<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1999
Registration No. _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
YOUNETWORK CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 13-399035
(State of Jurisdiction) (Primary Standard Industrial (I.R.S. Employee
Classification Code Number) Identification No.)
New York, New York 10010
212-576-2030
(Address and telephone number of principal executive offices
and principal place of business)
--------------------------------
Kyle S. Taylor, President
YouNetwork Corporation
220 East 23rd Street, Suite 607
New York, New York 10010
(212) 576 2030
(Name, address and telephone number of agent for service)
Copies of all communications to:
Silverman, Collura, Chernis & Balzano, P.C.
Gary W. Mair, Esq.
381 Park Avenue South, Suite 1601
New York, New York 10016
(212) 779-8600
<PAGE>
Approximate date of proposed sale to the public: As soon
as practicable after the effective date of this
Registration Statement.
If this form is filed to register additional securities
for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the
Securities Act registration statement number of he
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 registration statement
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, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Offering Price Per Aggregate Offering
Title of Each Class of Securities to Amount to be Shares(1) Price (1) Amount of
be Registered Registered Registration Fee
<S> <C> <C> <C> <C>
Class A Common Stock, .0001 par value 1,000,000 $0.00 $0.00 $ 0.00
per share
==========
Class B Common Stock, .0001 par value
per share 1,000,000 $1.00 $1,000,000 $280.00
========= ========= ===== ========== -------
Total 2,000,000 $1,000,000 $280.00
===== ========= -------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to 457(o).
2
<PAGE>
YOUNETWORK CORPORATION
Cross-Reference Sheet
pursuant to Item 501(b)
Showing Location in Prospectus of Information
Required by Items of Form SB-2
<TABLE>
<CAPTION>
Registration Statement Item Caption in Prospectus
<S> <C> <C>
1. Front of Registration Statement and Facing Page; Cross-Reference Sheet;
Outside Front Cover of Prospectus Prospectus Cover Page
2. Inside Front and Outside Back Cover Prospectus Cover Page; Prospectus
Pages of Prospectus Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; YouNetwork
Corporation; Risk Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Risk Factors; Shares Eligible For Future
Sale
6. Dilution Dilution and Other Comparative
Data
7. Selling Security holders Not Applicable
8. Legal Proceedings Not Applicable
9. Plan of Distribution Plan of Distribution
10. Directors, Executive Officers, Promoters Management; Principal Stockholders
and Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Description of Securities
Indemnification for Securities Act
Liabilities
15. Organization Within One Year Prospectus Summary; Risk Factors;
Business; Certain Transactions
16. Description of Business Business
17. Management's Discussion and Analysis Management's Discussion and
Analysis
18. Description of Property Business
19. Certain Relations and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Outside Front Cover Of Prospectus;
Stockholder Matters Description of Securities; Risk Factors
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Not applicable
Accountants on Accounting and Financial
Disclosure
</TABLE>
3
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 21, 1999
1,000,000 SHARES OF CLASS A COMMON STOCK
AND 1,000,000 SHARES OF CLASS B COMMON STOCK
YOUNETWORK CORPORATION
YouNetwork Corporation, a Delaware corporation ("YouNetwork, our, we
or us") is hereby offering 1,000,000 shares of Class A Common Stock, par value
$.0001 per share ("Class A Shares") and 1,000,000 shares of Class B Common
Stock, par value $.0001 ("Class B Shares")(collectively, the "Securities"). The
Securities are being distributed by YouNetwork Corporation (the "Offering") to
its new members ("Members") of its on-line consumer network ("Consumer
Network"). One Class A Share shall be offered at no cost to each of the first
250,000 consumers who register to become a Consumer Network Member. The
remaining 750,000 Class A Shares shall be distributed to our Members based on
Net Value, which is explained more fully within this prospectus. Class B Shares
will be offered to Members at $1.00 per share. A Class B Share may only be paid
with rebates a Member may earn by making purchases on our Consumer Network,
which is explained more fully within this prospectus. A holder of a Class A
Share shall not, directly or indirectly, offer, sell, pledge, grant any option
to purchase, or otherwise sell or dispose of any Class A Share for a period of
12 months after the Offering (the "Lock-Up Period"). After the Lock-Up Period,
all Class A Shares shall be automatically converted into Class B Shares. Prior
to this Offering, there has been no public market for the Securities, and there
can be no assurance that such a market will develop or be sustained. See "Risk
Factors -No Prior Public Market for Securities."
A brief description of our Securities can be found under "SUMMARY" in
this prospectus.
WE URGE YOU TO READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11,
ALONG WITH THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION.
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 this prospectus. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
Per Class A Per Class B
Share Total Share Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Initial public Offering price...................... $0.00 $0.00 $1.00 $1.00
Proceeds(1)........................................ $0.00 $0.00 $0.00 $0.00
</TABLE>
(1) We will not receive proceeds from the sale of our Class A or Class B
Shares. One Class A Share will be offered to each of our first 250,000 new
Members at no cost. The remaining 750,000 Class A Shares will be distributed to
Members' based on Net Value. Class B Shares may only be purchased with a rebate
balance. We will receive an indirect economic benefit from the sale of our
Class B Shares to the extent that our obligation to pay rebate dollars to our
Members will be reduced.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT DISTRIBUTE 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 A SOLICITATION OF AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE DATE OF THIS PROSPECTUS IS ________ __, 1999
4
<PAGE>
YouNetwork plans to offer and sell the Securities directly to
investors by publishing the final prospectus, which is a part of this
Registration statement, on the Internet World Wide Web at its YouNetwork site
at www. YouNetwork.com. The YouNetwork site is currently under development and
will be operational before this Offering is made to our Members. YouNetwork
will only offer the Securities in this Offering to those Members who accept
electronic delivery of our final prospectus. A Member who refuses to accept
electronic delivery of our final prospectus will not be offered the Securities
in this offering.
We will record all sales of our Class A and Class B Shares by listing
the number of shares owned by a Member on his or her home page. Record
ownership of either a Class A or Class B Share shall be made by bookkeeping
entry. A Member shall receive confirmation of his or her ownership in an
uncertificated share by e-mail. Members who request a stock certificate to
evidence their ownership in a Class A or Class B Share shall be charged a
nominal fee for shipping and handling.
We have not employed any brokers, dealers or underwriters in
connection with the distribution of the Securities included in this
Registration Statement. YouNetwork, however, reserves the right to use brokers
or dealers under circumstances were it may be required in certain states.
We are not currently a reporting company under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") and therefore we have not
filed any reports with the Securities and Exchange Commission ("Commission").
Upon completion of this offering we intend to register under the Securities Act,
and to furnish to our Security holders annual reports containing audited
financial statements reported on by independent auditors, and quarterly reports
containing unaudited financial information for the first three quarters of each
fiscal year by electronic delivery on our Website at www.YouNetwork.com.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with the more detailed information including "Risk Factors"
and financial statements and the notes relating thereto, which appear elsewhere
in this Prospectus. Unless otherwise indicated, all information included in
this prospectus has been adjusted to reflect the recapitalization and exchange
of each share of Common Stock of YouNetwork Corp., a New York corporation for
330,000 shares of Class C Common Stock of the Registrant, YouNetwork
Corporation, a Delaware corporation. The discussion in this Prospectus contains
certain forward-looking statements. The outcome of events described in such
forward-looking statements is subject to risks and uncertainties. YouNetwork's
actual results may differ materially form those discussed in such
forward-looking statements. Factors that may cause or contribute to such
differences include those discussed in "Risk Factors," "Management's Discussion
And Analysis" and "Business" as well as those discussed elsewhere in this
Prospectus.
YOUNETWORK CORPORATION
YouNetwork is a development stage company which is poised to launch a
unique and novel on line Consumer Network. By combining the virtues of
cooperative marketing with incentives designed to reward a Member's purchasing
influence, the Consumer Network will seek to develop a sizeable membership base
(without entry fees), and to distinguish itself from the emerging wave of
direct Internet marketing companies which are seeking to tap the rapidly
developing market for Internet commerce.
YouNetwork has developed proprietary tracking technology, which will
be utilized to track the referrals of a YouNetwork Member, and to pay rebates
to a Member based on purchases made by a Member and such referrals. Each Member
of our Consumer Network may sponsor an individual for membership in our
Consumer Network by sending an e-mail invitation or providing a sponsor code to
a Member referred individual.
A Member will receive a rebate based upon purchases he or she makes as
well as the purchases made by a new Member who they refer (a direct referral).
A Member will also receive rebates based upon purchases by any indirect
referral, i.e., an individual who is referred to YouNetwork by the Member's
direct referral. A Member's referral is tracked to the fifth level of referral.
By way of example, a Member who is being tracked (the Tracked Member) refers
Member number one (first level referral); Member number one refers Member
number two (second level referral); Member number two refers Member number
three (third level referral); Member number three refers Member number four
(fourth level referral) and Member number four refers Member number five (fifth
level referral). Rebates will be credited to the account of the Tracked Member
for purchases made by first level referrals based upon a designated rebate
percentage. A rebate at descending percentage rates will be credited to the
account of a Tracked Member for purchases made by the second through fifth
level referrals.
When a Member or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded as a Member's pending rebate
balance. The pending rebate balance is not available to the Member until the
transaction has been confirmed and the applicable time period in which a
product may be returned has elapsed, which varies from 5 to 40 business days.
The pending rebate balance is then transferred to a Member's available rebate
balance. A Member can choose to receive any portion of the available rebate
balance in the form of cash, use it to purchase other products or services or
apply the rebate balance to purchase Class B Shares at the purchase price of
$1.00 of available rebate dollars. For example, if a Member purchased a book on
our Website for $20.00 with a $1.25 rebate, and YouNetwork has a 30-day return
policy on its books, the $1.25 rebate is recorded in the Member's pending
rebate balance. If the product is not returned within 30 days and the
transaction confirmed, the $1.25 is transferred from the Member's pending
balance to his or her available rebate balance.
The rebate percentages for each direct referral of a Member, and each
indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as a NetValue). The
first 250,000 individuals who register as a Consumer Network Member will be
allotted one Class A Share each at no cost. The remaining 750,000 Class A Shares
will be distributed to a Member based on a Member's Net Value. Net Value will
also determine a Member's entitlement to future Network promotions. No Shares
will be distributed for fractional Net Value points.
CLASS A SHARE.
We will distribute one Class A Share (for an aggregate of 250,000
Class A Shares) to each of the first 250,000 Members of our Consumer Network at
no cost. The remaining 750,000 Class A Shares will be distributed to Members
based on their Net Value. Each Member will receive one Class A Share for each
whole point of
6
<PAGE>
NetValue they achieve as a result of direct and indirect referrals, until such
time as all the 750,000 Class A Shares have been distributed. By way of
example, a Member achieving a NetValue of 5.3 will receive five Class A shares
and a Member achieving a NetValue of 6.6 will receive six Class A shares.
Record ownership of a Class A Share shall be made by bookkeeping
entry. A Member shall receive confirmation of his or her ownership in an
uncertificated share by e-mail. Members who request a stock certificate to
evidence their ownership in a Class A or Class B Share shall be charged a
nominal fee for shipping and handling. We will distribute the Class A Shares to
our Members until such time as all the Class A Shares included in the
registration statement, of which this prospectus forms a part, are fully
distributed.
CLASS B SHARE.
When a Member or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded in a Member's pending rebate
balance. A rebate is transferred to a Member's available rebate balance,
approximately 5 to 40 business days after the transaction has been confirmed,
and the applicable return period has elapsed. A Member can request his or her
available rebate in the form of cash, use it to purchase a product or service,
or to purchase a Class B Share at the purchase price of $1.00 of available
rebate dollars. The rebate percentage for each direct referral of a Member and
each indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as a NetValue). We
will distribute the Class B Shares to our Members until such time as all the
Class B shares included in the registration statement, of which this prospectus
forms a part, are fully distributed.
Record ownership of a Class B Share shall be made by bookkeeping
entry. A Member shall receive confirmation of his or her ownership in an
uncertificated share by e-mail. Members who request a stock certificate to
evidence their ownership in a Class A or Class B Share shall be charged a
nominal fee for shipping and handling. We will distribute Class B Shares to our
Members until such time as all the Class B Shares included in the registration
statement, of which this prospectus forms a part, are fully distributed.
The following table illustrates how NetValue and available rebate
dollars may be used by a Member to receive Class A and Class B Shares. The
table assumes the following: (i) six direct referrals, (ii) the direct
referrals make an average of three referrals each, (iii) indirect referrals
have an average of three referrals each; and (iv) each Member spends an average
of $75.00.
<TABLE>
<CAPTION>
=============================================================================================================================
AVERAGE NUMBER TOTAL GROSS
THIS EXAMPLE SHOWS PROJECTED REBATES AND NUMBER OF OF INDIRECT GROSS VOLUME AVAILABLE REBATE
NETVALUE FOR A SINGLE MEMBER ASSUMING THE DIRECT REFERRALS PER PER MEMBER REBATE DOLLARS PER
VARIABLES ON THE RIGHT FOR ONE YEAR. REFERRALS MEMBER PERCENTAGE MEMBER
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
6 3 $75.00 10.0% $7.50
=============================================================================================================================
REBATE REBATES PER TOTAL
LEVEL REBATE RATE NUMBER OF NET VALUE DISTRIBUTION LEVEL OF REBATES PER
REFERRALS PERCENTAGE REFERRAL LEVEL
=============================================================================================================================
MEMBER 0.40 1 0.40 40.0% $3.00 $3.00
=============================================================================================================================
DIRECT REFERRAL ONE 0.07 6 0.42 7.0% $0.53 $3.15
=============================================================================================================================
INDIRECT REFERRAL TWO 0.06 18 1.08 6.0% $0.45 $8.10
=============================================================================================================================
INDIRECT REFERRAL THREE 0.05 54 2.70 5.0% $0.38 $20.25
=============================================================================================================================
INDIRECT REFERRAL FOUR 0.04 162 6.48 4.0% $0.30 $48.60
=============================================================================================================================
INDIRECT REFERRAL FIVE 0.03 486 14.58 3.0% $0.23 $109.35
--- ----- ---- -------
=============================================================================================================================
TOTALS: 727 25.66 65.0% $192.45
=============================================================================================================================
CLASS A SHARES (ONE CLASS A SHARE FOR EACH POINT OF NETVALUE)....................................................25 Shares
=============================================================================================================================
CLASS B SHARES WHICH MAY BE PURCHASED(ONE CLASS B SHARE FOR EACH $1.00 OF AVAILABLE REBATE BALANCE).............192 SHARES
=============================================================================================================================
</TABLE>
By offering the first 250,000 Class A Shares to the first 250,000
consumers who registers to become a Consumer Network Member, by offering the
remaining 750,000 Class A Shares to our Members based upon their NetValue, and
with competitively priced products and purchase incentives in the form of
rebate dollars, we believe that we can develop an innovative online sales
channel with low customer acquisition costs. The key elements of our approach
are: (i) to utilize the cost-effective direct marketing capabilities of the Web
to sell products to our customer base; (ii) to offer equity participation to
rapidly attract a sizeable membership base; (iii) to develop a detailed
7
<PAGE>
member database; (iv) to continue to grow online reach and membership utilizing
our proprietary Tracking technology; and (v) to provide customer convenience
and competitive prices to encourage purchasing.
All product fulfillment and post sale services will be provided by our
vendor affiliates ("Vendors"). We will not maintain an inventory in any product
line which we market. All return policies will be posted on our web site www.
YouNetwork.com under our help desk section.
We believe that promoting repeat usage and membership loyalty through
equity ownership in YouNetwork will help establish us as a preferred
destination among Web users.
This Prospectus contains product names, trade names and trademarks of
other organizations, which are the property of their respective owners.
YouNetwork Corp. was incorporated in the State of New York on January 14, 1998,
and was subsequently merged into YouNetwork Corporation, a Delaware corporation
on February 3, 1999. The principal executive offices of YouNetwork are located
at 220 East 23rd Street, Suite 607 New York, New York 10010, and its telephone
number at this address is (212) 576-2030. YouNetwork maintains a website at
www.YouNetwork.com. The website is currently under development and will be
operational before this Offering is made to our Members. Nothing contained on
such website should be construed as a part of this Prospectus.
This Prospectus includes statistical data regarding the Internet
industry. Such data is taken or derived from information published by sources
including Jupiter Research, Visa International Studies and Ziff-Davis Marketing
Intelligence. Although YouNetwork believes that such data are generally
indicative of the matters reflected therein, such data may be imprecise and
investors are cautioned not to place undue reliance on such data.
This is neither a solicitation to buy nor an offer to sell to persons
in the following jurisdictions: Alaska, South Carolina, Florida and West
Virginia, and no purchase of these securities by persons in these jurisdictions
is authorized.
8
<PAGE>
THE OFFERING
SECURITIES OFFERED............................... 1,000,000 shares of Class A
Common Stock and 1,000,000
shares of Class B Common
Stock. We are distributing
the first 250,000 Class A
Shares to the first 250,000
new Members of our Consumer
Network at no cost, our
remaining 750,000 Class A
Shares will be distributed
to Members based on Net
Value. Our Class B Shares
are offered to our Members
at a price of $1.00 per
share. Class B Shares may
only be paid with rebates
accumulated by our Members.
See "Description of
Securities."
SHARES OF COMMON STOCK
OUTSTANDING BEFORE OFFERING...................... 41,159,452
SHARES OF COMMON STOCK
OUTSTANDING AFTER OFFERING..................... 43,159,452
LOCK UP PERIOD..................................... A holder of our Class A
Shares shall not, directly
or indirectly, offer, sell,
pledge, grant any option to
purchase, or otherwise sell
or dispose of any Class A
Shares for a period of 12
months after the date of
this Offering. After 12
months from the date of
this Offering, one Class A
Share shall be
automatically converted
into one Class B share.
NO PROCEEDS........................................ No proceeds will be
received by YouNetwork from
the sale of our Class A or
Class B shares. See
"Management's Discussion
and Analysis-No Proceeds
From The Sale of Class A or
Class B Shares."
RISK FACTORS....................................... The Securities offered
hereby are highly
speculative and involve a
high degree of risk.
Prospective investors
should carefully review and
consider the factors set
forth under "Risk Factors"
as well as all other
information contained
herein.
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below as of December 31,
1998, and for the period from inception (January 14, 1998), to December 31,
1998, was derived from the audited financial statements of YouNetwork
Corporation (formerly known as YouNetwork Corp.) appearing elsewhere herein.
The summary should be read in conjunction with Management's Discussion and
Analysis, the financial statements of YouNetwork and the related notes to the
financial statements, each appearing elsewhere in this prospectus.
FOR THE PERIOD FROM
INCEPTION (JANUARY 14, 1998) TO
DECEMBER 31, 1998(1)
--------------------
OPERATING STATEMENT INFORMATION:
<TABLE>
<CAPTION>
<S> <C>
REVENUES............................................................................................ $-
EXPENSES..................................................................................... (160,848)
OPERATING LOSS............................................................................. (160,848)
INTEREST EXPENSE................................................................................(1,975)
NET LOSS DURING THE DEVELOPMENT STAGE...................................................... $(162,823)
NET LOSS PER COMMON SHARE, BASIC AND DILUTED.................................................... $(.01)(2)
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING
BASIC AND DILUTED.................................................................. 24,798,750 (2)
BALANCE SHEET INFORMATION: DECEMBER 31, 1998
-----------------
CASH.................................................................................... $178,068
WORKING CAPITAL DEFICIT.................................................................. (57,363)
TOTAL ASSETS............................................................................. 299,034
CAPITAL LEASE OBLIGATIONS, EXCLUDING CURRENT PORTION..................................... 25,554
STOCKHOLDERS' EQUITY....................................................................... 37,377
</TABLE>
(1) On February 3, 1999, YouNetwork Corp., a New York corporation merged into
the registrant, YouNetwork, a Delaware corporation. All shareholders of
YouNetwork Corp. exchanged their shares of Common Stock in YouNetwork
Corp. for shares of Class C Common Stock of the registrant, YouNetwork
Corporation at $.0001 par value per share on a basis of 330,000 shares of
YouNetwork Corporation for each outstanding share of YouNetwork Corp. The
reason for the merger was to take advantage of the laws of the State of
Delaware.
(2) These amounts have been retroactively adjusted to reflect the merger on
February 3, 1999.
10
<PAGE>
RISK FACTORS
The Securities offered hereby are highly speculative in nature and
involve a high degree of risk. Therefore each prospective investor should
consider very carefully certain risks and speculative factors inherent in and
affecting the business of YouNetwork prior to the purchase of any of the
Securities offered hereby, as well as all of the other matters set forth
elsewhere in this prospectus.
LACK OF OPERATING HISTORY; ANTICIPATED FUTURE LOSSES.
YouNetwork was incorporated on January 14, 1998, under the name
YouNetwork Corp., a New York corporation. Pursuant to a Merger effective
February 3, 1999, YouNetwork Corp. merged into the registrant, YouNetwork
Corporation, a Delaware corporation. The purpose of the merger is to take
advantage of the laws of the state of Delaware. YouNetwork has not yet
generated any revenue. To date, we have devoted our efforts to various
organizational activities, including our effort to build out our Website and to
develop our proprietary Tracking technology. As a result, we have no operating
history upon which you can evaluate YouNetwork. Our business must be considered
in light of the risks, expenses and problems frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets such as online commerce and the Internet. Set
forth below is a brief summary of risks, expenses and problems frequently
encountered by companies such as YouNetwork:
(i) Our inability to develop, maintain and/or
increase levels of traffic on the YouNetwork site;
the failure by us to develop the YouNetwork brand;
our inability to attract or retain Members; our
inability to generate significant Web-based commerce
revenue from our Members; our failure to anticipate
and adapt to a developing market; and the level of
use of the Internet and online services for the
purchase of consumer products.
(ii) YouNetwork's ability to upgrade and develop a
system and infrastructure and ability to attract new
personnel in a timely and effective manner; the
inability to effectively manage rapidly expanding
operations; the level of traffic on our Web site;
the failure of our server and networking systems to
efficiently handle our Web traffic; technical
difficulties and system downtime or Internet
brownouts; and the amount and timing of operating
costs and capital expenditures relating to expansion
of our business, operations and infrastructure.
(iii) The level of merchandise returns experienced
by YouNetwork; its competition and dependence on the
Internet; and the introduction and development of
different or more extensive electronic-commerce
networks by direct and indirect competitors,
particularly in light of the fact that most of such
competitors are much larger and have greater
financial, technical and marketing resources than
YouNetwork.
(iv) Governmental regulation and general economic
conditions and economic conditions specific to the
Internet and the online commerce industry.
To address these risks YouNetwork must, among other things, develop,
maintain and increase its membership base, continue to develop and upgrade its
technology, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance we will be successful
in addressing such risks, and any failure to do so could have a material
adverse effect on our business, results of operations and financial condition.
As of December 31, 1998, YouNetwork had an accumulated deficit of
$162,823, and we anticipate that we will incur net losses for the foreseeable
future. The extent of these losses will be dependent, in part, on our ability
to attract and build a membership base, to generate sales, and to offer
products and services at competitive prices. We expect our operating expenses
to increase, especially in the areas of sales and marketing and brand
promotion, and, as a result, we will need to commence operations and generate
revenue if profitability is to be achieved. Although we intend to develop our
marketing of products and services, no assurance can be given that we will be
able to achieve these objectives or that, if these objectives are achieved, we
will ever be profitable. To the extent that net revenue does not grow at
anticipated rates, or that increases in operating expenses are not followed by
commensurate increases in net revenue, or that we are unable to adjust
operating expense levels accordingly, YouNetwork's business, results of
operations and financial condition will be materially and adversely affected.
There can be no assurance that our operating losses will not increase in the
future or that we will ever achieve or sustain profitability. The establishment
of our operations is contingent upon our success in establishing markets for
11
<PAGE>
our products and services and achieving profitable operations.
UNPREDICTABILITY OF FUTURE NET REVENUE.
We have not generated any revenue to date and will not generate any
revenue until we commence sales of products and services to persons who become
Members of our Consumer Network. We believe that once we commence our marketing
operations, future operating results may fluctuate significantly as a result of
a variety of factors, many of which are outside of our control. These factors
include demand for the products and services we sell through the Consumer
Network, consumers' acceptance of electronic-commerce and, in particular,
direct e-mail marketing as a medium for the purchase of goods and services, the
level of traffic on the YouNetwork site, the amount and timing of capital
expenditures and other costs relating to the expansion of our operations, the
introduction of new or enhanced services by us or our competitors, the
availability of desirable products and services for sale through our Web site,
the loss of a key Vendor contract or relationship by us, technical difficulties
with the YouNetwork site, general economic conditions, and economic conditions
specific to the Internet or all or a portion of the technology market.
As a result of our lack of operating history, we have no meaningful
historical financial data upon which to base planned operating expenses. Our
expense levels are based in part on our expectations as to future revenue from
sales of products and services, and anticipated growth in membership. Sales and
operating results from product sales generally depend on the volume, timing and
ability to fulfill orders received, which are difficult to forecast. There can
be no assurance that we will be able to accurately predict our net revenue,
particularly in light of the intense competition for the sale of products and
services on the Web, and the uncertainty as to the broad acceptance of the Web
as a commerce medium. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any failure by us to
accurately make such predictions would have a material adverse effect on our
business, results of operations and financial condition.
RISKS OF CAPACITY CONSTRAINTS; SYSTEM FAILURES; TECHNOLOGICAL RISKS.
The performance of our server and networking hardware and software
infrastructure is critical to our business and our ability to attract Web users
and New Members to YouNetwork's Web site. Any system failure that causes an
interruption in service or decrease responsiveness of our Web site could impair
our ability to attract and retain Members. Any disruption in Internet access or
any failure of our server and networking systems to handle Member orders would
have a material adverse effect on our business, results of operations and
financial condition. Despite our implementation of network security measures,
our servers will be vulnerable to computer viruses, break-ins, and similar
disruptions from unauthorized tampering.
We will carry business interruption insurance but not a secondary
"off-site" system or a formal disaster recovery plan. We will also carry a
"Data Loss Insurance Policy" when our Web site is operational to cover any
losses as a result of certain security breaches; however, a system failure
would have a major adverse affect on the performance of our services. The
occurrence of any of these events could result in interruptions, delays or
cessations in service, which could have a material adverse effect on our
business, results of operations and financial condition. Moreover, our
reputation and the YouNetwork brand could be materially and adversely affected.
See "Management Of Growth And Relationships; Brief Tenure Of Management;
Dependence On Key Personnel."
SECURITY RISKS.
YouNetwork plans to implement reasonable security measures to prevent
any physical or electronic break-ins or attacks to its facilities and system
and to minimize the effect of such if it were to occur. These measures include
daily comprehensive backups of the systems, firewall implementation and
isolation of frontline systems to only serve World Wide Web (http) connections
wherever possible and deemed necessary. As a business that depends on access of
our systems by numerous unidentified remote client machines and servers, our
systems will always be vulnerable to attacks and disruption of services and
damages by various sources. No assurances can be given by us regarding the
security liability of YouNetwork in case of loss or damages, physical or
electronic. YouNetwork currently does not anticipate expending funds
specifically for the purpose of preventing security breaches; however, future
growth of our infrastructure may be funded by additional financing, which will
include maintaining the above-mentioned security measures in the foreseeable
future.
We may experience attempts by intruders or "hackers" to penetrate our
network security, some of which may succeed. If successful, such actions could
have a material adverse effect on our business, results of operations
12
<PAGE>
and financial condition. A party who is able to penetrate our network security
could misappropriate proprietary information or cause interruptions to our Web
site. We may be required to expend significant capital and resources to protect
against the threat of such security breaches or to alleviate problems caused by
such breaches.
Concerns over the security of Internet transactions and the
privacy of users may also inhibit the growth of the Internet generally,
particularly, as a means of conducting commercial transactions. Security
breaches or the inadvertent transmission of computer viruses could expose us to
a risk of loss or litigation and possible liability.
We will carry business interruption insurance but not a secondary
"off-site" systems or a formal disaster recovery plan. We will also carry a
"Data Loss Insurance Policy" when our Web site is operational to cover any
losses as a result of certain security breaches.
There can be no assurance that contractual provisions attempting to
limit our liability in such areas will be successful or enforceable, or that
other parties will accept such contractual provisions as part of our
agreements, which could have a material adverse effect on our business, results
of operations and financial condition.
DISRUPTIVE PROBLEMS.
Despite our implementation of network security measures, our servers
are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptive problems. Computer viruses, break-ins or other problems
caused by third parties could lead to interruptions, delays or cessation in
service to users of our services and products. We investigate compromised
networks and attempt to identify perpetrators of security breaches. We will
have a Data Loss Insurance Policy to cover our Website once it is operational.
The Data Loss Policy will insure our Consumer Network from the threat of
security breaches. We currently have business interruption insurance to cover
any interruption to our data. Any of these risks could have a negative effect
on our business, results of operations and financial condition.
RISK OF RELIANCE ON INTERNALLY DEVELOPED SYSTEMS.
We will use an internally developed system for our Web site and
substantially all aspects of our transaction processing and order management
systems. Reliability and efficiency of our system remains untested since we
have not, with the exception of beta testing, commenced operating our Consumer
Network. Moreover, our lack of operational experience and our inability to
modify this system as necessary to accommodate increased traffic on our Web
site or increased volume through our transaction processing systems may result
in system disruptions, slow response times, impaired quality and speed of order
fulfillment, and delays in reporting accurate financial information. Any of
these events could have a material adverse effect on our business, results of
operations and financial condition.
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE; DEPENDENCE ON DIRECT SALES.
Our future success is substantially dependent upon continued growth in
the use of the Internet and the Web. Use of the Internet as a means of
effecting retail transactions is at an early stage of development, and demand
and market acceptance for retail marketing over the Internet is uncertain. We
will be dependent on electronic-commerce revenue as our sole source of revenue.
We cannot predict the extent to which consumers will be willing to shift their
purchasing habits from traditional retailers to online retailers. The Internet
may not prove to be a viable commercial marketplace for a number of reasons,
including lack of acceptable security technologies, inconsistent quality of
service and lack of availability of cost-effective, high-speed service. If the
use of the Internet does not continue to grow or grows more slowly than
expected, YouNetwork's business, financial condition and results of operations
may be adversely affected.
RELIANCE ON VENDOR AFFILIATIONS.
We will be totally dependant on Vendors and distributors for all of
our product and service fulfillment, and we have no fulfillment operation or
facility of our own. As a result, we will need to establish and maintain
relationships and affiliations with a broad array of Vendors and distributors
in order to offer our Members a broad based product mix at competitive and
discounted prices. There can be no assurance that we will successfully
establish and, if established, maintain relationships and affiliations with
Vendors and distributors on terms satisfactory to us. An unanticipated
termination of our relationship with any Vendor or distributor could materially
adversely affect our results of operations even if we were able to establish a
relationship with an alternative Vendor. To the extent that Vendors and
distributors do not have sufficient capacity and/or are unable to satisfy on a
timely
13
<PAGE>
basis our requirements, our business and results of operations may be
materially adversely affected.
In addition, the success of our Consumer Network will be dependent
upon the ability of Vendors and distributors who will supply our products and
services to supply adequate amounts of inventory on a timely basis. We will not
maintain an inventory in any product line which we market. The failure of
Vendors and distributors to meet their commitments would have a material
adverse effect on YouNetwork's business, results of operations and financial
condition.
SALES TAX COLLECTION.
We do not intend to collect sales or other similar taxes in respect to
shipments of goods into states other than New York State. One or more states
may seek to impose sales tax collection obligations on an out-of-state company
such as YouNetwork which engage in online commerce. A successful assertion by
one or more states that we should collect sales or other similar taxes on the
sale of merchandise could have a material adverse effect on our business,
prospects, financial condition and results of operations.
See "--Government Regulation And Legal Uncertainties."
MANAGEMENT OF GROWTH AND RELATIONSHIPS; BRIEF TENURE OF MANAGEMENT; DEPENDENCE
ON KEY PERSONNEL.
We may experience rapid growth, which may place a significant strain
on our managerial, financial and operational resources. We will be required to
manage multiple relationships with various Members, Vendors distributors and
other third parties. These requirements will be strained in the event of rapid
growth of YouNetwork or in the number of third party relationships, and there
can be no assurance that our systems, procedures or controls will be adequate
to support our operations, or that our management will be able to manage any
growth effectively.
Our performance will be substantially dependent on the performance of
our executive officers, Kyle S. Taylor (President), and Don S. Senerath (Chief
Executive Officer), who have worked together only a short period of time, and
on the merchandising and marketing personnel we intend to hire. The loss of the
services of either of our executive officers could have a material adverse
effect on our business, results of operations and financial condition.
Competition for senior management, experienced media sales and marketing
personnel, qualified Web engineers and other employees is intense, and there
can be no assurance that we will be successful in attracting and retaining such
personnel. Our failure to successfully manage our personnel requirements would
have a material adverse effect on our business, results of operations and
financial condition. We currently have Key-Man life insurance policies covering
the life of Mr. Taylor and Mr. Senerath in the amount of $1,000,000 and
$3,000,000, respectively. Currently we do not have any employment agreements
with our employees or key personnel; however, Messrs. Taylor and Senerath are
subject to certain terms of an agreement among YouNetwork, Taylor and Senerath.
"See Executive Compensation - Agreements".
14
<PAGE>
YEAR 2000 COMPLIANCE.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. We believe that our
products and internal systems are year 2000 compliant.
Our systems are built upon multiple layers of third party software and
hardware components. A system failure that originates in one or more of these
layers may affect the performance and accuracy of computations carried out by
our systems as a whole. No assurances have been given to us by Vendors or third
parties which supply us with components regarding the Year 2000 compliance.
We are currently conducting a survey without Vendors and third party suppliers,
which may or may not uncover a potential source of a year 2000 non-compliance
problem. We cannot represent that our systems are fully and completely Year
2000 compliant although efforts are being made to minimize the possibility of
such a failure. Our efforts to become year 2000 compliant are as follows:
1. Where data corruption issues are concerned, we have instituted a full scale
24 hour archival process where the data archives are maintained.
2. Windows NT Basic Input Output System Year 2000 compliance is under review.
3. We are currently requesting Year 2000 compliance and certification of
compliance from database vendors and third party application server software
vendors. No assurances have been given to us regarding full
15
<PAGE>
certification by any of our Vendors. We will be maintaining readiness data and
upgrading if possible and if deemed necessary.
4. We estimate the cost of system re-engineering based on any Year 2000
non-compliance to reach a maximum of $2,000,000. This estimate is based on
hardware purchases and application of software patches as well as the worst
case replacement of the YouNetwork infrastructure system within a one month
period. Our cost of system re-engineering based on Year 2000 non-compliance is
as follows: (a) systems survey from $ 40,000 - $60,000; hardware systems
upgrade and swapping from $ 0.00 to $1,200,000; (c) software re-writing from
$40,000 to $400, 000; and (d) miscellaneous administrative costs from $20,000
to $300,000.
The 2,000,000 cost reflects the maximum out of pocket expense
that we believe is necessary if our Year 2000 non-compliance survey finds that
100% of our system and hardware and software assets are Year 2000
non-compliant. Our cost for Year 2000 non-compliant subsystems will be a
minimum of approximately $100,000; however, our source of funds for
re-engineering based on any year 2000 non-compliance, which may reach a maximum
of $2,000,000, will be from future private or public financing. There can be no
assurance that we will be able to raise the necessary financing to assure Year
2000 compliance or that financing will be available in amounts or on terms
acceptable to us, if at all. See "Risk Factors--Future Capital Needs;
Uncertainty Of Additional Financing."
5. Our ongoing survey and investigation is expected to conclude by June of
1999. All YouNetwork database Vendors and third party application server
software vendors that YouNetwork maintains a data transfer relationship with
will be treated as Year 2000 non-compliant until such time as these entities
provide us with written confirmation of Year 2000 compliance.
INTENSE COMPETITION.
The market for electronic commerce networks on the Internet is new and
rapidly evolving, and competition for members, consumers visitors and vendors
is intense and is expected to increase significantly in the future. Barriers to
entry are relatively insubstantial. We believe that the principal competitive
factors for companies seeking to create electronic commerce networks on the
Internet are critical mass, functionality, brand recognition and member
affinity and loyalty. We could also face competition in the future from Web
directories, search engines, shareware archives, content sites, commercial
online service providers, sites maintained by Internet service providers,
traditional media companies and other entities that attempt to or establish
electronic commerce networks on the Internet by developing their own community
or acquiring one of our competitors. There can be no assurance that our
competitors and potential competitors will not develop electronic commerce
networks that are equal or superior to ours or that achieve greater market
acceptance than our Consumer Network.
Most of our existing and potential competitors have relatively long
operating histories in the Web market, name recognition, large customer bases
and significantly greater financial, technical and marketing resources.
Competitors are able to undertake more extensive marketing campaigns for their
brands and services, adopt more aggressive advertising pricing policies and
make more attractive offers to potential employees, commerce companies, and
Vendors. Our competitors will be perceived by vendors as having more desirable
Web sites for placement of their goods or services. In addition, we expect all
of our current Vendors will have established collaborative relationships with
certain of our competitors or potential competitors, and other high-traffic Web
sites. Therefore, there can be no assurance that we will be able to grow our
membership base, traffic levels and Vendor customer base to the extent
necessary to generate sufficient net revenues to successfully operate our
Consumer Network; that competitors will not experience greater growth in
traffic than YouNetwork as a result of such relationships, which could have the
effect of making their Web sites more attractive to Vendors; or that Vendors
will not sever or elect not to renew their relationships with YouNetwork. There
can also be no assurance we will be able to compete successfully against our
current or future competitors or that competition will not have a material
adverse effect on our business, results of operations and financial condition.
See "Business--Competition."
16
<PAGE>
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT AND LIABILITY
FOR ONLINE CONTENT.
We regard our technology such as Tracking and Net Value as
proprietary, and will attempt to protect it by relying on trademark, service
mark and trade secret laws and other methods. We also intend to enter into
confidentiality agreements with our employees and consultants. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
technology independently. We have recently submitted an application to register
the servicemark, "YouNetwork" with the United States Patent and Trademark
Office.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of YouNetwork. There can be no
assurance that the steps we take have prevented or will prevent
misappropriation or infringement of our proprietary information. Any such
infringement or misappropriation, should it occur, might have a material
adverse effect on our business, results of operations and financial condition.
There can be no assurance that our business activities will not or
have not infringed upon the proprietary rights of others, or that other parties
will not assert infringement claims against YouNetwork. Such claims and any
resultant litigation, should it occur, might subject YouNetwork to significant
liability for damages and might result in invalidation of YouNetwork's
proprietary rights, and even if not meritorious, could be time consuming,
expensive to defend, and result in the diversion of management time and
attention, any of which might have a material adverse effect on our business,
results of operations and financial condition.
We currently license from third parties certain databases incorporated
into our Web site. As we continue to introduce new services that incorporate
new technologies, we may be required to license additional technology from
others. There can be no assurance that these third-party technology licenses
will continue to be available to YouNetwork on commercially reasonable terms,
if at all. Our inability to obtain any of these technology licenses could
result in delays or reductions in the introduction of new services or could
adversely affect the performance of our existing services until equivalent
technology is identified, licensed and integrated. Insurance carried by
YouNetwork may not be sufficient to offset liability arising from delays or
resolutions in our services, and any liability in excess of such coverage could
have a material adverse effect on YouNetwork. See "Business--Intellectual
Property And Proprietary Rights, and Year 2000 Compliance."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.
We are not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to commerce
on the Internet. Moreover, due to the increasing popularity and use of the
Internet, a number of legislative and regulatory proposals are under
consideration by federal, state, local governmental organizations, and it is
possible that a number of laws or regulations may be adopted with respect to
the Internet relating to such issues as user privacy, taxation, infringement,
pricing, quality of products and services and intellectual property ownership.
The adoption of any such laws or regulations may decrease the growth in the use
of the Internet, which could in turn decrease the demand for our community,
increase our cost of doing business, or otherwise have a material adverse
effect on our business, results of operations and financial condition. The
applicability to the Internet of existing laws governing issues such as
property ownership, copyright, trademark, trade secret, obscenity, libel and
personal privacy is uncertain and developing. Any new legislation or
regulation, or application or interpretation of existing laws, could have a
material adverse effect on our business, results of operations and financial
condition. Government legislation could hamper the growth in use of the Web
generally and decrease the acceptance of the Web as a communications and
commercial medium, and could, thereby, have a material adverse effect on our
business, results of operations and financial condition. In addition, a number
of proposals have been made at the federal, state and local level that would
impose additional taxes on the sale of goods and services over the Internet and
certain states have taken measures to tax Internet-related activities.
Because materials may be downloaded by Members and other users of the
our Web site, and subsequently distributed to others, there is a potential that
claims will be made against YouNetwork for defamation, negligence, copyright or
trademark infringement, personal injury or other theories based on the nature,
content, publication and advertising of such materials. Such claims have been
brought, sometimes successfully, against online service providers in the past.
In addition, the increased attention focused upon liability issues as a result
of these lawsuits and legislative proposals could impact the overall growth of
Internet use. We could also be exposed to liability with
17
<PAGE>
respect to the offering of third party content that may be accessible through
our Web site. Such claims might include, among others, that by directly or
indirectly providing hyperlink text links to Web sites operated by third
parties, we are liable for copyright or trademark infringement or other
wrongful actions by such third parties through such Web sites. It is also
possible that if any third-party content information provided on our Web site
contains errors, third parties could make claims against YouNetwork for losses
incurred in reliance on such information. Even to the extent such claims do not
result in liability, we could incur significant costs in investigating and
defending against such claims. The imposition on YouNetwork of potential
liability for information carried on or disseminated through our systems could
require us to implement measures to reduce our exposure to such liability,
which may require the expenditure of substantial resources and limit the
attractiveness of our services to Members and users. Although we carry general
liability insurance, it may not cover all potential claims to which we are
exposed or may not be adequate to indemnify us for all liability that may be
imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition. In addition, the
increased attention focused upon liability issues as a result of these lawsuits
and legislative proposals could impact the overall growth of Internet use.
The Federal Trade Commission and most states prohibit certain types of
multi-level sales programs. The statutes in question generally prohibit sales
promotions that require a participant to give consideration in exchange for the
opportunity to receive remuneration for soliciting more participants or buyers.
We believe such laws have no application to our Consumer Network rebate
program; however, there are certain states namely: Alaska, South Carolina,
Florida and West Virginia, which prohibit the sharing of any consideration
among participants in multi-level sales programs. Although residents of such
states will not be accepted as Members of our Consumer Network, there can be no
assurance that the YouNetwork rebate program will not be subject to challenge
in other states where we intend to do business.
NO PROCEEDS FROM THE SALE OF CLASS A OR CLASS B SHARES.
YouNetwork will not receive proceeds from the sale of its Class A or
Class B shares. One Class A Share will be offered to each of the first 250,000
Members at no cost. The remaining 750,000 Class A Shares will be offered to a
Member based on each Member's Net Value. A Class B Share in this Offering is
offered to a Member at a rate of one share for each $1.00 of a Member's rebate
balance. A rebate balance is created when a Member is credited for the value of
the product or service purchased on our Web site. A Member may choose to have a
percentage of their rebate balance paid to them in cash, to purchase additional
products or services or to purchase a Class B Share in this Offering. If a
Member chooses to purchase a Class B Share with his or her rebate dollars, the
rebate balance will be debited $1.00 for each Class B Share purchased. Since a
rebate balance is a liability owed by YouNetwork to its Members, the purchase
of Class B Shares will offset our outstanding liability to those Members who
choose to purchase Class B Shares with their rebate dollars. If a Member
chooses to purchase a Class B share with rebate dollars - we will not have to
provide a cash rebate and his or her rebate balance will be reduced. We
currently anticipate that we have sufficient capital to meet our needs for
working capital and capital expenditures for at least the next 6 months. After
6 months we will need to raise additional funds through a private or public
offering of our Securities in order to fund our operations while we build our
customer base. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. See "Risk Factors--Future
Capital Needs; Uncertainty Of Additional Financing."
NO PRIOR PUBLIC MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF STOCK PRICE.
Prior to the Offering, there has been no public market for the
Securities, and we presently do not intend to apply to have the Securities
listed. Our Class A and Class B Shares will not be listed upon completion of
this Offering. A limited market may develop on the over the counter bulletin
board after completion of this Offering, of which there can be no assurance.
Even if such a market developed, it would still be more difficult for an
investor to dispose of, or obtain quotations as to the Securities offered
hereby rather than a security traded on the NASDAQ small cap market or a
national securities exchange.
The initial public offering price of the Class B Shares has been
arbitrarily determined by YouNetwork and is not necessarily related to our
assets, book value, results of operations, or any other established criteria of
value. There can be no assurance that an active trading market for the Class A
Shares (which are subject to a Lock-Up Period of 12 months) or the Class B
Shares will develop, or be sustained if developed following the closing of the
Offering, or that the market price of the Class B Shares will not decline below
the initial public offering price.
In addition, the stock market in general and the technology and
Internet sectors in particular have experienced extreme price and volume
fluctuations, which have affected the market price for many companies in
industries similar or related to that of YouNetwork, and been unrelated to the
operating performance of these
18
<PAGE>
companies. These market fluctuations, as well as general economic, political
and market conditions, may have a material adverse effect on the market price
of our Securities. In the past, following periods of volatility in the market
price of company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, if instituted, and
irrespective of the outcome of such litigation, could result in substantial
costs and a diversion of management's attention and resources, and have a
material adverse effect on our business, results of operations and financial
condition.
PENNY STOCK REGULATION.
We have not applied to have the Securities listed on any market and do
not presently intend to do so. We may in the future apply to have the
Securities listed on the Nasdaq Small Cap market. A limited market may develop
on the over the counter bulletin board after completion of this Offering, of
which there can be no assurance. Even if such a market developed, it would
still be more difficult for an investor to dispose of, or obtain quotations as
to the Securities offered hereby rather than a security traded on the NASDAQ
small cap market or a national securities exchange.
If we do not satisfy Nasdaq listing or maintenance requirements then
we may list the shares of Common Stock to be traded subject to certain "penny
stock" rules promulgated by the Securities and Exchange Commission. Under such
rules, broker\dealers who recommend such securities to persons other than
established customers and accredited investors, must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
The Commission has adopted regulations that generally define a "penny
stock" to be an equity security that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share subject to certain
exceptions. Such exceptions include equity securities listed on Nasdaq and
equity securities issued by an issuer that has: (i) net tangible assets of at
least $2,000,000, if such issuer has been in continuous operation for more than
three years, or (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a risk of disclosure schedule
explaining the penny stock market and the risks associated therewith.
SHARES ELIGIBLE FOR FUTURE SALE.
Upon completion of this Offering, YouNetwork will have outstanding
43,159,452 shares of Common Stock Consisting of: (a) 1,000,000 shares of Class
A Common Stock; (b) 1,000,000 shares of Class B Common Stock; and (b)
41,159,452 shares of Class C Common Stock.
Of the 43,159,452 issued and outstanding shares of our Common Stock,
approximately 41,159,452 shares of Class C Common Stock may be deemed
"restricted shares." The "restricted" shares were issued by YouNetwork in
private transactions in reliance upon one or more exemptions contained in the
Securities Act of 1933, as amended (the "Act"). Restricted securities may, in
the future, be sold in compliance with Rule 144 under the Act.
Rule 144 provides that a person holding restricted securities for a
period of one year may sell in brokerage transactions an amount equal to 1% of
our outstanding Common Stock every three months. A person who is a
"non-affiliate" of YouNetwork and who has held restricted securities for over
two years is not subject to the aforesaid volume limitations as long as the
other conditions of the Rule are met. Possible or actual sales of our Common
Stock by certain of our present Stockholders under Rule 144 may, in the future,
have a depressive effect on the price of our Common Stock in any market which
may develop for such shares. See "Description of Capital Stock-Shares Eligible
for Future Sale." Such shares would be eligible for sale within one year under
Rule 144 (subject to certain volume restrictions and other conditions imposed
thereby) commencing February 4, 2000.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS.
Upon completion of the Offering, the directors, executive officers and
principal stockholders of YouNetwork, will in the aggregate, beneficially own
approximately 73.7% of the outstanding Common Stock. As a result, these
stockholders will possess significant influence over YouNetwork, giving them
the ability, among other things, to elect a majority of our Board of Directors
and approve significant corporate transactions. Such share ownership and
control may also have the effect of delaying or preventing a change in the
control of YouNetwork,
19
<PAGE>
impeding a merger, consolidation, takeover or other business combination
involving YouNetwork or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of YouNetwork, which could have
a material adverse effect on the market price of our securities.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING.
We currently anticipate that we have sufficient capital to meet our
needs for working capital and capital expenditures for at least the next 6
months. After 6 months we will need to raise additional funds through a private
or public offering of our securities in order to fund our operations while we
build our customer base. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of the
Stockholders of YouNetwork will be reduced, Stockholders may experience
additional dilution and such securities may have rights, preferences or
privileges senior to those of the rights of YouNetwork's securities. There can
be no assurance that additional financing will be available on terms favorable
to YouNetwork, or at all. If adequate funds are not available or not available
on acceptable terms, YouNetwork may not be able to fund its future operations,
promote its brand as it desires, take advantage of unanticipated acquisition
opportunities, develop or enhance services or respond to competitive pressures.
Any such inability could have a material adverse effect on our business,
results of operations and financial condition. We currently have no revenue and
do not expect to have any revenue until we commence operations following this
Offering.
DIVIDEND POLICY.
We have never declared or paid any cash dividends on our capital stock
to date and do not anticipate paying any cash dividends on our capital stock in
the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth: (1) the historical capitalization YouNetwork
Corp. as of December 31, 1998, and YouNetwork Corporation as of February 3,
1999; (2) pro forma effect of the issuance of 6,680,000 shares of Class C
Common Stock of YouNetwork Corporation through Private Placements in March and
April 1999 for consideration of $1,488,000 and the issuance of 1,479,452 shares
of Class C Common Stock of YouNetwork Corporation to certain shareholders of
YouNetwork Corporation in accordance with anti-dilutive provisions of a
stockholders' agreement; (3) pro forma capitalization after giving effect to
the merger of YouNetwork Corp. into YouNetwork Corporation on February 3, 1999,
and issuance of 330,000 shares of Class C Common Stock of YouNetwork
Corporation for each share of Common Stock of YouNetwork Corp. then
outstanding; and (4) as adjusted for: (a) the issuance of 1,000,000 shares of
Class A Common Stock for no cash proceeds with an assigned value of $.50 per
share based on YouNetwork's most recent private placements of its Common Stock,
(b) the issuance of 1,000,000 shares of Class B Common Stock for no cash
proceeds, and (c) offering costs of approximately $157,000.
This table should be read in conjunction with the financial statements of
YouNetwork Corp., and the related notes thereto, and other financial
information included in this prospectus. See "Use of Proceeds", "Dividend
Policy", and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
YouNetwork Pro Forma YouNetwork
(Historical) Adjustments Pro Forma As Adjusted
-------------------------------------------------------
(1) (2&3) (3) (4)
<S> <C> <C> <C> <C>
Long-term liabilities:
Capital lease obligation $25,554 $ - $25,554 $25,554
Stockholders' Equity:
Common Stock, no par value; 200 shares authorized;
100 shares issued and outstanding YouNetwork
Corp. (historical), no shares issued and outstanding
pro forma and as adjusted 200,200 (200,200) - -
Class A Common Stock, $.0001 par value, 1,500,000
shares authorized; no shares issued and outstanding
YouNetwork Corporation (historical) and 1,000,000
Shares issued and outstanding as adjusted - - - 100
Class B Common Stock, $.0001 par value, 1,500,000
shares authorized, no shares issued and outstanding
YouNetwork Corporation (historical) and 1,000,000
shares issued and outstanding as adjusted - - - 100
Class C Common Stock, $.0001 par value, 247,000,000
shares authorized; no shares issued and outstanding
YouNetwork Corporation (historical); 41,159,452
issued and outstanding pro forma and as adjusted - 4,116 4,116 4,116
Additional-paid-in-capital - 1,684,084 1,684,084 2,026,884
Accumulated Deficit (162,823) - (162,823) (662,823)
------------------------------------------------------
Total stockholder's equity 37,377 $1,488,000 1,525,377 1,368,377
------------------------------------------------------
Total capitalization $62,931 $1,488,000 $1,550,931 $1,393,931
======================================================
</TABLE>
Note: YouNetwork will not receive net proceeds from the sale of its Class A
or Class B shares. One Class A Share will be offered to each of the
first 250,000 Members at no cost. The remaining 750,000 Class A Shares
will be offered to a Member based on each Member's Net Value. Class B
Shares in this Offering is offered to a Member at a rate of one share
for each $1.00 of a Member's rebate balance. A rebate balance is
created when a Member is credited for a percentage of the value of
products or services purchased on our Web site. A Member may choose to
have their rebate balance paid to them in cash, purchase additional
products or services or purchase Class B Shares in this Offering. If a
Member chooses to purchase Class B Shares with his or her rebate
dollars, the rebate balance will be reduced $1.00 for each Class B
Share purchased. Since a rebate balance is a liability owed by
YouNetwork to its Members, the purchase of a Class B Share will offset
an outstanding liability to those Members who choose to purchase a
Class B Share with their rebate dollars.
21
<PAGE>
DILUTION
Members of YouNetwork who receive our shares of Class A Common Stock will
experience no dilution in their investment since they will receive their shares
for no monetary payment. Members' who purchase our shares of Class B Common
Stock will experience immediate and substantial dilution in the net tangible
book value of their investment. The difference between the initial public
offering price per share of Class B Common Stock and the net tangible book
value per share of common stock after this offering constitutes the dilution
per share of Class B Common Stock to investors in this offering. Net tangible
book value per share is determined by dividing the net tangible book value or
total tangible assets less total liabilities by the number of outstanding
shares of common stock. As of December 31, 1998, we had a net tangible book
value of $37,377, approximately $.001 per share of common stock. If we give
effect to the distribution of 1,000,000 shares of Class A Common Stock for no
monetary payment, and 1,000,000 shares of Class B Common Stock, at an assumed
initial public offering price of $1.00 per share, the net tangible book value
on December 31, 1998 would have been $880,377, or $.025 per share. This
represents an immediate increase in the net tangible book value of
approximately $.024 or an increase of 2,121% per share to existing stockholders
and an immediate dilution of $.975 per share or 97.5% to new investors in Class
B Common Stock. The following table illustrates the per share dilution assuming
the distribution of 1,000,000 shares of Class A Common Stock for no monetary
consideration and the sale of 1,000,000 shares of Class B Common Stock for
$1.00 per share to be paid by a debit to a Member's rebate balance.
Assumed initial public offering
price per share for Class B Common Stock............................ $1.00
Net tangible book value
per share as of December 31, 1998................................... $0.001
Increase per share attributable
to this offering.................................................... $0.024
Net tangible book value per share
after this offering................................................. $0.025
Dilution per share to new investors in Class B Common Stock......... $0.975
The following table summarizes, as of December 31, 1998, the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid by existing stockholders and by new investors.
Average
Shares Purchased Total
Consideration
Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
Existing
Stockholders (1)(2) 33,000,000 94.28% $ 200,200 19.19% $0.01
New Investors
(Class B Common Stock) 1,000,000 2.86 843,000 80.81 0.83
(Class A Common Stock) 1,000,000 2.86 - - -
-----------------------------------------
Total 35,000,000 100.00% $1,043,200 100.00%
=========================================
1. Adjusted to reflect the merger of YouNetwork Corp. into YouNetwork
Corporation on February 3, 1999, and the issuance of 330,000 shares of
Class C Common Stock of YouNetwork Corporation for each share of
Common Stock of YouNetwork Corp., then outstanding. The purpose of the
merger is to take advantage of the laws of the state of Delaware.
2. Does not include 6,680,000 shares of Class C Common Stock of
YouNetwork Corporation for consideration of $1,488,000, issued in
Private Placements in March and April of 1999, and 1,479,452 shares of
Class C Common Stock of YouNetwork Corporation issued to certain
stockholders in accordance with anti-dilutive provisions of a
stockholders' agreement.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of the financial condition and
results of operations of YouNetwork should be read in conjunction with, and is
qualified in its entirety by, the more detailed information including the
"Summary Financial Information" and our Financial Statements and the Notes
thereto included elsewhere in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in the forward-looking
statements. Factors that may cause or contribute to such differences include
those discussed in "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW.
YouNetwork is a development stage company, which is poised to launch a
unique on line Consumer Network. Our Consumer Network will offer a broad range
of consumer products and services through our Web site, www. YouNetwork.com.
Our Web site is currently under development and will be operational before the
offer of the Securities in this Offering.
We believe that our Consumer Network is unique in that we will utilize
our proprietary tracking technology to track the referrals of a YouNetwork
Member, and to pay rebates to a Member based on his or her purchases and the
purchases made by such referrals. Each Member of our Consumer Network may
sponsor an individual for membership in our Consumer Network by sending an
e-mail invitation or providing a sponsor code to a Member referred individual.
A Member will receive a rebate based upon purchases he or she makes as
well as the purchases made by a new Member who they refer (a direct referral).
A Member will also receive rebates based upon purchases by any indirect
referral, i.e., an individual who is referred to YouNetwork by the Member's
direct referral. A Member's referral is tracked to the fifth level of referral.
By way of example, a Member who is being tracked (the Tracked Member) refers
Member number one (first level referral); Member number one refers Member
number two (second level referral); Member number two refers Member number
three (third level referral); Member number three refers Member number four
(fourth level referral) and Member number four refers Member number five (fifth
level referral). Rebates will be credited to the account of the Tracked Member
for purchases made by first level referrals based upon a designated percentage
of the rebate. A rebate at descending percentage rates will be credited to the
account of a Tracked Member for purchases made by the second through fifth
level referrals.
When a Member, or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded as a Member's pending rebate
balance. The pending rebate balance is not available to the Member until the
transaction has been confirmed and the applicable time period in which a
product may be returned has elapsed, which varies from 5 to 40 business days.
The pending rebate balance is then transferred to a Member's available rebate
balance. A Member can choose to receive any portion of the available rebate
balance in the form of cash, use it to purchase other products or services, or
apply the rebate balance to purchase Class B Shares at the purchase price of
$1.00 of available rebate dollars. For example, if a Member purchased a book on
our Website for $20.00 with a $1.25 rebate, and YouNetwork has a 30-day return
policy on its books, the $1.25 rebate is recorded in the Member's pending
rebate balance. If the product is not returned within 30 days and the
transaction confirmed, the $1.25 is transferred from the Member's pending
balance to his or her available rebate balance.
The rebate percentage for each direct referral of a Member, and each
indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as NetValue), within
the membership of YouNetwork. One Class A Share will be offered at no cost to
the first 250,000 individuals who register to become a Consumer Network Member.
The remaining 750,000 Class A Shares will be distributed to Members based on
their Net Value. Net Value will also determine a Member's entitlement to future
Network promotions.
Currently, we have contracted with two distributors, Muze, Inc. and
Baker & Taylor, Inc., to sell computer hardware and software, books, music,
video products, consumer electronics. We will also provide long-distance
service through our arrangement with Qwest International, Inc.
A YouNetwork Member will purchase our products with a major credit
card by providing the requested information from our Web site. We will only
sell our products through our YouNetwork Web site. Once we have received the
necessary information, and confirmed the order from our purchasing Member, we
will electronically transfer the order to a third-party distributor. The
distributor will fulfill the order directly to our purchasing Member by
delivery of a product through the U.S. mail or courier service. The sale of a
consumer product will be recognized
23
<PAGE>
by us as revenue.
Members may also register to receive our long distance telephone
service through our Web site. A Member who requests long distance service
through our Web site will be billed directly by our service provider,
currently, Qwest International, Inc. Qwest will pay us $5.00 for each newly
installed Qwest subscriber. Commissions are payable by Qwest approximately 45
days following the end of the month in which collected revenue is collected, or
billed revenue is billed. See "License and Vendor Arrangements"
All product fulfillment and post sale services will be provided by our
distributors. We will not maintain an inventory in any products which we
market. As a result, the costs of our operations will be limited to data
management and front-end site development, product merchandising and general
office and administration. We believe our costs will remain relatively fixed,
while our membership and revenues grow. It is expected that our margins will be
limited as we build our initial membership base and grow as our membership base
increases. It is expected that we will operate at a loss in the foreseeable
future as we develop our operating system, infrastructure and market the
YouNetwork site. We have sufficient cash requirements to operate our YouNetwork
site for the next six months. We may seek to raise additional funding through a
private placement or another public offering. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at all.
See "Risk Factors--Future Capital Needs; Uncertainty Of Additional Financing."
By offering the first 250,000 of our Class A Shares at no cost to each
consumer who registers to become a Consumer Network Member, offering the
remaining 750,000 Class A Shares for NetValue; offering our Class B shares to
each Member for a purchase price of $1.00, which may only be paid with rebates
a Member may earn by making purchases on our Consumer Network, and by offering
competitively priced products and purchase incentives in the form of cash
rebates, we believe that we can develop an innovative online sales channel with
low customer acquisition costs. The key elements of our approach are: (i) to
utilize the cost-effective direct marketing capabilities of the Web to sell
products to our customer base; (ii) to offer equity participation to rapidly
attract a sizeable membership base; (iii) to develop a detailed member
database; (iv) to continue to grow online reach and membership utilizing our
proprietary Tracking technology; and (v) to provide customer convenience and
competitive prices to encourage purchasing.
We believe that promoting repeat usage and membership loyalty through
equity ownership in YouNetwork will help establish us as a preferred
destination among Web users.
We were incorporated on January 14, 1998 (formerly known as YouNetwork
Corp.), and have not yet commenced offering products or services for sale.
Since our inception we have been primarily engaged in the development of our
computer software programs, negotiating agreements with our Vendors, raising
capital, and initial planning and development of the YouNetwork site and
operations. As a result, there has not been any operating revenue generated by
utilization of our services or products through December 31, 1998.
We have funded our activities primarily from equity financing in the
amount of $1,688,000, and from an advance of commissions from Qwest
International Inc. in the approximate amount of $175,000. We will continue to
require substantial funding to continue development of activities and to
commence sales and marketing efforts. Our capital requirements will depend on
many factors, including the problems, delays, expenses and complications
frequently encountered by development stage companies; the progress and costs
associated with our development of our computer software, future research,
marketing or other funding arrangements; the availability of qualified
personnel; the success of our sales and marketing programs; and changes in
economic, regulatory or competitive conditions of our planned business.
Our future net revenues will be generated from electronic-commerce,
primarily through the sale of products and services on our Web site through our
Vendor affiliations. Our increase in total net revenue will be primarily due to
expansion in our Membership base, resulting in electronic-commerce revenue; and
Web-based Vendor revenue. As we grow, our operating expenses will increase, and
we expect that our operating expenses will continue to increase as a result of
increased sales and marketing efforts, increased funding of site development,
technology and operating infrastructure, and the increased general and
administrative staff needed to support our growth.
As of December 31, 1998, we had an accumulated deficit of $162,823.
Moreover, we anticipate that we will incur net losses for the foreseeable
future. The extent of these losses will be contingent, in part, on the amount
and rates of growth in our net revenue from electronic-commerce and our Vendor
affiliations. We expect our operating expenses to increase significantly,
especially in the areas of sales and marketing and brand promotion, and, as a
result, we will need to generate increased quarterly net revenue if
profitability is to be achieved. We believe that our operating results are not
meaningful and that the results for any period should not be relied upon as
24
<PAGE>
an indication of future performance. To the extent that net revenue does not
grow at anticipated rates or that increases in our operating expenses precede
or are not subsequently followed by commensurate increases in net revenue, or
that we are unable to adjust operating expense levels accordingly, our
business, results of operations and financial condition will be materially and
adversely affected. There can be no assurance that our operating losses will
not increase in the future or that we will ever achieve or sustain
profitability. See "Risk Factors--Limited Operating History; No Assurance Of
Profitability; Anticipated Losses."
To date, we have entered into Vendor affiliations, license
arrangements and strategic alliances in order to build our electronic commerce
networks.
On March 6, 1998, we entered into an agreement with Qwest International
Inc., a successor in interest to LCI International Telecom Corp. ("Qwest") to
solicit orders for long distance service. Qwest will pay us a 10% commission on
toll revenue generated by our Members during the term of the Agreement and up to
a maximum of 24 months following termination of the Agreement. The commission is
currently 10% of collected revenue defined as an inter-exchange toll actually
collected by Qwest relating to the services sold by YouNetwork (excluding taxes,
installation charges, subscription fees and local loops) for those subscribers
who remain on the Qwest service a minimum of 30 days. If in any month
disconnects of subscribers sold within the first 30 days the service is sold by
YouNetwork meet or exceeds 15% of those active subscribers sold within that same
30 day period, and if after notice from Qwest of the unacceptable disconnect
percentage, YouNetwork fails to meet the established disconnect percentage
within 30 days of the notice, Qwest may terminate the Agreement, and no usage
commission will be payable by Qwest. The industry standard for such disconnects
average 15% of subscribers within the first three months of the date service is
sold to a subscribers, 12% for the three months after the initial three month
period, and 7% for each month thereafter.
Qwest advanced YouNetwork approximately $175,000 as of December 31,
1998. Commissions earned for the referral of customers will be offset against
these advances. Advances made in excess of commissions earned are offset
against advances payable by YouNetwork on the earlier of the termination of the
Agreement or twelve months from the date of the Agreement. Each party may
terminate this Agreement at any time during a renewal term upon 30 days prior
written notice. Qwest may cancel this Agreement if we fail to attain the agreed
upon monthly revenue volume from our subscribers discussed above.
In July 9, 1998, we entered into a non-exclusive license with Baker &
Taylor, Inc. ("B&T"), which distributes books, spoken word audio products and
provides certain value added services. B&T gives us the ability to provide
access to its proprietary data base to our Members. Under the terms of the
Agreement we will pay B&T a license fee of $1,000 for the use of the data base
for each year we use it. We will also pay a subscription fee each year of
$1,650.
The fees were payable to B&T in July 9, 1998, and are due each year
thereafter up to July 2000, at which time the Agreement is subject to
negotiation. B&T may increase the fee at its option after giving notice to
YouNetwork. We can terminate this agreement for any reason by giving 30 days
prior written notice. The Agreement is automatically renewed for two
consecutive periods of one year ending on July 2002.
In January 4, 1999, we also entered into a non-exclusive license with
Muze, Inc. for us to gain access to music, video and book databases for a one
year period, which will renew automatically for successive one year periods
unless either party notifies the other in writing to terminate the agreement at
least (60) days before the end of the term of any successive term. Pursuant to
the Agreement, we must pay a license fee of $1,000 per music, video and book
database. The fee was due and paid on March 1, 1999.
In order to increase reach and membership, we intend to continue to
seek additional strategic relationships with our license arrangements and
Vendor affiliates and distributors, including, alliances that create co-branded
sites through which YouNetwork markets its services. Vendor affiliations carry
numerous risks and uncertainties, including risks of entering business markets
in which we have none or limited prior experience. No assurance can be given as
to our ability to successfully integrate any businesses, products, technologies
or personnel that might be acquired in the future, and the failure to do so
could have a material adverse effect on our business, results of operations and
financial condition. In addition, there can be no assurance that we will be
successful in identifying potential Vendor affiliation candidates.
Our Vendor affiliations provide for order fulfillment directly to our
customers. We will not maintain an inventory in any product line which we
market. There are inherent risks coordinating with Vendors for order
25
<PAGE>
fulfillment, including but not limited to, product obsolescence, excess
inventory, inventory shortages resulting in unfulfilled orders, which could
materially adversely affect operating results in the future. See "Risk
Factors--Reliance On Vendor Affiliations" and "--Risk Of Reliance On Internally
Developed Systems."
HISTORICAL RESULTS OF OPERATIONS.
From inception, operations have been in the early stages of
development. YouNetwork had no revenues for the period ended December 31, 1998.
YouNetwork incurred expenses of $162,823, consisting of compensation expense,
system development costs and other general and administrative expenses.
Compensation expenses are related to establishing strategic
relationships through license arrangements and vendor affiliations to market
the business. In addition, YouNetwork incurred costs in developing its
proprietary Tracking system as well as other general and administrative
expenses since inception.
As of December 31, 1998, we had U.S. net operating loss carry forwards
for federal income tax purposes of approximately $162,000. There can be no
assurance that we will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforward will expire in the
fiscal year 2013. We have established a valuation allowance with respect to
these federal and state carryforwards. "See Notes to Financial Statements, Note
6."
We expect operating results to fluctuate significantly in the future
as a result of a variety of factors, many of which are outside of our control.
These factors include demand for the products we sell through our Web site,
consumers' acceptance of electronic commerce and, in particular, direct e-mail
marketing as a medium for the purchase of goods and services, the level of
traffic on the YouNetwork site, the amount and timing of capital expenditures
and other costs relating to the expansion of our operations, the introduction
of new or enhanced services by YouNetwork or our competitors, the timing and
number of new hires, the availability of desirable products and services for
sale through our Web site, the accuracy of our predictions regarding optimal
inventory levels for products, the loss of a key Vendor affiliation or
relationship by YouNetwork, changes in our pricing policy or those of our
competitors, the mix of products and services sold by us, engineering or
development fees that may be paid in connection with adding new Web site
development and publishing tools, technical difficulties with the YouNetwork
site, incurrence of costs relating to general economic conditions, and economic
conditions specific to the Internet or all or a portion of the technology
market. As a strategic response to changes in the competitive environment, we
may from time to time make certain pricing, service or marketing decisions or
business combinations that could have a material adverse effect on our
business, results of operations and financial condition. In order to accelerate
the promotion of the YouNetwork brand, we intend to significantly increase our
marketing budget, which could materially and adversely affect our business,
results of operations and financial condition. We expect to experience
seasonality in our business, with user traffic on the YouNetwork site
potentially being lower during the summer and year-end vacation and holiday
periods when overall usage of our Web site is lower. Because Web-based commerce
is an emerging market, additional seasonal and other patterns may develop in
the future as the market matures. Any seasonality is likely to cause quarterly
fluctuations in our operating results, and there can be no assurance that such
patterns will not have a material adverse effect on our business, results of
operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES.
As of December 31, 1998, our principal commitments consisted of
obligations outstanding under operating and capital leases. Although we have no
material commitments for capital expenditures, we anticipate a substantial
increase in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.
Our capital requirements depend on numerous factors, including, market
acceptance of our services, the amount of resources we devote to investments in
YouNetwork electronic-commerce networks, the resources we devote to marketing
and selling our services and our brand promotions and other factors. We have
experienced a substantial increase in our capital expenditures since our
inception consistent with the growth in our operations and staffing; we
anticipate that this will continue for the foreseeable future particularly
relating to our Web site and systems infrastructure. We believe that our
current cash will be sufficient to meet our anticipated needs for working
capital, capital expenditures and business expansion for the next 6 months.
Thereafter, if cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt
securities or to obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. See "Risk Factors--Future
Capital Needs; Uncertainty Of Additional Financing."
26
<PAGE>
NO PROCEEDS FROM THE SALE OF CLASS A OR CLASS B SHARES.
YouNetwork will not receive proceeds from the sale of its Class A or
Class B shares. One Class A Share will be offered to the first 250,000 Members
at no cost. The remaining 750,000 Class A Shares will be offered to a Member
based on each Member' s Net Value. A Class B Share in this Offering is offered
to a Member at a rate of one share for each $1.00 of a Member's rebate balance.
A rebate balance is created when a Member is credited for the value of the
product or service purchased on our Web site. A Member may choose to have a
percentage of their rebate balance paid to them in cash, to purchase additional
products or services or to purchase a Class B Share in this Offering. If a
Member chooses to purchase a Class B Share with his or her rebate dollars, the
rebate balance will be debited $1.00 for each Class B Share purchased. Since a
rebate balance is a liability owed by YouNetwork to its Members, the purchase of
Class B Shares will offset our outstanding liability to those Members who choose
to purchase a Class B Share with their rebate dollars. If a Member chooses to
purchase a Class B share with rebate dollars - we will not have to provide a
cash rebate and his or her rebate balance will be reduced.
YEAR 2000 COMPLIANCE.
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results. We believe that our
products and internal systems are year 2000 compliant.
Our systems are built upon multiple layers of third party software and
hardware components. A system failure that originates in one or more of these
layers may affect the performance and accuracy of computations carried out by
our systems as a whole. No assurances have been given to us by Vendors or third
parties which supply us with components regarding the Year 2000 compliance.
We are currently conducting a survey without Vendors and third party suppliers,
which may or may not uncover a potential source of a year 2000 non-compliance
problem. We cannot represent that our systems are fully and completely Year
2000 compliant although efforts are being made to minimize the possibility of
such a failure. Our efforts to become year 2000 compliant are as follows:
1. Where data corruption issues are concerned, we have instituted a full scale
24 hour archival process where the data archives are maintained.
2. Windows NT Basic Input Output System Year 2000 compliance is under review.
3. We are currently requesting Year 2000 compliance and certification of
compliance from database vendors and third party application server software
vendors. No assurances have been given to us regarding full certification by any
of our Vendors. We will be maintaining readiness data and upgrading if possible
and if deemed necessary.
4. We estimate the cost of system re-engineering based on any Year 2000
non-compliance to reach a maximum of $2,000,000. This estimate is based on
hardware purchases and application of software patches as well as the worst
case replacement of the YouNetwork infrastructure system within a one month
period. Our cost of system re-engineering based on Year 2000 non-compliance is
as follows: (a) systems survey from $ 40,000 - $60,000; hardware systems
upgrade and swapping from $ 0.00 to $1,200,000; (c) software re-writing from
$40,000 to $400, 000; and (d) miscellaneous administrative costs from $20,000
to $300,000.
The 2,000,000 cost reflects the maximum out of pocket expense that we
believe is necessary if our Year 2000 non-compliance survey finds that 100% of
our system and hardware and software assets are Year 2000 non-compliant. Our
cost for Year 2000 non-compliant subsystems will be a minimum of approximately
$100,000; however, our source of funds for re-engineering based on any year 2000
non-compliance, which may reach a maximum of $2,000,000, will be from future
private or public financing. There can be no assurance that we will be able to
raise the necessary financing to assure Year 2000 compliance or that financing
will be available in amounts or on terms acceptable to us, if at all. See "Risk
Factors--Future Capital Needs; Uncertainty Of Additional Financing."
5. Our ongoing survey and investigation is expected to conclude by June of
1999. All YouNetwork database Vendors and third party application server
software vendors that YouNetwork maintains a data transfer relationship with
will be treated as Year 2000 non-compliant until such time as these entities
provide us with written
27
<PAGE>
confirmation of Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for all fiscal periods beginning after June 15, 1999.
SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction and, if it is the type of hedge transaction. Management of the
Company anticipates that due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material impact on the Company's
financial position or results of operations.
BUSINESS
This Prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
discussed in these forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
OVERVIEW.
YouNetwork is a development stage company which is poised to launch a
unique and novel on line Consumer Network. By combining the virtues of
cooperative marketing with incentives designed to reward a Member's purchasing
influence, the Consumer Network will seek to develop a sizeable membership base
(without entry fees), and to distinguish itself from the emerging wave of
direct Internet marketing companies which are seeking to tap the rapidly
developing market for Internet commerce.
YouNetwork has developed proprietary tracking technology, which will
be utilized to track the referrals of a YouNetwork Member, and to pay rebates
to a Member based on purchases made by the Member and Member referrals. Each
Member of our Network may sponsor an individual for membership in our consumer
network by sending an e-mail invitation or providing a sponsor code to the
referred individual.
A Member will receive a rebate based upon purchases he or she makes as
well as the purchases made by a new Member who they refer (a direct referral).
A Member will also receive rebates based upon purchases by any indirect
referral, i.e., an individual who is referred to YouNetwork by the Member's
direct referral. A Member's referral is tracked to the fifth level of referral.
By way of example, a Member who is being tracked (the Tracked Member) refers
Member number one (first level referral); Member number one refers Member
number two (second level referral); Member number two refers Member number
three (third level referral); Member number three refers Member number four
(fourth level referral) and Member number four refers Member number five (fifth
level referral). Rebates will be credited to the account of the Tracked Member
for purchases made by first level referrals based upon a designated percentage
of the rebate. Rebates at descending percentage rates will be credited to the
account of a Tracked Member for purchases made by the second through fifth
level referrals.
When a Member or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded as a Member's pending rebate
balance. The pending rebate balance is not available to the Member until the
transaction has been confirmed and the applicable time period in which a
product may be returned has elapsed, which varies from 5 to 40 business days.
The pending rebate balance is then transferred to a Member's available rebate
balance. A Member can choose to receive any portion of the available rebate
balance in the form of cash, use it to purchase other products or services or
apply the rebate balance to purchase Class B Shares at the purchase price of
$1.00 of available rebate dollars. For example, if a Member purchased a book
for $20.00 with a $1.25 rebate, and YouNetwork has a 30-day return policy on
books, the $1.25 rebate is recorded in the Member's pending rebate balance. If
the product is not returned within 30 days and the transaction confirmed, the
$1.25 is transferred from the Member's pending balance to his or her available
rebate balance.
The rebate percentages for each direct referral of a Member, and each
indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as NetValue). The
first 250,000 individuals who register as a Consumer Network Member will be
allotted one Class A Share each at no cost. The remaining 750,000 Class A
Shares will be distributed to a Member based on a Member's Net Value. Net Value
will also determine a Member's entitlement to future Network promotions. No
Shares will be distributed for a fractional NetValue point.
28
<PAGE>
CLASS A SHARE.
We will distribute one Class A Share (for an aggregate of 250,000
Class A Shares) to each of the first 250,000 Members of our Consumer Network at
no cost. The remaining 750,000 Class A Shares will be distributed to Members
based on their Net Value. Each Member will receive one Class A Share for each
whole point of NetValue they achieve as a result of direct and indirect
referrals, until such time as all the 750,000 Class A Shares have been
distributed. By way of example, a Member achieving a NetValue of 5.3 will
receive five Class A shares and a Member achieving a NetValue of 6.6 will
receive six Class A shares.
Record ownership of a Class A Share shall be made by bookkeeping
entry. A Member shall receive confirmation of his or her ownership in an
uncertificated share by e-mail. Members who request a stock certificate to
evidence their ownership in a Class A or Class B Share shall be charged a
nominal fee for shipping and handling. We will distribute the Class A Shares to
our Members until such time as all the Class A Shares included in the
registration statement, of which this prospectus forms a part, are fully
distributed.
CLASS B SHARE.
When a Member or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded in a Member's pending rebate
balance. A rebate is transferred to a Member's available rebate balance,
approximately 5 to 40 business days after the transaction has been confirmed,
and the applicable return period has elapsed. A Member can request his or her
rebate in the form of cash, use it to purchase a product or service, or to
purchase a Class B Share at the purchase price of $1.00 of available rebate
dollars. The rebate percentage for each direct referral of a Member and each
indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as NetValue).
Record ownership of a Class B Share shall be made by bookkeeping
entry. A Member shall receive confirmation of his or her ownership in an
uncertificated share by e-mail. Members who request a stock certificate to
evidence their ownership in a Class A or Class B Share shall be charged a
nominal fee for shipping and handling. We will distribute Class B Shares to our
Members until such time as all the Class B shares included in the registration
statement, of which this prospectus forms a part, are fully distributed.
By offering the first 250,000 Class A Shares to the first 250,000
consumers who registers to become a Consumer Network Member; by offering the
remaining 750,000 Class A Shares to our Members based upon their NetValue; and
with competitively priced products and purchase incentives in the form of
rebate dollars, we believe that we can develop an innovative online sales
channel with low customer acquisition costs. The key elements of our approach
are: (i) to utilize the cost-effective direct marketing capabilities of the Web
to sell products to our customer base; (ii) to offer equity participation to
rapidly attract a sizeable membership base; (iii) to develop a detailed member
database; (iv) to continue to grow online reach and membership utilizing our
proprietary Tracking technology; and (v) to provide customer convenience and
competitive prices to encourage purchasing.
29
<PAGE>
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET.
The Internet has emerged as a global medium, enabling millions of
people worldwide to share information, communicate and conduct business
electronically. Studies by Jupiter Research report that total
electronic-commerce for the calendar year 1998, reached approximately $200
billion, with consumer commerce estimated at 10 to 15% of that total. Visa
International studies suggest that consumer electronic commerce alone will
reach $100 billion by 2001. Recent studies by Ziff-Davis Market Intelligence
report that more than 23 million United States households are connected to the
Internet and almost 16 million of those are participating in
electronic-commerce. This growth is expected to be driven by the large and
growing number of PCs installed in homes and offices, the decreasing cost of
PCs, easier, faster and cheaper access to the Internet, improvements in network
infrastructure, the proliferation of Internet content and the increasing
familiarity with and acceptance of the Internet by businesses and consumers.
The Internet possesses a number of unique characteristics that differentiate it
from traditional media: a lack of geographic or temporal limitations; real-time
access to dynamic and interactive content; and instantaneous communication with
a single individual or with groups of individuals. As a result of these
characteristics, Web usage is expected to continue to grow rapidly. The
proliferation of users, combined with the Web's reach and lower cost of
marketing, has created a powerful direct sales and marketing channel.
ELECTRONIC-COMMERCE.
The growing adoption of the Web represents a significant opportunity
for businesses to conduct commerce over the Internet. One factor in this
projected growth is the increasing variety of transactions that take place on
the Web. Initially, companies focused on facilitating Internet transactions
between businesses. More recently, however, a number of companies have targeted
business-to-consumer transactions. These companies typically use the Internet
to offer standard products and services that can be easily described with
graphics and text and that do not necessarily require a physical presence for
purchase such as software, books, music CDs, videocassettes, home loans,
airline tickets and online banking and stock trading. The Internet allows these
companies to develop one-to-one relationships with customers without making
significant investments in traditional infrastructure such as retail outlets,
Vendor networks and sales personnel.
THE DIRECT MARKETING OPPORTUNITY OF THE INTERNET.
The same advantages that facilitate the growth of electronic-commerce
and advertising make the Internet a compelling medium for direct marketing
campaigns. Direct marketing over the Internet uses e-mail to reach potential
buyers, potentially offering them a significantly broader selection of products
and services than is available locally. Internet-based direct marketing also
allows marketers to rapidly collect meaningful demographic information and
feedback from consumers and to use this information to tailor new messages
quickly. Registration information typically collected by Web sites, and user
involvement in topical electronic commerce networks of interest, provide
additional demographic information. This offers businesses the chance to
increase the effectiveness of their direct marketing campaigns, which may
translate into higher sales. Moreover, the costs of direct marketing through
e-mail are dramatically lower than those of traditional direct marketing
techniques. As a result, Internet-based direct marketing campaigns can be
profitable at response rates that are a fraction of the rates for traditional
campaigns.
THE YOUNETWORK SOLUTION.
YouNetwork will use the unique characteristics of the Web to
cost-effectively market our products and services and to develop a sizeable
membership base. By offering our Members a variety of competitively priced
branded products offerings, together with purchase incentives, rebates and
equity participation in YouNetwork, we believe that we have created an
innovative online sales channel with low customer acquisition costs. The key
elements of the YouNetwork approach are:
(a) Development of a Detailed Member Database.
We expect to gather a significant base of information about our
Members through registration information, responses to closed end
beta tests and purchasing information obtained from third parties.
As Members join YouNetwork, and as we obtain a purchasing history
data, the level of information regarding YouNetwork's Members will
continue to grow. We intend to use this growing database to target
offers, increase our range of product offerings and encourage future
transactions and involvement
30
<PAGE>
with the YouNetwork site. Information obtained from a Member will be
kept confidential.
(b) Customer Convenience.
YouNetwork intends to provide attractive electronic-commerce
opportunities for potential purchasers. Order processing services
will be available 24 hours a day, seven days a week, which
facilitates on-demand ordering. Purchasers will be able to reach the
YouNetwork site from the home or office. Our Vendors will ship
products directly to a Member's address, without the need to travel
to a store, thereby enhancing convenience, particularly for
customers in rural locations without ready access to retail stores.
(c) Equity Participation.
As part of our promotion to rapidly build membership, we will offer,
at no cost, One Class A share to each of our first 250,000 Members
who have joined our Consumer Network, an additional 750,000 Class A
Shares to our Members based upon their NetValue; and 1,000,000 Class
B Shares to our Members for a purchase price of $1.00 each, which
Class B Shares may only be paid with rebates a Member may earn by
making purchases on our Consumer Network.
We will record all sales of our Class A and Class B Shares by
listing the number of shares owned by a Member on his or her home
page. Record ownership of either a Class A or Class B Share shall be
made by bookkeeping entry. A Member shall receive confirmation of
his or her ownership in an uncertificated share by e-mail. Members
who request a stock certificate to evidence their ownership in a
Class A or Class B Share shall be charged a nominal fee for shipping
and handling. YouNetwork will distribute the Class A and Class B
shares to registered members until such time as all the Class A and
Class B shares are fully distributed.
(d) Net Value.
YouNetwork has developed proprietary tracking technology, which will
be utilized to track the referrals of a YouNetwork Member, and to
pay rebates to the Member based on his or her purchases and the
purchases made by Member referrals.
A Member will receive a rebate based upon purchases he or she makes
as well as the purchases made by a new Member who they refer (a direct
referral). A Member will also receive rebates based upon purchases by any
indirect referral, i.e., an individual who is referred to YouNetwork by the
Member's direct referral. A Member's referral is tracked to the fifth level of
referral. By way of example, a Member who is being tracked (the Tracked Member)
refers Member number one (first level referral); Member number one refers
Member number two (second level referral); Member number two refers Member
number three (third level referral); Member number three refers Member number
four (fourth level referral) and Member number four refers Member number five
(fifth level referral). Rebates will be credited to the account of the Tracked
Member for purchases made by first level referrals based upon a designated
percentage of the rebate. Rebates at descending percentage rates will be
credited to the account of a Tracked Member for purchases made by the second
through fifth level referrals.
When a Member or the Member's direct or indirect referral purchases a
product or service, a cash rebate is recorded as a Member's pending rebate
balance. The pending rebate balance is not available to the Member until the
transaction has been confirmed and the applicable time period in which a
product may be returned has elapsed, which varies from 5 to 40 business days.
The pending rebate balance is then transferred to a Member's available rebate
balance. A Member can choose to receive any portion of the available rebate
balance in the form of cash, use it to purchase other products or services, or
apply the rebate balance to purchase Class B Shares at the purchase price of
$1.00 of available rebate dollars. For example, if a Member purchased a book
for $20.00 with a $1.25 rebate, and YouNetwork has a 30-day return policy on
books, the $1.25 rebate is recorded in the Member's pending rebate balance. If
the product is not returned within 30 days and the transaction confirmed, the
$1.25 is transferred from the Member's pending balance to his or her available
rebate balance.
The rebate percentages for each direct referral of a Member, and each
indirect referral (through the fifth level of referral) are totaled to
determine a Member's word-of-mouth influence (referred to as NetValue), within
the membership of YouNetwork. The first 250,000 individuals who register as a
Member of YouNetwork will be allotted one Class A Share each at no cost . The
remaining 750,000 Class A Shares will be distributed to a Member based on a
Member's Net Value. Net Value will also determine a Member's entitlement to
future Network promotions. No shares will be distributed for a fractional
NetValue point.
31
<PAGE>
By offering the first 250,000 Class A Shares to the first 250,000
consumers who registers to become a Consumer Network Member, by offering the
remaining 750,000 Class A Shares to our Members based upon their NetValue, and
with competitively priced products and purchase incentives in the form of
rebate dollars, we believe that we can develop an innovative online sales
channel with low customer acquisition costs. The key elements of our approach
are: (i) to utilize the cost-effective direct marketing capabilities of the Web
to sell products to our customer base; (ii) to offer equity participation to
rapidly attract a sizeable membership base; (iii) to develop a detailed member
database; (iv) to continue to grow online reach and membership utilizing our
proprietary Tracking technology; and (v) to provide customer convenience and
competitive prices to encourage purchasing.
STRATEGY.
Our objective is to develop a sizeable membership base and to create a
network which will provide consumers with built in incentives to participate in
on line commerce. Key strategies to achieve this objective include:
(a) Focus on Membership Growth.
We plan to increase membership by: (i) providing initial equity
participation through the issuance of Securities in YouNetwork; (ii)
offering a broad and expanding array of products and services at
competitive reduced prices; and (iii) offering incentive rebates
based on Member purchases and purchases by a Member's referrals.
(b) Build Strong Brand Recognition.
We believe that establishing and leveraging the YouNetwork brand is
critical to our ultimate success. We intend to develop our brand
recognition through effective marketing and promotion and improved
customer service.
(c) Promote Repeat Usage and Member Loyalty.
We believe that community-based Web sites have an inherent potential
for creating and retaining a loyal membership base, particularly
when combined with product and service offerings such as those
provided by YouNetwork. We intend to promote repeat usage and Member
loyalty by expanding our product offerings and by creating
incentives to buy through our Consumer Network based upon our rebate
program.
(d) Offer New Products and Services.
Our product offerings will include computer software, computer
accessories and peripherals, consumer electronics, books and music
and entertainment products. We also intend to enter into strategic
alliances with a host of other vendors to provide additional brand
name products and services to YouNetwork.
(e) Maintain and Improve Technological Focus and Expertise.
We believe that highly advanced functionality and performance of the
YouNetwork site are critical to our ultimate success. We are
committed to site reliability and accessibility, and intend to make
continuous enhancements to our technology, such as upgrading and
expanding server and networking infrastructure, increasing fault
tolerance and improving Internet connections. In addition, we intend
to increase the efficiency of our transaction processing and
fulfillment operations, and the sophistication of our direct
marketing campaign management software.
(f) How Visitors Become Members.
To become a Member, a visitor must provide his or her name and
billing address; no fee is required to become a Member. Information
obtained from a Member is treated as confidential.
(g) Converting Membership Into Commerce Revenue.
Following membership registration, a new Member will receive a user
name and a password to enable a Member to log on to our Consumer
Network. As our membership base grows, we will further develop
32
<PAGE>
our Member database enabling us to identify and effectively target
consumers having an affinity for certain products and services.
(h) Purchase of our Class A and Class B Shares.
Members may purchase our Class A and Class B Shares on our Web site
at www. YouNetwork. Com. Our Website is currently under development
and will be operational before this Offering is made to our Members.
Members who purchase Class A Shares will acknowledge on our Web site
that they accept and agree to the Class A Shares Lock-up Period and
their conversion into Class B Shares within 12 months from the date
of this offering. Members who do not agree to be subject to the
terms controlling the Class A Shares will not be sold Class A
Shares.
(i) Delivery of uncertificated Class A and Class B Shares.
We will record each sale of our Class A and Class B Shares, and list
the number of shares owned by a Member, on his or her home page.
Record ownership of our Securities shall be made by bookkeeping
entry. A Member will receive confirmation of his or her ownership in
our Securities by e-mail. Members requesting a Stock Certificate to
evidence their ownership in our Securities will be charged a nominal
fee for shipping and handling.
(j) Delivery of a Final Prospectus
YouNetwork will only offer the Securities in this Offering to those
Members who accept electronic delivery of our final prospectus. A
Member who refuses to accept electronic delivery of our prospectus
will not be offered the Securities in this offering
LICENSE AND VENDOR ARRANGEMENTS.
In July 1998, we entered into a non-exclusive license with Baker &
Taylor, Inc. ("B&T"), which distributes books, spoken word audio products and
provides certain value added services. B&T gives us the ability to provide
access to its proprietary data base to our Members. Under the terms of the
Agreement we will pay B&T a license fee of $1,000 for the use of the data base
for each year we use it. We will also pay a subscription fee each year of
$1,650. The fees were payable to B&T in July 1998, and are due each year
thereafter up to July 2000, at which time the Agreement is subject to
negotiation. B&T may increase the fee at its option after giving notice to
YouNetwork. We can terminate this agreement for any reason by giving 30 days
prior written notice. The Agreement is automatically renewed for two
consecutive periods of one year ending on July 2000.
In January 4, 1999, we also entered into a non-exclusive license with
Muze, Inc. for us to gain access to music, video and book databases for a one
year period which will renew automatically for successive one year periods
unless either parties notifies the other in writing to terminate the agreement
at least (60) days before the end of the term of any successive term. Pursuant
to the Agreement we must pay a license fee of $1,000 per music, video and book
database. The fee was due and paid on March 1, 1999.
On March 6, 1998, we entered into an agreement with Qwest International
Inc., a successor in interest to LCI International Telecom Corp. ("Qwest") to
solicit orders for long distance service. Qwest will pay us a 10% commission on
toll revenue generated by our Members during the term of the Agreement and up to
a maximum of 24 months following termination of the Agreement. The commission is
currently 10% of collected revenue defined as an inter-exchange toll actually
collected by Qwest relating to the services sold by YouNetwork (excluding taxes,
installation charges, subscription fees and local loops) for those subscribers
who remain on the Qwest service a minimum of 30 days. If in any month
disconnects of subscribers sold within the first 30 days the service is sold by
YouNetwork meet or exceeds 15% of those active subscribers sold within that same
30 day period, and if after notice from Qwest of the unacceptable disconnect
percentage, YouNetwork fails to meet the established disconnect percentage
within 30 days of the notice, Qwest may terminate the Agreement, and no usage
commission will be payable by Qwest. The industry standard for such disconnects
average 15% of subscribers within the first three months of the date service is
sold to a subscribers, 12% for the three months after the initial three month
period, and 7% for each month thereafter.
Qwest advanced YouNetwork approximately $175,000 as of December 31,
1998. Commissions earned for
33
<PAGE>
the referral of customers will be offset against these advances. Advances made
in excess of commissions earned are offset against advances are payable by
YouNetwork on the earlier of the termination of the Agreement or twelve months
from the date of the Agreement. Each party may terminate this Agreement at any
time during a renewal term upon 30 days prior written notice. Qwest may cancel
this Agreement if we fail to attain the agreed upon monthly revenue volume from
our subscribers discussed above.
We view our strategic relationships as a key factor in our overall
business strategy; however, there can be no assurance that our Vendor
affiliates will view their relationships with us as significant to their own
business or that they will not reassess their commitment to us in the future.
There can be no assurance that any agreement with a Vendor would be
specifically enforceable by YouNetwork. Our arrangements with our Vendors
generally may be terminated by either party with little notice. There can be no
assurance that these relationships will be successful. In the event that any
one or more of our strategic relationship is discontinued for any reason,
YouNetwork's business, results of operations and financial condition may be
materially adversely affected. In addition, there can be no assurance that
YouNetwork will be successful in establishing additional Vendor relationships.
See "Risk Factors--Reliance On Strategic Relationships."
SALES AND MARKETING.
Our sales and marketing strategy is designed to strengthen awareness
of the YouNetwork brand, increase online traffic, build Member loyalty,
maximize repeat purchases, increase the size and frequency of electronic
commerce transactions and develop additional revenue opportunities.
(a) Marketing the YouNetwork Site.
We expect that the marketing of our services will be primarily by
word-of-mouth and indirect promotions by Members with links to the
YouNetwork site and through the use of our services. We believe that
such relationship marketing (along with our unique equity
participation and rebate incentives) will generate a substantial
amount of additional traffic and new Members. To augment these
marketing efforts, we intend to initiate a more formal and
aggressive brand promotional campaign to enhance membership growth,
and draw additional advertisers and commerce partners. See "Risk
Factors--Reliance On Strategic Relationships."
(b) Product Marketing.
YouNetwork will apply a direct marketing program, modeled after
traditional direct mail campaigns, to generate product sales. As we
gather additional information about our Members, we intend to
further target our offers and increase our range of product
offerings. Information obtained from a Member is treated as
confidential.
WAREHOUSING AND FULFILLMENT.
We will be totally dependant on Vendors and distributors for all of
our product and service fulfillment. We have no fulfillment operation or
facility of our own; accordingly, we will need to establish and maintain
relationships and affiliations with a broad array of vendors and distributors
in order to offer our Members a broad based product mix at competitive and
discounted prices. We will not maintain an inventory in any product line.
We will use automated interfaces for accepting, sorting and processing
orders to enable us to achieve the most rapid and economical purchase and
delivery terms. All of our orders will be processed online. Once we receive an
order, we will send a confirmation by e-mail to the customer. At the end of
each day, we will send all orders to our Vendors and distributors for
processing. Our Vendors and distributors will then pack and ship orders,
providing confirmation to YouNetwork along with UPS shipping information for
all ground-shipped U.S. orders. YouNetwork will forward shipping information by
e-mail to customers, along with a link to UPS for package tracking. There can
be no assurance that we will successfully establish and, if established,
maintain relationships and affiliations with Vendors and distributors on terms
satisfactory to us. See "Risk Factors-Vendor Affiliations."
34
<PAGE>
TECHNOLOGY AND INFRASTRUCTURE.
Our systems are designed for portability, efficiency and growth. Using
state of the art technology from Windows NT and Unix technology we have created
a custom solution that is based on high bandwith access, latest server
technology and redundant storage systems. We have placed an emphasis on
portability of our application modules in order to support the migration of
systems as they encounter the added demand of a fast growing customer base. Our
access to the Internet is re-enforced with multiple support providers and daily
and weekly backups to minimize data loss as a result of system failure. A high
degree of automation is employed to assure quality of service as well as
cost-efficient operation of our system. We continue to monitor and upgrade
components of our infrastructure with the goal of providing highly productive
user experience to our Members. See "Risk Factors--Risks Of Capacity
Constraints; System Failures; Technological Risks" and "Risk Of Reliance On
Internally Developed Systems."
COMPETITION.
The market for electronic-commerce direct selling channels on the
Internet is new and rapidly evolving, and competition for members, consumers
and visitors is intense and is expected to increase significantly in the
future. Barriers to entry are relatively insubstantial. We believe that the
principal competitive factors for companies seeking to create
electronic-commerce networks on the Internet are critical mass, functionality,
brand recognition, member affinity and loyalty, broad demographic focus and
open access for visitors. Other established companies which are primarily
focused on creating electronic-commerce networks on the Internet and with whom
we will compete, include, companies such as: Amazon.com, Value America,
Shopping.com, Buy.com, the NetMarket division of Cendent Corporation, and
Ebay.com. We could also face competition in the future from Web directories,
search engines, shareware archives, content sites, commercial online service
providers, sites maintained by Internet service providers, traditional media
companies and other entities that attempt to or establish electronic-commerce
networks on the Internet by developing their own community or acquiring one of
our competitors. There can be no assurance that our competitors and potential
competitors will not develop electronic-commerce networks that are equal or
superior to us or that achieve greater market acceptance.
Nearly all of our existing and potential competitors, including Web
directories and search engines and large traditional media companies, have
longer operating histories in the Web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than YouNetwork. Such competitors are able to undertake more
extensive marketing campaigns for their brands and services, and make more
attractive offers to potential employees, Vendor affiliates, commerce companies
and third-party content providers. There can also be no assurance that we will
be able to compete successfully against our current or future competitors or
that competition will not have a material adverse effect on our business,
results of operations and financial condition. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We regard our technology as proprietary and attempt to protect it by
relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. We
currently have no patents and we do not anticipate that patents will become a
significant part of our intellectual property in the foreseeable future. We
will enter into confidentiality or license agreements with our employees and
consultants, and we will attempt to limit access by Vendors of our proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. Policing
unauthorized use of our proprietary information is difficult. Legal standards
relating to the validity, enforceability and scope of protection of certain
proprietary rights in Internet-related businesses are uncertain and still
evolving, and no assurance can be given as to the future viability or value of
any proprietary rights of YouNetwork.
EMPLOYEES.
As of December 31, 1998, YouNetwork had three full-time employees and
three part-time employees. Our future success will depend, in part, on our
ability to continue to attract, retain and motivate highly qualified technical
and management personnel, for whom competition is intense. From time to time,
we also employ independent contractors to support our research and development,
marketing, sales and support and administrative organizations. Our employees
are not covered by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
35
<PAGE>
FACILITIES.
Our headquarters are currently located in a leased facility in the
Borough of Manhattan, New York, New York, consisting of approximately 1,000
square feet of office space, which is under a lease that expires April 3, 2003.
We will carry business interruption insurance but not a secondary "off-site"
systems or a formal disaster recovery plan. We will also carry a Data Loss
Insurance Policy when our Web site is operational to cover any losses as a
result of certain security breaches. Our present network operations and
bandwith infrastructure located at our facility is capable of handling expected
customer demand for the next 6 month, after six months we will have to expand
to accommodate expected growth. We will finance expected growth through private
and public financing within the next six months. There can be no assurance we
will be successful in addressing such growth, and any failure to do so could
have a material adverse effect on our business, results of operations and
financial condition. See "Future Capital Needs; Uncertainty of Additional
Financing."
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of YouNetwork and
their respective ages as of April 19, 1999, are as follows:
NAME AGE POSITION
Kyle S. Taylor.............41 President and Director
Don S. Senerath............29 Chief Executive Officer, and Director
Peter R. Silverman.........52 Director
KYLE S. TAYLOR
Kyle S. Taylor has been President of YouNetwork since its inception in
January 1998. After attending the University of Tennessee, Mr. Taylor spent
twelve years in the retail apparel business both working as an executive with a
division of Federated Corporation as well as owning and operating a privately
held retail business. In 1994, Mr. Taylor was hired by Delta Woodside
Industries, a NYSE textile conglomerate, as Vice President of Merchandising
with responsibilities for product development, brand marketing and
merchandising. During his tenure at Delta Woodside he developed and implemented
several marketing campaigns, including a national product launch in conjunction
with Sears Corporation, J.C. Penny, Federated Department Stores and other major
retail accounts. In 1996, Mr. Taylor pursued new opportunities in the On-Line
Marketing. As Marketing Director for Interactive Imaginations, the owners of
Riddler.com and The Commonwealth Network, he was responsible for developing
electronic-commerce programs with on-line retailers and corporate sponsors such
as CitiBank, LCI International, Kodak, America On-line, Barnes & Noble and
others.
DON S. SENERATH.
Don S. Senerath has been Chief Executive Officer of YouNetwork since
its inception in January 1998. Mr. Senerath is also an officer of International
Computing LLC (formerly known as Digital Pulp Technologies LLC), a Manhattan
based new media consulting and development firm which he founded in 1997. In the
last five years, International Computing has developed large scale back-end
electronic-commerce systems for major corporations in the telecom, commercial
capital, entertainment and computer industries. From 1994 through 1997, Mr.
Senerath was employed as the chief engineer at Integrated Media Inc., where he
developed a full scale internet system for Miramax Films, and interactive
television products for Nynex, for which he was awarded the Nynex Quality Award
in 1995. In 1994, Mr. Senerath received a Bachelor of Science degree in
Electrical Engineering and Computer Science from Cornell University, where his
academic research concentrated on the compression and delivery of media with
applications in marketing and distribution.
PETER R. SILVERMAN.
Peter R. Silverman has been a director of YouNetwork since December
1998. Mr. Silverman has been a practicing attorney for over 27 years and has
specialized in the development of start up companies in the Telecom industry.
He is the founding member of the law firm Silverman, Collura, Chernis and
Balzano, P.C. Mr. Silverman received a bachelor of arts degree from George
Washington University in 1967, and a law degree from Brooklyn Law School in
1970.
All Directors hold office until the next annual meeting of the
stockholders and until their successors have been duly elected and qualified.
Executive Officers are elected by and serve at the direction of the Board of
Directors. There are no family relationships among any of the Directors or
Executive Officers of YouNetwork.
DIRECTOR COMPENSATION.
Our directors receive no cash compensation for their services as Board
members or committee members and are not reimbursed for expenses incurred in
connection with attending Board and committee meetings.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation of YouNetwork's Chief Executive Officer and each of the other most
highly compensated executive officers of YouNetwork whose aggregate salary,
bonus and other compensation exceeded $100,000 during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Annual Restricted Securities
Name and Principal Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation
---- ------ ----- ------------ ------ ------------ --------- ------------
Compensation
------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Don S. Senerath,
CEO 1998 $ -0- -0- -0- -0- -0- -0- 89,425
Kyle S. Taylor, 1998 $65,251 -0- -0- -0- -0- -0- -0-
President
</TABLE>
AGREEMENTS.
Currently we do not have any employment agreements with our employees
or key personnel; however, Messrs. Taylor and Senerath are subject to certain
terms of an agreement among YouNetwork, Taylor and Senerath.
Pursuant to a Stock and Warrant Purchase Agreement, dated as of
December 4, 1998 (the "Stock Purchase Agreement") if the employment of
Kyle S. Taylor, (President) or Don S. Senerath (Chief Executive Officer) is
terminated by YouNetwork without substantial cause (as defined in the
Agreement), the terminated executive will receive compensation equivalent to
twelve times his monthly compensation during the month immediately prior to the
termination date, which compensation shall be paid quarterly in advance.
The Stock Purchase Agreement also provides that for a period of two (2)
years from the date of termination of employment, with the exception of
termination by YouNetwork without substantial cause, the terminated executive
will not: (i) directly or indirectly, engage in the business of electronic
commerce with respect to buying or selling of consumer products through a
membership network or buying syndicate which offers its members purchase
incentives or which utilizes programs and/or systems which duplicate or are
similar to the programs and systems which have been developed exclusively by or
for YouNetwork; or (ii) solicit YouNetwork employees or its clients.
International Computing, LLC (formerly known as Digital Pulp
Technologies, LLC), provides software and system integration consultation
services in connection with our efforts to build out our web site and to develop
our proprietary Tracking technology. Don S. Senerath, Chief Executive Officer of
YouNetwork, is an officer and principal member of International Computing. For
the period from inception (January 14, 1998) through December 31, 1998,
YouNetwork paid $89,425 for such consulting services. In March 1999, YouNetwork
entered into an oral agreement with International Computing to continue to
provide software and systems integration consultation services to YouNetwork
and will be paid $50,000 per month for such services through completion of the
proprietary software development. Mr. Senerath has not received a salary from
YouNetwork.
38
<PAGE>
STOCK OPTION PLAN.
In April 1999, we adopted the 1999 Stock Option Plan. The purpose of
the plan is to enable us to attract, retain and motivate key employees,
directors, and consultants, by providing them with stock options. Options
granted under the plan may be either incentive stock options, as defined in
Section 422A of the Internal Revenue Code of 1986, or non-qualified stock
options. We have reserved 2,000,000 shares of Class C common stock for issuance
under the plan. As of the date of this prospectus, no options have been granted
pursuant to the plan.
Our board of directors will administer the plan. Our board has the
power to determine the terms of any options granted under the plan, including
the exercise price, the fair market value if no trading market exists for our
securities, the number of shares subject to the option, and conditions of
exercise. Options granted under the plan are generally not transferable, and
each option is generally exercisable during the lifetime of the holder only by
the holder. The exercise price of all incentive stock options granted under the
plan must be at least equal to the fair market value of the shares of common
stock on the date of the grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our stock, the
exercise price of any incentive stock option granted must be equal to at least
110% of the fair market value on the grant date. The term of all incentive
stock options under the plan may not exceed ten years, or five years in the
case of 10% owners. Our board of directors approve the terms of each stock
option. These terms are reflected in our written stock option agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS.
Our Certificate of Incorporation provides that the liability of the
YouNetwork's directors for monetary damages shall be eliminated to the fullest
extent permissible under the Delaware Business Corporations Act, as amended. We
may enter into indemnification agreements with our directors and officers.
This provision in the Certificate of Incorporation does not eliminate
a director's duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to YouNetwork, for acts or omissions not in good
faith or involving intentional misconduct or knowing violations of law, for
acts or omissions that the director believes to be contrary to the best
interests of YouNetwork or its stockholders, for any transaction from which the
director derived an improper personal benefit, for improper transactions
between the director and YouNetwork and for improper loans to stockholders and
loans to directors and officers. This provision also does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of YouNetwork 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 and
is, therefore, unenforceable.
There is no pending litigation or proceeding involving a director or
officer of YouNetwork as to which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
CERTAIN TRANSACTIONS.
Pursuant to a stockholders' agreement, dated as of December 4, 1998,
among Kyle S. Taylor, Don S. Senerath (the "Management Stockholders"), Dalia
Silverman and Kleopatra Georgiades (the "Original Investors") and YouNetwork;
the Board of YouNetwork, the Management Stockholders and the Original Investors
who presently own 77.3% of YouNetwork's Common Stock, have agreed to vote their
shares of Common Stock to elect a Board of Directors consisting of three
directors one of whom is designated by the Original Investors, and two of whom
are designated by the Management Stockholders. The ratio of directors designated
by the Original Investors to those designated by the Management Stockholders
shall be maintained in the event the Board is increased in number. Pursuant to
the stockholders' agreement, no significant transaction can be approved without
the unanimous approval of all of the directors. A significant transaction is
defined as: (i) any creation of any class of capital stock; (ii) the sale or
issuance of shares of capital stock, warrants or other securities convertible
into or exchangeable for capital stock; (iii) any declaration or issuance of any
dividend; (iv) any transaction or contract with a value of $10,000 or more; (v)
any amendment to or modification of any provision of the Certificate of
Incorporation or By-laws of YouNetwork; (vi) any change in YouNetwork's
auditors; (vii) any consolidation or merger of YouNetwork; (viii) any executive
employment contract; (ix) payment of salaries to any officer at a rate of more
than $85,000 per annum; and (x)
39
<PAGE>
election of officers.
The stockholders' agreement also provides for certain bring along
rights and rights of first refusal among the Management Stockholders and the
Investors with respect to any sale of their shares in YouNetwork. The
stockholders' agreement terminates on December 1, 2010, or such earlier time as
either: (i) the Investors no longer own at least 10% of the Common Stock of
YouNetwork on a fully diluted basis; or (ii) YouNetwork has completed a public
offering of its securities resulting in net proceeds to YouNetwork of at least
$10,000,000.
Pursuant to a December 4, 1998, stock sale agreement among YouNetwork,
the Management Stockholders and the Original Investors (the "Stock Sale
Agreement"), the Original Investors purchased from YouNetwork, for an aggregate
purchase price of $200,000: (i) an aggregate of 8,910,000 shares of Common Stock
(the "Purchased Shares") representing 27% of the issued and outstanding Common
Stock, on a fully diluted basis; and (ii) Options (the "Purchase Options") to
purchase in the aggregate such number of shares of Common Stock, at nominal
consideration, as shall equal, in the aggregate when added to the Purchased
Shares, 27% of the issued and outstanding Common Stock of YouNetwork on a fully
diluted basis, immediately following the sale of additional Common Stock by
YouNetwork in consideration of the first $400,000 of Common Stock sale proceeds
received by YouNetwork following December 4, 1998.
The proceeds from the sale of our shares to the Original Investors
was used for software development in the approximate amount of $68,000, legal
expenses in the amount of $10,000, and $122,000 to salaries, office expenses
and general administrative costs. In March of 1999, the Original Investors
exercised the Purchase Options following a private placement in March of 1999
for the sale of 4,630,000 Class C Shares by YouNetwork to certain accredited
investors for consideration of $463,000. As a result of their March 1999,
exercise of their respective Purchase Options, the Original Investors each
received, 739,726 shares of YouNetwork Class C Common Stock.
Currently we do not have any employment agreements with our employees
or key personnel; however, pursuant to the Stock Sale Agreement if either
Mr. Taylor's or Mr. Senerath's employment with YouNetwork is terminated without
substantial cause (as defined in the Agreement), the terminated executive will
receive compensation equivalent to twelve times his monthly compensation during
the month immediately prior to the termination date, which compensation shall
be paid quarterly in advance.
Under the Agreement, Mr. Taylor and Mr. Senerath have agreed that for a
period of two (2) years from the date of termination of employment, with the
exception of termination by YouNetwork without substantial cause, they will not,
directly or indirectly, engage in the business of electronic commerce with
respect to buying or selling of consumer products through a membership network
or buying syndicate which offers its members purchase incentives or which
utilizes programs and/or systems which duplicate or are similar to the programs
and systems which have been developed exclusively by or for YouNetwork; or (ii)
solicit YouNetwork employees or its clients.
International Computing, LLC (formerly known as Digital Pulp
Technologies, LLC), provides software and system integration consultation
services in connection with our efforts to build out our web site and to develop
our proprietary Tracking technology. Don S. Senerath, Chief Executive Officer of
YouNetwork, is an officer and principal member of International Computing. For
the period from inception (January 14, 1998) through December 31, 1998,
YouNetwork paid $89,425 for such consulting services.
40
<PAGE>
In March 1999, YouNetwork entered into an oral agreement with International
Computing to continue to provide software and systems integration consultation
services to YouNetwork and will be paid $50,000 per month through completion of
the proprietary software. Mr. Senerath has not received a salary from
YouNetwork.
On March 6, 1998, we entered into an agreement with Qwest International
Inc., a successor in interest to LCI International Telecom Corp. ("Qwest") to
solicit orders for long distance service. Qwest will pay us a 10% commission on
toll revenue generated by our Members during the term of the Agreement and up to
a maximum of 24 months following termination of the Agreement. The commission is
currently 10% of collected revenue defined as an inter-exchange toll actually
collected by Qwest relating to the services sold by YouNetwork (excluding taxes,
installation charges, subscription fees and local loops) for those subscribers
who remain on the Qwest service a minimum of 30 days. If in any month
disconnects of subscribers sold within the first 30 days the service is sold by
YouNetwork meet or exceeds 15% of those active subscribers sold within that same
30 day period, and if after notice from Qwest of the unacceptable disconnect
percentage, YouNetwork fails to meet the established disconnect percentage
within 30 days of the notice, Qwest may terminate the Agreement, and no usage
commission will be payable by Qwest. The industry standard for such disconnects
average 15% of subscribers within the first three months of the date service is
sold to a subscribers, 12% for the three months after the initial three month
period, and 7% for each month thereafter.
Qwest advanced YouNetwork approximately $175,000 as of December 31,
1998. Commissions earned for the referral of customers will be offset against
these advances. Advances made in excess of commissions earned are offset
against advances are payable by YouNetwork on the earlier of the termination of
the Agreement or twelve months from the date of the Agreement. Each party may
terminate this Agreement at any time during a renewal term upon 30 days prior
written notice. Qwest may cancel this Agreement if we fail to attain the
agreed upon monthly revenue volume from our Subscribers discussed above.
In February 1999, YouNetwork agreed to issue to Raw Interactive Ltd.
warrants to purchase 100,000 shares of Class C Common Stock in consideration of
certain services to be rendered. The exercise price shall be the lesser of $2.00
per share or 50% of the offering price for which our Common Stock is sold in our
first underwritten public offering of Class C Common Stock, provided said
offering is consummated before the expiration of the exercise period, March, 1,
2001. To date, no warrants have been issued, and no warrants will be used until
consummation of Raw's service. The services to be rendered by Raw Interactive
include graphic design for our web site, design of our corporate image design,
web site navigation development, online presentation design, member page layout
design and front page design.
On February 3, 1999, YouNetwork, a New York corporation ("YNY"),
merged with and into YouNetwork, a Delaware corporation ("YDW"), the surviving
corporation. Pursuant to the Agreement and Plan of Merger between YNY and YDW,
dated February 3, 1999, all Shareholders of YNY exchanged their Common Stock in
YNY for Common Stock of YDW at $.0001 par value, per share on a basis of
330,000 shares of YDW for each outstanding share of YNY. The reason for the
merger was to take advantage of the laws of the State of Delaware.
In March of 1999, and April of 1999, YouNetwork sold 6,680,000 shares
of its Class C common stock for $1,488,000 to accreditd investors. Proceeds from
the private placements will be used for network expansion, equipment upgrades,
and development costs in connection with our proprietary software, Tracking.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to YouNetwork
with respect to beneficial ownership of YouNetwork's Common Stock as of April
19, 1999, and as adjusted for the sale of the Securities offered by this
prospectus, the number and percentage of outstanding shares of common stock
beneficially owned by each person who beneficially owns:
o more than 5% of the outstanding shares of our common stock;
o each of our officers and directors; and
o all of our officers and directors as a group.
Except as otherwise noted, the persons named in this table, based upon
information provided by these persons, have sole voting and investment power
with respect to all shares of common stock owned by them. Unless otherwise
indicated, the address of each beneficial owner is c/o YouNetwork Corporation,
220 East 23rd Street, Suite 607 New York, New York 10010. The percentages shown
after the completion of this offering assumes the sale of the 1,000,000 Class A
Shares and 1,000,000 Class B Shares of our common stock offered in this
prospectus.
<TABLE>
<CAPTION>
Number of
Shares % Beneficially Owned % Beneficially Owned After
NAME AND ADDRESS OF Beneficially Owned Before Offering Offering
Beneficial Owner(1) ----- --------- ---------
- -------------------
<S> <C> <C> <C>
Kyle S. Taylor................ 9,637,500 23.4 % 22.3 %
Don S. Senerath............. 12,575,000 30.6 % 29.1 %
Dalia S.Silverman(2) 4,682,226 11.4 % 10.8 %
Kleopatra Georgiades(3)...... 4,904,726 11.9 % 11.4 %
Spencer Trask Partners....... 4,000,000 9.7 % 9.3 %
All Officers and Directors as a 22,212,500 54.0 % 51.5 %
Group (2 persons)
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock which is issuable: (a) upon the exercise of
a Warrant or Stock Option which is presently exercisable or which becomes
exercisable within 60 days of [_________1999], or (b) upon the exercise of
a Warrant or Stock Option which is presently exercisable or which becomes
exercisable within 60 days of [________, __, 1999], are deemed
outstanding. Percentage of beneficial ownership is based upon 41,159,452
shares of Common Stock outstanding prior to the Offering and 43,159,452
shares of Common Stock outstanding after the Offering, as of [_____ __,
1999]. To YouNetwork's knowledge, except as set forth in the footnotes to
this table and subject to applicable community property laws, each person
named in the table has sole voting and investment power with respect to
the shares set forth opposite such person's name.
(2) Dalia Silverman is the wife of Peter R. Silverman, a director at
YouNetwork. Mr. Silverman disclaims any beneficial ownership in the shares
owned by his wife, Dalia Silverman.
(3) There is no family relationship between Kleopatra Georgiades and any of the
directors or officers of YouNetwork.
DESCRIPTION OF SECURITIES
Upon the closing of the Offering, we will be authorized to issue up
to: (a) 1,500,000 shares of Class A Common Stock; (b) 1,500,000 shares of Class
B Common Stock; and 247,000,000 shares of Class C Common Stock, $.0001 par
value per share. The following summary of certain provisions of the Common
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of YouNetwork's Restated and Amended Certificate of
Incorporation, which is included as an exhibit to the registration statement,
of which this Prospectus is a part, and by the provisions of applicable law.
42
<PAGE>
COMMON STOCK.
As of April 19,1999, there were 41,159,452 shares of Class C Common
Stock outstanding that were held of record by approximately 52 stockholders
(assuming conversion of all Warrants outstanding as of April 19, 1999). There
were no Class A Shares or Class B Shares outstanding as of April 19, 1999.
The holders of Class A, Class B and Class C shares of Common Stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of the stockholders. YouNetwork does not have cumulative voting rights
in the election of directors; accordingly, holders of a majority of the shares
voting are able to elect all of the directors. In the event of a liquidation,
dissolution or winding up of YouNetwork, holders of Common Stock are entitled
to share ratably in all assets of YouNetwork remaining after payment of
liabilities. Holders of Common Stock have no preemptive or other subscription
of conversion rights. There are no redemption or sinking fund provisions
applicable to our Common Stock.
LOCK-UP PERIOD; CONVERSION OF CLASS B SHARES.
A holder of our Class A Shares shall not, directly or indirectly,
offer, sell, pledge, grant any option to purchase, or otherwise sell or dispose
of any Class A Shares for a period of 12 months after the Offering. There are
no exceptions to the Lock-Up period. After 12 months from the date of this
Offering, one Class B Share shall be automatically converted into one Class A
share. Members who purchase Class A Shares will acknowledge on our Web site
that they accept and agree to the Class A Shares Lock-UP Period and its
conversion into Class B Shares before being sold the Class A Shares.
PLAN OF DISTRIBUTION
The Securities are being offered by YouNetwork through its officers. No
selling discounts, commissions or other form of remuneration will be paid in
connection with this Offering. YouNetwork has not made any arrangements with any
broker-dealers to act as an underwriter in connection with the offer and sale of
our Securities.
YouNetwork plans to publish the final prospectus, which is a part of
this Registration statement, on the Internet World Wide Web at
www.YouNetwork.com. YouNetwork will only offer the Securities in this Offering
to those Members who accept electronic delivery of our final prospectus.
Record ownership of Class A and Class B Shares shall be made by
bookkeeping entry. A Member will receive confirmation of his or her ownership
in our uncertificated Securities by e-mail. Members requesting a Stock
Certificate to evidence their ownership in our Securities will be charged a
nominal fee for shipping and handling.
Holders of Class A Shares will not be permitted subject to directly or
indirectly, offer, sell, pledge, grant any option to purchase, or otherwise
dispose of Class A Shares for a period of 12 months after the Offering. After 12
months from the date of this Offering - Class A Shares shall be automatically
converted into Class B Shares.
The price at which the Class B Shares are offered has been established
without independent appraisal by YouNetwork's management and has no
relationship to the book value per share, earnings of YouNetwork, or other
generally accepted measurement of value. No Securities will be offered for the
account of any existing security holder.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after the
Offering could adversely affect the market price of the Common Stock and could
impair YouNetwork's ability to raise capital through the sale of equity
securities. Upon completion of the Offering, YouNetwork will have outstanding
43,159,452 shares of Common Stock.
41,159,452 shares of Class C Common Stock were sold by YouNetwork in
private transactions in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act of 1933, as
amended. Such shares would be
43
<PAGE>
eligible for sale within one year under Rule 144 (subject to certain volume
restrictions and other conditions imposed thereby) commencing February 4, 2000.
Prior to the Offering there has been no public market for the
Securities offered hereby. We have not applied to have the Securities listed on
any market and do not presently intend to do so. We may in the future apply to
have the Securities listed on the Nasdaq Small Cap market. A limited market may
develop on the over the counter bulletin board after completion of this
Offering, of which there can be no assurance. Even if such a market developed,
it would still be more difficult for an investor to dispose of, or obtain
quotations as to the Securities offered hereby rather than a security traded on
the NASDAQ small cap market or a national securities exchange.
The purchase price of the Class B Shares has been arbitrarily
determined by YouNetwork and is not necessarily related to our assets, book
value, results of operations, or any other established criteria of value. There
can be no assurance that an active trading market for the Securities will
develop or be sustained following the closing of the Offering.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as amended,
authorizes YouNetwork to indemnify any director or officer under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceedings, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of YouNetwork if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of YouNetwork's Certificate of Incorporation
provides for the indemnification of directors and officers to the full extent
permitted by Delaware law.
YouNetwork may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which YouNetwork could not
indemnify such person.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of YouNetwork pursuant to the foregoing provisions, or otherwise,
YouNetwork has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR.
YouNetwork will be its own transfer agent and registrar for its
uncertificated Class A and Class B Shares. Our address is 220 East 23rd Street,
Suite 607 New York, New York 10016, and our telephone number is (212) 576-2030.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon
for YouNetwork by Silverman, Collura, Chernis & Balzano, P.C. ("SCCB") New
York, New York.
EXPERTS
The financial statements of YouNetwork Corp. at December 31, 1998
and for the period from inception (January 14, 1998) to December 31, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Mahoney Cohen & Company, CPA, P.C., independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
The report of Mahoney Cohen & Company, CPA, P.C. covering the December
31, 1998, financial statements contains an explanatory paragraph that states
that YouNetwork Corp. has incurred losses since inception and expects to incur
losses for the foreseeable future, which raises substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of reported
assets amounts or the amounts and classification of liabilities that might
result from the outcome of that uncertainly.
44
<PAGE>
ADDITIONAL INFORMATION
With respect to the securities offered hereby, YouNetwork has filed
with the principal office of the Securities and Exchange Commission
("Commission") in Washington, D.C., a Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended ("Securities Act"). For purpose hereof,
the term "Registration Statement" means the original Registration Statement and
any and all amendments thereto. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
to which reference hereby is made. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is not
necessarily complete and is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions. Any interested party may
inspect the Registration Statement and its exhibits without charge, or obtain a
copy of all or any portion thereof, at prescribed rates, at the public
reference facilities of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Information
on the Operation of the Public Reference Room can be obtained by calling the
Commission at 1-800-SEC-0330. The Registration Statement and exhibits may also
be inspected at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
at 7 World Trade Center, Suite 1300, New York, New York 10048, or the
Commissions website located at www.sec.gov.
45
<PAGE>
No dealer, salesman or any other person is authorized to give any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell the securities offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this Prospectus is current only as of this date
TABLE OF CONTENTS
Page
Prospectus Summary................................................. 6
Summary Financial Information...................................... 10
Risk Factors....................................................... 11
Capitalization..................................................... 21
Dilution........................................................... 22
Management's Discussion and Analysis............................... 23
Business........................................................... 28
Industry Background................................................ 30
Management......................................................... 37
Executive Compensation Table....................................... 38
Principal Stockholders............................................. 42
Description of Securities.......................................... 42
Shares Eligible for Future Sale.................................... 43
Disclosure of Compensation Position on Indemnification
for Securities Act Liabilities..................................... 44
Legal Matters...................................................... 44
Experts............................................................ 44
YOUNETWORK CORPORATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-1-F-2
Financial Statements:
Balance Sheets...................................... F-3
Statements of Operations............................ F-4
Statement of Stockholders' Equity................... F-5
Statements of Cash Flows............................ F-6
Notes to Financial Statements............................... F-7-F-14
- -------------------- ---
Until , __ 1999 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as Representatives and with respect to their
unsold allotments or subscriptions.
46
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Financial Statements
December 31, 1998
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Index
-----
Page
----
Independent Auditor's Report F-1 - F-2
Balance Sheet as of December 31, 1998 F-3
Statement of Operations for the Period from Inception
(January 14, 1998) to December 31, 1998 F-4
Statement of Changes in Stockholders' Equity for the Period
from Inception (January 14, 1998) to December 31, 1998 F-5
Statement of Cash Flows for the Period from Inception
(January 14, 1998) to December 31, 1998 F-6
Notes to Financial Statements F-7 - F-14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
YouNetwork Corp.
We have audited the accompanying balance sheet of YouNetwork
Corp., a development stage company, as of December 31, 1998, and the related
statements of operations, changes in stockholders' equity and cash flows for
the period from inception (January 14, 1998) to December 31, 1998. 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 YouNetwork
Corp., a development stage company, as of December 31, 1998, and the results of
its operations and its cash flows for the period from inception (January 14,
1998) to December 31, 1998, in conformity with generally accepted accounting
principles.
F-1
<PAGE>
As more fully described in Note 1 to the financial statements,
the Company is in the development stage, has incurred losses since inception of
approximately $163,000 and expects to incur net losses for the foreseeable
future. At December 31, 1998, the Company had a working capital deficit of
approximately $57,000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
January 20, 1999, except for Note 11
first paragraph as to which the
date is February 3, 1999, second
paragraph as to which the date is
February 8, 1999 and the third and
fourth paragraphs as to which the
date is April 19, 1999
F-2
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Balance Sheet
December 31, 1998
ASSETS
------
Current assets:
Cash $ 178,068
Other current assets 672
----------
Total current assets 178,740
Property and equipment, net (Notes 3 and 4) 47,369
Other assets:
Software development costs (Notes 2 and 7) 69,425
Security deposit 3,500
----------
Total other assets 72,925
----------
$ 299,034
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Deferred revenue (Note 5) $ 175,000
Current portion of capital lease obligation (Note 4) 14,000
Due to related party (Note 7) 23,150
Accounts payable 9,224
Other current liabilities 14,729
----------
Total current liabilities 236,103
Capital lease obligation (Note 4) 25,554
Commitment (Note 10)
Stockholders' equity (Note 9):
Common stock, no par value:
Authorized - 200 shares
Issued and outstanding - 100 shares 200,200
Deficit accumulated during the development stage (162,823)
----------
Total stockholders' equity 37,377
----------
$ 299,034
==========
See accompanying notes.
F-3
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Statement of Operations
For the Period from Inception (January 14, 1998) to December 31, 1998
Revenue $ -
Expenses:
Compensation 67,251
Development costs 20,000
General and administrative 66,089
Depreciation and amortization 7,508
Interest expense 1,975
-----------
Total expenses 162,823
-----------
Net loss during the development stage $ (162,823)
===========
Net loss per common share, basic and diluted $ (2,170.97)
===========
Weighted average of common shares outstanding
- basic and diluted 75
====
See accompanying notes.
F-4
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
For the Period from Inception (January 14, 1998) to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the
---------------------- Development
Shares Amount Stage Total
------ ------ ----------- -----
<S> <C> <C> <C> <C>
Issuance of 73 shares of common
stock on January 22, 1998 for
cash (at $2.74 per share) 73 $ 200 $ - $ 200
Issuance of 27 shares of common
stock on December 4, 1998 for
cash (at $7,407.41 per share) 27 200,000 - 200,000
Net loss for the period from inception
(January 14, 1998) to December 31,
1998 - - (162,823) (162,823)
----- -------- --------- ---------
Balances, December 31, 1998 100 $200,200 $(162,823) $ 37,377
===== ======== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Statement of Cash Flows
For the Period from Inception (January 14, 1998) to December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss during the development stage $ (162,823)
Adjustments to reconcile net loss during the development
stage to net cash provided by operating activities:
Depreciation and amortization 7,508
Change in assets and liabilities:
Other current assets (672)
Deferred revenue 175,000
Due to related party 23,150
Accounts payable 9,224
Other current liabilities 14,729
----------
Net cash provided by operating activities 66,116
----------
Cash flows from investing activities:
Purchase of property and equipment (9,927)
Software development costs (69,425)
Payment of security deposit (3,500)
----------
Cash used in investing activities (82,852)
----------
Cash flows from financing activities:
Proceeds from issuance of common stock 200,200
Payments of capital lease obligation (5,396)
----------
Net cash provided by financing activities 194,804
----------
Net increase in cash and cash, end of year $ 178,068
==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 1,975
==========
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligation incurred for the acquisition of new equipment $ 44,950
==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 1 - The Company
YouNetwork Corp. (the "Company") was incorporated in the State of
New York on January 14, 1998. The Company is developing an on-line consumer
network comprised of consumers who are Internet shoppers. The Company will
market a wide range of branded consumer products and services provided through
vendor affiliations at discounted prices to members of its network. Members
will earn rebates based on purchases. Members will be able to request rebates
as cash, as a credit to future product purchases or to purchase stock in the
Company. The Company will not maintain an inventory in any product line which
it markets. All product fulfillment and post sale services will be provided by
the Company's vendors.
Basis of Presentation and Management's Plans
Since its inception, the Company has been primarily engaged in the
development of its computer software program, negotiating agreements with its
vendors and raising capital. As a consequence, there has not been any operating
revenue generated by the utilization of the Company's services and/or products
through December 31, 1998. Management believes that by offering competitively
priced products, purchase incentives in the form of rebates and equity
participation to members, they can develop an on-line sales channel with low
customer acquisition costs.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. For the period from inception
(January 14, 1998) through December 31, 1998, the Company has incurred a net
loss of approximately $163,000 and had a working capital deficit of
approximately $57,000 as of December 31, 1998. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management expects to incur additional losses for the foreseeable future and
recognizes the need for an infusion of cash to achieve their business plan. The
Company is actively pursuing various options which include seeking additional
equity financing. The Company believes it will be able to raise sufficient
funds to achieve its planned business objectives through private placements
(see Note 11) and through the issuance of stock to members upon commencement of
operations of its online consumer network. The Company expects to fund its
equipment needs through debt and equity financing. The Company has no bank
lines of credit and there can be no assurance that the Company will be able to
obtain any needed additional financing on commercially reasonable terms. If the
Company is unable to obtain sufficient funds, it may be necessary for the
Company to explore other options which could have a material adverse effect on
the Company's business. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result.
F-7
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies
Use of 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 at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company has entered into contracts with certain vendors
whereby the Company will be paid commissions based on purchases by the members
of its consumer network. The Company will recognize revenue at the time the
goods are shipped or services are provided by its vendors.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major
additions and betterments are capitalized. Maintenance and repairs are charged
to operations as incurred. Depreciation of property and equipment is computed
by the straight-line method over the assets' estimated useful lives ranging
from three to five years. Leasehold improvements will be amortized by the
straight-line method over the lesser of the term of the related lease or the
useful life. Upon sale or retirement of property and equipment, the related
cost and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in operations.
Software Development Costs
The Company accounts for its software development costs in
accordance with the provisions of Statement of Position 98-1, "Accounting for
Costs of Computer Software for Internal Use", issued by the American Institute
of Certified Public Accountants ("SOP 98-1"). Under the provisions of SOP 98-1,
certain costs incurred in developing internal use software principally in the
software application development stage, are eligible for capitalization.
The Company has developed proprietary tracking technology which
will be utilized to track member referrals and pay rebates based on purchases
made. Accordingly, during the period from inception (January 14, 1998) to
December 31, 1998, the Company capitalized $69,425 of fees incurred related to
software application development costs. Such costs will be amortized on a
straight-line basis over three years commencing with the substantial completion
of the software development. To date, all of the Company's software development
has been conducted by an affiliate, International Computing, Inc., formerly
Digital Pulp Technologies, Inc. ("Digital") (see Note 7).
F-8
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for all fiscal periods beginning after June 15, 1999. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material impact on the Company's
financial position or results of operations.
Advertising and Promotion Costs
Advertising and promotion costs are charged to operations during
the period in which they are incurred. For the period from inception (January
14, 1998) to December 31, 1998, such costs were nominal.
Computation of Net Loss per Common Share
The Company adopted SFAS No. 128, "Earnings per Share". This
statement requires that the Company report basic and diluted earnings (loss)
per share for all periods reported. Basic net income (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted net income (loss) per share
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding for the period, adjusted for the dilutive effect of
common stock equivalents, consisting of dilutive common stock options using the
treasury stock method.
For all periods presented, common stock warrants are not included
in the computation as they would be anti-dilutive. In the event that the
Company was to report net income in future periods, these warrants could have a
dilutive effect on future earnings per share calculations in those periods.
The Company's board of directors declared a 3.65 to 1 stock split
of its common stock effective December 4, 1998. The stock split was effective
prior to the issuance of shares discussed in Note 9. All share data has been
retroactively adjusted for the effect of the split.
F-9
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Computation of Net Loss per Common Share (Continued)
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
entities to recognize as compensation expense over the vesting period the fair
value of stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB No. 25 and provide
pro forma net income and pro forma income (loss) per share disclosures for
employee stock option grants made from 1995 forward as if the fair-value-based
method, defined in SFAS No. 123, had been applied.
The Company has elected to adopt the disclosure-only provision of
SFAS No. 123, and as described above, will continue to apply APB No. 25 to
account for stock options. Since there were no stock options outstanding at
December 31, 1998, there is no pro forma effect on loss per share.
Note 3 - Property and Equipment
Property and equipment consists of:
Computer equipment $ 4,071
Office equipment 3,706
Leasehold improvements 2,150
-----------
9,927
Equipment held under capital lease 44,950
-----------
54,877
Less: Accumulated depreciation and
amortization 7,508
-----------
$ 47,369
===========
F-10
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 4 - Capital Lease Obligation
Capital lease obligation consists of:
Capital lease obligation, payable in monthly
installments of $1,472, including interest
at 11%, maturing in July 2001, secured by
specific equipment with a carrying value of
approximately $38,700 $ 45,619
Less: Amount representing interest 6,065
---------
39,554
Less: Current portion 14,000
---------
$ 25,554
=========
Minimum future lease payments under the capital lease as of
December 31, 1998 are as follows:
Year Ending
December 31,
------------
1999 $ 14,000
2000 15,620
2001 9,934
--------
$ 39,554
========
Note 5 - Deferred Revenue
The Company entered into an agreement in March 1998 with a company
which provides long-distance telephone service. The agreement includes
provisions for advances to the Company totalling $250,000. At December 31,
1998, the Company had received advances of $175,000. Commissions earned by the
Company for the referral of customers to the telephone company are offsetable
against these advances. The initial term of the agreement is three years.
Advances made in excess of commissions earned and offset against the advances
are payable by the Company on the earlier of the termination of the agreement
or twelve months from the date of full execution of the agreement.
F-11
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 6 - Income Taxes
At December 31, 1998, the Company had a U.S. federal and New York
State net operating loss carryforward of approximately $162,000 expiring in
2013. The Company has established a valuation allowance with respect to these
federal and state carryforwards.
Deferred tax assets:
Net operating loss carryforwards $ 65,100
Valuation allowance (65,100)
-----------
Net deferred tax assets $ -
===========
Note 7 - Related Party Transactions
From inception, the Company has retained the services of Digital,
a corporation that is partially-owned by one of the Company's significant
stockholders. Digital has provided software and systems integration
consultation services in connection with the Company's development of its
proprietary tracking software. Total consulting fees paid by the Company for
the period from inception (January 14, 1998) to December 31, 1998 were $89,425,
of which $69,425 was capitalized and the balance charged to operations. At
December 31, 1998, $23,150 was due to Digital by the Company.
Note 8 - Concentration of Credit Risk
The Company maintains cash balances at two banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Note 9 - Stock Warrants
On December 4, 1998, the Company issued 27 shares (the "Purchased
Shares") of common stock and common stock purchase warrants (the "Purchase
Warrants") for $200,000. These shares represented 27% of the issued and
outstanding shares of common stock of the Company on a fully diluted basis. The
Purchase Warrants can be used to purchase in the aggregate such number of
shares of common stock, at nominal consideration, as shall equal, in the
aggregate when added to the Purchased Shares, 27% of the issued and outstanding
shares of common stock of the Company on a fully diluted basis, immediately
following the sale of additional common stock by the Company in consideration
of the first $400,000 of common stock proceeds received by the Company after
December 4, 1998. During 1998, no warrants were exercised.
F-12
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 10 - Commitment
Lease
The Company leases office space under an operating lease expiring
in April 2003. The future minimum lease payments, excluding escalation charges,
are as follows:
Year Ending
December 31,
------------
1999 $ 21,000
2000 21,000
2001 21,000
2002 21,000
2003 7,000
--------
$ 91,000
========
Total rent expense charged to operations for the period from
inception (January 14, 1998) to December 31, 1998 was approximately $12,100.
Note 11 - Subsequent Events
Exchange of Stock
On February 3, 1999, the stockholders of YouNetwork Corp., a New
York corporation, exchanged each share of their common stock for 330,000 shares
of Class C common stock of YouNetwork Corporation, a recently formed Delaware
corporation under common control. Since the entities are under common control,
the transaction is to be accounted for in the same manner as a pooling of
interest.
YouNetwork Corporation is authorized to issue common stock as
follows:
Par Shares
Value Authorized
----- ----------
Class A Common stock $ .0001 1,500,000
Class B Common stock $ .0001 1,500,000
Class C Common stock $ .0001 247,000,000
F-13
<PAGE>
YOUNETWORK CORP.
(A Development Stage Company)
Notes to Financial Statements
Note 11 - Subsequent Events (Continued)
Registration Statement
On February 8, 1999, YouNetwork Corporation filed a registration
statement under the Securities Act of 1933 to register 1,000,000 shares each of
Class A and Class B common stock. The first 250,000 Class A shares will be
offered at no cost to each consumer who registers to become a member of
YouNetwork Corporation's consumer network. The remaining 750,000 Class A shares
will be distributed to members based upon referring new members to the consumer
network. Class B shares will be offered to consumer network members at $1.00
per share, which may only be paid with rebates earned by members making
purchases on the consumer network.
Private Placements
Through April 19, 1999, the Company received $1,488,000 from the
issuance of 6,680,000 shares of Class C common stock from private offerings,
pursuant to Regulation D of the Securities Act of 1933, as amended, and issued
1,479,452 shares of Class C common stock of the Company to certain stockholders
in accordance with anti-dilutive provisions of a stockholders' agreement (see
Note 9).
Consulting Agreement
During 1999, the Company entered into an oral agreement with
Digital, a corporation that is partially-owned by one of the Company's
significant stockholders, to continue to provide software and systems
integration consultation services. Digital will receive $50,000 per month
through completion of the proprietary software development.
F-14
<PAGE>
1,000,000 SHARES OF CLASS A
COMMON STOCK AND
1,000,000 SHARES OF CLASS B
COMMON STOCK
YOUNETWORK CORPORATION
PROSPECTUS
____________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
YouNetwork's Certificate of Incorporation, as amended, and Bylaws
limit the liability of directors and officers to the maximum extent permitted
by Delaware law. Delaware law provides that directors of a corporation will not
be personally liable for monetary damages for breach of their fiduciary duties
as directors, including gross negligence, except liability for: (i) breach of
the directors' duty of loyalty; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption,
and (iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not permit a corporation to eliminate a director's
duty of care, and this provision of our Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission, based upon a director's breach of the duty of care.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of YouNetwork pursuant to the foregoing provisions, or otherwise, YouNetwork
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
Corporation Takeover Provisions
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain
"business combinations" between a Delaware corporation whose stock
generally is publicly traded or held of record by more than 2,000
stockholders and an "interested stockholder" are prohibited for a
three-year period following the date that such stockholder became an
interested stockholder, unless (i) the corporation has elected in
its original certificate of incorporation not to be governed by
Section 203 (we did not make such an election) (ii) the business
combination was approved by the Board of Directors of the
corporation before the other party to the business combination
became an interested stockholder (iii) upon consummation of the
transaction that made it an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a
confidential right to render or vote stock held by the plan) or,
(iv) the business combination was approved by the Board of Directors
of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year
prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder
during t he previous three years or who became an interested
stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to
include mergers or consolidations between a Delaware corporation and
an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an
interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three
years prior, did own) 15% or more of a Delaware corporation's voting
stock. Section 203 could prohibit or delay a merger, takeover or
other change in control of YouNetwork and therefore could discourage
attempts to acquire YouNetwork.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee $280
Printing and Engraving Expenses $10,000*
Legal Fees and Expenses (including blue sky fees and expenses) $100,000*
Accounting Fees and Expenses $25,000*
Transfer Agent's Fees and Expenses $20,000*
Miscellaneous Expenses $2,000*
-------
TOTAL $157,280*
<PAGE>
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following gives effect to the 330,000 to 1 exchange of Class C
shares of Common Stock effected February 3, 1999, pursuant to an Agreement and
Plan of Merger between YouNetwork, Corp., a New York corporation and the
Registrant, YouNetwork Corporation, a Delaware corporation. The purpose of the
merger is to take advantage of the laws of the state of Delaware.
PRIVATE PLACEMENT.
In March and April of 1999, YouNetwork sold 6,680,000 shares of its
Class C common stock for $1,488,000. The reason for the offering was to raise
necessary additional capital to finance network expansion and equipment
upgrades, and development costs in connection with our proprietary software,
Tracking. The offering was a private transaction exempt from registration
provisions of the Securities Act of 1933, as amended, pursuant to section 4(2)
and 4(6) of the Securities Act and\or Regulation D of Rule 506 promulgated
under the Securities Act. Investors were afforded the access to corporate
information as required under the Securities Act of 1933, as amended.
Pursuant to an agreement among YouNetwork, Dalia Silverman and
Kleopatra Georgiades (the "Original Investors"), the Original Investors
purchased from YouNetwork, for an aggregate purchase price of $200,000: (i) an
aggregate of 8,910,000 shares of Common Stock (the "Purchased Shares")
representing 27% of the issued and outstanding Common Stock, on a fully diluted
basis; and (ii) Options (the "Purchase Options") to purchase in the aggregate
such number of shares of Common Stock, at nominal consideration, as shall
equal, in the aggregate when added to the Purchased Shares, 27% of the issued
and outstanding Common Stock of YouNetwork on a fully diluted basis,
immediately following the sale of additional Common Stock by YouNetwork in
consideration of the first $400,000 of Common Stock sale proceeds received by
YouNetwork following December 4, 1998.
The proceeds from the sale of our shares to the Original Investors was
used for software development in the approximate amount of $68,000, legal
expenses in the amount of $10,000, and $122,000 to salaries, office expenses and
general administrative costs. In March of 1999, the Original Investors exercised
the Purchase Options following a private placement in March of 1999 for the sale
of 4,630,000 shares of Class C Common Stock by YouNetwork to certain accredited
investors for consideration of $463,000. As a result of the exercise of the
Original Investors respective Purchase Options, the Original Investors received,
739,726 shares of YouNetwork Class C Common Stock.
The foregoing offerings were private transactions exempt from
registration provisions of the Securities Act of 1933, as amended, pursuant to
section 4(2) and 4(6) of the Securities Act and\or Regulation D of Rule 506
promulgated under the Securities Act. Investors were afforded the access to
corporate information as required under the Securities Act of 1933, as amended.
<PAGE>
Except as otherwise indicated, all exhibits listed below were filed
with YouNetwork's initial filing, Form SB-2 on February 5, 1999.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1* Agreement and Plan of Merger Agreement, dated
February 3, 1999, by and between YouNetwork Corp., a
New York corporation and YouNetwork Corporation, a
Delaware corporation.
3.1* Certificate of Incorporation of Registrant, as
amended
3.2* By-laws of Registrant
4.1** Specimen certificate representing Registrant's Class
A Common Stock
4.2* Specimen certificate representing Registrant's Class
B Common Stock
5.1*** Opinion of Silverman, Collura, Chernis & Balzano,
P.C. with respect to legality of the securities of
the Registrant being registered
10.1* Stockholders' Agreement, dated December 4, 1998
10.2* Stock and Warrant Purchase Agreement, dated December
4, 1998
10.3* Agreement between Muze, Inc. and YouNetwork , dated
January 7, 1999
10.4* Agreement between Qwest International Inc. (a
successor in interest to LCI International Telecom
Corp.), dated March 6, 1998.
10.5* Agreement between Baker & Taylor, Inc. and
YouNetwork, dated, July 9, 1998.
10.6** 1999 Stock Option Plan.
23.1*** Consent of Silverman, Collura, Chernis & Balzano,
P.C. (included in Exhibit 5.1)
23.2** Consent of Mahoney Cohen & Company, CPA, P.C.
27* Financial Data Schedule
* Previously filed
** Filed with this Amendment No. 2 to Form SB-2
*** To be filed by amendment
</TABLE>
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offerings.
The undersigned issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the Registration Statement; and
(iii) Includes any additional or changed material
information on the plan of distribution. Provided,
however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the Registration Statement is on Form S-3 or
Form S-8, and the information required in a
post-effective amendment by those paragraphs is contained
in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) For determining liability under the Securities Act,
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of
the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at
the end of the offering.
(b) Request for acceleration of effective date.
(1) Insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director,
officer or controlling person of the issuer in the successful
defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the issuer will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of
such court.
(2) For determining liability under the Securities Act, treat the
information in the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in
the form of prospectus file by the small business issuer under rule
424(b)(1), or (4) or 457(h) under the Securities Act as part of this
registration statement as at the time the Commission declares it
effective.
(3) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as
a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on this Form SB-2 Amendment No. 2 and
authorizes this registration statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York, on April 21, 1999.
YOUNETWORK CORPORATION
By: /s/ Kyle S. Taylor
---------------------
Kyle S. Taylor, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in their
respective capacities with YouNetwork and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Kyle S. Taylor President, April 21, 1999
- ----------------- Director
Kyle S. Taylor
/s/Don S. Senerath Chief Executive Officer, April 21, 1999
- ----------------- Director
Don S. Senerath
/s/Peter R. Silverman Director April 21, 1999
- -----------------
Peter Silverman
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
<S> <C>
2.1* Agreement and Plan of Merger Agreement, dated February 3, 1999, by and between YouNetwork
Corp., a New York corporation and YouNetwork Corporation, a Delaware corporation.
3.1* Certificate of Incorporation of Registrant, as amended
3.2* By-laws of Registrant
4.1** Specimen certificate representing Registrant's Class A Common Stock
4.2* Specimen certificate representing Registrant's Class B Common Stock
5.1*** Opinion of Silverman, Collura, Chernis & Balzano, P.C. with respect to legality of the
securities of the Registrant being registered
10.1* Stockholders' Agreement, dated December 4, 1998
10.2* Stock and Warrant Purchase Agreement, dated December 4, 1998
10.3* Agreement between Muze, Inc. and YouNetwork, dated January 7, 1999
10.4* Agreement between Qwest International Inc. (a successor in interest to LCI International
Telecom Corp.), dated March 6, 1998.
10.5* Agreement between Baker & Taylor, Inc. and YouNetwork, dated, July 9, 1998.
10.6** 1999 Stock Option Plan.
23.1*** Consent of Silverman, Collura, Chernis & Balzano, P.C. (included in Exhibit 5.1)
23.2** Consent of Mahoney Cohen & Company, CPA, P.C.
27* Financial Data Schedule
</TABLE>
- ------------
* Previously filed
** Filed with this Amendment No. 2 to Form SB-2
*** To be filed by Amendment
<PAGE>
- -------------------------------------------------------------------------------
[YOUNETWORK CORPORATION]
Class A Common Stock
This is to certify that ___________________________________ is the _________ of
_______________________________________________________________________________
Fully Paid and Non-Assessable Shares of Class A Common Stock of
YOUNETWORK CORPORATION
transferable only on the books of the Corporation by the holder thereof in
person or by a duly authorized Attorney upon surrender of this Certificate
properly endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated
[SEAL]
- -------------------------------------------------------------------------------
THESE SECURITIES WERE ORIGINALLY ISSUED IN TRANSACTIONS EXEMPT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT") PURSUANT TO THE EXEMPTION PROVIDED BY
SECTION 4(2) OF THE ACT, AND HAVE BEEN REGISTERED UNDER THE ACT FOR SALE ON
BEHALF OF THE HOLDER. THESE SECURITIES MAY NOT OFFERED, SOLD OR TRANSFERRED
EXCEPT, (I) PURSUANT TO THE REGISTRATION STATEMENT IF A CURRENT PROSPECTUS WITH
RESPECT TO THESE SECURITIES IS DELIVERED IN CONNECTION THEREWITH, OR (II)
PURSUANT TO AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND ANY
APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAW.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJKECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE COMPANY'S PROSPECTUS TO ITS
REGISTRATION STATEMENT ON FORM SB-2 WITH RESPECT TO THESE SECURITIES DELIVERED
IN CONNECTION THEREWITH. A HOLDER OF OUR CLASS A SHARES SHALL NOT, DIRECTLY OR
INDIRECTLY, OFFER, SELL, PLEDGE, GRANT ANY OPTION TO PURCHASE, OR OTHERWISE
SELL OR DISPOSE OF ANY CLASS A SHARES FOR A PERIOD OF 12 MONTHS FROM THE DATE
OF THE PROSPECTUS SET FORTH IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM SB-2, DATED , , 1999. A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER WILL BE MADE ON
THE BOOKS OF THE ISSUER UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN
COMPLIED WITH.
<PAGE>
YOUNETWORK CORPORATION
1999 STOCK OPTION PLAN
1. PURPOSE
The purpose of the 1999 Stock Option Plan ("Plan") is to provide a
method whereby selected key employees, selected key consultants, professionals
and non employee directors of YouNetwork Corporation ("Corporation") and its
subsidiaries may have the opportunity to invest in shares of the Corporation's
Class C Common Stock ("Common Stock" or "Shares"), thereby giving them a
proprietary and vested interest in the growth and performance of the
Corporation, and in general, generating an increased incentive to contribute to
the Corporation's future success and prosperity, thus enhancing the value of
the Corporation for the benefit of shareholders. Further, the Plan is designed
to enhance the Corporation's ability to attract and retain individuals of
exceptional managerial talent upon whom, in large measure, the sustained
progress, growth, and profitability of the Corporation depends.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors
("the Board") or if so designated by resolution of the Board by a Committee
composed of not less than two individuals ("Committee"). From time to time the
Board, or if so designated the Committee, may grant stock options ("Stock
Options" or "Options") to such eligible parties and for such number of Shares
as it in its sole discretion may determine. A grant in any year to an eligible
Employee (as defined in Section 3 below) shall neither guarantee nor preclude a
grant to such Employee in subsequent years. Subject to the provisions of the
Plan, the Board, shall be authorized to interpret the Plan, to establish, amend
and rescind any rules and regulations relating to the Plan, to determine the
terms and provisions of the Option agreements described in Section 5(h) thereof
to make all other determinations necessary or advisable for the administration
of the Plan. The Board, or if so designated the Committee, may correct any
defect, supply any omissions or reconcile any inconsistency in the Plan or in
any Option in the manner and to the extent it shall deem desirable. The
determinations of the Board in the administration of the Plan, as described
herein, shall be final and conclusive. The validity, construction, and effect
of Plan and any rules and regulations relating to the Plan shall be determined
in accordance with the laws of the State of Delaware.
3. ELIGIBILITY
The class of employees eligible to participate under the Plan shall
include, employees of the Corporation, key consultants or professionals and
non-employee directors of the Company and its subsidiaries (collectively and
individually, "Employees"). Nothing in the Plan or in any agreement thereunder
shall confer any right on an Employee or key vendor of goods and services to
continue in the employ of the Corporation or shall interfere in any way with
the right of the Corporation or its subsidiaries, as the case may be, to
terminate his employment at any time.
4. SHARES SUBJECT TO THE PLAN
<PAGE>
Subject to adjustment as provided in Section 7, an aggregate of
2,000,000 shares of Class C Common Stock shall be available for issuance under
the Plan. The shares of Class C Common Stock deliverable upon the exercise of
Options may be made available from authorized but unissued Shares or Shares
reacquired by the Corporation, including Shares purchased in the open market or
in private transactions. If any Option granted under the Plan shall terminate
for any reason without having been exercised or settled in Class C Common Stock
or in cash pursuant to related Class C Common Stock appreciation rights, the
Shares subject to, but not delivered under, such Option shall be available for
other Options.
5. GRANT TERM AND CONDITIONS OF OPTIONS
The Board or if so designated the Committee, may from time to time
after consultation with management select employees to whom Stock Options shall
be granted. The Options granted may be incentive Stock Options ("Incentive
Stock Options") within the meaning of Section 422 of the Internal Revenue Code,
as amended (the "Code"), or non-statutory Stock Options ("Non-statutory Stock
Options"), whichever the Board, or if so designated the Committee, shall
determine, subject to the following terms and conditions:
(a) Price. The purchase price per share of Class C Common Stock
deliverable upon exercise of each Incentive Stock Option shall not be
less than 100 percent of the Fair Market Value of the Class C Common
Stock on the date such Option is granted. Provided, however, that if
an Incentive Stock Option is issued to an individual who owns, at the
time of grant, more than ten percent (10%) of the total combined
voting power of all classes of the Company's Class C Common Stock, the
exercise price of such Option shall be at least 110% of the Fair
Market Value of the Class C Common Stock on the date of grant and the
term of the Option shall not exceed five years from the date of grant.
The Option price of Shares subject to Non-statutory Stock Options
shall be determined by the Board of Directors or Committee in its
absolute discretion at the time of grant of such Option, provided that
such price shall not be less than 85% of the Fair Market Value of the
Class C Common Stock at the time of grant. For purposes of this plan,
Fair Market Value shall be: (i) the average of the closing Bid and Ask
prices for the Class C Common Stock on the date in question or if no
trading market exists for the Class C Common Stock, Fair Market Value
shall be determined by the Board of Directors.
(b) Payment. Options may be exercised only upon payment of the
purchase price thereof in full. Such payment shall be made in such
form of consideration as the Board or Committee determines and may
vary for each Option. Payment may consist of cash, check, notes,
delivery of shares of Class C Common Stock having a fair market value
on the date of surrender equal to the aggregate exercise price, or any
combination of such methods or other means of payment permitted under
the Delaware General Corp. Law.
(c) Term of Options. The term during which each Option may be
exercised shall be determined by the Board, or if so designated the
Committee, provided that an Incentive Stock
2
<PAGE>
Option shall not be exercisable in whole or in part more than 10 years
from the date it is granted. All rights to purchase Class C Common
Stock pursuant to an Option shall, unless sooner terminated, expire at
the date designated by the Board or, if so designated the Committee.
The Board, or if so designated the Committee, shall determine
the date on which each Option shall become exercisable and may provide
that an Option shall become exercisable in installments. The Shares
comprising each installment may be purchased in whole or in part at
any time after such installment becomes purchasable, except that the
exercise of Incentive Stock Options shall be further restricted as set
forth herein. The Board, or if so designated the Committee, may in its
sole discretion, accelerate the time at which any Option may be
exercised in whole or in part, provided that no Option shall be
exercisable until one year after grant.
(d) Limitations on Grants. The aggregate Fair Market Value (determined
at the time the Option is granted) of the Class C Common Stock with
respect to which the Incentive Stock Option is exercisable for the
first time by an Optionee during any calendar year (under all plans of
the Company and its parent or any subsidiary of the Corporation) shall
not exceed $100,000. The foregoing limitation shall be modified from
time to time to reflect any changes in Section 422 of the Code and any
regulations promulgated thereunder setting forth such limitations.
(e) Termination of Employment.
(i) If the employment of an Employee by the Company or a
subsidiary corporation of the Company shall be terminated voluntarily
by the Employee or for cause by the Company, then his Option shall
expire forthwith. Except as provided in subparagraphs (ii) and (iii)
of this Paragraph (e), if such employment shall terminate for any
other reason, then such Option may be exercised at any time within
three (3) months after such termination, subject to the provisions of
subparagraph (iv) of this Paragraph (e). For purposes of this
subparagraph, an employee who leaves the employ of the Company to
become an employee of a subsidiary corporation of the Company or a
corporation (or subsidiary or parent corporation of the corporation)
which has assumed the Option of the Company as a result of a corporate
reorganization, etc., shall not be considered to have terminated his
employment.
(ii) If the holder of an Option under the Plan dies (a) while
employed by, or while serving as a non-employee Director for, the
Company or a subsidiary corporation of the Company, or (b) within
three (3) months after the termination of his employment or services
other than voluntarily by the employee or non-employee Director, or
for cause, then such Option may, subject to the provisions of
subparagraph (iv) of this Paragraph (e), be exercised by the estate of
the employee or non-employee Director or by a person who acquired the
right to exercise such Option by bequest or inheritance or by reason
of the death of such employee or non-employee Director at any time
within one (1) year after such death.
3
<PAGE>
(iii) If the holder of Option under the Plan ceases
employment because of permanent or total disability (within the
meaning of Section 22 (e) (3) of the Code) while employed by the
Company or a subsidiary corporation of the Company, then such Option
may, subject to the provisions of subparagraph (iv) of this paragraph
e, be exercised at any time within one year after his termination of
employment due to disability.
(iv) An Option may not be exercised pursuant to this
Paragraph (e), except to the extent that the holder was entitled to
exercise the Option at the time of termination of employment,
termination of Directorship, or death, and in any event may not be
exercised after the expiration of the Option. For purpose of this
Paragraph (e), the employment relationship of an employee of the
Company or of a subsidiary corporation of the company will be treated
as continuing intact while he is on military or sick leave or other
bona fide leave of absence (such as temporary employment by the
Government) if such leave does not exceed ninety (90) days, or, if
longer, so long as his right to reemployment is guaranteed either by
statute or by contract.
(f) Nontransferability of Options. No Option shall be transferable by
a Holder otherwise than by will or the laws of descent and
distribution, and during the lifetime of the Employee to whom an
Option is granted it may be exercised only by the employee, his
guardian or legal representative if permitted by Section 422 and
related sections of the Code and any regulations promulgated
thereunder.
(g) Listing and Registration. Each Option shall be subject to the
requirement that if at any time the Board, or if so designated the
Committee, shall determine, in its discretion, the listing,
registration or qualification of the Class C Common Stock subject to
such Option upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with,
the granting of such Option or the issue or purchase of Shares
thereunder, no such Option may be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable
to the Board, or if so designated the Committee.
(h) Option Agreement. Each Employee, to whom an Option is granted,
shall enter into an agreement with the Corporation which shall contain
such provisions, consistent with the provisions of the Plan, as may be
established by the Board, or if so designated the Committee.
(i) Withholding. Prior to the delivery of certificates for shares of
Class C Common Stock, the Corporation or a subsidiary shall have the
right to require a payment from an Employee to cover any applicable
withholding or other employment taxes due upon the exercise of an
Option. An Optionee may make such payment either (i) in cash, (ii) by
authorizing the Company to withhold a portion of the stock otherwise
issuable to the Optionee, (iii) by delivering already-owned Class C
Common Stock, or (iv) by any combination of these means.
4
<PAGE>
6. STOCK APPRECIATION RIGHTS
The Board or Committee may grant stock appreciation rights ("SARs") in
connection with all or any part of an Option granted under the Plan, either
concurrently with the grant of the Option or at any time thereafter, and may
also grant SARs independently of Options.
(a) SARs Granted in Connection with an Option. An SAR granted in
connection with an Option entitles the Optionee to exercise the SAR by
surrendering to the Company, unexercised, the underlying Option. The Optionee
receives in exchange from the Company an amount equal to the excess of (x) the
Fair Market Value on the date of surrender of the underlying Option (y) the
exercise price of the Class C Common Stock covered by the surrendered portion
of the Option.
When an SAR is exercised, the underlying Option, to the extent
surrendered, ceases to be exercisable, and the number of Shares available for
issuance under the Plan is reduced correspondingly.
An SAR is exercisable only when and to the extent the underlying
Option is exercisable and expires no later than the date on which the
underlying Option expires. Notwithstanding the foregoing, neither an SAR nor a
related Option may be exercised during the first six (6) months of its
respective term: provided, however, that this limitation will not apply if the
Optionee dies or is disabled within such six (6) month period.
(b) Independent SARs. The Board or the Committee may grant SARs
without related Options. Such an SAR will entitle the Optionee to receive from
the company on exercise of the SAR an amount equal to the excess of (x) the
fair market value of the Class C Common Stock covered by the exercised portion
of the SAR, as of the date of such exercise, over (y) the fair market value of
the Class C Common Stock covered by the exercised portion of the SAR as of the
date on which the SAR was granted.
SARs shall be exercisable in whole or in part at such times as the
Board or the Committee shall specify in the Optionee's SAR grant or agreement.
Notwithstanding the foregoing, an SAR may not be exercised during the first six
(6) months of its term: provided, however, that this limitation will not apply
if the Optionee dies or is disabled within such six (6) month period.
(c) Payment on Exercise. The Company's obligations arising upon the
exercise of an SAR may be paid in cash or Class C Common Stock, or any
combination of the same, as the Board or the Committee may determine. Shares
issued on the exercise of an SAR are valued at their fair market value as of
the date of exercise.
(d) Limitation on Amount paid on SAR Exercise. The Board or the
Committee may in its discretion impose a limit on the amount to be paid on
exercise of an SAR. In the event such a limit is imposed on an SAR granted in
connection with an Option, the limit will not restrict the exercisability of
the underlying Option.
5
<PAGE>
(e) Persons Subject to 16(b). An Optionee subject to Section 16(b) of
the Securities Exchange Act of 1934, may only exercise an SAR during the period
beginning on the third and ending on the twelfth business day following the
Company's public release of quarterly or annual summary statements of sales and
earnings and in accordance with all other provisions of Section 16(b).
(f) Non-Transferability of SARs. An SAR is non-transferable by the
Optionee other than by will or the laws of descent and distribution, and is
exercisable during the Optionee's lifetime only by the Optionee, or, in the
event of death, by the Optionee's estate or by a person who acquires the right
to exercise the Option by bequest or inheritance.
(g) Effect on Shares in Plan. When an SAR is exercised, the aggregate
number of shares of Class C Common Stock available for issuance under the Plan
will be reduced by the number of underlying shares of Class C Common Stock as
to which the SAR is exercised.
7. ADJUSTMENT OF AND CHANGES IN CLASS C COMMON STOCK
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of Shares, merger, consolidation, distribution of assets,
or any other changes in the corporate structure or Shares of the Corporation,
the Board, or if so designated the Committee, shall make such adjustments as it
deems appropriate in the number and kind of Shares and SARs authorized by the
Plan, in the number and kind of Shares covered by the Options granted and in
the exercise price of outstanding Options and SARs.
6
<PAGE>
8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger,
consolidation or combination in which the Corporation is the continuing
corporation and which does not result in its outstanding Class C Common Stock
being converted into or exchanged for different securities, cash or other
property, or any combination thereof) or a sale of all or substantially all of
the business or assets of the Corporation or (ii) a Change in Control (as
defined below) of the Corporation, each Option or SAR then outstanding for one
year or more shall (unless the Board, or if so designated the Committee,
determines otherwise), receive upon exercise of such Option or SAR an amount
equal to the excess of the Fair Market Value on the date of such exercise of
(a) the securities, cash or other property, or combination thereof, receivable
upon such merger, consolidation or combination in respect of a share of Class C
Common Stock, in the cases covered by clause (i) above, or (b) the final tender
offer price in the case of a tender offer resulting in a Change in Control or
(c) the value of the Class C Common Stock covered by the Option or SAR as
determined by the Board, or if so designated the Committee, in the case of a
Change in Control by reason of any other event, over the exercise price of such
Option, multiplied by the number of shares of Class C Common Stock with respect
to which such Option or SAR shall have been exercised provided that in each
event the amount payable in the case of an Incentive Stock Option shall be
limited to the maximum permissible amount necessary to preserve the Incentive
Stock Option status. Such amount may be payable fully in cash, fully in one or
more of the kind or kinds or property payable in such merger, consolidation or
combination, or partly in cash and partly in one or more such kind or kinds of
property, all in the discretion of the Board or if so designated the Committee.
Any determination by the Board, or if so designated the Committee,
made pursuant to this Section 8 may be made as to all outstanding Options and
SARs or only as to certain Options and SARs specified by the Board, or if so
designated the Committee and any such determination shall be made (a) in cases
covered by clause (i) above, prior to the occurrence of such event, (b) in the
event of a tender or exchange offer, prior to the purchase of any Class C
Common Stock pursuant thereto by the offeror and (c) in the case of a Change in
Control by reason of any other event, just prior to or as soon as practicable
after such Change in Control.
A "Change in Control" shall be deemed to have occurred if (a) any
person, or any two or more persons acting as a group, and all affiliates of
such person or persons, shall own beneficially 25% or more of the Class C
Common Stock outstanding, or (b) if following (i) a tender or exchange offer
for voting securities of the Corporation, or (ii) a proxy contest for the
election of directors of the Corporation, the persons who were directors of the
Corporation immediately before the initiation of such event cease to constitute
a majority of the Board of Directors of the Corporation upon the completion of
such tender or exchange offer or proxy contest or within one year after such
completion.
9. NO RIGHTS OF SHAREHOLDERS
7
<PAGE>
Neither an Employee nor the Employee's legal representative shall be,
or have any of the rights and privileges of, a shareholder of the Corporation
in respect of any Shares purchasable upon the exercise of any Option, in whole
or in part, unless and until certificates for such Shares shall have been
issued.
10. PLAN AMENDMENTS
The plan may be amended by the Board, as it shall deem advisable or to
conform, to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the aggregate number of Shares available for Options except as
permitted by Section 7; (ii) materially increase the benefits accruing to
participants under this Plan; (iii) extend the maximum period during which an
Option may be exercised; or (iv) change the Plan's eligibility requirements.
Any discrepancy between the Board and any committee regarding this Plan shall
be decided in any manner directed by the Board.
11. TERM OF PLAN
The Plan became effective upon its approval by the Corporation=s
majority shareholders on April 12, 1999. No Options or SARs shall be granted
under the Plan after the date which is ten years after the date on which the
Plan was approved by the Corporation shareholders.
8
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 20, 1999 except for Note 11 first
paragraph as to which the date is February 3, 1999, second paragraph as to
which the date is February 8, 1999 and the third and fourth paragraphs as to
which the date is April 16, 1999, in the Registration Statement and related
Prospectus of YouNetwork Corporation.
Our report dated January 20, 1999, except for Note 11 first paragraph
as to which the date is February 3, 1999, second paragraph as to which the
date is February 8, 1999 and the third and fourth paragraphs as to which the
date is April 19, 1999, contains an explanatory paragraph that states that the
Company has incurred losses since inception and expects to incur losses for
the foreseeable future which raise substantial doubt about the entity's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of reported
asset amounts or the amounts and classification of liabilities that might
result from the outcome of that uncertainty.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
April 21, 1999
