing and promotion of our products and services. Our failure to
obtain additional funds would significantly limit or eliminate our ability to
fund our sales and marketing activities.
We anticipate that we may seek additional funding through public or private
sales of our securities. That could include equity securities, or through
commercial or private financing arrangements. Adequate funds may not be
available when needed or on terms acceptable to us. In the event that we are not
able to obtain additional funding on a timely basis, we may be required to limit
any proposed operations or eliminate certain or all of our marketing programs,
either of which could have a material adverse affect on our results of
operations.
We are dependent on the efforts and abilities of certain of our senior
management.
The interruption of the services of key management could have a material adverse
effect on our operations, profits and future development, if suitable
replacements are not promptly obtained. We anticipate that we will enter into
employment agreements with each of our key executives. We cannot guaranty that
each executive will remain with us during or after the term of his or her
employment agreement. In addition, our success depends, in part, upon our
ability to attract and retain other talented personnel. Although we believe that
our relations with our personnel are good and that we will continue to be
successful in attracting and retaining qualified personnel, we cannot guaranty
that we will be able to continue to do so. Our officers and directors will hold
office until their resignations or removal.
Our officers and directors are engaged in other activities that could have
conflicts of interest with us. Therefore, our officers and directors may not
devote sufficient time to our affairs, which may affect our ability to conduct
marketing activities and generate revenues.
The persons serving as our officers and directors have existing responsibilities
and may have additional responsibilities to provide management and services to
other entities. As a result, conflicts of interest between us and the other
activities of those entities may occur from time to time, in that our officers
and directors shall have conflicts of interest in allocating time, services, and
functions between the other business ventures in which they may be or become
involved and our affairs. Mr. Sherman currently works for us on a full time
basis. Mr. Thompson currently devotes approximately ten hours per week, but
anticipates that he will devote significantly more hours if we begin generating
significant revenues.
Our success may depend in part upon our ability to preserve our trade secrets,
obtain and maintain patent protection for our technologies, products and
processes, and operate without infringing the proprietary rights of other
parties.
However, we may rely on certain proprietary technologies, trade secrets, and
know-how that are not patentable. Although we may take action to protect our
unpatented trade secrets and our proprietary information, in part, by the use of
confidentiality agreements with our employees, consultants and certain of our
contractors, we cannot guaranty that:
o these agreements will not be breached;
o we would have adequate remedies for any breach; or
o our proprietary trade secrets and know-how will not otherwise become
known or be independently developed or discovered by competitors.
We cannot guaranty that our actions will be sufficient to prevent imitation or
duplication of either our products and services by others or prevent others from
claiming violations of their trade secrets and proprietary rights.
Because we are not listed for trading on any exchange or quotation service, we
have no obligation to file timely reports with any exchange or quotation
service.
Our securities are not listed for trading on any exchange or quotation service.
We are not required to comply with the timely disclosure policies of any
exchange or quotation service. The requirements to which we would be subject if
our securities were so listed typically include the timely disclosure of a
material change or fact with respect to our affairs and the making of required
filings. We cannot guaranty that our reports will be filed timely.
6
Risks related to this offering
We may not be able to implement our business strategy unless sufficient funds
are raised in this offering, which could prevent us from becoming profitable.
We are a development stage company. We depend on the proceeds of this offering
in order to implement our business plan. We may not realize sufficient proceeds
to complete organizational and development costs, or to provide adequate cash
flow for planned marketing expenses. Our inability to raise sufficient funds in
this offering may significantly hinder our growth. If we fail to raise
sufficient funds in this offering, investors may lose their entire cash
investment.
We arbitrarily determined the offering price of the shares of common stock.
Therefore, investors may lose all or part of their investment if the offering
price is higher than the current market value of the offered shares.
The offering price of the shares of common stock being offered by us has been
determined primarily by our capital requirements and has no relationship to any
established criteria of value, such as book value or earnings per share.
Additionally, because we have no significant operating history and have only
generated minimal revenues to date, the price of the shares of common stock is
not based on past earnings, nor is the price of the shares indicative of current
market value for the assets owned by us. Investors could lose all or a part of
their investment if the offering price has been arbitrarily set too high. Even
if a public trading market develops for our common stock, the shares may not
attain market values commensurate with the offering price.
We lack a public market for shares of our common stock, which may make it
difficult for investors to sell their shares.
There is no public market for shares of our common stock. We cannot guaranty
that an active public market will develop or be sustained. Therefore, investors
may not be able to find purchasers for their shares of our common stock. Should
there develop a significant market for our shares, the market price for those
shares may be significantly affected by such factors as our financial results
and introduction of new products and services. Factors such as announcements of
new or enhanced products by us or our competitors and quarter-to-quarter
variations in our results of operations, as well as market conditions in our
sector may have a significant impact on the market price of our shares. Further,
the stock market has experienced extreme volatility that has particularly
affected the market prices of stock of many companies and that often has been
unrelated or disproportionate to the operating performance of those companies.
We may not have sufficient financial resources to fund our operations if the
offering is substantially undersold.
There is no minimum offering amount for this offering. We may not sell any or
all of the offered shares. If the offering is substantially undersold, investors
may lose their entire investment because we will not have sufficient funds to
fund our operations. If we do not sell all of the offered shares, we may also be
forced to limit any proposed marketing activities, which will hinder our ability
to generate revenues.
Investors in this offering will suffer immediate and substantial dilution of
their investment because they will provide 94% of the capital for a 55% equity
interest in the company.
The initial public offering price is substantially higher than the pro forma net
tangible book value per share of our outstanding common stock. Our existing
shareholders have paid an average of $0.004 per share for their common stock,
which is considerably less than the amount to be paid for the common stock in
this offering. As a result, assuming an initial public offering price of $0.05
per share, investors purchasing common stock in this offering will incur
immediate dilution of $0.02 in pro forma net tangible book value per share of
common stock as of June 30, 2001.
Our existing shareholders control our operations and matters requiring
shareholder approval.
Scott Sherman and Brad Thompson, each of whom is one of our officers and
directors, will beneficially own approximately 45% of our common stock following
the completion of this offering if all of the shares of are sold, or
approximately 55.5% if two thirds of the offered shares are sold. As a result,
they will have the ability to control or significantly influence all matters
requiring approval by our shareholders, including the election and removal of
directors, approval of significant corporate transactions and the ability to
control the decision of whether a change in control will occur.
We may not realize sufficient proceeds from this offering to implement our
business plan, as we are offering shares on direct participation basis, rather
then using the experience of a dealer-broker.
We are offering shares on a direct participation basis. No individual, firm, or
corporation has agreed to purchase any of the offered Shares. We cannot guaranty
that any or all of the shares will be sold. We do not plan to use a
dealer-broker, even though a dealer-broker may have more experience, resources
or contacts to more effectively achieve the sale of shares. A delay in the sale
of the shares in this offering can be expected to cause a similar delay in the
implementation of our business plan.
7
Because we may be subject to the "penny stock" rules, the level of trading
activity in our stock may be reduced which may make it difficult for investors
to sell their shares.
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, like shares of our common stock, generally are equity
securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on Nasdaq. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market, and monthly account statements
showing the market value of each penny stock held in the customer's account. In
addition, broker-dealers who sell these securities to persons other than
established customers and "accredited investors" must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security subject to the penny
stock rules, and investors in our common stock may find it difficult to sell
their shares.
Investment in our common stock is highly speculative and purchasers may lose
their entire investment.
Any person who cannot afford the loss of his or her entire purchase price for
the offered shares should not purchase of the offered shares because such a
purchase is highly speculative and involves significant risks. A purchase of the
offered shares would be unsuitable for a person who cannot afford to lose his or
her entire purchase price for the offered shares. Our business objectives must
also be considered speculative, and we cannot guaranty that we will satisfy
those objectives. Purchasers of the offered shares may not realize any return on
their purchase of the offered shares. Purchasers may lose their investments in
us completely.
Information in this prospectus contains "forward looking statements" which can
be identified by the use of forward-looking words such as "believes",
"estimates", "could", "possibly", "probably", "anticipates", "estimates",
"projects", "expects", "may", "will", or "should" or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that could
cause actual results to vary materially from the future results anticipated by
those forward-looking statements. Among the key factors that have a direct
bearing on our results of operations are the effects of various governmental
regulations, the fluctuation of our direct costs and the costs and effectiveness
of our operating strategy. Other factors could also cause actual results to vary
materially from the future results anticipated by those forward-looking
statements.
8
Use of Proceeds
---------------
We will receive up to $150,000 if all of the shares of common stock offered by
us at $0.05 per share are purchased. Assuming all of the shares are purchased,
we intend to use 25% of the proceeds for marketing expenses and 75% of the
proceeds for working capital. If all of the shares are not sold, then we intend
to use the proceeds that we receive for working capital. We cannot guaranty that
we will sell any or all of the shares being offered by us.
Determination of Offering Price
-------------------------------
Factors Used to Determine Share Price. The offering price of the 3,000,000
shares of common stock being offered by us has been determined primarily by our
capital requirements and has no relationship to any established criteria of
value, such as book value or earnings per share. Additionally, because we have
no significant operating history and have not generated any revenues to date,
the price of the shares of common stock is not based on past earnings, nor is
the price of the shares indicative of current market value for the assets owned
by us. No valuation or appraisal has been prepared for our business and
potential business expansion.
Dilution
--------
We are intending to sell 3,000,000 shares of our common stock being registered
by this registration statement. We were initially capitalized by the sale of our
common stock. The following table sets forth the number of shares of common
stock purchased from us, the total consideration paid and the price per share.
The table assumes all 3,000,000 shares of common stock will be sold.
========================= ========================================= ====================================== ==================
Shares Issued Total Consideration Price
----------------------------------------- ------------------------------------- Per Share
------------------
Number Percent Amount Percent
------------------------- ---------------------- ------------------ ------------------- ------------------ ------------------
Founding Shareholders 2,500,000 Shares 45.45% $10,000 6.25% $0.004
------------------------- ---------------------- ------------------ ------------------- ------------------ ------------------
Purchasers of Shares 3,000,000 Shares 54.55% $150,000 93.75% $0.05
========================= ====================== ================== =================== ================== ==================
Total 5,500,000 Shares 100% $160,000 100%
========================= ====================== ================== =================== ================== ==================
The following table sets forth the difference between the offering price of the
shares of our common stock being offered by us, the net tangible book value per
share, and the net tangible book value per share after giving effect to the
offering by us, assuming that all of the shares of the common stock offered by
us are sold. Net tangible book value per share represents the amount of total
tangible assets less total liabilities divided by the number of shares
outstanding as of June 30, 2001.
-------------------------------------------------------------- -----------------
Offering Price $0.05 per share
-------------------------------------------------------------- -----------------
Net tangible book value at 6/30/01 $.003 per share
-------------------------------------------------------------- -----------------
Net tangible book value after giving effect to the offering $0.03 per share
-------------------------------------------------------------- -----------------
Per Share Dilution to New Investors $0.02 per share
-------------------------------------------------------------- -----------------
Percent Dilution to New Investors 40%
-------------------------------------------------------------- -----------------
9
Selling Security Holders
------------------------
There are no selling security holders in this offering.
Plan of Distribution
--------------------
We are offering for sale 3,000,000 shares of our common stock on a direct
participation basis. We have not conducted any discussions or negotiations for
the sale of all or any portion of those 3,000,000 shares of our common stock.
There is no minimum number of shares that must be purchased by each prospective
purchaser and the maximum number of shares we will sell is 3,000,000. We will
not pay any commissions or other fees, directly or indirectly to any person or
firm in connection with solicitation of sales of the common stock. There is no
minimum proceeds set for this offering. We will not place the funds raised in an
escrow account. All funds received in this offering will be deposited directly
into our corporate general account and will be available for immediate
utilization.
We anticipate that Scott Sherman, our president, will participate in the offer
and sale of our shares of common stock, and rely on the safe harbor from
broker-dealer registration set out in Rule 3a4-1 under the Securities Exchange
Act of 1934. Although Mr. Sherman is an associated person of the company as that
term is defined in Rule 3a4-l under the Exchange Act, he is deemed not to be a
broker for the following reasons:
o Mr. Sherman is not subject to a statutory disqualification as that term
is defined in Section 3(a)(39) of the Exchange Act at the time of his
participation in the sale of our securities.
o Mr. Sherman will not be compensated for his participation in the sale
of company securities by the payment of commission or other
remuneration based either directly or indirectly on transactions in
securities.
o Mr. Sherman is not an associated person of a broker or dealer at the
time of participation in the sale of company securities.
Mr. Sherman will restrict his participation to the following activities:
o Preparing any written communication or delivering any communication
through the mails or other means that does not involve oral
solicitation by the president of a potential purchaser;
o Responding to inquiries of potential purchasers in communication
initiated by the potential purchasers, provided, however, that the
content of responses are limited to information contained in a
registration statement filed under the Securities Act or other offering
document;
o Performing ministerial and clerical work involved in effecting any
transaction.
We have not retained a broker for the sale of securities being offered. In the
event we retain a broker who may be deemed an underwriter, an amendment to the
registration statement will be filed.
The shares of common stock being offered by us have not been registered for sale
under the securities laws of any state as of the date of this prospectus. We
intend to register or qualify the offered shares in the following states:
Colorado, Georgia, Nevada, Oregon, Washington and Wisconsin.
Under the Securities Exchange Act of 1934 and the regulations thereunder, any
person engaged in a distribution of the shares of our common stock offered by
this prospectus may not simultaneously engage in market making activities with
respect to our common stock during the applicable "cooling off" periods prior to
the commencement of such distribution.
Legal Proceedings
-----------------
There are no legal actions pending against us nor are any legal actions
contemplated by us at this time.
10
Directors, Executive Officers, Promoters and Control Persons
------------------------------------------------------------
Our directors and principal executive officers are as specified on the following
table:
===================== =============== =========================================
Name Age Position
--------------------- --------------- -----------------------------------------
Scott Sherman 27 president, secretary and a director
--------------------- --------------- -----------------------------------------
Brad Thompson 32 treasurer and a director
===================== =============== =========================================
Scott J. Sherman. Mr. Sherman is our president, secretary and one of our
directors since our inception. Mr. Sherman manages all aspects of our
operations, including web development and marketing and sales of our products.
From January 2001 to May 2001, Mr. Sherman worked, as a Sr. Account Manager for
Speedera Networks, Inc. Speedera Networks, Inc. provides managed services for
global load balancing, failover, content delivery, and streaming media to
improve the quality of the Internet experience for users worldwide. From January
2000 to January 2001, Mr. Sherman was the western USA regional manager for
Adero, Inc. which provides website performance services for companies worldwide.
From 1998 to January 2000, Mr. Sherman worked was the director of western
operations for Lynxus, Inc., a national internet service provider. From 1996 to
August 1998, Mr. Sherman worked for Log-On Data Corp., Inc., a California
corporation, as a regional sales manager where he was responsible for all
Internet Service Provider sales. Mr. Sherman earned his Bachelor of Arts Degree
in Economics from California State University Long Beach in 1996. Mr. Sherman
has not been a director of any other reporting company.
Brad W. Thompson. Mr. Thompson is our treasurer and one of our directors since
our inception. Since 1998, Mr. Thompson has worked as a computer consultant,
which includes the design, setup, implementation, and management of local area
networks for businesses. Mr. Thompson possesses a certification with Microsoft
as a Microsoft Certified Systems Engineer and works primarily in the Microsoft
Windows family of software products including Windows NT, 2000, ME, 95 and 98.
Mr. Thompson has also set up primary and backup domain controllers, proxy
servers, web servers, exchange servers, print servers, file servers, and
application servers. Mr. Thompson also has significant experience in developing
and implementing web sites. In addition to Mr. Thompson's software knowledge and
experience, Mr. Thompson has worked extensively with computer hardware including
hubs, switches, printers and wiring and hardware issues within a computer such
as motherboards, hard drives, cd writers and readers, monitors and power
sources. During the past three years, Mr. Thompson has worked approximately
thirty hours per week as a computer consultant and generated approximately
$70,000 per year. From 1996 to 1998, Mr. Thompson handled the day-to-day
operations of Medical2000, in which he was one of the two partners. He managed
all the back office work while his partner worked out in the field making sales
calls. Mr. Thompson earned his Bachelor of Science Degree in Agricultural and
Managerial Economics from the University of California at Davis in 1992. Mr.
Thompson is not an officer or director of any other reporting company.
There is no family relationship between any of our officers or directors. There
are no orders, judgments, or decrees of any governmental agency or
administrator, or of any court of competent jurisdiction, revoking or suspending
for cause any license, permit or other authority to engage in the securities
business or in the sale of a particular security or temporarily or permanently
restraining any of our officers or directors from engaging in or continuing any
conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security, or any aspect of the securities business or of theft or of any felony.
Nor are any of the officers or directors of any corporation or entity affiliated
with us so enjoined.
Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 28, 2001, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group.
11
Title of Class Name and Address of Amount and Nature of Percent of Class Percent of Percent of Percent of
Beneficial Owner Beneficial Owner if no shares are Class if Class if Class if
sold 3,000,000 2,000,000 1,000,000
shares are shares are shares are sold
sold sold
--------------- ------------------------- ----------------------- ------------------ ---------- ---------- -----------------
Common Stock Scott Sherman 1,250,000 shares, 50% 22.73% 27.77% 35.71%
1241 N. Central Avenue, president, secretary,
Suite 7 director
Glendale, California
91202
Common Stock Brad Thompson 1,250,000 shares, 50% 22.73% 27.77% 35.71%
51-66th Place treasurer, director
Long Beach, California
90803
Common Stock All directors and named 2,500,000 shares 100% 45.46% 55.54% 71.42%
executive officers as a
group
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with Securities and Exchange
Commission rules, shares of our common stock which may be acquired upon exercise
of stock options or warrants which are currently exercisable or which become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionees. Subject to community property laws, where applicable,
the persons or entities named in the table above have sole voting and investment
power with respect to all shares of our common stock indicated as beneficially
owned by them.
Changes in Control. Our management is not aware of any arrangements which may
result in "changes in control" as that term is defined by the provisions of Item
403(c) of Regulation S-B.
Description of Securities
-------------------------
We are authorized to issue 50,000,000 shares of $.001 par value common stock and
5,000,000 shares of $.001 par value preferred stock. As of September 28, 2001,
2,500,000 shares of our common stock were issued and outstanding.
Each shareholder of our common stock is entitled to a pro rata share of cash
distributions made to shareholders, including dividend payments. The holders of
our common stock are entitled to one vote for each share of record on all
matters to be voted on by shareholders. There is no cumulative voting with
respect to the election of our directors or any other matter. Therefore, the
holders of more than 50% of the shares voted for the election of those directors
can elect all of the directors. The holders of our common stock are entitled to
receive dividends when, as and if declared by our Board of Directors from funds
legally available therefore. Cash dividends are at the sole discretion of our
Board of Directors. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of our liabilities
and after provision has been made for each class of stock, if any, having any
preference in relation to our common stock. Holders of shares of our common
stock have no conversion, preemptive or other subscription rights, and there are
no redemption provisions applicable to our common stock.
Dividend Policy. We have never declared or paid a cash dividend on our capital
stock. We do not expect to pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain our earnings, if any, for use
in our business. Any dividends declared in the future will be at the discretion
of our board of directors and subject to any restrictions that may be imposed by
our lenders.
12
Interest of Named Experts and Counsel
-------------------------------------
No "expert" or our "counsel" was hired on a contingent basis, or will receive a
direct or indirect interest in us, or was a promoter, underwriter, voting
trustee, director, officer, or employee of the company, at any time prior to the
filing of this registration statement.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
------------------------------------------------------------------------
Article Seven of our Articles of Incorporation provides, among other things,
that our officers and directors shall not be personally liable to us or our
shareholders for monetary damages for breach of fiduciary duty as an officer or
a director, except for liability:
o for any breach of such director's duty of loyalty to us or our security
holders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o for unlawful payments of dividends or unlawful stock purchase or
redemption by us; or
o for any transaction from which such director derived any improper
personal benefit.
Accordingly, our directors may have no liability to our shareholders for any
mistakes or errors of judgment or for any act of omission, unless the act or
omission involves intentional misconduct, fraud, or a knowing violation of law
or results in unlawful distributions to our shareholders.
Indemnification Agreements. We will enter into indemnification agreements with
each of our executive officers. We will agree to indemnify each such person for
all expenses and liabilities, including criminal monetary judgments, penalties
and fines, incurred by such person in connection with any criminal or civil
action brought or threatened against such person by reason of such person being
or having been our officer or director or employee. In order to be entitled to
indemnification by us, such person must have acted in good faith and in a manner
such person believed to be in our best interests. With respect to criminal
actions, such person must have had no reasonable cause to believe his or her
conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that act and is, therefore, unenforceable.
Organization Within Last Five Years
-----------------------------------
Transactions with Promoters. Scott Sherman was our promoter. In June 2001, we
issued 1,250,000 shares of our common stock to Mr. Sherman in exchange for
$5,000.
Description of Business
-----------------------
Our Background. We were incorporated in Nevada on June 8, 2001.
Our Business. We are an Internet solutions company that specializes in website
hosting and development services. Website hosting encompasses a broad range of
possible services, including basic services, such as simply posting a customer's
website on the Internet using the hosting company's computer hardware and
software, and enhanced services such as enabling financial transactions over the
Internet, email, audio and video capabilities. Enhanced services may be
developed internally by the web hosting company or purchased from external
sources and resold by the web hosting company. We focus on meeting the needs of
small and medium-sized businesses and individuals who are establishing a
commercial or informational presence on the Internet.
Our Products and Services. We offer, on a resale basis, a range of basic and
enhanced web hosting services to businesses wishing to place their website on
the Internet. These businesses often decide to use a web hosting company in
order to avoid the financial cost, time and expertise requirements of hosting
the website and obtaining enhanced services themselves.
13
We also offer website design and development services. Website design and
development may include such features as graphics, text, color, typestyle, audio
and video. The person or company typically responsible for assisting in the
design and maintenance of a website is called a webmaster. This function is
labor intensive and would involve significant human resources and time to
service a broad customer base. Consequently, webmaster functions are typically
performed by specialized companies servicing a number of customers. These
customers may also rely upon their webmasters to direct them to suitable hosting
or Internet service provider company.
We also provide server co-location services. Server co-location services involve
a customer physically placing their computer hardware, referred to as a server,
on our premises. The customer gains access to our Internet support and
maintenance services, high-speed Internet connections, security systems and
appropriate physical environment for the server, such as static free and
air-conditioned.
Our Target Markets and Marketing Strategy. We believe that our primary target
market will consist of small and medium sized businesses that wish to have a
website on the Internet without incurring the costs and time delays involved
with developing, maintaining and updating a web presence on their own. The
website is an informational or an informational/ commercial tool for these
customers. In addition to small and medium sized businesses, reseller web
hosting services may be purchased by entities, such as value added resellers, or
VARs, and original equipment manufacturers, or OEMs, that will resell the
services in connection with their own web related services.
Our marketing strategy is to promote our services and products and attract
businesses to our website. Our marketing initiatives include:
o utilizing direct response print advertisements placed primarily in
small business, entrepreneurial, and special interest magazines;
o links to industry focused websites;
o advertising by television, radio, banners, affiliated marketing and
direct mail; and
o presence at industry tradeshows.
Growth Strategy. Our objective is to become a dominant provider of web hosting
and development services. Our strategy is to provide clients with exceptional
personal service and high quality web design. Key elements of our strategy
include:
o increase our relationships with businesses;
o increase our relationships with third party providers of web products
and services;
o continue and expand our website;
o provide additional services for businesses and consumers; and
o pursue relationships with joint venture candidates. We will attempt to
establish joint ventures with companies that will support our business
development.
Competition. The markets for web hosting and development are very competitive.
Our current and potential competitors include:
o other web hosting and Internet services companies;
o regional and national ISPs;
o regional and national telecommunications companies; and
o large information technology outsourcing firms.
We believe that most web-hosting competitors fit into two major groupings, each
having our own set of competitive strengths and weaknesses. The first grouping,
and most obvious of direct competition, are the big telephone and cable
companies. We believe that because of their large corporate size, it takes these
competitors much longer to develop and incorporate new features into their
hosting services and to offer those services at a competitive price without
subsidizing the pricing. As a result, we believe that by careful attention to
our cost structure and rapid response to market demand for new features we can
effectively compete with larger and more financially secure companies, both in
services provided and on price.
The second major type of competitors are the pure website hosting companies. We
believe that many of these companies have insufficient resources, inadequate
infrastructure, insufficient Internet connectivity, and/or inadequate technical
support. These companies may have congested network servers and slow Internet
connectivity causing delays in website access and upload. This can result in
lost customers visiting and exploring a website through abandoned connections.
The smaller of these companies the less they are able to scale and respond
quickly to their customers' growth requirements and may not be capable of
supporting large numbers of new customers. While some of these pure website
hosting companies may face these competitive deficiencies, there are a number of
website hosting companies that have shown the ability to compete effectively.
Our ability to compete with these companies over time is unproven.
14
Many of these competitors have greater financial resources than we have,
enabling them to finance acquisition and development opportunities, to pay
higher prices for the same opportunities or to develop and support their own
operations. In addition, many of these companies can offer bundled, value-added
or additional services not provided by us, and may have greater name
recognition. These companies might be willing to sacrifice profitability to
capture a greater portion of the market for web hosting or related web hosting
activities, or pay higher prices than we would for the same expansion and
development opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our internal growth objectives.
Our Website www.srmnetworks.com. Our current website displays our corporate logo
and contact information and provides a general description of the services that
we provide as well as prices of those services.
Our Intellectual Property. We do not presently own any patents, trademarks,
licenses, concessions or royalties.
We own the Internet domain name www.srmnetworks.com. Under current domain name
registration practices, no one else can obtain an identical domain name, but
someone might obtain a similar name, or the identical name with a different
suffix, such as ".org", or with a country designation. The regulation of domain
names in the United States and in foreign countries is subject to change, and we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our domain names.
Government Regulation. Internet access and online services are not subject to
direct regulation in the United States. Changes in the laws and regulations
relating to the telecommunications and media industry, however, could impact our
business. For example, the Federal Communications Commission could begin to
regulate the Internet and online services industry, which could result in
increased costs for us. The laws and regulations applicable to the Internet and
to our services are evolving and unclear and could damage our business. There
are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. Due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted, covering
issues such as user privacy, defamation, pricing, taxation, content regulation,
quality of products and services, and intellectual property ownership and
infringement. Such legislation could expose us to substantial liability as well
as dampen the growth in use of the Internet, decrease the acceptance of the
Internet as a communications and commercial medium, or require us to incur
significant expenses in complying with any new regulations. The European Union
has recently adopted privacy and copyright directives that may impose additional
burdens and costs on international operations.
Our Research and Development. We are not currently conducting any research and
development activities, other than the development of our website. We do not
anticipate conducting such activities in the near future.
Employees. As of September 28, 2001, we have one full time employee and one part
time employee. We anticipate that we will not hire any employees in the next six
months, unless we generate significant revenues. From time-to-time, we
anticipate that we will use the services of independent contractors and
consultants to for website design and development.
Facilities. Our executive, administrative and operating offices are located 1241
North Central Avenue, Suite 7, Glendale, California 91202. We do not own our
offices. Scott Sherman, our president, secretary and one of our directors,
currently provides office space to us at no charge. We do not have a written
lease or sublease agreement and Mr. Sherman does not expect to be paid or
reimbursed for providing office facilities.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
---------------------------------------------------------------------------
For the period from June 8, 2001, our date of formation, through June 30, 2001.
-------------------------------------------------------------------------------
Liquidity and Capital Resources. We have cash of $9,290 as of June 30, 2001. Our
accounts receivable were approximately $720 as of June 30, 2001. Despite our
limited history, we believe that we will collect those receivables in a timely
fashion. Therefore, we believe that our available cash is sufficient to pay our
day-to-day expenditures. Our officers and directors provided us with our initial
capitalization of $10,000. Those proceeds were used to provide us with
additional working capital.
Results of Operations.
Revenues. We have realized revenues of approximately $720 from web hosting and
development services that we provided during the period ended June 30, 2001. We
anticipate that we will generate more revenues as we expand our customer base.
Operating Expenses. For the period ended June 30, 2001, our total expenses were
approximately $2,855. The majority of those expenses were legal and professional
fees of $2,675. For the period ended June 30, 2001, we experienced a net loss of
approximately $2,135.
Our Plan of Operation for the Next Twelve Months. To effectuate our business
plan during the next twelve months, we must increase our current customer base.
We anticipate that we will use the funds raised in this offering and revenues
generated to fund marketing activities and for working capital. Our failure to
market and promote our services will harm our business and future financial
performance.
We have cash of $9,290 as of June 30, 2001. In the opinion of management,
available funds will satisfy our working capital requirements through January
2002. Our forecast for the period for which our financial resources will be
adequate to support our operations involves risks and uncertainties and actual
results could fail as a result of a number of factors. We anticipate that we may
need to raise additional capital to expand our operations, although we have not
made any efforts to obtain additional capital. Such additional capital may be
raised through public or private financing as well as borrowings and other
sources. We cannot guaranty that additional funding will be available on
favorable terms, if at all. If adequate funds are not available, then our
ability to expand our operations may be adversely affected. If adequate funds
are not available, we believe that our officers and directors will contribute
funds to pay for our expenses. Our belief that our officers and directors will
pay our expenses is based on the fact that our officers and directors
collectively own 2,500,000 shares of our common stock, which equals
approximately 45% of our outstanding common stock following the completion of
this offering if all of the offered shares are sold, or approximately 55.5% if
two thirds of the offered shares are sold. We believe that our officers and
directors will continue to pay our expenses as long as they maintain their
ownership of our common stock. Therefore, we have not contemplated any plan of
liquidation in the event that we do not generate revenues. As of June 30, 2001,
our officers and directors have provided us with our initial capitalization of
$10,000. On September 6,2001, Mr. Sherman contributed an additional $5,000 to
pay any expenses that we may incur in the next two months.
We are not currently conducting any research and development activities, other
than the development of our website. We do not anticipate conducting such
activities in the near future. In the event that we expand our customer base,
then we may need to hire additional employees or independent contractors as well
as purchase or lease additional equipment.
Description of Property
-----------------------
Property held by us. As of the date specified in the following table, we held
the following property:
================================== =========================
Property June 30, 2001
---------------------------------- -------------------------
Cash $9,290
---------------------------------- -------------------------
Property and Equipment, net $0
================================== =========================
Our facilities. Our executive, administrative and operating offices are located
at 1241 North Central Avenue, Suite 7, Glendale, California 91202. Scott
Sherman, our president, secretary and one of our directors, currently provides
office space to us at no charge. We do not have a written lease or sublease
agreement and Mr. Sherman does not expect to be paid or reimbursed for providing
office facilities.
16
Certain Relationships and Related Transactions
----------------------------------------------
Related party transactions.
Scott Sherman, our president, secretary and one of our directors, currently
provides office space to us at no charge. Mr. Sherman does not expect to be paid
or reimbursed for providing office facilities. We do not have a written lease or
sublease agreement with Mr. Sherman. However, we anticipate that Mr. Sherman
will continue to provide office space to us at no charge as long as he owns
1,250,000 shares of our common stock, which equals approximately 22.5% of our
outstanding common stock following the completion of this offering if all of the
offered shares are sold, or approximately 27.75% if two thirds of the offered
shares are sold. We have not contemplated any future transactions with Mr.
Sherman with respect to office space.
Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Reports to Security Holders. Our securities are not listed for trading on any
exchange or quotation service. We are not required to comply with the timely
disclosure policies of any exchange or quotation service. The requirements to
which we would be subject if our securities were so listed typically include the
timely disclosure of a material change or fact with respect to our affairs and
the making of required filings. Although we are not required to deliver an
annual report to security holders, we intend to provide an annual report to our
security holders, which will include audited financial statements.
When we become a reporting company with the Securities and Exchange Commission,
the public may read and copy any materials filed with the Securities and
Exchange Commission at the Security and Exchange Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may also
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Securities and Exchange Commission. The address of that
site is http://www.sec.gov.
As of September 28, 2001, there were two record holders of our common stock.
There are no outstanding shares of our common stock which can be sold pursuant
to Rule 144. There are no outstanding options or warrants to purchase, or
securities convertible into, shares of our common stock. There are no
outstanding shares of our common stock that we have agreed to register under the
Securities Act of 1933 for sale by security holders.
There have been no cash dividends declared on our common stock. Dividends are
declared at the sole discretion of our Board of Directors.
Penny stock regulation. Shares of our common stock will probably be subject to
rules adopted by the Securities and Exchange Commission that regulate
broker-dealer practices in connection with transactions in "penny stocks". Penny
stocks are generally equity securities with a price of less than $5.00, except
for securities registered on certain national securities exchanges or quoted on
the Nasdaq system, provided that current price and volume information with
respect to transactions in those securities is provided by the exchange or
system. The penny stock rules require a broker-dealer, prior to a transaction in
a penny stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the Securities and Exchange Commission, which
contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to such duties or other requirements of securities' laws;
o a brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and the significance of the
spread between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks; and
o such other information and is in such form, including language, type,
size and format, as the Securities and Exchange Commission shall
require by rule or regulation.
17
Prior to effecting any transaction in penny stock, the broker-dealer also must
provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
Holders of shares of our common stock may have difficulty selling those shares
because our common stock will probably be subject to the penny stock rules.
Executive Compensation
----------------------
Any compensation received by our officers, directors, and management personnel
will be determined from time to time by our Board of Directors. Our officers,
directors, and management personnel will be reimbursed for any out-of-pocket
expenses incurred on our behalf.
Summary Compensation Table. The table set forth below summarizes the annual and
long-term compensation for services in all capacities to us payable to our chief
executive officer and our other executive officers whose total annual salary and
bonus are anticipated to exceed $50,000 during the years ending December 31,
2001 and December 31, 2002. Our Board of Directors may adopt an incentive stock
option plan for our executive officers which would result in additional
compensation.
======================================= ======= ============= ============= ===================== =========================
Name and Principal Position Year Annual Bonus ($) Other Annual All Other Compensation
Salary ($) Compensation ($)
--------------------------------------- ------- ------------- ------------- --------------------- -------------------------
Scott Sherman - president, secretary 2001 None None None None
--------------------------------------- ------- ------------- ------------- --------------------- -------------------------
2002 $30,000 None None None
--------------------------------------- ------- ------------- ------------- --------------------- -------------------------
Brad Thompson - treasurer 2001 None None None None
--------------------------------------- ------- ------------- ------------- --------------------- -------------------------
2002 $5,000 None None None
======================================= ======= ============= ============= ===================== =========================
Compensation of Directors. Our directors who are also our employees receive no
extra compensation for their service on our Board of Directors.
Compensation of Officers. As of September 28, 2001, our officers have received
no compensation for their services provided to us.
Employment Contracts. We anticipate that we will enter into an employment
agreement with Scott Sherman.
Financial Statements
--------------------
SRM NETWORKS, INC.
(A Development Stage Company)
REPORT AND FINANCIAL STATEMENTS
JUNE 30, 2001
18
SRM NETWORKS, INC.
(a development stage company)
CONTENTS
PAGE
------
Independent Auditor's Report 1
Financial Statements:
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6
19
Independent Auditor's Report
To the Stockholders of
SRM Networks, Inc.
I have audited the accompanying balance sheet of SRM Networks, Inc. (a
development stage company) as of June 30, 2001, and the related statements of
operations, changes in stockholders' equity, and cash flows for the period June
8, 2001 (inception) through June 30, 2001. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SRM Networks, Inc.
(a development stage company) as of June 30, 2001, and the results of its
operations and its cash flows for the period June 8, 2001 (inception) through
June 30, 2001 in conformity with generally accepted accounting principles.
/s/ Quintanilla
A Professional Accountancy Corporation
Laguna Niguel, California
July 31, 2001
20
SRM NETWORKS, INC.
(a development stage company)
BALANCE SHEET
JUNE 30, 2001
ASSETS
------
Current assets
Cash $ 9,290
Accounts receivable, net of allowance of $-0- 720
----------------
Total current assets 10,010
Other assets ---
----------------
Total assets $ 10,010
================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 2,000
----------------
Total current liabilities 2,000
----------------
Stockholders' Equity
Preferred stock, $.001 par value;
Authorized shares-- 5,000,000
Issued and outstanding shares-- 0
Common stock, $.001 par value;
Authorized shares-- 50,000,000
Issued and outstanding shares-- 2,500,000 2,500
Additional paid-in capital 7,645
Deficit accumulated during the development stage (2,135)
---------------
Total stockholders' equity 8,010
----------------
Total liabilities and stockholders' equity $ 10,010
================
See accompanying notes to financial statements.
21
SRM NETWORKS, INC.
(a development stage company)
STATEMENT OF OPERATIONS
JUNE 8, 2001 (INCEPTION) THROUGH JUNE 30, 2001
Revenues
Website hosting $ 120
Website development 600
Less: returns and allowances ---
-----------------
Net revenues 720
-----------------
Operating expenses
Legal and professional fees 2,675
Occupancy 145
Office supplies 35
-----------------
Total operating expenses 2,855
-----------------
Loss from operations (2,135)
-----------------
Provision for income tax expense (benefit) ---
-----------------
Net loss/Comprehensive loss $ (2,135)
==================
Net income per common share-- basic and diluted $ ---
=================
Weighted average of common shares-- basic and diluted 2,500,000
==================
See accompanying notes to financial statements.
22
SRM NETWORKS, INC.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
JUNE 8, 2001 (INCEPTION) THROUGH JUNE 30, 2001
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital DEFICIT Total
------------ ----------- ----------- --------------- ------------
Balance, June 8, 2001 --- $ --- $ --- $ --- $ ---
Issuance of common stock,
June 9, 2001 2,500,000 2,500 7,500 --- 10,000
Cost of occupancy
contributed by officer --- --- 145 --- 145
Net loss/Comprehensive loss --- --- --- (2,135) (2,135)
------------ ----------- ----------- --------------- ------------
Balance, June 30, 2001 2,500,000 $ 2,500 $ 7,645 $ (2,135) $ 8,010
============= ============ ============ ================ ============
See accompanying notes to financial statements.
23
SRM NETWORKS, INC.
(a development stage company)
STATEMENT OF CASH FLOWS
JUNE 8, 2001 (INCEPTION) THROUGH JUNE 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,135)
Adjustments to reconcile net loss to net cash used in operating activities
Occupancy cost contributed by officer 145
Changes in operating assets and liabilities
(Increase) in accounts receivable (720)
Increase in accounts payable and accrued expenses 2,000
-----------------
Net cash used in operating activities (710)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES ---
-----------------
Net cash provided by investing activities ---
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 10,000
-----------------
Net cash provided by financing activities 10,000
-----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,290
CASH AND CASH EQUIVALENTS, beginning of period ---
-----------------
CASH AND CASH EQUIVALENTS, end of period $ 9,290
=================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ ---
=================
Interest paid $ ---
=================
See accompanying notes to financial statements.
24
SRM NETWORKS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description - SRM Networks, Inc. (the "Company") was
incorporated in the state of Nevada on June 8, 2001. The Company is an Internet
solutions company that specializes in website hosting and website development
services. The Company is headquartered in Glendale, California.
Cash and Cash Equivalents - For purposes of the balance sheet and
statement of cash flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Receivables - Receivables represent valid claims against debtors for
sales or other charges arising on or before the balance-sheet date and are
reduced to their estimated net realizable value. An allowance for doubtful
accounts will be computed as a percentage (%) of sales when experience is
established. As of June 30, 2001, the Company considered all receivables fully
collectible.
Fair Value of Financial Instruments - The carrying value of cash,
accounts receivable, and accounts payable and accrued expenses approximate their
fair value due to the short period to maturity of these instruments.
Recognition of Revenues and Costs of Goods Sold - The Company records
revenues of its services when they are complete and collectibility is reasonably
assured. The Company will also provide an allowance for returns when experience
is established. Cost of goods sold consists of the payroll and related expenses
of personnel used and the purchase price of products sold including inbound and
outbound shipping charges.
Income Taxes - The Company recognizes deferred tax assets and
liabilities based on differences between the financial reporting and tax bases
of assets and liabilities using the enacted tax rates and laws that are expected
to be in effect when the differences are expected to be recovered. The Company
provides a valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.
Net Loss per Common Share - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the reporting of basic and diluted earnings/loss per
share. Basic loss per share is calculated by dividing net loss by the weighted
average number of outstanding common shares during the period.
25
SRM NETWORKS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Accounting 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.
New Accounting Pronouncements - In March 2000, the Emerging Issues Task
Force (EITF) of the FASB reached a consensus on EITF Issue 00-2, "Accounting for
Web Site Development Costs." This consensus provides guidance on what types of
costs incurred to develop Web sites should be capitalized or expensed. The
Company adopted this consensus upon incorporation on June 8, 2001. Such
capitalized costs, if material, are to be included in "Fixed assets, net" and
will be depreciated over a period of two years.
In September 2000, the EITF reached a final consensus on EITF Issue
00-10, "Accounting for Shipping and Handling Fees and Costs." This consensus,
also adopted upon incorporation on June 8, 2001, requires that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue and should be classified as revenue.
NOTE 2 - ACCRUED EXPENSES
Accrued Wages and Compensated Absences - As of June 30, 2001, the
Company currently did not have any employees. The majority of development costs
and services have been provided to the Company by outside, third party vendors.
As such, there is no accrual for wages or compensated absences as of June 30,
2001.
NOTE 3 - COMMON STOCK
On June 9, 2001, the Company issued 2,500,000 shares of its common
stock to its officers for cash of $10,000. Since there was no readily available
market value at the time of issuance, the value of $0.004 per share was
considered as a reasonable estimate of fair value between the Company and the
officers.
26
SRM NETWORKS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 4 - INCOME TAXES
At June 30, 2001, the Company has available for federal income tax
purposes a net operating loss carryforward of approximately $2,135, expiring
2016, that may be used to offset future taxable income. Therefore, no provision
for income taxes has been provided.
In addition, the Company has deferred tax assets of approximately $320
at June 30, 2001. The Company has not recorded a benefit from its net operating
loss carryforward because realization of the benefit is uncertain and,
therefore, a valuation allowance of ($320) has been provided for the deferred
tax assets.
NOTE 5 - RELATED PARTY TRANSACTIONS
On June 9, 2001, the Company issued 2,500,000 shares of its common
stock to it current officers for cash as described in Note 3.
The Company occupies office space provided by its officer. Accordingly,
occupancy costs have been allocated to the Company based on the square foot
percentage assumed multiplied by the officer's total monthly costs. These
amounts are shown in the accompanying statement of operations for the period
June 8, 2001 (inception) through June 30, 2001 and are considered additional
contributions of capital by the officer and the Company.
27
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
--------------------------------------------------------------------------
In June 2001, our Board of Directors appointed Quintanilla Accountancy
Corporation, independent accountant, to audit our financials statements from
June 8, 2001, our date of formation, through June 30, 2001.
There have been no disagreements with our accountant since our formation
required to be disclosed pursuant to Item 304 of Regulation S-B.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by us has
been passed upon by the law firm of Stepp Law Group, located in Newport Beach,
California.
EXPERTS
Our financial statements for the period from June 8, 2001, our date of
formation, through June 30, 2001, appearing in this prospectus which is part of
a Registration Statement have been audited by Quintanilla Accountancy
Corporation and are included in reliance upon such reports given upon the
authority of Quintanilla Accountancy Corporation as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission pursuant to the Securities Act of 1933. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules to the registration statement. For further
information regarding us and our common stock offered hereby, reference is made
to the registration statement and the exhibits and schedules filed as a part of
the registration statement.
28
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
-----------------------------------------
Article Seven of our Articles of Incorporation provides, among other things,
that our officers and directors shall not be personally liable to us or our
shareholders for monetary damages for breach of fiduciary duty as an officer or
a director, except for liability:
o for any breach of such director's duty of loyalty to us or our security
holders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o for unlawful payments of dividends or unlawful stock purchase or
redemption by us; or
o for any transaction from which such director derived any improper
personal benefit.
Accordingly, our directors may have no liability to our shareholders for any
mistakes or errors of judgment or for any act of omission, unless the act or
omission involves intentional misconduct, fraud, or a knowing violation of law
or results in unlawful distributions to our shareholders.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have 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.
Other Expenses of Issuance and Distribution
-------------------------------------------
We will pay all expenses in connection with the registration and sale of our
common stock. The estimated expenses of issuance and distribution are set forth
below.
======================================== ==================== ===============
Registration Fees Approximately $39.60
---------------------------------------- -------------------- ---------------
Transfer Agent Fees Approximately $650.00
---------------------------------------- -------------------- ---------------
Costs of Printing and Engraving Approximately $500.00
---------------------------------------- -------------------- ---------------
Legal Fees Approximately $5,000.00
---------------------------------------- -------------------- ---------------
Accounting Fees Approximately $2,500.00
======================================== ==================== ===============
Recent Sales of Unregistered Securities
---------------------------------------
There have been no sales of unregistered securities within the last three years,
which would be required to be disclosed pursuant to Item 701 of Regulation S-B,
except for the following:
In June 2001, we issued 1,250,000 shares of our common stock to Scott Sherman,
our president, secretary and one of our directors, in exchange for $5,000 and
1,250,000 shares of our common stock to Brad Thompson, our treasurer and one of
our directors, in exchange for $5,000. The shares were issued in a transaction
which we believe satisfies the requirements of that certain exemption from the
registration and prospectus delivery requirements of the Securities Act of 1933,
which exemption is specified by the provisions of Section 4(2) of the Securities
Act of 1933, as amended.
29
Exhibits
--------
Copies of the following documents are filed with this registration
statement, Form SB-2, as exhibits:
Exhibit No.
-----------
1. Underwriting Agreement (not applicable)
3.1 Articles of Incorporation*
(Charter Document)
3.2 Bylaws*
5. Opinion Re: Legality
8. Opinion Re: Tax Matters (not applicable)
11. Statement Re: Computation of Per Share Earnings**
15. Letter on unaudited interim financial information (not applicable)
23.1 Consent of Auditors*
23.2 Consent of Counsel**
* Included in Registration Statement on Form SB-2, Amendment No. 1,
which was filed on September 7, 2001.
** Included in Financial Statements
*** Included in Exhibit 5
Undertakings
------------
A. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by us of expenses incurred or paid by
our director, officer or controlling person 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, we will, unless in
the opinion of our 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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
B. We hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To specify in the prospectus any facts or events
arising after the effective date of the registration
statement, or most recent post-effective amendment
thereof, which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered, if the total dollar value of
securities offered would not exceed that which was
registered, and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule
424(b) (Section 230.424(b) of Regulation S-B) if, in
the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any additional or changed material
information with respect to the plan of distribution
not previously disclosed in the registration
statement or any material change to such information
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
30
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
we certify that we have reasonable grounds to believe that we meet all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on our behalf by the undersigned, in the city of Glendale, State of
California, on September 28, 2001.
SRM Networks, Inc.,
a Nevada corporation
/s/ Scott Sherman
---------------------------------------------
Scott Sherman
president, secretary, director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
/s/ Scott Sherman September 28, 2001
--------------------------------------------
Scott Sherman
president, secretary, director
/s/ Brad Thompson September 28, 2001
--------------------------------------------
Brad Thompson
treasurer, principal financial officer, director
31