SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly period ended September 30, 2000.
[_] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ________ to ___________
Commission File Number 0-25238
YOUNETWORK CORPORATION
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 13-3990305
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(State or Other Jurisdiction of (IRS Employer
incorporation or Organization) Identification No.)
115 East 23rd Street, New York, New York 10010
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(Address of Principal Executive Office)
(212) 387-0310
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
State the number of shares outstanding of each of issuer's classes of
common equity, as of the latest practicable date: As of November 7, 2000,
8,980, shares of Registrant's Class A Common Stock, $.0001 par value, were
outstanding, 1,988 shares of Registrant's Class B Common Stock, $.0001 par
value, were outstanding and 223,827,132 shares of Registrant's Class C Common
Stock, $.0001 par value, were outstanding.
<PAGE>
YOUNETWORK CORPORATION 10-QSB FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at December 31, 1999 and at
September 30, 2000 (Unaudited)............................................3
Unaudited Condensed Statement of Operations for the three months and
nine months ended September 30, 2000 and 1999 and for the period from
inception (January 14, 1998) to September 30, 2000 .......................4
Unaudited Condensed Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 and for the period from inception
(January 14, 1998) to September 30, 2000 ................................5
Notes to the Unaudited Condensed Financial Statements.....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................12
Part II: Other Information.
Item 1 Legal Proceedings........................................................19
Item 2 Changes in Securities and Use of Proceeds................................19
Item 3 Defaults Upon Senior Securities..........................................19
Item 4 Submission of Matters to a Vote of Security Holders......................19
Item 5 Other Information........................................................19
Item 6 Exhibits and Reports on Form 8-K.........................................19
Signatures .......................................................................20
</TABLE>
2
<PAGE>
PART I
FINANCIAL STATEMENTS
Item 1 Financial statements.
YOUNETWORK CORP
(A Development Stage Company)
Balance Sheets
December 31, 1999 and September 30, 2000
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,822 $ 41,127
Prepaid expenses 1,033 59,308
----------- -----------
Total current assets 4,855 100,435
Property and equipment, net 549,113 763,731
Other assets:
Software development costs, net 369,698 508,334
Software license, net 60,361 165,431
Security deposits 187,196 187,196
Loan to stockholder -- 12,201
Other assets 25,549 41,974
Intangible assets, net 21,528 --
Due from Affiliates 26,400 --
----------- -----------
Total other assets 690,732 915,136
----------- -----------
$ 1,244,700 $ 1,779,302
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 254,009 $ 242,627
Notes payable - stockholders 85,000 200,000
Due to related party -- 200,000
Deferred revenue -- 175,000
Accounts payable 175,916 114,381
Accrued rebate payable 5,267 4,063
Other current liabilities 19,749 73,710
----------- -----------
Total current liabilities 539,941 1,009,781
Capital lease obligations, less current portion 62,839 254,439
Due to ICES 144,710 --
Due to ICES Venture 2,926 --
Due to International Computing 199,353 --
Note payable - stockholder 15,000 --
----------- -----------
Total other liabilities 424,828 254,439
----------- -----------
Total liabilities 964,769 1,264,220
----------- -----------
Commitments
Stockholders' equity:
Common stock:
Class A - par value $.0001 per share:
Authorized - 1,500,000
shares Issued and outstanding - 7,052 shares at December 31, 1999 and
8,980 shares at September 30, 2000 -- 1
Class B - par value $.0001 per share:
Authorized - 1,500,000 shares
Issued and outstanding - 1,058 shares at December 31, 1999 and
1,988 shares at September 30, 2000 1 1
Class C - par value $.0001 per share:
Authorized - 247,000,000 shares
Issued and outstanding - 41,852,352 shares at 22,383 4,185
December 31, 1999 and 223,827,132 at September 30, 2000
Additional paid-in capital 3,425,545 2,395,242
Receivable in connection with equity transaction (37,753) --
Deficit accumulated during the development stage (3,130,245) (1,884,347)
----------- -----------
Total stockholders' equity 279,931 515,082
----------- -----------
$ 1,244,700 $ 1,779,302
=========== ===========
</TABLE>
3
<PAGE>
YOUNETWORK CORP
(A Development Stage Company)
Statements of Cash Flows
For the Nine months Ended September 30, 2000 and 1999 and for
the Period from Inception (January 14, 1998) to September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from Inception
(January 14,
1998) to
Nine Months Ended September September 30,
30, 2000
--------------------------- -------------
2000 1999
------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,245,898) $(1,022,522) $(3,130,245)
Adjustments to reconcile net loss to net cash used by operating activities:
Prepaid expenses 58,275 154,384 (1,033)
Depreciation and amortization 475,719 -- 767,121
Other assets 16,425 (36,452) (25,549)
Due from Affiliates (26,400) -- (1,050)
Deferred revenue (175,000) 75,035 --
Accounts payable 438,782 19,912 553,163
Accrued rebate payable 1,204 -- 5,267
Interest payable on loans 6,823 -- 6,823
Costs incurred with severance package 120,000 -- 120,000
Due to ICES Ventures 2,926 -- 2,926
Other current liabilities (53,961) (37,083) 19,749
----------- ----------- -----------
Net cash used in operating activities (381,105) (846,726) (1,708,178)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (13,924) (153,230) (918,000)
Software development costs -- (440,584) (554,545)
Loan to stockholder 12,201 (23,861) --
Purchase of software license -- (270,276) (270,276)
Payment of security deposits -- (179,331) (187,196)
----------- ----------- -----------
Net cash used in investing activities (1,723) (1,067,282) (1,930,017)
Cash flows from financing activities:
Proceeds from issuance of common stock 248,500 2,083,291 2,847,928
Proceeds from revolving credit line - ICES 142,274 -- 142,274
Payment on loan to International Computing (5,034) -- 194,966
Proceeds from Notes Payable stockholders 140,000 -- 140,000
Deferred registration costs -- (175,740) --
Payments of capital lease obligations (180,217) (6,808) 316,849
----------- ----------- -----------
Net cash provided by financing activities 345,523 1,900,743 3,642,017
----------- ----------- -----------
Net increase (decrease) in cash (37,305) (13,265) 3,822
Cash, beginning of period 41,127 178,068 --
----------- ----------- -----------
Cash, end of period $ 3,822 $ 164,803 $ 3,822
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $ 45,004 $ 2,026 $ 66,956
=========== =========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities
Capital lease obligation incurred for the acquisition of equipment $ -- $ -- $ 627,392
=========== =========== ===========
Issuance of Class A Common Stock for services $ -- $ -- $ 21,400
=========== =========== ===========
Issuance of Class C Common Stock for various costs $ 347,247 $ -- $ 347,247
=========== =========== ===========
Contribution to capital from liabilities forgiven $ 415,000 $ -- $ 415,000
=========== =========== ===========
Issuance of warrants for acquisition of software development costs $ -- $ -- $ 38,000
=========== =========== ===========
Issuance of warrants for portion of computer equipment lease $ -- $ -- $ 54,748
=========== =========== ===========
</TABLE>
4
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
Statement of Operations
for the three months and nine months ended September 30, 2000 and 1999
and for the Period from Inception (January 14, 1998) to September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
For the Period
from Inception
(January 14,
1998) to
Three Months Ended Nine Months Ended September 30,
September 30, September 30, 2000
------------------------------ ------------------------------ --------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 26,400 $ -- $ 26,400 $ -- $ 26,400
General and administrative expenses 172,334 201,760 645,608 295,915 1,290,694
------------- ------------- ------------- ------------- -------------
Operating loss (145,934) (201,760) (619,208) (295,915) (1,264,294)
Other income (expense):
Other -- -- 175,000 -- 175,000
Interest income (expense), net (16,423) 2,612 (45,175) 7,635 (69,932)
------------- ------------- ------------- ------------- -------------
Other income (expense), net (16,423) 2,612 129,825 7,635 105,068
------------- ------------- ------------- ------------- -------------
Loss from continuing operations (162,357) (199,148) (489,383) (288,280) (1,159,226)
Income (loss) from discontinued operations (net
of income taxes) 21,950 (499,943) (756,515) (734,242) (1,971,019)
------------- ------------- ------------- ------------- -------------
Net loss $ (140,407) $ (699,091) $ (1,245,898) $ (1,022,522) $ (3,130,245)
============= ============= ============= ============= =============
Per share:
Loss from continuing operations -- (0.01) -- (0.01)
Loss from discontinued operations -- (0.01) (0.01) (0.02)
------------- ------------- ------------- -------------
Net loss per common share, basic and diluted $ -- $ (0.02) $ (0.01) $ (0.03)
============= ============= ============= =============
Weighted average of common shares outstanding -
basic and diluted 223,827,132 40,753,957 132,208,432 37,095,591
============= ============= ============= =============
</TABLE>
5
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
YouNetwork Corporation, a Delaware corporation (the "Company"), a development
stage company incorporated on January 14, 1998 under the name YouNetwork Corp.,
a New York corporation and, pursuant to a merger effective February 3, 1999, the
stockholders of YouNetwork Corp. exchanged all of their common stock for shares
of Class C Common Stock, $.0001 par value per share ("Class C Shares") of the
Company.
The Company had developed an online consumer network comprised of consumers who
were internet shoppers and who became members of the Company's network. Members
earned rebates based on purchases and could request such rebates as cash, a
credit to future product purchases or to purchase Class B Common Stock, $.0001
par value per share ("Class B Shares") in the Company at $1.00 per share. At
September 30, 2000, $5,267 of such rebates have not been refunded or converted
to Class B Shares.
During 1999, the Company filed a registration statement under the Securities Act
of 1933, as amended, to register 1,000,000 shares each of its Class A Common
Stock, $.0001 par value per share ("Class A Shares") and Class B Shares (the
"Registration Statement"). Of the total number of the Class A Shares registered,
250,000 shares were reserved for issuance at no cost to each consumer who
registered to become a member of the Company's consumer network. The remaining
750,000 shares of the Class A Shares were reserved for distribution to existing
members based upon referring new members to the consumer network. The
Registration Statement became effective in July 1999.
Upon the issuance of the Class A Shares, the Company recorded a charge to
operations for promotions costs for the value of the shares issued based on the
current fair market value of the Company's securities. Upon the issuance of
Class B Shares, the Company recorded 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 were recorded when members make
purchases on the consumer network. To date, the Company has issued 8,980 Class A
Shares and 1,988 Class B Shares.
Pursuant to the Restructure and Recapitalization Agreement dated April 20, 2000
between the Company and the certain stockholders listed therein, $415,000 of
outstanding loans due to such stockholders of the Company were reclassified as a
contribution to capital of the Company.
On May 19, 2000, the Company and Compuces, Inc., a Delaware corporation
("Compuces"), entered into a Stock Purchase Agreement (the "Stock Purchase
6
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
Agreement") pursuant to which the Company agreed to sell to Compuces, after
giving effect to such sale, 80% of the Company's outstanding Class C Shares on a
fully diluted basis. Accordingly, Compuces is now the beneficial holder of
approximately 80.3% of the Class C Shares and approximately 80.3% of the
Company's outstanding voting securities (which include the Class A Shares and
the Class B Shares), which effected a "change in control" of the Company.
Compuces is a wholly-owned subsidiary of International Commerce Exchange
Systems, Inc., a Delaware corporation ("ICES"). ICES is a privately held company
which develops, invests in and operates Internet technology related companies.
The consideration for the issuance of the Class C Shares to Compuces was the
agreement by Compuces to advance funds to the Company in an amount sufficient to
pay certain specified debts of the Company in an amount not to exceed $300,000.
As of September 30, 2000, Compuces has advanced the Company approximately
$262,247 for the repayment of such debts.
In June 2000, the Company terminated its Web site and related online business
operations and, as a result, suspended the issuance of any additional Class A
Shares or Class B Shares in connection therewith. Accordingly, all operations
and financial activity associated with the online business has been classified
as discontinued operations.
Commencing in July 2000, the Company has been deriving revenue from licensing
the use of the Company's system components and from providing hosting management
services to related parties. In addition, the Company intends to derive revenue
from third party users. This strategic shift to a managed infrastructure company
seeks to utilize the existing investment in the Company's hardware, proprietary
and leased licensed software and to provide eCommerce services designed to
enable clients to extend their business to the Internet.
The accompanying unaudited financial statements are for interim periods and have
been prepared in accordance with generally accepted accounting principles but do
not include all disclosures provided in the annual financial statements. While
the Company believes that the disclosures presented are adequate to make the
information not misleading, these financial statements should be read in
conjunction with the financial statements and accompanying notes included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999
("Form 10-KSB") as filed with the Securities and Exchange Commission.
The December 31, 1999 balance sheet was derived from these audited financial
statements, but does not include all disclosures required by generally accepted
7
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
accounting principles. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary to present fairly the
financial position as of September 30, 2000 and the results of operations for
the three months and nine months ended September 30, 2000 and 1999 and the cash
flows for the nine months ended September 30, 2000 and 1999.
The statements of operations and cash flows for the nine months ended September
30, 2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles and as such, include estimates and assumptions of
management that affect the amounts reported in the financials statements. Actual
results could differ from these estimates.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Accordingly, deferred income taxes have been provided for to show the effect of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. A valuation allowance was
established to offset the Company's net deferred tax assets as of September 30,
2000 and December 31, 1999 because management does not currently believe that
the future realization of such deferred tax assets is more likely than not.
LOSS PER SHARE
The computation of loss per share of common stock in the accompanying Statements
of Operations is computed by dividing the net loss by the weighted average
number of common shares outstanding for the respective periods. Diluted earnings
per share as computed under SFAS No. 128 includes the effects of common stock
equivalents, including the dilutive effect of all outstanding common stock
options and warrants using the treasury stock method. Diluted earnings per share
is the same as basic earnings per share in the accompanying Statements of
Operations. Options and warrants to purchase 520,500 and 244,000 shares of
common stock, respectively, have been excluded from the computation of diluted
loss per share for the three months and nine months ended September 30, 2000 and
1999, respectively, as their effect would be antidilutive for the respective
periods.
8
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 2 - GOING CONCERN
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As noted in the Company's
audited financial statements for the year ended December 31, 1999, the Company
has incurred significant net losses. This factor, in addition to a working
capital deficiency and minimal revenues, raises substantial doubt as to the
Company's ability to obtain long-term debt or equity financing and achieve
profitability to generate positive cash flows from operations. These
accompanying financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue its existence. Since May 2000, ICES has advanced funds under
a revolving promissory note ("Revolving Promissory Note") to the Company to
satisfy its working capital requirements. Under the terms of the Revolving
Promissory Note, the Company may borrow from ICES amounts not to exceed
$750,000, with interest at 10% on principal advances only, and due in total as
to principal and interest on or before January 31, 2002 without any prepayment
penalty. As of September 30, 2000, these advances totaled $142,274. Accrued
interest under this note totaled $2,436 at September 30, 2000.
Note 3 - DEFERRED REVENUE AND NOTES PAYABLE
The Company entered into an agreement in March 1998 with a company that provides
long-distance telephone service. During 1998, the Company received from this
company advances totaling $175,000. In March 2000, the Company was released from
all obligations pursuant to this agreement and was not required to perform its
obligations under the agreement or to repay the advance. Accordingly, the
Company recorded $175,000 as other income in the quarter ended March 31, 2000.
Under the terms of an employment contract, George Santacroce, a former chief
executive officer and director of the Company, was entitled to a severance
payment in the amount of $120,000. He was issued an aggregate of 2,000,000 Class
C Shares in lieu of $60,000 and a non-interest bearing promissory note payable
in the principal amount of $60,000. The Company has agreed to pay the aggregate
principal amount under the note in twelve equal and consecutive monthly
installments of $5,000 commencing January 1, 2001.
The Company has borrowed money from ICES to fund working capital requirements
pursuant to the Revolving Promissory Note. The amount payable under the
Revolving Promissory Note as of September 30, 2000 is $142,274. Accrued interest
under this Note totaled $2,436 at September 30, 2000.
9
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 3 - DEFERRED REVENUE AND NOTES PAYABLE (Continued)
The Company has a non-interest bearing promissory note to Don Senerath, the
Company's chairperson, chief executive officer and a director of the Company, in
the amount of $40,000. This amount is payable upon demand by Don Senerath to the
extent that the Company has funds available for such purpose.
The Company owes International Computing, LLC ("IC"), a New York limited
liability company, $194,966 for software development costs. Pursuant to the
Stock Purchase Agreement, the amount due to IC was converted to long-term debt
and repayable in a lump-sum payment of principal and interest at a rate of 6% on
May 19, 2005. The Stock Purchase Agreement contains provisions to accelerate the
repayment of the debt contingent upon specific levels of revenue or placement of
equity securities, neither of which have occurred. Accrued interest payable to
IC for this debt totaled $4,387 at September 30, 2000.
Until July 21, 2000, IC was 100% owned by Steadfast Ventures, LLC ("Steadfast"),
a Delaware limited liability company, of which Don Senerath, the Company's
chairperson and chief executive officer, is a member. Pursuant to a Unit
Purchase Agreement dated July 21, 2000, ICES acquired 70% of the membership
units in IC from Steadfast.
Note 4 - AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS
Amortization of $46,212 and $138,636 for the three months and nine months ended
September 30, 2000, respectively, is included in general and administrative
expense. Amortization did not commence until October 1, 1999 and, therefore, the
three months and nine months ended September 30, 1999 do not include any
amortization expense.
Note 5 - DEPRECIATION AND AMORTIZATION
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 are amortized by the straight-line method over the lesser
of the term of the related lease or the useful life.
Depreciation and amortization for property, equipment and leasehold improvements
of $78,435 and $232,013 for the three months and nine months ended September 30,
2000,
10
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 5 - DEPRECIATION AND AMORTIZATION (Continued)
and $27,867 and $41,769 for the three months and nine months ended September 30,
1999, respectively, is included in general and administrative expense.
The capitalized software license fees and technical support costs (collectively
referred to as the "Capitalized License") are being amortized on a straight-line
basis over 24 months and 12 months, respectively, commencing July 1, 1999.
Capitalized License amortization of $22,636 and $105,070 for the three months
and nine months ended September 30, 2000, and $112,615 and $112,615 for the
three months and nine months ended September 30, 1999, respectively, is included
in general and administrative expense.
Note 6 - DISCONTINUED OPERATIONS
In June 2000, the Company suspended its Web site and related online business
operations and, as a result, suspended the issuance of any additional Class A
Shares or Class B Shares.
Subsequently, the Company has decided to terminate this business and redeploy
its infrastructure to provide eCommerce hosting management services.
Accordingly, the operations and financial activity directly associated with the
online business has been classified as discontinued operations.
The historical investment in the hardware, proprietary and leased licensed
software and technology development consulting has, at nominal cost, been
modified to be fully functional and scaleable as an eCommerce hosting platform.
As a result, these investments and associated costs have not been classified as
discontinued operations and an impairment loss has not been recognized.
Note 7 - RELATED PARTY TRANSACTIONS
The Company has provided hosting management services to various subsidiaries of
ICES during the three months ended September 30, 2000 totaling $26,400.
The Company has borrowed $107,224 from ICES and has accrued interest in the
amount of $2,436 under the Revolving Promissory Note during the three months
ended September 30, 2000. At September 30, 2000, the Company owes ICES $142,274
and accrued interest of $2,436 under this note.
11
<PAGE>
YOUNETWORK CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)
Note 7 - RELATED PARTY TRANSACTIONS (Continued)
The Company is indebted to IC $194,966 and associated accrued interest of $4,387
at September 30, 2000 under the terms of the Stock Purchase Agreement. During
the three months ended September 30, 2000, the Company has accrued $2,745 of
interest related to the debt.
The Company leases shared facilities on a month to month basis from ICES for its
computer room and is charged its prorata share of such occupancy expenses based
upon the actual cost incurred by ICES. The expenses totaled $2,926 during the
three months ended September 30, 2000. The Company owes ICES a total of $2,926
at September 30, 2000 for these expenses.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
The matters discussed in this section contain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, that involve risks
and uncertainties. All statements other than statements of historical
information provided herein maybe deemed to be forward-looking statements.
Without limiting the foregoing, the words "may", "will", "could", "should",
"intends", "thinks", "believes", "anticipates", "estimates", "plans", "excepts",
or the negative of such terms and similar expressions are intended to identify
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed throughout
this report and the Company's Annual Report on Form 10-KSB, for the year ended
December 31, 1999. The following cautionary statements identify important
factors that could cause the Company's actual results to differ materially from
those projected in the forward-looking statements made in this Report. Among the
key factors that have a direct bearing on the Company's results of operations
are:
o General economic and business conditions; the existence or absence of
adverse publicity; changes in, or failure to comply with, government
regulations; changes in marketing and technology; changes in political,
social and economic conditions;
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<PAGE>
o Increased competition in the Internet; Internet capacity; general risks of
the Internet;
o Success of acquisitions and operating initiatives; changes in business
strategy or development plans; management of growth;
o Availability, terms and deployment of capital;
o Costs and other effects of legal and administrative proceedings;
o Dependence on senior management; business abilities and judgment of
personnel; availability of qualified personnel; labor and employee benefit
costs;
o Development risks; risks relating to the availability of financing, and
o Other factors referenced in this Report and the Form 10-KSB.
Because the risk factors referred to above could cause actual results or outcome
to differ materially from those expressed in any forward-looking statements made
by the Company, you should not place undue reliance on any such forward-looking
statements. Other factors may be described from time to time in the Company's
other filings with the Securities and Exchange Commission, news releases and
other communications. Further, any forward-looking statement speaks only as of
the date on which it is made and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for the Company to predict which will arise. In addition, the Company
cannot assess the impact of each factor on the Company's business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth above and contained elsewhere in
this Quarterly Report on Form 10-QSB.
OVERVIEW
The Company, a Delaware Corporation, was incorporated on January 14, 1998 under
the name YouNetwork Corp., a New York corporation and, pursuant to a merger
effective February 3, 1999, the stockholders of YouNetwork Corp. exchanged all
of their common stock for shares of the Class C Shares of the Company.
The Company had developed an online consumer network comprised of consumers who
were Internet shoppers and who became members of the Company's network. Members
13
<PAGE>
earned rebates based on purchases and could request such rebates as cash, a
credit to future product purchases or to purchase Class B Shares in the Company
at $1.00 per share. At September 30, 2000, $5,267 of such rebates have not been
refunded or converted to Class B Shares.
During 1999, the Company filed the Registration Statement which became effective
in July 1999. Of the total number of the Class A Shares registered, 250,000
shares were reserved for issuance at no cost to each consumer who registered to
become a member of the Company's consumer network. The remaining 750,000 shares
of the Class A Shares were reserved for distribution to existing members based
upon referring new members to the consumer network.
Upon the issuance of the Class A Shares, the Company recorded a charge to
operations for promotions costs for the value of the shares issued based on the
current fair market value of the Company's securities. Upon the issuance of
Class B Shares, the Company recorded 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 were recorded when members make
purchases on the consumer network. To date, the Company has issued 8,980 Class A
Shares and 1,988 Class B Shares.
On May 19, 2000, pursuant to the Stock Purchase Agreement, the Company agreed to
sell to Compuces, after giving effect to such sale, 80% of the Company's
outstanding Class C Shares on a fully diluted basis. Accordingly, Compuces is
now the beneficial holder of approximately 80.3% of the Class C Shares and
approximately 80.3% of the Company's outstanding voting securities (which
include the Class A Shares and the Class B Shares), which effected a "change in
control" of the Company. The Stock Purchase Agreement also provides for, among
other things, that the Company will not dilute the other Class C stockholders'
equity interest in the Company unless and until the Company raises at least
$300,000 in capital in a private or public financing based upon a $5,000,000
post-money valuation.
Compuces is a wholly-owned subsidiary of ICES, a privately held company which
develops, invests in and operates Internet technology related companies.
The consideration for the issuance of the Class C Shares to Compuces was the
agreement by Compuces to advance funds to the Company in an amount sufficient to
pay certain specified debts of the Company in an amount not to exceed $300,000.
As of September 30, 2000, Compuces has advanced the Company approximately
$262,247 for the repayment of such debts.
In June 2000, the Company terminated its Web site and related online business
operations and, as a result, suspended the issuance of any additional Class A
Shares or Class B Shares in connection therewith. Accordingly, all operations
and financial activity associated with the online business has been classified
as discontinued operations.
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Under the Stock Purchase Agreement, one member of the Company's management has
agreed to perform services without further compensation until such time as cash
flow from operations permits or the Company is able to obtain additional
financing.
The Company has historically financed its operations through working capital
provided by operations, related party loans and advances and the private
placement of equity securities. The Company's ability to continue its operations
in any form is currently dependent on financing from external sources. There can
be no assurance that additional capital will be available on terms favorable to
the Company or at all, or that the Company will be able to generate sufficient
cash flow in order to sustain operations. To the extent that additional capital
is raised through the sale of equity or debt securities, the issuance of such
securities could result in additional dilution to the Company's stockholders. In
the event that the Company experiences the need for additional capital, and is
not able to generate capital from financing sources or from future operations,
management may be required to modify, suspend or discontinue the operations of
the Company indefinitely.
Since May 2000, ICES has advanced funds under the Revolving Promissory Note to
the Company to satisfy its working capital requirements. As of September 30,
2000, these advances totaled $142,274.
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As noted in the Company's
audited financial statements for the year ended December 31, 1999, the Company
has incurred significant net losses. The Company has incurred losses of $140,408
and $1,245,898 for the three months and nine months ended September 30, 2000 and
$699,091 and $1,022,522 for the three months and nine months ended September 30,
1999, respectively. The Company expects to continue to incur operating losses
over at least the next six months and no assurances can be given that the
Company will be able to continue as a going concern. This factor, in addition to
working capital deficiency and minimal revenues, raises substantial doubt as to
the Company's ability to obtain long-term debt or equity financing and achieve
profitable operations. The Company's ability to continue as a going concern is
dependent upon its ability to generate positive cash flows from operations.
These accompanying financial statements do not include any adjustments related
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue its existence.
Commencing in July 2000, the Company has been deriving revenue from licensing
the use of the Company's system components and from providing hosting management
services to related parties. The Company also intends to derive revenue from
third party users. This strategic shift to a managed infrastructure company
seeks to utilize the existing investment in the Company's hardware, proprietary
and leased licensed software and to provide eCommerce services designed to
enable clients to extend their business to the Internet. Management believes
that the existing infrastructure can be leveraged, in conjunction with certain
strategic partners, to provide Web development, hosting and support services
between eCommerce business enterprises and between business
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enterprises and consumers. Under this new business plan and until significant
revenues can be generated, the Company intends to keep its operating overhead at
minimal levels.
The Company believes that its current Revolving Promissory Note coupled with
revenues from its licensing and hosting management services will be sufficient
for this first phase of its business development.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SEPTEMBER 30, 1999
Since inception, the Company has been in the early stages of development and has
generated nominal revenues to date.
Total revenues were $26,400 and the Company incurred operating expenses in the
amount of $172,334 during the three months ended September 30, 2000 as compared
with $201,760 for the three months ended September 30, 1999. This decrease of
$29,426 consists of a reduction in general and administrative expenses of
$36,227 primarily as a result of overall lower levels of spending as the Company
commences operations pursuant to its new business plan, and a reduction in other
depreciation and amortization of $39,411 offset by amortization of software
development costs of $46,212 as amortization of software development costs did
not commence until October 1, 1999.
All revenues and operating expenses relating to the former online business have
been classified as discontinued operations for all periods prior to July 1,
2000. During the three months ended September 30, 2000, $21,950 of income has
been recorded relating to the former online business as a result of the
write-off of net excess accruals and have been classified as discontinued
operations.
Other expenses increased during the three months ended September 30, 2000 by
$19,035 versus the three months ended September 30, 1999 primarily due to higher
interest expense on capital lease obligations of $5,763, interest on
intercompany indebtedness of $5,181, amortization of capitalized interest on
warrants issued in 1999 of $5,475 and a reduction in interest income of $2,616.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH SEPTEMBER 30, 1999
Since inception, the Company has been in the early stages of development and has
had nominal revenues to date.
Total revenues were $26,400 and the Company incurred operating expenses in the
amount of $645,608 during the nine months ended September 30, 2000 as compared
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with $295,915 for the nine months ended September 30. This increase of $349,693
is primarily reflects the results of a full nine months of operations in
calendar 2000 and principally is comprised of an increase in other depreciation
and amortization of $182,699 and amortization of software development costs of
$138,636 as amortization of software development costs did not commence until
October 1, 1999,and an increase in general and administrative expenses of
$28,358 primarily as a result of overall higher levels of spending in the first
half of 2000.
All revenues and operating expenses relating to the former online business have
been classified as discontinued operations for all periods prior to July 1,
2000. During the nine months ended September 30, 2000, $21,950 of income has
been recorded relating to the former online business as a result of the
write-off of net excess accruals during the 3rd quarter of 2000 and have been
classified as discontinued operations.
Other income increased during the nine months ended September 30, 2000, by
$122,190 as compared with the nine months primarily due to a contract settlement
in March 2000 of $175,000 offset by an increase in interest expense on capital
lease obligations of $16,859, an increase in interest expense of $26,542 and a
decrease in interest income of $9,410.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had a working capital deficit of $535,086.
During the quarter ended September 30, 2000, the Company's cash flow
requirements were provided solely by related party loans. In order to continue
to finance operations, the Company needs to borrow against the Revolving
Promissory Note provided by ICES. The amount of these borrowings were $107,224
during the quarter ended September 30, 2000 and the total amount outstanding at
September 30, 2000 was $142,274. Accrued interest under this note totaled $2,436
as of September 30, 2000.
The Company has no commitments for capital expenditures or additional equity or
debt financing and no assurances can be made that its working capital needs can
be met should they exceed the funds available under the Revolving Promissory
Note.
The Company has historically financed its operations through working capital
provided by operations, related party loans and advances and the private
placement of equity securities. The Company's ability to continue its operations
in any form is currently dependent on financing from external sources. There can
be no assurance that additional capital will be available on terms favorable to
the Company or at all, or that the Company will be able to generate sufficient
cash flow in order to sustain operations. To the extent that additional capital
is raised through the sale of equity or debt securities, the issuance of such
securities could result in additional dilution to the Company's stockholders. In
the event that the Company experiences the need for additional capital, and is
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not able to generate capital from financing sources or from future operations,
management may be required to modify, suspend or discontinue the operations of
the Company indefinitely.
The Company has incurred losses, some of which may be available to offset future
taxable income. Due to uncertainties regarding the recovery of such asset
through future operations, management has recorded a valuation allowance to
reduce all its deferred tax asset to zero. Accordingly, there is no benefit for
income taxes in the accompanying financial statements.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
An action was brought by EIN Corporation against the Company and Compuces,
Inc. in Civil Court of City of New York, New York County on September 18,
2000, alleging breach of agreement and seeking to recover $27,514.42 for
services allegedly rendered by the plaintiff. An answer was filed denying
the allegations and the Company intends to defend the action vigorously.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Although it was previously reported in the Registrant's Current Report on
Form 8-K dated October 5, 2000 that the Registrant's board of directors
had selected Deloitte & Touche LLP as the Registrant's principal
accountant, on October 31, 2000 the Registrant's board of directors has,
by unanimous vote, engaged J.H. Cohn LLP as the Registrant's principal
accountant.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Current Reports on Form 8-K.
On October 5, 2000 the Registrant filed a Current Report on Form 8-K to
report, under Item 4, the change in the Registrant's certifying
accountants, which event occurred on October 4, 2000.
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SIGNATURES
In accordance with the requirement of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YOUNETWORK CORPORATION
Dated: November 7, 2000
By: /s/ Don Senerath
-----------------
Don Senerath
Chairman & Chief Executive Officer
By: /s/ Joseph C. Sienkiewicz
-------------------------
Joseph C. Sienkiewicz
Chief Financial Officer
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