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Filed Pursuant to Rule 424B1
Registration No. 333-71949
1,000,000 SHARES OF CLASS A COMMON STOCK
AND 1,000,000 SHARES OF CLASS B COMMON STOCK
[logo] 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 shares are
being distributed by us to new members of our online consumer network.
WE URGE YOU TO READ THE RISK FACTORS BEGINNING ON PAGE 6, 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 shares, 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
our 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>
PROSPECTUS DATED JULY 13, 1999
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary ....................................................................... 3
The Offering ............................................................................. 4
Summary Financial Information ............................................................ 5
Risk Factors ............................................................................. 6
We have no operating history for you to judge our prospects ............................. 6
We have had losses and anticipate that this will continue in the foreseeable future ..... 6
We depend on our own developed system and computer infrastructure and will be adversely
affected by any failure or damage to our system ....................................... 6
Despite our security measures we will always be vulnerable to computer viruses and
physical or electronic break-ins, which could hinder electronic commerce and the
demand for our products and services .................................................. 7
Our success is dependent on the continued growth of online commerce ..................... 7
If we do not continually upgrade technology we may not be able to compete in our
industry .............................................................................. 7
Our operations could be materially adversely affected if we are unable to
maintain relationships with our vendors and distributors .............................. 8
Sales tax collection by states may adversely affect our growth .......................... 8
We need to manage our growth effectively ................................................ 8
The loss of the services of our President, Kyle S. Taylor, Chief Executive Officer, Don
S. Senerath and of our key personnel could impair our chances for success ............. 8
Failure of our computer systems and software products to be year 2000 compliant could
negatively impact our business ........................................................ 9
We face significant competition in the electronic commerce network for members,
consumers, visitors and from more established competitors ............................. 9
We must establish and maintain our brand name, YouNetwork ............................... 9
We are heavily dependent on our proprietary technology, tracking and net value .......... 10
We may be held liable for online content provided by us or third parties ................ 10
Government regulation and legal uncertainties could add additional costs to doing
business on the internet............................................................... 10
We have no independent directors, audit or compensation committee ....................... 11
We will not receive any proceeds and we may be unable to raise additional capital in the
future, which would adversely affect your investment .................................. 11
The price investors pay for our class B shares is higher than the per share
value of our net assets and is also higher than the price paid by our founders and
prior investors ....................................................................... 11
We may not be able to achieve profitability in the future ............................... 11
You may not be able to sell your shares unless a public market develops for our 11
securities
Capitalization ........................................................................... 12
Dividend Policy .......................................................................... 13
Dilution ................................................................................. 14
Plan of Operation ........................................................................ 15
Business ................................................................................. 22
Industry Background ...................................................................... 24
Management ............................................................................... 31
Certain Transactions ..................................................................... 34
Principal Stockholders ................................................................... 36
Description of Shares .................................................................... 37
Plan of Distribution ..................................................................... 39
Shares Eligible for Future Sale .......................................................... 40
Disclosure of Commission position on Indemnification for Securities Act Liabilities ...... 40
Transfer Agent and Registrar ............................................................. 41
Legal Matters ............................................................................ 41
Experts .................................................................................. 41
Additional Information ................................................................... 41
Index to Financial Statements ............................................................ F-1
</TABLE>
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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 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 a member and a referred member. Each member of
our consumer network may sponsor an individual for membership on our consumer
network by sending an e-mail invitation or providing a sponsor code to a member
referred individual.
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.
This is neither a solicitation to buy nor an offer to sell to persons
in the following jurisdictions: Alabama, Arizona, Arkansas, Connecticut, Idaho,
Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana,
Nebraska, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota,
Tennessee, Texas, Utah, Vermont, Virginia, Washington, and no purchase of these
securities by persons in these jurisdictions is authorized.
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THE OFFERING
SHARES 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 through the purchase
of our products and services.
SHARES OF COMMON STOCK
OUTSTANDING BEFORE OFFERING... 41,159,452
SHARES OF COMMON STOCK
OUTSTANDING AFTER OFFERING.... 43,159,452
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SUMMARY FINANCIAL INFORMATION
The summary financial information presented below as of December 31, 1998,
and for the period from inception (January 14, 1998), to December 31, 1998, was
derived from 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 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. 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., for 330,000
shares of our Class C common stock.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(JANUARY 14, 1998) FOR THE THREE
TO MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------------ ------------------
<S> <C> <C>
OPERATING STATEMENT INFORMATION:
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
DECEMBER 31, 1998 MARCH 31, 1999
------------------------ ------------------
BALANCE SHEET INFORMATION:
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>
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(1) Amounts retroactively adjusted to reflect the merger on February 3, 1999.
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RISK FACTORS
The shares 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 shares 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.
Since inception 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 that 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.
WE HAVE HAD LOSSES AND ANTICIPATE THAT THIS WILL CONTINUE IN THE FORSEEABLE
FUTURE.
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.
WE DEPEND ON OUR OWN DEVELOPED SYSTEM AND 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; however, we will not have 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
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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.
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.
DESPITE OUR SECURITY MEASURES WE WILL ALWAYS BE VULNERABLE TO COMPUTER VIRUSES
AND PHYSICAL OR ELECTRONIC BREAK-INS, WHICH COULD HINDER ELECTRONIC COMMERCE
AND THE DEMAND FOR OUR PRODUCTS AND SERVICES.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptive problems caused by third parties. These disruptive problems could
lead to interruptions, delays or cessation in service to users of our services
and products. 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, firewell 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 system 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 securitybreaches.
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 the 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 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.
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OUR OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED IF WE ARE UNABLE TO
MAINTAIN RELATIONSHIPS WITH OUR 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. 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, CHIEF EXECUTIVE
OFFICER, DON S. SENERATH AND OF OUR KEY PERSONNEL 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. 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.
Each officer will devote his full-time to working on our affairs.
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
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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 Management--Agreements on page 32".
FAILURE OF OUR COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are year 2000 compliant. No assurances have been given to us
by vendors or third parties, which supply us with components, regarding the
Year 2000 compliance. 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
forseeable future.
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, VISITORS AND FROM MORE ESTABLISHED COMPETITORS.
The market for electronic commerce direct selling channels on the internet
is new and rapidly evolving, and competition for members, consumers, visitors
and more established competitors 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.
Nearly all of our existing and potential competitors, 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, web traffic and commerce
relationships. We also believe that the importance
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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" 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. We 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. No assurance can be given as to the future
viability or value of any of 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.
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
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of any consideration among participants in multi-level sales programs. Although
residents of those states will not be offered the shares 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 HAVE NO INDEPENDENT DIRECTORS, AUDIT OR COMPENSATION COMMITTEE.
Currently, we have no independent directors, an audit or compensation
committee. We are currently in the process of recruiting two independent
directors. The board of directors intends to have a standing Audit Committee
shortly after the nomination of its independent directors. The Audit Committee
will assist the board of directors in exercising its fiduciary responsibilities
for oversight of audit and related matters, including corporate accounting,
reporting and control practices. It will be responsible for recommending to the
board of directors the independent auditors for the following year. We intend
to have the Audit Committee meet periodically with management, financial
personnel and the independent auditors to review internal accounting controls
and auditing and financial reporting matters.
WE WILL NOT RECEIVE ANY PROCEEDS, AND WE MAY BE UNABLE TO RAISE ADDITIONAL
CAPITAL IN THE FUTURE, WHICH WOULD ADVERSELY AFFECT YOUR INVESTMENT.
We will not receive proceeds from the sale of class A or class B shares.
Moreover, 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 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.
THE PRICE INVESTORS PAY FOR OUR CLASS B SHARES IS HIGHER THAN THE PER SHARE
VALUE OF OUR NET ASSETS AND IS ALSO HIGHER THAN THE PRICE PAID BY OUR FOUNDERS
AND PRIOR INVESTORS.
The initial public offering price per share of our class B common stock is
substantially higher than the net tangible book value per share of our
outstanding common stock. Purchasers of our class B common stock will suffer
immediate and substantial dilution of $ 0.972 per share, or approximately 97.2%
of the assumed initial public offering price of $1.00 per class B share.
Further, existing stockholders, including founders, purchased or were issued
their shares at an average price of $0.02 per share as compared to the
anticipated initial public offering price of $1.00 per class B share.
WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY IN THE FUTURE.
We may be unable to operate as a going concern because we have suffered
recurring losses from operations and have a working capital deficiency. Our
independent accountants have included an explanatory paragraph stating that our
financial statements have been prepared assuming that we will continue as a
going concern and that we have suffered recurring losses from operations and
have a working capital deficiency which cause substantial doubt as to our
ability to do so.
YOU MAY NOT BE ABLE TO SELL YOUR SHARES UNLESS A PUBLIC MARKET DEVELOPS FOR OUR
SECURITIES.
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 shares. Failure to
develop or maintain an active trading market could negatively effect the price
of our shares.
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<PAGE>
CAPITALIZATION
On February 3, 1999, YouNetwork Corp., a New York corporation merged into
us. All stockholders 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
$257,000, 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, $.0001 par
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 1,926,884
Accumulated Deficit ....................... (253,512) -- (253,512) (753,512)
---------- ---------- ---------- ----------
Total stockholder's equity ................ 409,688 1,025,000 1,434,688 1,177,688
---------- ---------- ---------- ----------
Total capitalization ..................... $ 431,496 $1,025,000 $1,456,496 $1,199,496
========== ========== ========== ==========
</TABLE>
We will not receive any 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.
12
<PAGE>
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.
13
<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
$1,152,688, or $.028 per share. This represents an immediate increase in the
net tangible book value of approximately $.018 or an increase of 268% per share
to existing stockholders and an immediate dilution of $0.972 per share or 97.2%
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.
<TABLE>
<S> <C> <C>
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 ........................ $0.018
-------
Net tangible book value per share after this offering ................... $ 0.028
-------
Dilution per share to new investors in class B common stock ............. $ 0.972
-------
</TABLE>
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>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders .......... 39,109,452 95.14% $ 663,200 47.16% $ 0.02
---------- ------ ---------- ------ -------
New Investors
(class B common stock) ......... 1,000,000 2.43 743,000 52.84 0.74
(class A common stock) ......... 1,000,000 2.43 -- -- --
---------- ------ ---------- ------ -------
Total ....................... 41,109,452 100.00% $1,406,200 100.00%
========== ====== ========== ======
</TABLE>
14
<PAGE>
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 will be operational when we offer the shares in this offering.
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.
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 on 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 made by the member 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 on a member's home page as a
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.
Each product is assigned a gross markup and rebate percentage by
our merchandising staff. Rebates are based on a percentage of selling price and
are credited to members when the purchase is made. Rebates earned by members
based on merchandise purchased or services provided will be recorded as a
reduction of the corresponding revenue.
15
<PAGE>
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;
however, 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 on our website, www.YouNetwork.com. 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. When the product has been
shipped we are notified and the member's credit card charge is processed. The
distributor generates an invoice for the wholesale of goods to us, which is
recorded on our books as an account payable. After the goods are shipped and
invoiced, we will take legal possession of our product, and are responsible to
our members for any claims or returns. The sale of a consumer product will be
recognized by us as revenue. At this time revenues are recognized and related
rebates are recorded. We will establish an allowance for any claims or returns
of our products, which are not a vendor or distributor's responsibility.
VENDOR AND DISTRIBUTION AGREEMENTS.
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.
We will recognize revenue for installation commissions at the time of a
newly referred subscriber's first usage of the service, as defined and limited
by the agreement. Under the agreement, Qwest will recover all monies advanced
to us at a rate of 100% holdback of installation commissions. We will record a
reduction of our liability for deferred revenue when such installation revenue
is recognized. As payment of the usage commission is based on collected
revenue, as defined in the agreement, we will provide an allowance for possible
uncollected commissions. Usage commissions earned in accordance with our
agreement with Qwest will be recorded as revenue at the time Qwest collects
payment for those services provided.
A member may 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.
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.
The initial term of the agreement shall be three years; the agreement shall be
renewed thereafter automatically on a year to year basis. 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.
16
<PAGE>
On June 16, 1998, we entered into a distribution agreement with Ingram
Micro, Inc. to purchase computers, hardware, software and peripherals. Upon
receipt of an invoice, we pay Ingram Micro for all products ordered, including
shipping and handling. Either party may terminate this agreement at any time.
We entered into a distribution agreement on January 19, 1999, and February
15, 1999, with Baker & Taylor, Inc. for the purchase of books, spoken word
audio products, pre-recorded video products, laser disc and DVD formats,
multi-media products and music audio products. The terms of both agreements are
for a one year period ending January 18, 2000, and February 14, 2000,
respectively. Unless notified by the other party, both agreements are
automatically renewable for five consecutive periods of one year. We pay Baker
& Taylor for all products ordered, including shipping and handling, within 30
days from date of delivery to our customers. Either party may terminate either
agreement within 30 days notice of an event of default.
LICENSE AGREEMENTS.
We currently license from Baker & Taylor, Inc. and Muze, Inc. certain
databases incorporated into our website.
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. The fees will be amortized over a one year period and charged to
operations as a marketing expense. We do not purchase any products or services
under this arrangement. 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 minimum monthly license fee of $1,000 per music,
video and book database.
Muze, Inc. and Baker & Taylor, Inc. are not involved in the sale on
fulfillment of any products listed on their respective databases. Our expenses
incurred in connection with our license agreements for units sold to members
will be charged to cost of goods sold.
The introduction by us of new services that incorporate new technologies
may require us to license additional technology from others. There can be no
assurance that these 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.
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 our
website.
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
17
<PAGE>
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. 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 of another public offering. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
OUR GROWTH STRATEGY.
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.
We have not generated any revenue to date and we will not 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 of March 31, 1999, we had an accumulated deficit of $253,512. 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
18
<PAGE>
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 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.
STRATEGIC ALLIANCES.
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 International Computing $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; it 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, 2000, at an exercise price of $2.00
per share provided, however, that if the warrant is exercised after our 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 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. We lacked sufficient
disinterested independent directors to ratify the transaction at the time the
transactions were initiated. All future material affiliated transactions and
loans, and any forgiveness of loans, will be approved by a majority of our
independent directors who do not have an interest in the transaction and who
had access, at our expense, to our or independent legal counsel.
19
<PAGE>
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, and $90,689 for the
period ended December 31, 1998, 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, 1998, 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 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, 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. After 6
months, if cash generated from operations is insufficient to satisfy our
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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.
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 of
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.
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
compliant 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 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,
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 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.
This prospectus contains product names, trade names and trademarks of
other organizations, which are the property of their respective owners. Our
website located at www.YouNetwork.com will be operational at the time this
offering is made to our members. Nothing contained on our website should be
construed as a part of this prospectus.
OUR UNIQUE ON-LINE CONSUMER NETWORK.
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 consumer
network may sponsor an individual for membership on our network by sending an
e-mail invitation or providing a sponsor code to the referred individual.
A member will receive a rebate based upon a purchase as well as purchases
made by a new member who they refer, a direct referral. A member will also
receive rebates based upon a purchase 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 referral.
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; however, 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.
Our class B shares are offered to our members at a price of $1.00 per
share. Class B shares may only be purchased with rebate dollars accumulated by
our members through the purchase of our products and services.
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.
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 shares included in the
registration statement, of which this prospectus forms a part, are fully
distributed. No shares 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; (d) each member spends an average of $75.00, and (e) a
member's available rebate perentage is 10.0% of the selling price with a
maximum of 65.0% of the rebate distribution provided to a member. We may adjust
a member's available rebate percentage and distribution percentage based on
marketing conditions.
<TABLE>
<CAPTION>
AVERAGE
NUMBER GROSS
OF INDIRECT GROSS TOTAL REBATE
THIS EXAMPLE SHOWS PROJECTED REBATES AND NET VALUE NUMBER OF REFERRALS VOLUME AVAILABLE DOLLARS
FOR A SINGLE MEMBER ASSUMING THE VARIABLES ON THE DIRECT PER PER REBATE PER
RIGHT FOR ONE YEAR. REFERRALS MEMBER MEMBER PERCENTAGE MEMBER
- -------------------------------------------------- ------------- ------------- ------------ ------------- --------------
6 3 $ 75.00 10.0% $ 7.50
REBATE REBATES PER TOTAL
NUMBER OF DISTRIBUTION LEVEL OF REBATES
LEVEL REBATE RATE REFERRALS NET VALUE PERCENTAGE REFERRAL PER 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. The
statistical data concerning the internet 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.
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 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 TO MARKET SERVICES AND PRODUCTS AND DEVELOP A SIZEABLE
MEMBERSHIP BASE.
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
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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.
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 to 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. The 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 included in this
registration statement, of which this prospectus forms a part, are fully
distributed.
(d) Net value.
We have developed proprietary tracking technology. Our tracking technology
will be utilized to track the referrals of our members and to pay rebates to
the member based on a member's purchases and the purchases made by a member's
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, which rebate dollars may be used to purchase our class B
shares, 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.
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OUR STRATEGY.
Our objective is to develop a sizeable membership base and to create a
unique consumer network which will provide consumers with built in incentives
to participate in online commerce. Key strategies to achieve this objective
include:
(a) Focus on membership growth.
We plan to increase membership by: (1) providing initial equity
participation through the issuance of our shares; (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 YouNetwork brand is
critical to our ultimate success. We intend to develop our brand recognition
through effective marketing and promotion and improved customer service.
(c) Promote repeat usage and member loyalty.
We believe that community-based 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 computers, software, computer
accessories and peripherals, consumer electronics, books, 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
our members.
(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 and members 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 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 shares shall be made by bookkeeping entry. A member will receive
confirmation of his or her ownership in our shares by e-mail. Members
requesting a stock certificate to evidence their ownership in our shares will
be charged a nominal fee for shipping and handling.
(j) Delivery of our prospectus.
We will only offer the shares in this offering to those members who
consent to accept electronic delivery of our final prospectus, and other
related communications 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. The terms
of the agreement requires us to pay a minimum license fee of $1,000 a month 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.
On June 16, 1998, we entered into a distribution agreement with Ingram
Micro, Inc. to purchase computers, hardware, software and peripherals. Upon
receipt of an invoice, we pay Ingram Micro for all products ordered, including
shipping and handling. Either party may terminate this agreement at any time.
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We entered into a distribution agreement on January 19, 1999, and February
15, 1999, with Baker & Taylor, Inc for the purchase of books, spoken word audio
products, pre-recorded video products, laser disc and DVD formats, multi-media
products and music audio products. The terms of both agreements are for a one
year period ending January 18, 2000 and February 14, 2000, respectively. Unless
notified by the other party, both agreements are automatically renewable for
five consecutive periods of one year. We pay Baker & Taylor for all products
ordered, including shipping and handling, within 30 days from date of delivery
to our customers. Either party may terminate either agreement within 30 days
notice of an event of default.
We view our strategic relationships as a key factor in our overall
business strategy; however, there can be no assurance that our licensor or
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 licensor or vendor
would be specifically enforceable by us. Our arrangements with our licensors
and 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 licensor or 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; therefore, 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 ship 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.
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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 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 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.
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
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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 6,000 square feet
of office space, which is under a lease that expires June 30, 2002. 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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MANAGEMENT
DIRECTORS AND OFFICERS.
Our directors and executive officers and their respective ages as of
July 13, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- ----- --------------------------------------
<S> <C> <C>
Kyle S. Taylor .............. 41 President and Director
Don S. Senerath ............. 29 Chief Executive Officer, and Director
Peter R. Silverman .......... 52 Director
</TABLE>
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, 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.
DIRECTORS.
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. 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 discretion of the board of directors. There are no family
relationships among any of our directors or
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<PAGE>
executive officers. All future material affiliated transactions and loans, and
any forgiveness of loans, will be approved by a majority of our independent
directors who do not have an interest in the transaction and who had access, at
our expense, to our or independent legal counsel.
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
--------------------------------- --------------------------
RESTRICTED SECURITIES ALL
OTHER ANNUAL STOCK UNDERLYING LTIP OTHER
NAME AND PRINCIPAL POSITION 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,
President 1998 $65,251 0 0 0 0 0 0
</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 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 International Computing $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, which 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 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.
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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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<PAGE>
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 in the agreement 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; 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 the 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 our 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 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.
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
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<PAGE>
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 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 July 13, 1999, and as
adjusted for the sale of the securities offered by this prospectus, the number
and percentage of outstanding shares of common stock beneficially owned by each
person who beneficially owns:
o more than 5% of the outstanding shares of our common stock;
o each of our officers and directors; and
o all of our officers and directors as a group.
Except as otherwise noted, the persons named in this table, based upon
information provided by these persons, have sole voting and investment power
with respect to all shares of common stock owned by them. 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. Michael Karfunkel, George Karfunkel and Kevin Kimberlin
are partners of Spencer Trask Partners.
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 ................ 4,682,226 11.4% 10.8%
Kleopatra Georgiades ........... 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 SHARES
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 July 13,1999, 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 July 13, 1999. There were no class
A shares or class B shares outstanding as of July 13, 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.
Our class A shares have an assigned value of $.50 per share based on our
private placement of our class C common stock.
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 shares
offered. We have not applied to have the shares listed on any forum, including
an exchange, the Over the Counter Bulletin Board or pink sheets, and do not
presently intend to do so. We may in the future apply to have our shares listed
on the Nasdaq SmallCap Market. Even if such a market developed, it would still
be more difficult for an investor to dispose of, or obtain quotations as to the
shares offered in this prospectus rather than a security traded on the Nasdaq
small cap market or a national securities exchange.
If we applied in the future to have our shares listed on Nasdaq SmallCap
Market and we did not satisfy Nasdaq listing or maintenance requirements then
we may list our shares 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.
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.
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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.
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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<PAGE>
PLAN OF DISTRIBUTION
Our shares 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.
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. Net value is calculated by our proprietary tracking
software which tracks each member's direct and indirect referrals. When a
member refers someone to join our consumer network they are assigned a rebate
rate that is added to the referring member's net value. The rebate rates of
both direct referrals and indirect referrals, up to five levels, are totaled to
determine an individual member's net value. Members can locate their net value
calculation upon logging on to the network. They may also link to their
personalized stockholder statement to view the shares that have been credited
to their account. 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.
Our class B shares are offered to our members at a price of $1.00 per
share. Class B shares may only be purchased with rebate dollars accumulated by
our members through the purchase of our products and services. 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 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. A member's rebate dollars will be posted on
a member's home page website.
We will publish our prospectus, which is a part of this registration
statement, on the internet world wide web at www.YouNetwork.com. We will only
offer the shares in this offering to those members who consent to accept
electronic delivery of our prospectus, and all other communications by e-mail.
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 shares by e-mail. Members requesting a stock certificate to
evidence their ownership in our shares will be charged a nominal fee for
shipping and handling. We will distribute the class A and class B shares to our
members until such time as all the class A and class B shares included in the
registration statement, of which this prospectus forms a part, are fully
distributed.
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.
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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.
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.
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.
Rule 144 provides that a person holding restricted securities for a period
of one year may sell in brokerage transactions an amount equal to 1% of our
outstanding common stock every three months. A person who is a "non-affiliate"
of us and who has held restricted securities for over two years is not subject
to the aforesaid volume limitation as long as the other conditions of the Rule
are met. Possible or actual sales or 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 thereon commencing
February 4, 2000.
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.
40
<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, and the three months ended March 31, 1999, 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 shares offered in this prospectus, 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.
41
<PAGE>
YOUNETWORK CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditor's Report .............................................. 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
Notes to Financial Statements ............................................. F-7 - F-12
</TABLE>
F-1
<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.
As more fully described in Note 1 to the financial statements, the Company
is in the development stage, has incurred losses since inception of
approximately $163,000 and expects to incur net losses for the foreseeable
future. At December 31, 1998, the Company had a working capital deficit of
approximately $57,000. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
January 20, 1999, except for Note 11
first paragraph as to which the date
is February 3, 1999, second paragraph
as to which the date is February 8, 1999
and the third and fourth paragraphs as to
which the date is April 19, 1999
F-2
<PAGE>
YOUNETWORK CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
------------------- ---------------
(UNAUDITED)
<S> <C> <C>
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>
F-3
<PAGE>
YOUNETWORK CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE FOR THE PERIOD
FROM INCEPTION THREE MONTHS FROM INCEPTION
(JANUARY 14, 1998) TO ENDED (JANUARY 14, 1998) 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>
F-4
<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
ADDITIONAL ACCUMULATED
COMMON STOCK DURING THE
-------------------------------------- PAID-IN DEVELOPMENT
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>
F-5
<PAGE>
YOUNETWORK CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION FOR THE THREE FROM INCEPTION
(JANUARY 14, 1998) MONTHS ENDED (JANUARY 14, 1998)
TO DECEMBER 31, 1998 MARCH 31, 1999 TO 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
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
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.
F-6
<PAGE>
YOUNETWORK CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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 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.
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.
F-7
<PAGE>
YOUNETWORK CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-8
<PAGE>
YOUNETWORK CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Computation of Net Loss per Common Share
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.
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>
F-9
<PAGE>
YOUNETWORK CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
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>
Minimum future lease payments under the capital lease as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------
<S> <C>
1999 ....................................................................... $14,000
2000 ....................................................................... 15,620
2001 ....................................................................... 9,934
-------
$39,554
=======
</TABLE>
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.
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards .......................................... $65,100
Valuation allowance ....................................................... (65,100)
----------
Net deferred tax assets .................................................... $ --
==========
</TABLE>
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
F-10
<PAGE>
YOUNETWORK CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 -- RELATED PARTY TRANSACTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------
<S> <C>
1999 ......... $21,000
2000 ......... 21,000
2001 ......... 21,000
2002 ......... 21,000
2003 ......... 7,000
-------
$91,000
=======
</TABLE>
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
F-11
<PAGE>
YOUNETWORK CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 -- SUBSEQUENT EVENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
PAR SHARES
VALUE AUTHORIZED
----------- --------------
<S> <C> <C>
Class A Common stock ......... $ .0001 1,500,000
Class B Common stock ......... $ .0001 1,500,000
Class C Common stock ......... $ .0001 247,000,000
</TABLE>
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.
F-12
<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
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Prospectus Summary ....................... 3
The Offering ............................. 4
Summary Financial Information ............ 5
Risk Factors ............................. 6
Capitalization ........................... 12
Dividend Policy .......................... 13
Dilution ................................. 14
Plan of Operation ........................ 15
Business ................................. 22
Industry Background ...................... 24
Management ............................... 31
Executive Compensation Table ............. 32
Certain Transactions ..................... 34
Principal Stockholders ................... 36
Description of Shares .................... 37
Plan of Distribution ..................... 39
Shares Eligible for Future Sale .......... 40
Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities ....................... 40
Transfer Agent and Registrar ............. 41
Legal Matters ............................ 41
Experts .................................. 41
Additional Information ................... 41
YOUNETWORK CORPORATION
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ............. 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-12
</TABLE>
- ----------------------
Until August 7, 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.
1,000,000 SHARES OF CLASS A
COMMON STOCK AND
1,000,000 SHARES OF CLASS B
COMMON STOCK
[logo] YOUNETWORK
CORPORATION
-----------------------
PROSPECTUS
-----------------------
JULY 13, 1999
================================================================================
