<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE __, 1999,
REGISTRATION NO. 333-71949.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
YOUNETWORK CORPORATION
(Name of Small Business Issuer in its charter)
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<S> <C> <C>
DELAWARE 7380 13-399035
(State of Jurisdiction) (Primary Standard Industrial Classification Code Number) (I.R.S. Employee Identification No.)
</TABLE>
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
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. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED BE REGISTERED SHARES(1) PRICE(1) REGISTRATION FEE
- ------------------------------------- ------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
class A common stock, .0001 par value
per share 1,000,000 $0.00 $0.00 $0.00
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
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<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
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SUBJECT TO COMPLETION, DATED JUNE __ , 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 is hereby offering
1,000,000 shares of class A common stock, par value $.0001 per share, and
1,000,000 shares of class B common stock, par value $.0001. The securities are
being distributed by us to our new members of our online consumer network.
We urge you to read the risk factors beginning on page 8, 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.
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.
<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............................................. $0.00 $0.00 $0.00 $0.00
</TABLE>
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 IS NOT A SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS DATED ________ __, 1999
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<PAGE>
PROSPECTUS SUMMARY
You should carefully read the entire prospectus, including the "Risk
Factors" section and the financial statements and related notes.
YOUNETWORK CORPORATION
YouNetwork, a Delaware Corporation, is a development stage company
which is poised to launch a unique and novel online consumer network. By
combining the virtues of cooperative marketing with incentives designed to
reward a member's purchasing influence, our 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.
We have developed proprietary tracking technology, which will be
utilized to track the referrals of our members, and to pay rebates to a member
based on purchases and referrals made by member and a referred member. 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.
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 our Predecessor, YouNetwork Corp., a New York corporation for
330,000 shares of our class C common stock.
This prospectus contains product names, trade names and trademarks of
other organizations, which are the property of their respective owners. We were
incorporated in the State of New York on January 14, 1998, and subsequently
merged into YouNetwork Corporation, a Delaware corporation, on February 3, 1999.
Our principal executive offices are located at 220 East 23rd Street, Suite 607
New York, New York 10010, and our telephone number at this address is (212)
576-2030. We maintain 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 we believe that the data is generally indicative of the
matters reflected therein, the data may be imprecise and investors are cautioned
not to place undue reliance on it.
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.
5
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THE OFFERING
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<S> <C>
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 rebate dollars
accumulated by our members.
Shares of common stock
outstanding before offering...................... 41,159,452
Shares of common stock
outstanding after offering..................... 43,159,452
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
You should read the summary financial information presented below as of
December 31, 1998, and for the period from inception (January 14, 1998), to
December 31, 1998. The summary financial information was derived from our
audited financial statements appearing elsewhere in this prospectus. The
financial information for the three months ended March 31, 1999, was derived
from our unaudited financial statements. In the opinion of management the
financial information for the three months ended March 31, 1999, contain all
adjustments, consisting only of normal recurring accruals necessary for the fair
presentation of the results of operations and financial position for such
period. You should read this summary financial information in conjunction with
our plan of operation, financial statements and related notes to the financial
statements, each appearing elsewhere in this prospectus.
On February 3, 1999, YouNetwork Corp., a New York corporation merged
into us, YouNetwork, a Delaware corporation. All shareholders of the New York
corporation exchanged their shares of common stock for our shares of class C
common stock, $.0001 par value per share, on a basis of 330,000 shares of our
class C common stock Class for each outstanding share of the New York
Corporation. The reason for the merger was to take advantage of the laws of the
State of Delaware.
OPERATING STATEMENT INFORMATION:
<TABLE>
<CAPTION>
INCEPTION FOR THE THREE
(JANUARY 14, 1998) MONTH ENDED
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Revenues..................................................................... $ -- $ --
Expenses..................................................................... (160,848) (89,626)
Operating Loss............................................................... (160,848) (89,626)
Interest Expense............................................................. (1,975) (1,063)
Net Loss During The Development Stage........................................ $ (162,823) (90,689)
Net Loss Per Common Share, Basic And Diluted................................. $ (.01)(1)
Weighted Average Of Common Shares Outstanding
Basic And Diluted....................................................... 24,916,434 (1) 34,993,89
<CAPTION>
BALANCE SHEET INFORMATION: DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Cash......................................................................... $ 178,068 $ 355,902
Working Capital Deficit...................................................... (57,363) 86,442
Total Assets................................................................. 299,034 712,959
Capital Lease Obligations, Excluding Current Portion......................... 25,554 21,808
Stockholders' Equity......................................................... 37,377 409,688
</TABLE>
(1) Amounts retroactively adjusted to reflect the merger on February 3, 1999.
7
<PAGE>
RISK FACTORS
The securities offered in this prospectus are highly speculative in
nature and involve a high degree of risk. You should consider very carefully
certain risks and speculative factors inherent in and affecting our business
prior to the purchase of any of our securities offered to you in this
prospectus, as well as all of the other matters set forth elsewhere in this
prospectus.
WE HAVE NO OPERATING HISTORY FOR YOU TO JUDGE OUR PROSPECTS.
We were incorporated on January 14, 1998, under the name YouNetwork
Corp., a New York corporation. Pursuant to a merger effective February 3, 1999,
the New York Corporation merged into us. The purpose of the merger is to take
advantage of the laws of the state of Delaware. We have not yet generated any
revenue. We have devoted all 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 us. 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
To address these risks we must, among other things, develop, maintain
and increase our membership base, continue to develop and upgrade our
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.
OUR CURRENT AND ANTICIPATED FUTURE LOSSES.
As of March 31, 1999, we had an accumulated deficit of $253,512, 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 our 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, 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. The establishment of our operations is contingent upon
our success in establishing markets for our products and services and achieving
profitable operations.
UNPREDICTABILITY OF OUR 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 our website, 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 website, the loss of a key vendor
contract or relationship, technical difficulties with our website, 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
8
<PAGE>
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.
WE DEPEND ON THE CONTINUED DEVELOPMENT AND RELIABILITY OF THE WEB
INFRASTRUCTURE.
Our success will depend in large part upon the development of a Web
infrastructure, with the necessary speed, data capacity and security, and timely
development of complementary products for providing reliable Web access and
services. Because global commerce and online exchange of information on the Web
and other similar open wide area networks are new and evolving, it is difficult
to predict with any assurance whether the Web will support increasing use or
will prove to be a viable commercial marketplace. The Web has experienced, and
is expected to continue to experience, significant growth in the number of users
and the amount of content. To the extent that the Web continues to experience
increased numbers of users, frequency of use or increased bandwidth requirements
of users, there can be no assurance that the Web infrastructure will continue to
be able to support the demands placed on it by this continued growth or that the
performance or reliability of the Web will not be adversely affected by this
continued growth. In addition, the Web could lose its viability or effectiveness
due to delays and the development or adoption of new standards and protocols to
handle increased levels of activities or due to increased government regulation.
There can be no assurance that the infrastructure necessary to make the Web a
viable commercial marketplace will be developed, or, if developed, that the Web
will achieve broad acceptance. If the necessary infrastructure standards,
protocols or complementary products, services or facilities are not developed,
our business, results of operations and financial condition will be materially
and adversely affected.
WE DEPEND ON OUR COMPUTER INFRASTRUCTURE AND WILL BE ADVERSELY AFFECTED BY ANY
FAILURE OR DAMAGE TO OUR SYSTEM.
Substantially all of our communications and computer hardware is
located at our offices in New York, New York. Our system is vulnerable to damage
from fire, flood, earthquakes, power loss, telecommunications failures,
break-ins and similar events. Aside from "off-site" backups of essential
systems, we will carry business interruption insurance but not a secondary
"off-site" systems or a formal disaster recovery plan. A system failure at our
present location would have a major adverse affect on the performance of our
services.
The performance of our server and networking hardware and software
infrastructure is critical to our business and our ability to attract Web users
and members to our website. Any system failure that causes an interruption in
service or decrease responsiveness of our website 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 major
adverse effect on the performance of our server, which could have a material
adverse effect on our business, results of operations and financial condition.
9
<PAGE>
INTERNET SECURITY CONCERNS COULD HINDER ELECTRONIC COMMERCE AND THE DEMAND FOR
OUR PRODUCTS AND SERVICES.
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 major adverse effect on our services and financial condition. We plan to
implement reasonable security measures to prevent any physical or electronic
break-ins or attacks to our 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 Web connections wherever possible and deemed necessary. As a business that
depends on access of our system to numerous unidentified remote computers and
servers, our systems will always be vulnerable to electronic break-ins on our
server and disruption of our services.
No assurances can be given by us regarding our security liability in
case of loss or damages, physical or electronic as a result of physical or
electronic break-ins. We currently do 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 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.
OUR SERVICES ARE SUSCEPTIBLE TO 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. Although we investigate compromised networks
and attempt to identify perpetrators of security breaches, any of these risks
could have a negative effect on our services and financial condition. 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.
WE WILL RELY HEAVILY ON OUR OWN DEVELOPED SYSTEM.
We will use an internally developed system for our website 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 website
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.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED GROWTH OF ONLINE COMMERCE.
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, our business, financial condition and results of operations may be
adversely affected.
IF WE DO NOT CONTINUALLY UPGRADE TECHNOLOGY WE MAY NOT BE ABLE TO COMPETE IN OUR
INDUSTRY.
We will need to continually expand and upgrade our infrastructure and
systems and ensure high levels of
10
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service, speedy operation, and reliability. We will have to improve our methods
for measuring the performance and commercial success of our different products
to better respond to customer demands for information on product effectiveness
and to better determine which products and services can be developed most
profitably. Our current and planned personnel, financial and operating
procedures and controls may not be adequate to support our future operations. If
we are unable to manage our growth effectively, our business will be negatively
affected.
OUR OPERATIONS WILL BE TOTALLY DEPENDENT ON VENDORS AND DISTRIBUTORS.
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 or are unable to satisfy on a timely basis our requirements,
our business and results of operations may be materially adversely affected.
Moreover, 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 our business, results of operations and financial condition. All
product fulfillment and post sale services will be provided by our vendor
affiliates. We will not maintain an inventory in any product line which we
market. All return policies will be posted on our website www.
YouNetwork.com under our help desk section.
SALES TAX COLLECTION BY STATES MAY ADVERSELY AFFECT OUR GROWTH.
One or more states may seek to impose sales tax collection obligations
on an out-of-state company such as us which engages 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.
WE NEED TO MANAGE OUR GROWTH EFFECTIVELY.
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 our
rapid growth 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. We will need to:
o improve our financial management and controls, reporting systems and
procedures;
o expand, train and manage our workforce for marketing, sales and support,
product development, site design, maintenance, network and equipment
repair; and
o manage multiple relationships with various vendors, distributors and other
third parties.
THE LOSS OF THE SERVICES OF OUR PRESIDENT, KYLE S. TAYLOR AND CHIEF EXECUTIVE
OFFICER, DON S. SENERATH COULD IMPAIR OUR CHANCES FOR SUCCESS.
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.
11
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COMPETITION FOR KEY PERSONNEL IS INTENSE.
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. In connection with our key executive officers, we currently
have keyman life insurance policies covering the life of Mr. Taylor and Mr.
Senerath in the amounts of $1,000,000 and $3,000,000, respectively. 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
us, Taylor and Senerath. "See Executive Compensation-Agreements on page 40 ".
FAILURE OF OUR COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS.
Like many other entities, we are currently assessing our computer
software and database with respect to its functionality beyond the turn of the
century. Software that records only the last two digits of the calender 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.
Our systems are built upon multiple layers of third party software and
hardware components. 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 with our vendors and third party suppliers,
which may or may not uncover a potential source of a year 2000 non-compliance
problem. The failure of products or systems maintained by third parties or our
products and systems to be year 2000 compliant could cause us to incur
significant expenses to remedy any problems, or seriously damage our business.
We have not incurred significant costs for these purposes and we do not believe
that we will incur significant costs for these purposes in the foreseeable
future. In July 1999, we will begin converting our computer system to be Year
2000 compliant. As of June 1999, we have not incurred any expenses attributed to
our Year 2000 compliance efforts.
However, to insure year 2000 compliance we have instituted the
following:
o a full scale 24 hour archival process to insure against data corruption;
o Windows NT Basic Input Output System Year 2000 compliance is under review;
and
o we are seeking Year 2000 compliance and certification of compliance from
database vendors and third party application server software vendors.
As of June 7, 1999, we estimate the reasonable cost to become Year 2000
compliance to be as follows: (a) systems survey approximately $ 10,000, hardware
systems upgrade and swapping approximately $60,000, software re-writing if any,
$40,000; and (d) miscellaneous administrative costs of $20,000. It is expected
that such expenditures will not have a material effect on the financial
condition and results of our operations. The funds to insure year 2000
compliance will be from current and 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.
WE FACE SIGNIFICANT COMPETITION IN THE ELECTRONIC COMMERCE NETWORK FOR MEMBERS,
CONSUMERS AND VISITORS.
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. Our
primary competitors which are primarily focused on creating electronic commerce
networks on the Internet include such companies as Amazon.com, Value America,
Shopping.com, Buy.com, the NetMarket division of Cendent Corporation, and
Ebay.com.
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WE FACE COMPETITION FROM MORE ESTABLISHED COMPETITORS.
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, namely,
Amazon.com, Value America, Shopping.com, Buy.com, the NetMarket division of
Cendent Corporation, and Ebay.com, Web directories, 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 us. Our 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 be no assurance that our competitors will not experience
greater growth in traffic than us, which could have the effect of making their
websites more attractive to vendors; or that vendors will not sever or elect not
to renew their relationships with us. 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.
WE MUST ESTABLISH AND MAINTAIN OUR BRAND NAME, YOUNETWORK.
We believe that establishing and maintaining the YouNetwork brand will
be critical to attracting and expanding our member base and Web traffic and
commerce relationships. We also believe that the importance of brand recognition
will increase due to the growing number of Internet sites and the low barriers
to entry. If members, visitors to our website, businesses, vendors or
distributors do not perceive our existing services to be of high quality, or if
we alter or modify our brand image, introduce new services or enter into new
business ventures that are not favorably received by such parties, the value of
our brand could be diluted, thereby, decreasing the attractiveness of our
website to such parties. We recently submitted an application to register our
servicemark, YouNetwork Corporation with the United States Patent and Trademark
Office.
WE ARE HEAVILY DEPENDENT ON OUR PROPRIETARY TECHNOLOGY, TRACKING AND NET VALUE.
We regard our proprietary 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 MAY BE HELD LIABLE FOR ONLINE CONTENT PROVIDED BY US OR THIRD PARTIES.
Materials may be downloaded and distributed to others by the on-line
or Internet services offered by us or the Internet service providers with which
we have a relationship. If this happens, claims may be made against us for
defamation, negligence, copyright or trademark infringement, or some other
reason. These claims or the imposition of liability may have a negative effect
on our business, results of operations and financial condition.
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 if our proprietary rights. There can be no assurance
that the steps we take have prevented or will prevent misappropriation or
infringement of our proprietary information.
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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 us. Such claims and any resultant
litigation, should it occur, might subject us to significant liability for
damages and might result in invalidation of our 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.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL COSTS TO
DOING BUSINESS ON THE INTERNET.
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. 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. 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.
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 that these 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 those states
will not be offered the securities in this offering, there can be no assurance
that our rebate program will not be subject to challenge in other states where
we intend to do business.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE CLASS A OR CLASS B SHARES
OFFERED IN THIS PROSPECTUS.
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 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 website. 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 us to our 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.
Although we will receive no proceeds from this offering 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.
WE REQUIRE SUBSTANTIAL FUNDS AND MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE
FUTURE.
We currently have no revenue and do not expect to have any revenue
until we commence operations following this offering; however, 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
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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 our stockholders will be reduced, stockholders may
experience additional dilution, and those securities may have rights,
preferences or privileges senior to those securities held by existing
stockholders. There can be no assurance that additional financing will be
available on terms favorable to us, or at all. If adequate funds are not
available or not available on acceptable terms, we may not be able to fund our
future operations, promote our brand as we desire, 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.
UNLESS A PUBLIC MARKET DEVELOPS FOR OUR SECURITIES, YOU MAY NOT BE ABLE TO SELL
YOUR SHARES.
The initial public offering price of the class B shares has been
arbitrarily determined by us and is not necessarily related to our assets, book
value, results of operations, or any other established criteria of value. Prior
to the offering, there has been no public market for our securities. Failure to
develop or maintain an active trading market could negatively effect the price
of our securities.
WE WILL NOT LIST OUR CLASS A OR CLASS B SHARES ON ANY EXCHANGE.
Currently, we do not intend to list our securities on any exchange. We may
in the future apply to have the securities listed on the Nasdaq SmallCap Market.
As a result, it would be difficult for an investor to dispose of our securities
rather than a security traded on the Nasdaq Smallcap Market or a national
securities exchange.
WE MAY BE SUBJECT TO PENNY STOCK REGULATIONS.
If we applied in the future to have our securities listed on Nasdaq
SmallCap Market and we did not satisfy Nasdaq listing or maintenance
requirements then we may list our 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 Securities and Exchange 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 PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Upon completion of this offering, we 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 us in private
transactions in reliance upon one or more exemptions. Restricted securities may,
in the future, be sold in compliance with Rule 144.
Rule 144 provides that a person holding restricted securities for a
period of one year may sell in
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brokerage transactions an amount equal to 1% of our outstanding common stock
every three months. A person who is a "non-affiliate" of us 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. These 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.
Holders of our class A shares shall be subject to a one year lock-up
period in which they shall not directly or indirectly, offer, sell, pledge,
grant any option to purchase, or otherwise sell or dispose of any of our shares
for a period of twelve months after the offering without our prior written
consent.
OUR MANAGEMENT HAS SUBSTANTIAL CONTROL OVER US AND INVESTORS IN THIS OFFERING
MAY HAVE NO EFFECTIVE VOICE IN MANAGEMENT.
Upon completion of the offering, our directors, executive officers and
principal stockholders will, in the aggregate, beneficially own approximately
73.7% of the outstanding common stock. As a result, these stockholders will
possess significant influence over us, giving them the ability, among other
things, to elect a majority of our Board of Directors and approve significant
corporate transactions. This share ownership and control may also have the
effect of delaying or preventing a change in control, impeding a merger,
consolidation, takeover or other business combination involving us or discourage
a potential acquirer from making a tender offer or otherwise attempting to
obtain control of us, which could have a material adverse effect on the market
price of our securities.
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CAPITALIZATION
On February 3, 1999, YouNetwork Corp., a New York corporation merged
into us. All shareholders of the New York Corporation exchanged their shares of
common stock for shares of our class C common stock, $.0001 par value per share,
on a basis of 330,000 shares of our class C common stock for each outstanding
share of the New York Corporation's common stock. The reason for the merger was
to take advantage of the laws of the State of Delaware.
The following table sets forth: (1) the historical capitalization of
YouNetwork Corp. a New York Corporation as of March 31, 1999; (2) pro forma
effect of the issuance of 2,050,000 shares of our class C common stock through a
private placement in April 1999, for consideration of $1,025,000; and (3) 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 our private
placement of our common stock, and the recognition of a charge to operations of
$500,000 for promotion costs, (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 which will be offset against additional-paid-in-capital.
You should read this table in conjunction with our financial
statements, and the related notes thereto, and other financial information
included in this prospectus.
<TABLE>
<CAPTION>
YouNetwork Pro Forma YouNetwork
(Historical) Adjustments Pro Forma As Adjusted
(1) (2) (1) (2) (3)
<S> <C> <C> <C> <C>
Long-term liabilities:
Capital lease obligation $ 21,808 $ -- $ 21,808 $ 21,808
Stockholders' Equity:
class A common stock, $.0001par value, 1,500,000
shares authorized, no shares issued and outstanding
YouNetwork Corp. (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; 39,109,452 shares
issued and outstanding YouNetwork Corporation
(historical); 41,159,452 issued and outstanding
pro forma and as adjusted 3,911 205 4,116 4,116
Additional-paid-in-capital 659,289 1,024,795 1,684,084 2,026,884
Accumulated Deficit (253,512) -- (253,512) (753,512)
----------- ----------- ----------- -----------
Total stockholder's equity 409,688 1,025,000 1,434,688 1,277,688
----------- ----------- ----------- -----------
Total capitalization $ 431,496 $ 1,025,000 $ 1,456,496 $ 1,299,496
=========== =========== =========== ===========
</TABLE>
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<PAGE>
We will not receive net proceeds from the sale of our 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 are 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 website. 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 us to our 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.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We do not intend
to declare or pay dividends on our common stock, but to retain our earnings, if
any, for the operation and expansion of our business. Dividends will be subject
to the discretion of our board of directors and will be contingent on future
earnings, if any, our, financial condition, capital requirements, general
business conditions and other factors as our board of directors' deem relevant.
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<PAGE>
DILUTION
Our members who receive 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
March 31, 1999, we had a net tangible book value of $409,688, approximately
$.010 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 March 31, 1999 would have been
$1,252,688, or $.030 per share. This represents an immediate increase in the net
tangible book value of approximately $.020 or an increase of 291% per share to
existing stockholders and an immediate dilution of $970 per share or 97.0% 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............................... $ 0.010
Increase per share attributable
to this offering ............................................... $ 0.020
Net tangible book value per share
after this offering ............................................ $ 0.030
Dilution per share to new investors in class B common stock .... $ 0.970
The following table summarizes, as of March 31, 1999, 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.
Existing stockholders shares does not include 2,050,000 shares of our class C
common stock for consideration of $1,025,000, issued in a private placement in
April 1999.
<TABLE>
<CAPTION>
Average
Shares Purchased Total
Consideration
Price
Number Percent Amount Percent Per Share
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1) 39,109,452 95.14% $ 663,200 44.03% $0.02
New Investors
(class B common stock) 1,000,000 2.43 843,000 55.97 0.84
(class A common stock) 1,000,000 2.43 -- -- --
---------- ------ ---------- ------ -----
Total 41,109,452 100.00% $1,506,200 100.00%
========== ====== ========== ======
</TABLE>
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PLAN OF OPERATION
The following discussion and analysis of the financial condition and
results of our operations 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.
We are a development stage company, which is poised to launch a unique
online consumer network. Our consumer network will offer a broad range of
consumer products and services through our website, www. YouNetwork.com. Our
website 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 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 us 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 refers member number one, the first level
referral; member number one refers member number two, the second level referral;
member number two refers member number three, the third level referral; member
number three refers member number four, the fourth level referral, and member
number four refers member number five, the 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 we have a 30-day return policy
on our 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, which we define as Net value, within our
membership. 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.
A member will purchase our products with a major credit card by
providing the requested information from our website. We will only sell our
products through our website. 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 delivering the product through
the U.S. mail or courier service. The sale of a consumer product will be
recognized by us as revenue.
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Members may also register to receive our long distance telephone
service through our website. A member who requests long distance service through
our website 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.
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.
On March 6, 1998, we entered into an agreement with Qwest International
Inc., a successor in interest to LCI International Telecom Corp., to solicit
orders for long distance service. Under the agreement, Qwest will pay us a 10%
commission on toll revenue generated by our members during its term and up to a
maximum of 24 months following termination. The commission is currently 10% of
our collected revenue relating to services sold by us (excluding taxes,
installation charges, subscription fees and local loops). Collected revenue will
only be realized for those subscribers who remain on the Qwest service a minimum
of 30 days.
If in any month the disconnect percentage of established subscribers
meet or exceeds 15% of our new subscribers within that same 30 day period, and
if we fail to meet the established disconnect percentage within 30 days of
notice from Qwest of an unacceptable disconnect percentage, 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.
Pursuant to the terms of the agreement, Qwest advanced to us
approximately $175,000 as of March 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 us 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 currently license from third parties certain databases incorporated
into our website. 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 us 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. Our insurance 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 us.
In July 9, 1998, we entered into a non-exclusive license with Baker &
Taylor, Inc., which distributes books, spoken word audio products and provides
certain value added services. Baker & Taylor gives us the ability to provide
access to its proprietary database to our members. Under the terms of the
agreement we will pay Baker & Taylor a license fee of $1,000 for the use of the
database for each year we use it. We will also pay a subscription fee each year
of $1,650.
The fees were payable to Baker & Taylor in July 9, 1998, and are due
each year thereafter up to July 2000, at which time the Agreement is subject to
negotiation. Baker & Taylor may increase the fee at its option after giving
notice to us. 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.
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<PAGE>
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 our website. We have
sufficient cash requirements to operate our website 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.
We have funded our activities primarily from equity financing in the
amount of $1,688,000, and from advanced 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.
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 net value; 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:
o to utilize the cost-effective direct marketing capabilities of the Web to
sell products to our customer base;
o to offer equity participation to rapidly attract a sizeable membership
base;
o to develop a detailed member database;
o to continue to grow online reach and membership utilizing our proprietary
tracking technology; and
o to provide customer convenience and competitive prices to encourage
purchasing.
We believe that promoting repeat usage and membership loyalty through
equity ownership in our company will help establish us as a preferred
destination among Web users.
Our future net revenues will be generated from electronic commerce,
primarily through the sale of products and services on our website 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 March 31, 1999, we had an accumulated deficit of $253,512.
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 an
indication of future performance. To the extent that net revenue does not grow
at anticipated rates or that increases in our
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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.
To date, we have entered into vendor affiliations, license arrangements
and strategic alliances in order to build our electronic commerce networks.
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 we market our 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
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.
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 a member of International Computing. For the period from
inception through December 31, 1998, we paid $89,425 for consulting services. In
March 1999, we entered into an oral agreement with International Computing to
continue to provide software and systems integration consultation services to us
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
us.
In March of 1999, we 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 in the form of graphic design of our website. The rights
represented by this warrant are exercisable at any time commencing on March 31,
1999, and expiring on March 1, 200, at an exercise price of $2.00 per share
provided, however, that if the warrant is exercised after a first underwriting
public offer of our common stock, the exercise price shall be the lesser of
$2.00 or 50% of the offering price for which our common stock is sold in our
first underwritten public offering, subject to adjustment in accordance with its
anti-dilution provision. After the expiration of the exercise period, Raw
Interactive will have no right to purchase any shares of the common stock
underlying this warrant.
On May 26, 1999, we entered into a master lease agreement with Leasing
Technologies, Inc., in which we leased computers, servers and other hardware.
The term of the agreement shall commence on the installation date of such
equipment for a term of 36 months.
We were incorporated on January 14, 1998, 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 our website and operations. As a result, there has not
been any operating revenue generated by utilization of our services or products
through December 31, 1998, and the three months ended, March 31, 1999.
RESULTS OF OPERATIONS.
From inception, operations have been in the early stages of
development. We had no revenues for the period ended December 31, 1998, and the
three months ended March 31, 1999. We incurred expenses of $162,823,
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and $90,689 for the period ended December 31, 1999, and the three months ended,
March 31, 1999, respectively, 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, we incurred costs in developing our proprietary tracking
system as well as other general and administrative expenses since inception.
As of December 31, 1999, we had 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 website,
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 our website, 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 timing and number of new hires,
the availability of desirable products and services for sale through our
website, the accuracy of our predictions regarding optimal inventory levels for
products, the loss of a key vendor affiliation or relationship by us, 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 website development and publishing tools, technical difficulties with
our website, 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 our 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 our website potentially being
lower during the summer and year-end vacation and holiday periods when overall
usage of our website 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 March 31, 1999, 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
our 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 website 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.
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NO PROCEEDS FROM THE SALE OF CLASS A OR CLASS B SHARES.
We will not receive proceeds from the sale of our 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 website. 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 us to our 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.
Our systems are built upon multiple layers of third party software and
hardware components. 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 with our vendors and third party suppliers,
which may or may not uncover a potential source of a year 2000 non-compliance
problem. The failure of products or systems maintained by third parties or our
products and systems to be year 2000 compliant could cause us to incur
significant expenses to remedy any problems, or seriously damage our business.
We have not incurred significant costs for these purposes and we do not believe
that we will incur significant costs for these purposes in the foreseeable
future. In July 1999, we will begin converting our computer system to be Year
2000 compliant. As of June 1999, we have not incurred any expenses attributed to
our Year 2000 compliance efforts.
However, to insure year 2000 compliance we have instituted the
following:
o a full scale 24 hour archival process to insure against data corruption;
o Windows NT Basic Input Output System Year 2000 compliance is under review;
and
o we are seeking Year 2000 compliance and certification of compliance from
database vendors and third party application server software vendors.
As of June 7, 1999, we estimate the reasonable cost to become Year 2000
compliance to be as follows: (a) systems survey approximately $ 10,000, hardware
systems upgrade and swapping approximately $60,000, software re-writing if any,
$40,000; and (d) miscellaneous administrative costs of $20,000. It is expected
that such expenditures will not have a material effect on the financial
condition and results of our operations.
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.
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BUSINESS
OVERVIEW.
We were incorporated on January 14, 1998, under the name YouNetwork
Corp., a New York corporation. Pursuant to a merger effective, February 3, 1999,
the New York corporation merged into us, YouNetwork corporation, a Delaware
corporation. The purpose of the merger is to take advantage of the laws of the
state of Delaware.
We are a development stage company which is poised to launch a unique
and novel online 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.
We have developed proprietary tracking technology, which will be
utilized to track the referrals of our members, 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 made 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 us 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 refers member number one, the first level referral); member
number one refers member number two, the second level referral; member number
two refers member number three, the third level referral; member number three
refers member number four, the fourth level referral, and member number four
refers member number five, the 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 we have 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, which we define as net value. 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 net value point.
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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 net value they achieve as a result of direct and indirect referrals,
until such time as all the 750,000 class A shares have been 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 which we defines as net value. 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 our class A and 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 our class A and class
B shares to our members until such time as all the securities included in the
registration statement, of which this prospectus forms a part, are fully
distributed. No securities will be distributed for a fractional net value point.
The following table illustrates how net value and available rebate
dollars may be used by a member to receive class A and class B shares. The table
assumes the following: (a) six direct referrals, (b) the direct referrals make
an average of three referrals each, (c) indirect referrals have an average of
three referrals each; and (d) each member spends an average of $75.00.
<TABLE>
<CAPTION>
=============================================================================================================================
AVERAGE NUMBER TOTAL GROSS
THIS EXAMPLE SHOWS PROJECTED REBATES AND NET NUMBER OF OF INDIRECT GROSS VOLUME AVAILABLE REBATE
VALUE 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
=============================================================================================================================
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
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
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 NET VALUE)............................................. 25 SHARES
=============================================================================================================================
CLASS B SHARES WHICH MAY BE PURCHASED(ONE CLASS B SHARE FOR EACH $1.00 OF
AVAILABLE REBATE BALANCE)
......................................................................................................... 192 SHARES
=============================================================================================================================
</TABLE>
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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 personal computers
installed in homes and offices, the decreasing cost of personal computers,
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 websites, 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.
We 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 our company, we believe that we have created an innovative online sales
channel with low customer acquisition costs. The key elements of our approach
are:
(a) Development of a detailed member database.
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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 us, and as we obtain a purchasing history data, the
level of information regarding our 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 with our website. Information obtained from a member is
kept confidential.
(b) Customer Convenience.
We intend 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 our website 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 net value; 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. We 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.
We have developed proprietary tracking technology, which will be
utilized to track the referrals of our members, and to pay rebates to
the member based on his or her purchases and the purchases made by
member referrals.
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 net value, 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:
o to utilize the cost-effective direct marketing capabilities of the Web to
sell products to our customer base;
o to offer equity participation to rapidly attract a sizeable membership
base;
o to develop a detailed member database;
o to continue to grow online reach and membership utilizing our proprietary
tracking technology; and
o 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
online commerce. Key strategies to achieve this objective include:
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(a) Focus on membership growth.
We plan to increase membership by: (1) providing initial equity
participation through the issuance of our securities; (2) offering a
broad and expanding array of products and services at competitive
reduced prices; and (3) 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 our 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 websites have an inherent potential
for creating and retaining a loyal membership base, particularly when
combined with product and service offerings such as those we will
provide. 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 us.
(e) Maintain and Improve Technological Focus and Expertise.
We believe that highly advanced functionality and performance of our
website 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. 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 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 website 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 website
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.
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(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
We will only offer the securities in this offering to those members
who consent to accept electronic delivery of our final prospectus and
other related communication by e-mail.
LICENSE AND VENDOR ARRANGEMENTS.
In July 1998, we entered into a non-exclusive license with Baker &
Taylor, Inc., which distributes books, spoken word audio products and provides
certain value added services. Baker & Taylor gives us the ability to provide
access to its proprietary data base to our members. Under the terms of the
agreement we will pay Baker & Taylor 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 Baker & Taylor in July 1998, and are due
each year thereafter up to July 2000, at which time the agreement is subject to
negotiation. Baker & Taylor may increase the fee at its option after giving us
notice. 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., to solicit
orders for long distance service. Under the agreement, Qwest will pay us a 10%
commission on toll revenue generated by our members during its term and up to a
maximum of 24 months following termination. The commission is currently 10% of
our collected revenue relating to services sold by us, excluding taxes,
installation charges, subscription fees and local loops. Collected revenue will
only be realized for those subscribers who remain on the Qwest service a minimum
of 30 days.
If in any month the disconnect percentage of established subscribers
meet or exceeds 15% of our new subscribers within that same 30 day period, and
if we fail to meet the established disconnect percentage within 30 days of
notice from Qwest of an unacceptable disconnect percentage, 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.
Pursuant to the terms of the agreement, Qwest advanced us approximately
$175,000 as of March 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 us 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.
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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 us. 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, our business, results of operations
and financial condition may be materially adversely affected. In addition, there
can be no assurance that we will be successful in establishing additional vendor
relationships.
SALES AND MARKETING.
Our sales and marketing strategy is designed to strengthen awareness of
our 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 our website.
We expect that the marketing of our services will be primarily by
word-of-mouth and indirect promotions by members with links to our
website 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.
(b) Product marketing.
We 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 us along with UPS shipping information for all ground-shipped U.S. orders. We
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.
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 reinforced with multiple support providers and daily
and weekly
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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.
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.
Established companies which are primarily focused on creating electronic
commerce networks on the Internet and with whom we will compete, include:
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.
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 us. 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.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
We have recently submitted an application to register the servicemark,
"YouNetwork" with the United States Patent and Trademark Office. 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 regard our
technology as proprietary and will attempt to protect out Tracking and net value
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. 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 of our proprietary rights.
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<PAGE>
EMPLOYEES.
As of June 8, 1999, we had five full-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.
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"
system or a formal disaster recovery plan. Our business interruption insurance
policy coverage is up to $750,000. We also have a data processing policy
covering hardware for up to $1,000,000 and software up to $250,000 in connection
with our internet services. We will carry a Data Loss Insurance Policy when our
website 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.
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.
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<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS.
Our directors and executive officers and their respective ages as of
June 10, 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, PRESIDENT.
Kyle S. Taylor has been our President since our 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, CHIEF EXECUTIVE OFFICER.
Don S. Senerath has been our Chief Executive Officer since our
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, DIRECTOR.
Peter R. Silverman has been our director 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 our Directors or
Executive Officers.
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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.
EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning
compensation to our Chief Executive Officer and each of our other most highly
compensated executive officers 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
Stock Underlying LTIP All Other
Name and Principal Year Salary Bonus Compensation Awards Options/SARs Payouts 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 us, Messrs. Taylor and Senerath.
Pursuant to a stock and warrant purchase agreement, dated as of
December 4, 1998 if the employment of Kyle S. Taylor, President or Don S.
Senerath, Chief Executive Officer is terminated by us 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 us without substantial cause, the terminated executive will not:
o 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 us
; or
o solicit our employees or our 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 website and to develop
our proprietary tracking technology. Don S. Senerath, our Chief Executive
Officer, is a member of International Computing. For the period from inception
through December 31, 1998, we paid $89,425 for such consulting services. In
March 1999, we entered into an oral agreement with International Computing to
continue to provide software and systems integration consultation services to us
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
us.
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
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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 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, as amended, and our bylaws provides
that the liability of our directors for monetary damages shall be limited to the
fullest extent permissible under Delaware law. 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 us, 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 us
or our stockholders, for any transaction from which the director derived an
improper personal benefit, for improper transactions between the director and us
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 may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving our directors or
officers 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.
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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 us; our Board
of Directors, the Management Stockholders and Original Investors who owned 77.3%
of our common stock agreed to vote their shares of common stock to elect a Board
of Directors consisting of three directors one of whom was designated by the
Original Investors, and two of whom were 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:
o any creation of any class of capital stock;
o the sale or issuance of shares of capital stock, warrants or other
securities convertible into or exchangeable for capital stock;
o any declaration or issuance of any dividend;
o any transaction or contract with a value of $10,000 or more;
o any amendment to or modification of any provision of our Certificate of
Incorporation or By-laws;
o any change in our auditors;
o any consolidation or merger of us;
o any executive employment contract;
o payment of salaries to any officer at a rate of more than $85,000 per
annum; and
o election of officers.
The stockholders' agreement also provides for certain bring along
rights and rights of first refusal among the Management Stockholders and the
Original Investors with respect to any sale of their shares. The stockholders'
agreement terminates on December 1, 2010, or such earlier time as either:
o the Original Investors no longer own at least 10% of our common stock on a
fully diluted basis; or
o we have completed a public offering of its securities resulting in net
proceeds to us of at least $10,000,000.
Pursuant to a December 4, 1998, stock sale agreement among us, the
Management Stockholders and the Original Investors, the Original Investors
purchased from us, for an aggregate purchase price of $200,000: (a) 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 (b)
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 our Purchased shares, 27% of our issued and outstanding
common stock on a fully diluted basis, immediately following the sale of
additional common stock by us in consideration of the first $400,000 of common
stock sale proceeds received by us 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 to
accredited investors only for the sale of 4,630,000 class C shares by us to
accredited investors for consideration of $463,000. Proceeds from the private
placements is being used for salaries and fees, network expansion, equipment
upgrades, and development costs in connection with our proprietary software,
tracking.
As a result of their March 1999 exercise of their respective Purchase
Options, the Original Investors each received 739,726 shares of our class C
common stock. The $463,000 raised from the private placement in March of 1999,
was used for salaries, fees and working capital.
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<PAGE>
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 us 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 years from the date of termination of employment, with the
exception of termination by us 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 or systems which duplicate or are similar to the programs and
systems which have been developed exclusively by or for us; or (ii) solicit our
employees or its clients.
On February 3, 1999, YouNetwork, a New York corporation, merged with
and into us, the surviving corporation. Pursuant to the agreement and plan of
merger, dated February 3, 1999, all shareholders of the New York corporation
exchanged their common stock for our class C common stock $.0001 par value per
share, on a basis of 330,000 shares of our class C common stock for each
outstanding share of the New York corporation. 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, we sold 6,680,000 shares of our
class C common stock for $1,488,000 to accredited 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 with persons
affiliated with us were made on terms no less favorable to us than could have
been obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with
respect to beneficial ownership of our common stock as of June 8, 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.
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 our 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.
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. Dalia
Silverman is the wife of Peter R. Silverman, one of our directors. Mr. Silverman
disclaims any beneficial ownership in the shares owned by his wife, Dalia
Silverman. There is no family relationship between Kleopatra Georgiades and any
of our directors or officers.
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
Name and Address of shares Beneficially % Beneficially Owned % Beneficially Owned
Beneficial Owner(1) Owned Before offering After offering
- ------------------- ------------------- --------------------- --------------------
<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 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
Group (2 persons) 22,212,500 54.0% 51.4%
</TABLE>
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<PAGE>
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 (c) 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.
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 June 10, 1999.
There were no class A shares or class B shares outstanding as of June 9, 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. We do 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 our liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all of our assets 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 AND CONVERSION OF CLASS A SHARES.
A holder of our class A shares shall be subject to a lock-up period and
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 this offering. There are no exceptions to the lock-up period. After
12 months from the date of this offering, one class A share shall be
automatically converted into one class B share. members who purchase class A
shares will acknowledge on our website 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 us through our officers. No selling
discounts, commissions or other form of remuneration will be paid in connection
with the offering. In those states that require a registered broker\dealer to
act on behalf of an issuer selling its own securities we have engaged the
services of Corinthian Partners, L.L.C., a registered broker\dealer. We have
engaged the services of Corinthian Partners solely in connection with the offer
and sale of our securities in those states which require a registered
broker\dealer.
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 net value they achieve as a result of direct and indirect referrals,
until such time as all the 750,000 class A shares have been 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 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 us by the member's direct referral. A
member's referral is tracked to the fifth level of referral. By way of example,
a
41
<PAGE>
member who is being tracked refers member number one, the first level referral;
member number one refers member number two, the second level referral; member
number two refers member number three, the third level referral; member number
three refers member number four, the fourth level referral, and member number
four refers member number five, the 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 we have a 30-day return policy
on our 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. 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.
We plan to publish the final prospectus, which is a part of this
registration statement, on the Internet World Wide Web at www.YouNetwork.com. We
will only offer the securities in this offering to those members who consent to
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 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 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 management and has no relationship to the book
value per share, our earnings, or other generally accepted measurement of value.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market,
or the availability of shares for sale, could adversely affect the prevailing
market price of our common stock and our ability to raise capital through an
offering of equity securities.
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 our ability to raise capital through the sale of equity securities. Upon
completion of the offering we will have outstanding 43,159,452 shares of common
stock.
41,159,452 shares of class C common stock were sold by us in private
transactions in reliance on exemptions from the registration requirements and
are "restricted securities" as that term is defined under Rule 144. 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.
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 SmallCap 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 class A shares are subject to a lock-up period in which a holder
will be unable to they shall not directly or indirectly, offer, sell, pledge,
grant any option to purchase, or otherwise sell or dispose of any of our shares
for a period of twelve months after the offering without our prior written
consent. Class A shares shall automatically be converted into class B shares
after the twelve month period.
The purchase price of the class B shares has been arbitrarily
determined by us 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 us 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 one of our directors or officers if it is determined that the person acted
in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of our certificate of incorporation provides for
the indemnification of directors and officers to the full extent permitted by
Delaware law.
We may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which we could not indemnify such
person.
Insofar as indemnification for liabilities may be permitted to
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
43
<PAGE>
TRANSFER AGENT AND REGISTRAR.
We will act as our own transfer agent and registrar for our
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 Corporation by Silverman, Collura & Chernis, P.C. New York, New York.
EXPERTS
The financial statements included in this prospectus and elsewhere in
the registration statement as of December 31, 1998, and from January 14, 1998,
(date of inception) to December 31, 1998, have been audited by Mahoney Cohen &
Company, CPA, P.C., independent auditors, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report.
The report of Mahoney Cohen & Company, CPA, P.C. covering the December
31, 1998, financial statements contains an explanatory paragraph that states
that we have 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.
ADDITIONAL INFORMATION
With respect to the securities offered hereby, we have filed with the
principal office of the Securities and Exchange Commission in Washington, D.C.,
a registration statement on Form SB-2. 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.
We are not currently a reporting company under the Securities and
Exchange Act of 1934, and therefore we have not filed any reports with the
Securities and Exchange Commission.. Upon completion of this offering we intend
to file reports with the Securities and Exchange Commisson under the Securities
Act of 1933, 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.
44
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Financial Statements
March 31, 1999
45
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1 - F-2
Balance Sheets as of December 31, 1998 and March 31, 1999
(Unaudited) F-3
Statement of Operations for the Period from Inception (January 14, 1998) to
December 31, 1998, the Three Months Ended March 31, 1999 (Unaudited) and the
Period from
Inception (January 14, 1998) to March 31, 1999 (Unaudited) F-4
Statement of Changes in Stockholders' Equity for the Period from Inception
(January 14, 1998) to December 31, 1998
and the Three Months Ended March 31, 1999 (Unaudited) F-5
Statement of Cash Flows for the Period from Inception (January 14, 1998) to
December 31, 1998, the Three Months Ended March 31, 1999 (Unaudited) and the
Period from
Inception (January 14, 1998) to March 31, 1999 (Unaudited) F-6 - F-7
Notes to Financial Statements F-8 - F-17
</TABLE>
46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
YouNetwork Corp.
We have audited the accompanying balance sheet of YouNetwork
Corporation (formerly 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
Corporation (formerly 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.
47
<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
48
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 178,068 $ 355,902
Other current assets 672 12,003
--------- ---------
Total current assets 178,740 367,905
Property and equipment, net (Notes 3 and 4) 47,369 43,882
Other assets:
Software development costs (Notes 2 and 7) 69,425 234,425
Deferred registration costs -- 62,047
Security deposits 3,500 4,700
--------- ---------
Total other assets 72,925 301,172
--------- ---------
$ 299,034 $ 712,959
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Deferred revenue (Note 5) $ 175,000 $ 175,000
Current portion of capital lease obligation (Note 4) 14,000 14,388
Due to related party (Note 7) 23,150 59,190
Accounts payable 9,224 22,737
Other current liabilities 14,729 10,148
--------- ---------
Total current liabilities 236,103 281,463
Capital lease obligation (Note 4) 25,554 21,808
Commitment (Note 10) Stockholders' equity (Note 9):
Common stock:
Class A - par value $.0001 per share,
Authorized - 1,500,000 shares
No shares issued and outstanding -- --
Class B - par value $.0001 per share,
Authorized - 1,500,000 shares
No shares issued and outstanding -- --
Class C - par value $.0001 per share,
Authorized - 247,000,000 shares,
Issued and outstanding - 33,000,000 shares at
December 31, 1998 and 39,109,452 shares at
March 31, 1999 3,300 3,911
Additional paid-in capital 196,900 659,289
Deficit accumulated during the development stage (162,823) (253,512)
--------- ---------
Total stockholders' equity 37,377 409,688
--------- ---------
$ 299,034 $ 712,959
========= =========
</TABLE>
49
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
For the Period
For the Period For the From Inception
From Inception Three Months (January 14, 1998)
(January 14, 1998) to Ended to
December 31, 1998 March 31, 1999 March 31, 1999
------------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Expenses:
Compensation 67,251 24,854 92,105
Development costs 20,000 -- 20,000
General and administrative 66,089 60,372 126,461
Depreciation and amortization 7,508 4,400 11,908
Interest expense 1,975 1,063 3,038
--------- --------- ---------
Total expenses 162,823 90,689 253,512
--------- --------- ---------
Net loss during the development stage $(162,823) $ (90,689) $(253,512)
========= ========= =========
Net loss per common share, basic and
diluted $ (.01) $ -- $ (.01)
========= ========= =========
Weighted average of common shares
outstanding - basic and diluted 24,916,434 34,993,896 26,968,406
========== ========== ==========
</TABLE>
50
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Statement of Changes in Stockholders' Equity
For the Period from Inception (January 14, 1998) to
December 31, 1998 and the Three Months Ended
March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Development --------------------------------- During the
Additional Paid-In
Shares Amount Capital Stage Total
------ ------ ------- ----- -----
<S> <C> <C> <C> <C> <C>
Issuance of 24,090,000 shares of common
stock on January 22, 1998 for cash (at
less than $.01
per share) 24,090,000 $ 2,409 $ (2,209) $ -- $ 200
Issuance of 8,910,000 shares of
common stock on December 4,
1998 for cash (at $.02 per share) 8,910,000 891 199,109 -- 200,000
Net loss for the period from
inception (January 14, 1998)
to December 31, 1998 -- -- -- (162,823) (162,823)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1998 33,000,000 3,300 196,900 (162,823) 37,377
Issuance of 4,630,000 shares
of common stock on
March 22, 1999 for cash
(at $.10 per share) 4,630,000 463 462,537 -- 463,000
Exercise of common stock
purchase warrants for no
cash proceeds in accordance
with anti-dilutive provisions
(Notes 9 and 11) 1,479,452 148 (148) -- --
Net loss for the three months
ended March 31, 1999
(unaudited) -- -- -- (90,689) (90,689)
---------- ---------- ---------- ---------- ----------
Balances, March 31, 1999
(unaudited) 39,109,452 $ 3,911 $ 659,289 $ (253,512) $ 409,688
========== ========== ========== ========== ==========
</TABLE>
51
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
For the Period
For the Period For the From Inception
From Inception Three Months (January 14, 1998)
(January 14, 1998) to Ended to
December 31, 1998 March 31, 1999 March 31, 1999
------------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss during the development stage $ (162,823) $ (90,689) $ (253,512)
Adjustments to reconcile net loss during
the development stage to net cash
provided by (used in) operating
activities:
Depreciation and amortization 7,508 4,400 11,908
Change in assets and liabilities:
Other current assets (672) (11,331) (12,003)
Deferred revenue 175,000 - 175,000
Due to related party 23,150 36,040 59,190
Accounts payable 9,224 13,513 22,737
Other current liabilities 14,729 (4,581) 10,148
------------ ------------ -------------
Net cash provided by (used in)
operating activities 66,116 (52,648) 13,468
------------ ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (9,927) (913) (10,840)
Software development costs (69,425) (165,000) (234,425)
Payment of security deposit (3,500) (1,200) (4,700)
------------ ------------ -------------
Cash used in investing activities (82,852) (167,113) (249,965)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 200,200 463,000 663,200
Deferred registration costs - (62,047) (62,047)
Payments of capital lease obligation (5,396) (3,358) (8,754)
------------ ------------ -------------
Net cash provided by financing
activities 194,804 397,595 592,399
------------ ------------ -------------
Net increase in cash 178,068 177,834 355,902
Cash, beginning of period - 178,068 -
------------ ------------ -------------
Cash, end of period $ 178,068 $ 355,902 $ 355,902
============ ============ =============
</TABLE>
52
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Statement of Cash Flows (Concluded)
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Period
For the Period For the From Inception
From Inception Three Months (January 14, 1998)
(January 14, 1998) to Ended to
December 31, 1998 March 31, 1999 March 31, 1999
------------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 1,975 $ 1,063 $ 3,038
============ ============ =============
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligation incurred for the
acquisition of new equipment $ 44,950 $ - $ 44,950
============ ============ =============
</TABLE>
In March 1999, common stock purchase warrants were exercised and the Company
issued 1,479,452 of class C common stock for no cash proceeds.
Note 1 - The Company
YouNetwork Corp. was incorporated in the State of New York on
January 14, 1998. On February 3, 1999, the stockholders of YouNetwork Corp.
exchanged their common stock for shares of class C common stock of YouNetwork
Corporation (the "Company") (see Note 11). 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
since inception. 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
53
<PAGE>
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.
54
<PAGE>
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 certain proprietary e-commerce technology
for its online systems. Development includes software for its member referral
tracking, shopping list and checkout, rebate and reward accounting, credit card
transaction engine, automated merchandising
55
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued)
Software Development Costs (Continued)
and product presentation, as well as data base management tools and reporting
programs. Front-end site development includes such items as design and
development of the shopping interface, dynamic home page and Internet gateway.
Accordingly, during the period from inception (January 14, 1998) to December 31,
1998 and the three months ended March 31, 1999, the Company capitalized $69,425
and $165,000, respectively, 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, substantially 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).
Deferred Registration Costs
Deferred registration costs will be offset against additional
paid-in capital upon the issuance of shares as contemplated in the registration
statement (see Note 11). Deferred registration costs will be charged to
operations if at such time it is determined that the offering is unsuccessful.
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. Since inception, such costs have been
nominal.
56
<PAGE>
Note 2 - Summary of Significant Accounting Policies (Continued)
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 stock split on December 4, 1998 and
the exchange of stock on February 3, 1999 (see Note 11).
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 and March 31, 1999, there is no pro forma effect on loss per
share.
57
<PAGE>
Note 3 - Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Computer equipment $ 4,071 $ 4,071
Office equipment 3,706 4,619
Leasehold improvements 2,150 2,150
------------ -----------
9,927 10,840
Equipment held under capital lease 44,950 44,950
------------ -----------
54,877 55,790
Less: Accumulated depreciation and
amortization 7,508 11,908
------------ -----------
$ 47,369 $ 43,882
============ ===========
</TABLE>
Note 4 - Capital Lease Obligation
Capital lease obligation consists of:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
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 at December 31, 1998 and $35,000 at
March 31, 1999
$ 45,619 $ 41,205
Less: Amount representing interest 6,065 5,009
------------- -----------
39,554 36,196
Less: Current portion 14,000 14,388
------------- -----------
$ 25,554 $ 21,808
============== ===========
</TABLE>
58
<PAGE>
Note 4 - Capital Lease Obligation (Continued)
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.
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 $ --
========
59
<PAGE>
Note 7 - Related Party Transactions
From inception, the Company has retained the services of Digital, a
corporation that is partially-owned by the Company's chief executive officer who
is also a significant shareholder of the Company. For the period from inception
through March 31, 1999, this individual had not performed any significant
services on behalf of the Company in his role as chief executive officer and no
compensation expense has been recorded by the Company. Digital has provided
software and systems integration consultation services in connection with the
Company's development of its proprietary tracking software. Consulting fees paid
by the Company to Digital 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. Consulting fees paid by the Company to Digital and
capitalized were $155,000 for the three months ended March 31, 1999. At December
31, 1998 and March 31, 1999, $23,150 and $59,190, respectively, 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 8,910,000 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. During the three
months ended March 31, 1999, the warrants were exercised and the Company issued
1,479,452 shares of class C common stock.
Note 10 - Commitment
Lease
The Company leases office space under an operating lease expiring
in April 2003. As of December 31, 1998, the future minimum lease payments,
excluding escalation charges, are as follows:
60
<PAGE>
Note 10 - Commitment (Continued)
Lease (Continued)
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 and the three months ended
March 31, 1999 was approximately $12,100 and $5,700, respectively.
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
61
<PAGE>
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.
Upon the issuance of class A shares, the Company will record a
charge to operations for promotions costs for the value of the shares issued
based on the most recent private offering. Upon the issuance of class B shares,
the Company will record a reduction in the liability for rebates due to members
of the consumer network. A liability for rebates due to members and a
corresponding charge to cost of goods sold are recorded when members make
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, 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.
Note 12 - Interim Periods (Unaudited)
In the opinion of the Company, the accompanying unaudited financial
statements include all adjustments (which consist only of normally recurring
items) necessary to present fairly the financial position as of March 31, 1999,
and the results of operations and cash flows for the three months ended March
31, 1999 and the period from inception (January 14, 1998) to March 31, 1999. The
results for the months ended March 31, 1999 and the period from inception
(January 14, 1998) to March 31, 1999, are not necessarily indicative of the
results to be expected for the year. Operations for the three months ended March
31, 1998 and the Company's financial position at March 31, 1998 were not
significant.
62
<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 ............................................. 23
Management's Discussion and Analysis ................. 24
Business ............................................. 30
Industry Background .................................. 32
Management ........................................... 39
Executive Compensation Table ......................... 40
Principal Stockholders ............................... 44
Description of securities ............................ 46
shares Eligible for Future Sale ...................... 46
Disclosure of Compensation Position on
Indemnification for Securities Act Liabilities ...... 46
Legal Matters ........................................ 44
Experts .............................................. 47
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.
63
<PAGE>
1,000,000 SHARES OF CLASS A
COMMON STOCK AND
1,000,000 SHARES OF CLASS B
COMMON STOCK
YOUNETWORK CORPORATION
PROSPECTUS
____________, 1999
64
<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 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 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.
65
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration Fee $ 280
Printing and Engraving Expenses $ 20,000*
Legal Fees and Expenses (including blue sky fees and expenses) $100,000*
Accounting Fees and Expenses $ 25,000*
Transfer Agent's Fees and Expenses $ 10,000*
Miscellaneous Expenses $ 2,000*
--------
TOTAL $157,280*
*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. All
investors are accredited.
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. All investors in these private transactions are accredited.
66
<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.
10.7** Master lease agreement between Leasing Technologies,
Inc and YouNetwork corporation, dated April 15, 1999.
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. 3 to Form SB-2
*** To be filed by amendment
</TABLE>
67
<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.
68
<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 June 10, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- -----
<S> <C> <C>
s/Kyle S. Taylor President, June 10, 1999
- ---------------------- Director
Kyle S. Taylor
s/Don S. Senerath Chief Executive Officer, June 10, 1999
- ---------------------- Director
Don S. Senerath
S/Peter R. Silverman Director June 10, 1999
- ----------------------
Peter Silverman
</TABLE>
69
<PAGE>
Except as otherwise indicated, all exhibits listed below were filed
with YouNetwork's initial filing, Form SB-2 on February 5, 1999.
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.
10.7** Master lease agreement between Leasing Technologies, Inc and
YouNetwork corporation, dated April 15, 1999.
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. 3 to Form SB-2
*** To be filed by amendment
70
<PAGE>
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT (THE "LEASE") IS MADE THE 15TH DAY OF APRIL, 1999
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC., WITH ITS PRINCIPAL OFFICE AT
221 DANBURY ROAD, WILTON, CT 06897 (THE "LESSOR"), AND YOUNETWORK CORPORATION, A
DELAWARE CORPORATION, WITH ITS PRINCIPAL OFFICE AT 220 EAST 23RD STREET, SUITE
607, NEW YORK, NY 10010 (THE "LESSEE"). THE PARTIES HERETO AGREE AS FOLLOWS:
1. LEASE:
This Lease establishes the general terms and conditions by which Lessor
may lease to Lessee the Equipment (the "Equipment") listed on each Equipment
Schedule executed periodically pursuant to this Lease. Each such Equipment
Schedule shall incorporate by reference the terms of this Lease, and shall be a
separate lease agreement as to the Equipment listed thereon for all purposes,
including default. In the event of any conflict between the terms and conditions
of this Lease and the terms and conditions of any Equipment Schedule(s) or
Rider(s) thereto, the terms and conditions of such Equipment Schedule(s) or
Rider(s) shall prevail.
2. DEFINITIONS:
(a) The "Installation Date" means the date determined in accordance
with the applicable Equipment Schedule.
(b) The "Commencement Date" means, as to any item of Equipment
designated on any Equipment Schedule where the Installation Date for such item
of Equipment falls on the first day of the month, that date, or, in any other
case, the first day of the month following the month in which such Installation
Date falls.
(c) The "Daily Rental" means 1/30th of the amount set forth as the
monthly rental in the applicable Equipment Schedule.
3. TERM OF LEASE:
The term of this Lease, as to all Equipment designated on any Equipment
Schedule, shall commence on the Installation Date for such Equipment, and shall
continue for an initial period ending that number of months as is specified on
the applicable Equipment Schedule from the Commencement Date for the last item
of Equipment to be installed (the "Initial Term"). The term of this Lease for
all such Equipment shall be automatically extended for successive monthly
periods until terminated in accordance with this Lease. Any termination shall be
effective only on the last day of the Initial Term or the last day of any such
successive period.
4. RENTAL:
The monthly rental payable hereunder is as set forth in the Equipment
Schedule(s). Rental shall begin to accrue on the Installation Date for each item
of Equipment and shall be due and payable by Lessee in advance on the first day
of each month. If the Installation Date does not fall on the first day of a
month, the rental for that period of time from the Installation Date until the
Commencement Date shall be an amount equal to the Daily Rental multiplied by the
number of days from (and including) the Installation Date to (but not including)
the Commencement Date and shall be due and payable on the Installation Date. In
addition to the monthly rental set forth in the Equipment Schedule(s), Lessee
shall pay to Lessor an amount equal to all taxes paid, payable or required to be
collected by Lessor, however designated, which are levied or based on the
rental, on the Lease or on the Equipment or on its purchase for lease hereunder,
or on its use, lease, operation, control or value (including, without
limitation, state and local privilege or excise taxes based on gross revenue),
any penalties or interest in connection therewith which are attributable to
Lessee's negligence or taxes or amounts in lieu thereof paid or payable by
Lessor in respect of the foregoing, but excluding taxes based on Lessor's net
income. Personal property taxes assessed on the Equipment during the term hereof
shall be paid by Lessee. Lessee agrees that Lessor, or Lessor's agent may file
all required property tax returns and reports and pay all taxes thereon
pertaining to the Equipment. In such event, Lessee shall reimburse Lessor or
Lessor's agent for all costs and expenses incurred in connection therewith,
provided that such costs and expenses (including property taxes) shall not
exceed the property taxes pursuant to statutory tax rates and regulations. If
requested by Lessor, Lessee agrees to file, on behalf of Lessor, all required
property tax returns and reports concerning the Equipment with all appropriate
governmental agencies, and, within not more than thirty (30) days after the due
date of such filing to send Lessor confirmation of such filing.
Interest on any past due payments, including but not limited to
administrative charges and any other charges or fees arising out of or related
to this Lease (excluding any payments relating to taxes which have not been
timely paid other than due to Lessee's conduct), shall accrue at the rate of 1
1/2% per month, or if such rate shall exceed the maximum rate allowed by law,
then at such maximum rate, and shall be payable on demand. Charges for taxes,
penalties and interest shall be promptly paid by Lessee when invoiced by Lessor.
1
<PAGE>
As security for the full performance of all of Lessee's obligations
under each Equipment Schedule, Lessee shall, simultaneously with the execution
and delivery of each Equipment Schedule, deposit with Lessor the amount set
forth on such Equipment Schedule. The security deposit shall be promptly
returned to Lessee by Lessor upon the expiration of such Equipment Schedule and
return or purchase of all Equipment, as the case may be, provided that all
Lessee obligations under such Equipment Schedule have been fulfilled.
5. INSTALLATION, USE AND QUIET POSSESSION OF EQUIPMENT:
(a) Lessee, at its own expense, will provide the required suitable
electric current to operate the Equipment and appropriate installation
facilities as specified by the manufacturer.
(b) Any equipment, cards, disks, tapes or other items not specified in
the Equipment Schedule(s) which are used on or in connection with the Equipment
must meet the specifications of the manufacturer and shall be acquired by Lessee
at its own expense.
(c) Lessee shall use the Equipment solely in connection with Lessee's
business and for no other purpose. Subject to the preceding sentence, Lessee
shall be entitled to unlimited usage of the Equipment without extra charge by
Lessor.
(d) Unless otherwise set forth in the applicable Equipment Schedule,
Lessee will at all times keep the Equipment in its sole possession and control.
The Equipment shall not be moved from the location stated in the applicable
Equipment Schedule without the prior written consent of Lessor.
(e) After prior notice to Lessor, Lessee may, at its own expense, make
alterations in or add attachments to the Equipment, provided such alterations or
attachments do not interfere with the normal and satisfactory operation or
maintenance of the Equipment or with Lessee's ability to obtain and maintain the
maintenance contract required by Section 5(h) hereof. The manufacturer or other
organization selected by Lessee and approved in writing by Lessor to maintain
the Equipment ("Maintenance Organization") may incorporate engineering changes
or make temporary alterations to the Equipment upon request of Lessee. All such
alterations and attachments shall be and become the property of Lessor or, at
the option of Lessee, shall be removed by Lessee and the Equipment restored, at
Lessee's expense, to its original condition as of the Installation Date thereof,
reasonable wear and tear only excepted, and upon the removal and restoration,
the alteration and/or attachment which was made by Lessee shall become the
property of Lessee.
(f) So long as Lessee is not in default hereunder, neither Lessor nor
any party claiming through or under Lessor shall interfere with Lessee's use or
possession of any Equipment during the term of this Lease.
(g) Lessee shall, during the term of this Lease, at its expense, keep
the Equipment in good working order and condition reasonable wear and tear
excepted and make all necessary adjustments, repairs and replacements and shall
not use or permit the Equipment to be used in any manner or for any purpose for
which, in the opinion of the manufacturer, the Equipment is not designed or
reasonably suitable.
(h) Unless otherwise set forth in the applicable Equipment Schedule,
Lessee shall, during the term of this Lease, at its own expense, enter into and
maintain in force a contract with the manufacturer or the Maintenance
Organization covering at least prime shift maintenance of each item of
Equipment. Such contract shall commence upon expiration of the manufacturer's
warranty period, if any, relating to such item. Lessee shall furnish Lessor with
a copy of such contract(s).
(i) At the termination of the applicable Equipment Schedule, Lessee at
its expense shall return, if permitted by the applicable Equipment Schedule, not
less than all the Equipment subject thereto to Lessor (at the location
designated by Lessor within the Continental United States) in the same operating
order, repair, condition and appearance as on the Installation Date, reasonable
wear and tear only excepted, with all engineering and safety changes prescribed
by the manufacturer or Maintenance Organization incorporated therein. Lessee
shall, prior to such termination, arrange and pay for any repairs, changes and
manufacturer's certifications as are necessary for the manufacturer or
Maintenance Organization to accept the Equipment under contract maintenance at
its then standard rates. Lessee shall return all accessories supplied with the
Equipment, including but not limited to all manuals, cables and software
diskettes. Lessee shall promptly pay, after receipt of an invoice therefore, all
costs and expenses pertaining to the replacement of any missing items and for
the repair of any Equipment, together with any audit, inspection or
certification charges reasonably incurred by Lessor.
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6. LEASEHOLD RIGHTS AND INSPECTION:
(a) Lessee shall have no interest in the Equipment other than the
rights acquired as a lessee hereunder and the Equipment shall remain personalty
regardless of the manner in which it may be installed or attached. Lessee shall,
at Lessor's request, affix to the Equipment, tags, decals or plates furnished by
Lessor, indicating Lessor's ownership and Lessee shall not permit their removal
or concealment. Lessee shall replace any such tag, decal or plate which may be
removed or destroyed or become illegible. Lessee shall keep all Equipment free
from any marking or labeling which might be interpreted as a claim of ownership
thereof by Lessee or any party other than Lessor or anyone claiming through
Lessor.
(b) Lessee shall keep the Equipment free and clear of all liens and
encumbrances except liens or encumbrances arising through the actions or
omissions of Lessor. LESSEE SHALL NOT ASSIGN OR OTHERWISE ENCUMBER THIS LEASE OR
ANY OF ITS RIGHTS HEREUNDER OR SUBLEASE THE EQUIPMENT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR except that Lessee may assign this Lease or sublease the
Equipment to its parent or any subsidiary corporation, or to a corporation which
shall have acquired all or substantially all of the property of Lessee by
merger, consolidation or purchase. No permitted assignment or sublease shall
relieve Lessee of any of its obligations hereunder.
(c) Lessor or its agents shall have free access to the Equipment at all
reasonable times for the purpose of inspection and for any other purpose
contemplated by this Lease.
(d) Lessee shall immediately notify Lessor of all details concerning
any damage to, or loss of, the Equipment arising out of any event or occurrence
whatsoever, including but not limited to, the alleged or apparent improper
manufacture, functioning or operation of the Equipment.
7. NO WARRANTIES BY LESSOR:
Lessee represents that, at the Installation Date thereof, it shall have
(a) thoroughly inspected the Equipment; (b) determined for itself that all items
of Equipment are of a size, design, capacity and manufacture selected by it; and
(c) satisfied itself that the Equipment is suitable for Lessee's purposes.
LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT BEING THE MANUFACTURER OF THE
EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED AS TO THE EQUIPMENT'S MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL
OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that
all such risks, as between Lessor and Lessee, are to be borne by Lessee. Lessee
agrees to look solely to the manufacturer or to suppliers of the Equipment for
any and all warranty claims and any and all warranties made by the manufacturer
or the supplier of Lessor are, to the extent to which the same may be
assignable, hereby assigned to Lessee for the term of the applicable Equipment
Schedule. Lessee agrees that Lessor shall not be responsible for the delivery,
installation, maintenance, operation or service of the Equipment or for delay or
inadequacy of any or all of the foregoing. Lessor shall not be responsible for
any direct or consequential loss or damage resulting from the installation,
operation or use of the Equipment or otherwise. Lessee will defend, indemnify
and hold Lessor harmless against any and all claims, demands and liabilities
arising out of or in connection with the design, manufacture, possession or
operation of the Equipment.
8. RISK OF LOSS ON LESSEE:
(a) Beginning on the Installation Date thereof and continuing until the
Equipment is either returned to Lessor or purchased by Lessee as provided in
this Lease, Lessee relieves Lessor of responsibility for all risks of physical
damage to or loss or destruction of the Equipment, howsoever caused. During the
term of this Lease as to any Equipment Schedule, Lessee shall, at its own
expense, keep in effect "all risk" property insurance and public liability
insurance policies covering the Equipment designated in each Equipment Schedule.
The public liability insurance policy shall be in such amount as is reasonably
acceptable to Lessor. The "all risk" property insurance policy shall be for an
amount not less than the replacement cost of the Equipment. Lessor, its
successors and assigns and/or such other party as may be designated by any
thereof to Lessee, in writing, shall be named as additional insureds and loss
payees on such policies, which shall be written by an insurance company of
recognized responsibility which is reasonably acceptable to Lessor. Evidence of
such insurance coverage shall be furnished to Lessor no later than the
Installation Date set forth in the Equipment Schedule(s) and, from time to time,
thereafter as Lessor may request. Such policies shall provide that no less than
ten days written notice shall be given Lessor and any other party named as loss
payee prior to cancellation of such policies for any reason. To the extent of
Lessor's interest therein, Lessee hereby irrevocably appoints Lessor or any
other party named as loss payee as Lessee's attorney-in-fact coupled with an
interest to make claim for, receive payment of, and execute any and all
documents that may be required to be provided to the insurance carrier in
substantiation of any such claim for loss or damage under said insurance
policies, and to endorse Lessee's name to any and all drafts or checks in
payment of the loss proceeds.
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(b) If any item of Equipment is rendered unusable as a result of any
physical damage to, or destruction of, the Equipment, Lessee shall give to
Lessor immediate notice thereof and this Lease shall continue in full force and
effect without any abatement of rental. Lessee shall determine, within fifteen
(15) days after the date of occurrence of such damage or destruction, whether
such item of Equipment can be repaired. In the event Lessee determines that the
item of Equipment cannot be repaired, Lessee shall either, at its expense,
promptly replace such item of Equipment and convey title to such replacement to
Lessor free and clear of all liens and encumbrances, and this Lease shall
continue in full force and effect as though such damage or destruction had not
occurred, or pay Lessor therefor in cash the Stipulated Loss Value (defined
below) within thirty (30) days of such loss or damage. "Stipulated Loss Value,"
as used herein, shall be an amount as shown on Exhibit A to the applicable
Equipment Schedule. In the event Lessee determines that such item of Equipment
can be repaired, Lessee shall cause such item of Equipment to be promptly
repaired. All proceeds of insurance received by Lessor, the designated loss
payee, or Lessee under the policy referred to in the preceding paragraph of this
Section shall be applied toward the cost of any such repair or replacement so
long as Lessee shall not be in default of its obligations hereunder.
9. EVENTS OF DEFAULT AND REMEDIES:
The occurrence of any one of the following shall constitute an Event of
Default hereunder:
(a) Lessee fails to pay an installment of rent on or before the date
when the same becomes due and payable and such failure continues for a period of
five days;
(b) Lessee attempts to remove, sell, transfer, encumber, sublet or part
with possession of the Equipment or any items thereof, except as expressly
permitted herein;
(c) Lessee shall fail to observe or perform any of the other material
obligations required to be observed or performed by Lessee hereunder and such
failure shall continue uncured for ten (10) days after written notice thereof to
Lessee by Lessor or the then assignee hereof;
(d) Lessee ceases doing business as a going concern, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
its debts as they become due, files a voluntary petition of bankruptcy, is
adjudicated a bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of the petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action looking
to its dissolution or liquidation;
(e) Within sixty (60) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed or stayed, or if
within sixty (60)days after the appointment without Lessee's consent or
acquiescence of any trustee, receiver or liquidator of it or of all or any
substantial part of its assets and properties, such appointment shall not be
vacated;
(f) Lessee defaults in the performance or observation of any material
term, condition or covenant of any loan agreement, indenture, trust agreement,
lease or similar agreement to which Lessee is a party or by which Lessee is
bound and such default continues beyond any applicable cure period;
(g) Lessee enters into any transaction, the effect of which adversely
affects (i) a material portion of Lessee's business value and (ii) the ability
of Lessee, in Lessor's reasonable judgment, to repay Lessee's obligations under
the Lease as they become due.
Upon the occurrence of an Event of Default, Lessor may at its option do
any one or more of the following: (i) by notice to Lessee terminate this Lease
as to any or all Equipment Schedules; (ii) whether or not this Lease is
terminated as to any or all Equipment Schedules, take possession on not less
than three (3) days' notice of any or all of the Equipment listed on any or all
Equipment Schedules, wherever situated, and for such purpose, enter upon any
premises without liability for so doing or Lessor may cause Lessee and Lessee
hereby agrees, to return said Equipment to Lessor as provided in this Lease;
(iii) recover from Lessee, as liquidated damages for loss of a bargain and not
as a penalty, all past due amounts as well as an amount equal to the present
value of all monies to be paid by Lessee during the remaining Initial Term or
any successive period then in effect, calculated by discounting at the rate of
six percent (6%) per annum compounded monthly, which payment shall become
immediately due and payable; and (iv) sell, dispose of, hold, use or lease any
Equipment as Lessor in its sole discretion may determine (and Lessor shall not
be obligated to give preference to the sale, lease or other disposition of the
Equipment over the sale, lease or other disposition of similar equipment owned
or leased by Lessor).
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In the event that Lessee shall have first paid to Lessor or its assigns
the liquidated damages referred to in (iii) above, Lessee shall thereafter be
entitled to receive all rentals or proceeds received from any reletting or sale
of the Equipment during the balance of the Initial Term (after deduction of
Lessor's expected residual value of the Equipment at the expiration of the
Initial Term or any extension thereof and of all expenses incurred in connection
therewith) said amount never to exceed the amount of the liquidated damages paid
by Lessee. Lessee agrees that Lessor shall have no obligation to sell the
Equipment. Lessee shall in any event remain fully liable for reasonable damages
as provided by law and for all costs and expenses incurred by Lessor or its
assigns on account of such default including but not limited to all court costs
and reasonable attorney's fees. Lessee hereby agrees that, in any event, it will
be liable for any deficiency after any lease or other disposition of the
Equipment. The rights afforded Lessor hereunder shall not be deemed to be
exclusive, but shall be in addition to any rights or remedies provided by law.
10. NET LEASE:
Except as otherwise specifically provided in this Lease, it is
understood and agreed that this is a net lease, and that, as between Lessor and
Lessee, Lessee shall be responsible for all costs and expenses of every nature
whatsoever arising out of or in connection with or related to this Lease or the
Equipment (including, but not limited to, equipment inspection, tagging,
transportation in and out, rigging, manufacturer's approved packing,
installation, certification costs and disconnect charges). Lessee hereby agrees
that in the event that Lessee fails to pay or perform any obligation under this
Lease, Lessor may, at its option, pay or perform said obligation and any payment
made or expense incurred by Lessor in connection therewith shall become
additional rent which shall be due and payable by Lessee upon demand. Lessee
acknowledges that Lessor may, from time to time, and at Lessee's request,
execute and deliver purchase orders pertaining to the purchase of equipment to
be leased pursuant to this Lease. Lessee agrees that it will indemnify and hold
Lessor harmless from and against any and all loss, cost, liability and expense
that Lessor may incur as a result of the execution and delivery of such purchase
orders.
11. ASSIGNMENT:
Lessee agrees that Lessor may transfer or assign all or any part of
Lessor's right, title, and interest in, under or to the Equipment and this Lease
and any or all sums due or to become due pursuant to any of the above, to any
third party (the "Assignee") for any reason and that the Assignee may so
re-assign and transfer. Lessee agrees that upon receipt of written notice from
Lessor or Assignee of such assignment, Lessee shall perform all of its
obligations hereunder for the benefit of Assignee and any successor assignee
and, if so directed, shall pay all sums due or to become due thereunder directly
to the Assignee or to any other party designated by the Assignee. Lessee hereby
covenants, represents and warrants as follows and agrees that the Assignee and
any successor assignee shall be entitled to rely on and shall be considered a
third party beneficiary of the following covenants, representations and
warranties: (i) Lessee's obligations hereunder are absolute and unconditional
and are not subject to any abatement, reduction, recoupment, defense, offset or
counterclaim available to Lessee for any reason whatsoever including operation
of law, defect in the Equipment, failure of Lessor or Assignee to perform any of
its obligations hereunder or for any other cause or reason whatsoever, whether
similar or dissimilar to the foregoing; (ii) Lessee shall not look to Assignee
or any successor assignee to perform any of Lessor's obligations hereunder;
(iii) Lessee will not amend or modify this Agreement without the prior written
consent of the Assignee and any successor assignee; and (iv) Lessee will send a
copy to Assignee and any successor assignee of each notice which Lessee sends to
Lessor.
12. REPRESENTATIONS AND WARRANTIES OF LESSEE AND LESSOR:
Lessee represents and warrants to Lessor and its assigns, as follows:
1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessee in accordance with its
terms, subject to laws governing creditors' rights;
2. The performance by Lessee will not result in any material breach,
default or violation of, Lessee's certificate of incorporation or by-laws or any
agreement to which Lessee is a party;
Lessee is in good standing in its jurisdiction of incorporation and in to those
foreign jurisdictions where qualification is legally required, and where failure
to qualify would have a material adverse effect on Lessee and its subsidiaries
as a whole.
4. Any and all financial statements or other information with respect
to Lessee heretofore furnished by Lessee to Lessor was, when furnished, and
remains at the time of execution of this Lease, true and complete, subject to
normal year-end adjustments.
Lessor represents and warrants to Lessee as follows:
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1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessor in accordance with its
terms, subject to laws governing creditors' rights; and
2. The performance by Lessor will not result in any breach, default or
violation of, Lessor's certificate of incorporation or by-laws or any agreement
to which Lessor is a party;
The foregoing representations and warranties shall survive the
expiration or termination of this Lease.
13. END OF LEASE:
Provided (i) no Event of Default has occurred and is continuing and
(ii) Lessee has made all payments in accordance with the Lease, upon written
notice furnished by Lessee no later than four (4) months prior to the expiration
of the Initial Term, Lessee shall, with respect to each Equipment Schedule elect
only such alternatives as may be set forth on the Equipment Schedule.
To the extent that any of such alternatives involves a determination of
Fair Market Value, the Fair Market Value shall be defined and determined by the
provisions of this Section. For purposes hereof, Fair Market Value shall mean
the amount that would obtain in a retail arm's length transaction between an
informed and willing lessee-buyer in possession and an informed and willing
lessor-seller. Rental charges previously paid pursuant to the applicable
Equipment Schedule shall have no effect on the determination of Fair Market
Value. Unless otherwise stated in the Equipment Schedule: the Fair Market Value
for items set forth on the Equipment Schedule which do not have a readily
ascertainable market value, (including but not limited to software, cabling and
certain equipment) shall be determined by multiplying the Lessor's acquisition
cost of such items by a fraction, the numerator of which shall be the Fair
Market Value of the other items and the denominator of which shall be the
Lessor's acquisition cost of such other items; and the determination of Fair
Market Value shall be based upon the assumption that all items set forth on the
Equipment Schedule or included with the Equipment may be transferred to, and
used by, a third party user. In such determination, all alternative uses in the
hands of each buyer or lessee, including, without limitation, the further
leasing of the Equipment shall be taken into account in making such
determination.
If, on or before a date which is sixty (60) days prior to the
expiration of the Initial Term, Lessor and Lessee are unable to agree upon a
determination of the Fair Market Value of the Equipment, the Fair Market Value
(to be determined in accordance with the definition set forth in this Section)
shall, upon written request by Lessee therefor, be conclusively established not
less than thirty (30) days prior to the expiration of the Initial Term by an
independent appraiser selected by Lessor. Lessor shall notify Lessee of the name
and address of said appraiser. The costs of such appraiser shall be paid by
Lessee within ten (10) days after receipt of an invoice therefor. The Lease,
including the obligation to pay monthly rentals, shall remain in effect pending
the determination of Fair Market Value.
14. ADDITIONAL COLLATERAL:
In order to secure the prompt and full performance of all of Lessee's
obligations (the "Obligations") arising under the Lease, the Lessee hereby
grants to Lessor a first priority security interest in the assets set forth on
Exhibit A annexed hereto and made a part hereof, as additional collateral (the
"Collateral") for the performance of the Obligations. Lessee agrees to deliver
to Lessor, at any time or times hereafter, any Uniform Commercial Code financing
statements and amendments and all other agreements, documents and instruments
requested by Lessor to perfect and maintain Lessor's security interest in the
Collateral and pay any cost incurred in connection with the filing or recording
of such documents, agreements or instruments. Lessee represents and warrants
that it has title to the equipment, free and clear of all liens, claims or
encumbrances and that the obligations pertaining to the other Equipment subject
to this Lease shall apply to the Collateral, including but not limited to the
obligation to adequately insure and maintain the Collateral and to inform Lessor
of any change in the location of the Collateral. Upon a default under the Lease
in the payment or performance of any of the Obligations which continues beyond
any grace or cure periods, Lessor shall have all of the rights of a secured
party under the Uniform Commercial Code. Provided that no Event of Default
exists, the lien set forth herein shall be released by Lessor, upon Lessee's
receipt, on or after April 15, 1999, of $5,000,000 in cash in additional equity
in the form of non-callable, non-redeemable common stock of Lessee. Lessor
agrees that upon written request from Lessee, it will subordinate the security
interest set forth herein to an institutional lender that provides a line of
credit or other borrowing facility to Lessee of not less than $500,000 and will
execute and deliver such documents as the institutional lender may reasonably
request in order to effectuate such subordination.
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15. MISCELLANEOUS:
(a) During the term of this Lease, Lessee hereby agrees to deliver to
Lessor or Assignee and any successor assignee a copy of Lessee's monthly
unaudited financial statements, and the annual financial budget for the upcoming
year as soon as available and as it may be adjusted during the year. Lessee
shall also furnish, as soon as available and in any event within ninety (90)
days after the last day of Lessee's fiscal year, a copy of Lessee's annual
audited statements and consolidating and consolidated balance sheet, if any, as
of the end of such fiscal year, accompanied by the opinion of an independent
certified public accounting firm of recognized standing or its present
accounting firm, Mahoney Cohen and Company CPA P.C. The Lessee shall furnish
such other financial information as may be reasonably requested by Lessor,
including but not limited to any material changes in budgets or financial
reports furnished to the Lessee's Board of Directors or Shareholders.
(b) This Lease constitutes the entire agreement between Lessee and
Lessor with respect to the Equipment, and except as agreed upon in writing no
covenant, condition or other term or provision hereof may be waived or modified
orally.
(c) All notices hereunder shall be in writing and shall be delivered in
person or sent by registered or certified mail, postage prepaid, or by facsimile
transmission (confirmed by registered mail as set forth in this section) to the
address of the other party as set forth herein or to such other address as such
party shall have designated by proper notice.
(d) This Lease shall be binding upon and inure to the benefit of Lessor
and Lessee and their respective successors and assigns (including any subsequent
assignee of Assignee).
(e) If any term or provision of this Lease or the application thereof
to any person is, to any extent, invalid or unenforceable, the remainder of this
Lease, or the application of such provision to the person other than those to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
(f) No waiver of any of the terms and conditions hereof shall be
effective unless in writing and signed by the party against whom such waiver is
sought to be enforced. Any waiver of the terms hereof shall be effective only in
the specific instance and for the specific purpose given. The subsequent
acceptance of rental payments hereunder by Lessor shall not be deemed a waiver
of any prior existing breach by Lessee regardless of Lessor's knowledge of such
prior existing breach at the time of acceptance of such rental payments. Where
permitted by law, Lessee authorizes any attorney of record, Clerk of Court or
Prothonotary of any state to appear for and confess judgment (a) against Lessee
for all amounts as to which Lessee is in default under this Agreement and (b)
against Lessee in any action for writ of replevin or possession of the
Equipment. No bond shall be required.
(g) Lessor is hereby authorized by Lessee to cause this Lease or other
instruments, including Uniform Commercial Code Financing Statements to be filed
or recorded for the purpose of showing Lessor's interest in the Equipment and
Lessee agrees that Lessor may execute such instruments for and on behalf of
Lessee. All filing fees reasonably incurred by Lessor in connection therewith
and filing fees incurred by Lessor's assignees in perfecting security interests
shall be paid by Lessee or reimbursed to Lessor by Lessee.
(h) No consent or approval provided for herein shall be binding upon
Lessor unless signed on its behalf by an officer of Lessor. THIS LEASE AND EACH
EQUIPMENT SCHEDULE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF CONNECTICUT
AND SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF SUCH STATE. The Lessee
accepts for itself the non-exclusive jurisdiction of any Federal or State court
of competent jurisdiction in the State of Connecticut in any action, suit or
proceeding of any kind against it which arises out of or by reason of this Lease
or any Equipment Schedule.
(i) Lessee acknowledges that the late payment by Lessee to Lessor of
monthly rental and other sums due hereunder will cause Lessor harm and to incur
costs not contemplated by this Lease, the precise amount and severity of which
will be difficult to ascertain. Such costs include, but are not limited to,
administrative, accounting and legal charges which Lessor may incur due to such
late payment. Accordingly, if any monthly rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's assignee within twenty (20) days
after the same is due, Lessee shall pay to Lessor or Lessor's assignee a late
charge equal to five per cent (5%) of such overdue amount monthly until such
overdue amount is paid. Lessee acknowledges that such late charge represents a
fair and reasonable estimate of the cost Lessor will incur by reason of a late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default, if any, with respect to such overdue
amounts, nor prevent Lessor from exercising any of the other rights and remedies
which Lessor may have pursuant to this Lease.
(j) The obligations which Lessee is required to perform during the term
of this Lease shall survive the expiration or other termination of this Lease.
(k) Lessee will promptly execute and deliver to Lessor such further
documents and assurances and take such further action as Lessor may reasonably
request in order to effectuate the intent and purpose of this Lease and to
establish and protect the rights,
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interests and remedies intended to be created in favor of Lessor hereunder,
including without limitation, the execution and filing of financing statements
and continuation statements with respect to this Lease, the Equipment and any
Equipment Schedule. Lessee authorizes Lessor to effect any such filing and
Lessor's reasonable expenses (together with the reasonable expenses of Lessor's
assignees in this regard) shall be payable by Lessee on demand.
16. ADDITIONAL LEASE FINANCING:
Lessee agrees that it will finance the next $1,400,000 of its equipment
financing transactions (the "Additional Transactions) with Lessor upon the terms
and conditions set forth on Exhibit B. Notwithstanding anything to the contrary
herein, Lessor shall not be obligated to finance such Additional Transactions
unless Lessee has received the additional equity as set forth in Section 14 of
this Lease.
LESSOR: LESSEE:
LEASING TECHNOLOGIES INTERNATIONAL, INC. YOUNETWORK CORPORATION
BY: BY:
--------------------------------- -----------------------------
NAME: NAME:
--------------------------------- -----------------------------
TITLE: TITLE:
--------------------------------- -----------------------------
DATE: DATE:
--------------------------------- -----------------------------
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EXHIBIT A TO
MASTER LEASE AGREEMENT DATED APRIL 15, 1999 (THE "LEASE")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. (THE "LESSOR")
AND YOUNETWORK CORPORATION (THE "LESSEE")
COLLATERAL
All of the assets of the Lessee, wherever located and whether now owned or
hereafter acquired or arising, and all proceeds therefrom, including but not
limited to:
(i) all of the Lessee's inventory, goods, wares, merchandise, raw
materials, software, supplies, work in process, finished goods, and other
personal property of every kind and description held for sale or lease or
furnished or to be furnished under any contract of service, and all goods which
are in transit, and all returned, repossessed and rejected goods of the
foregoing description, and any other tangible personal property held by the
Lessee for licensing, processing, sale or other business purpose or to be used,
licensed or consumed in the Lessee's business;
(ii) all machinery, equipment, motor vehicles, furniture, office
equipment and supplies, plant equipment, tools, dies, molds, fixtures and
leasehold improvements of Lessee, of every kind and description, wherever
located and including all additions, improvements, accessions and substitutions
thereto;
(iii) accounts receivable now owned or hereafter acquired and all
proceeds thereof. "Accounts Receivable" means all accounts receivable of Lessee,
including but not limited to (a) all notes, drafts, acceptances and other
instruments representing or evidencing a right to payment for goods sold or
leased, or services rendered, whether or not earned by performance; (b) all
general intangibles of Lessee that constitute debts, obligations or liabilities
owed to Lessee arising out of or in connection with such accounts receivable;
(c) all of Lessee's chattel paper of every kind and description from account
Lessees including all additions thereto and substitutions therefor; (d) all
files, records (including, without limitation computer programs, disks, tapes
and related electronic data processing media) and writings of Lessee or in which
Lessee has an interest in any way relating to the foregoing property and all
rights of Lessee to the retrieval from third parties of electronically processed
and recorded information pertaining to any of such property; (e) all of Lessee's
documents and instruments constituting or evidencing the foregoing and (f) all
guaranties and securities for, and all proceeds of any of the foregoing;
(iv) all of Lessee's other general intangibles, now existing or
hereafter acquired, including without limitation, all copyrights, royalties,
trademarks, tradenames, service marks, patents and proprietary rights,
blueprints, drawings, designs, trade secrets, plans, diagrams, schematics, and
assembly and display materials relating thereto and all customer lists;
(v) all insurance proceeds, whether arising out of any of the foregoing
or otherwise.
LESSOR: LESSEE:
LEASING TECHNOLOGIES INTERNATIONAL, INC. YOUNETWORK CORPORATION
BY: BY:
--------------------------------- -----------------------------
NAME: NAME:
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9
<PAGE>
EXHIBIT B
TO
MASTER LEASE AGREEMENT DATED APRIL 15, 1999 (THE "LEASE")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. (THE "LESSOR")
AND YOUNETWORK CORPORATION (THE "LESSEE")
ADDITIONAL TRANSACTIONS
-----------------------
Date: 5/21/99
Lessee: YouNetwork Corporation Equipment Location: New York
Equipment: New brand name computers, servers and other hardware to be
approved by LTI.
Cost (approximate): $1,400,000
Commencement: Prior to 9/1/99
Term: 36 Months
Rate Factor: .03118
Monthly Rental: $43,582
Warrant Coverage: 7% of lease line, 7 year warrants to purchase common (or
preferred) stock at a price of most recent equity
investment offering.
Other: 1. Last month in advance
2. Subject to YouNetwork Corporation's raising $5MM in new
equity.
End of Lease Option: Upon written notice in accordance with Section 3 of Master
Lease Agreement, you may:
1. Renew lease at FMV rate for 12 months;
2. Purchase equipment at FMV;
3. Renew lease for 12 months at 60% of existing rent,
equipment may then be purchased at end of 12 months for
$1.00;
4. Return the equipment subject to a remarketing charge
equal to 5% of Cost.
Note: The Rate Factor is subject to change upon any changes in the Prime Rate
prior to drawdowns.
TRANSACTION IS SUBJECT TO CREDIT AND FINAL EQUIPMENT APPROVAL.
<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 19, 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
June 10, 1999
