-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FIlsfkum00HgkM2ulormjLffV4oTbmyF4QntU4kYVBIynKWbw+Y2YWVIFenA0VU7 aHV6am9lRQ1PQ7pUYWOmsw== 0000950136-99-000152.txt : 19990209 0000950136-99-000152.hdr.sgml : 19990209 ACCESSION NUMBER: 0000950136-99-000152 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19990208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YOUNETWORK CORP CENTRAL INDEX KEY: 0001078306 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-71949 FILM NUMBER: 99523563 BUSINESS ADDRESS: STREET 1: . CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2125762030 SB-2 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on February 5, 1999 Registration No. _________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- YOUNETWORK CORPORATION (Name of Small Business Issuer in its charter)
Delaware 13-399035 (State of Jurisdiction ) (Primary Standard Industrial Classification Code Number) (I.R.S. Employee Identification No.)
New York, New York 10010 212-576-2030 (Address and telephone number of principal executive offices and principal place of business) -------------------- Kyle S. Taylor, President YouNetwork Corporation 220 East 23rd Street, Suite 607 New York, New York 10010 (212) 576 2030 (Name, address and telephone number of agent for service) Copies of all communications to: Silverman, Collura, Chernis & Balzano, P.C. Gary W. Mair, Esq. 381 Park Avenue South, Suite 1601 New York, New York 10016 (212) 779-8600 Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of he earlier effective registration statement for the same offering. [ ] ______________________________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______________________________ If this form is a post-effective registration statement filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
======================================= ====================== ===================== ======================== ===================== Proposed Maximum Proposed Maximum Offering Price Per Aggregate Offering Title of Each Class of Securities to Amount to be Shares(1) Price (1) Amount of be Registered Registered Registration Fee ======================================= ====================== ===================== ======================== ===================== Class A Common Stock, .0001 par value 1,000,000 $0.00 $0.00 $0.00 per share ======================================= ====================== ===================== ======================== ===================== Class B Common Stock, .0001 par value per share 1,000,000 $1.00 $1,000,000 $200.00 ======================================= ====================== ===================== ======================== ===================== Total 2,000,000 $1,000,000 $200.00 ======================================= ====================== ===================== ======================== =====================
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to 457(o). YOUNETWORK CORPORATION Cross-Reference Sheet pursuant to Item 501(b) Showing Location in Prospectus of Information Required by Items of Form SB-2
Registration Statement Item Caption in Prospectus --------------------------- --------------------- 1. Front of Registration Statement and Facing Page; Cross-Reference Sheet; Outside Front Cover of Prospectus Prospectus Cover Page 2. Inside Front and Outside Back Cover Prospectus Cover Page; Prospectus Pages of Prospectus Back Cover Page 3. Summary Information and Risk Factors Prospectus Summary; YouNetwork Corporation; Risk Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Risk Factors; Shares Eligible For Future Sale 6. Dilution Dilution and Other Comparative Data 7. Selling Security holders Not Applicable 8. Legal Proceedings Not Applicable 9. Plan of Distribution Not Applicable 10. Directors, Executive Officers, Promoters Management; Principal Stockholders and Control Persons 11. Security Ownership of Certain Beneficial Principal Stockholders Owners and Management 12. Description of Securities Description of Securities 13. Interest of Named Experts and Counsel Legal Matters; Experts 14. Disclosure of Commission Position on Description of Securities Indemnification for Securities Act Liabilities 15. Organization Within One Year Prospectus Summary; Risk Factors; Business;Certain Transactions 16. Description of Business Business 17. Management's Discussion and Analysis Management's Discussion and Analysis 18. Description of Property Business 19. Certain Relations and Related Certain Transactions Transactions 20. Market for Common Equity and Related Outside Front Cover Of Prospectus; Stockholder Matters Description of Securities; Risk Factors 21. Executive Compensation Management 22. Financial Statements Financial Statements 23. Changes in and Disagreements With Not applicable Accountants on Accounting and Financial Disclosure
SUBJECT TO COMPLETION, DATED FEBRUARY 5, 1999 1,000,000 SHARES OF CLASS A COMMON STOCK AND 1,000,000 SHARES OF CLASS B COMMON STOCK YOUNETWORK CORPORATION YouNetwork,Corporation, a Delaware corporation ("YouNetwork, our, we or us") is hereby offering 1,000,000 shares of Class A Common Stock, par value $.0001 per share ("Class A Shares") and 1,000,000 shares of Class B Common Stock, par value $.0001 ("Class B Shares")(collectively, the "Securities"). The Securities are being distributed by YouNetwork Corporation (the "Offering") to its new members ("Members") of its on-line consumer network ("Consumer Network"). Class A Shares will be offered at no cost to each consumer who registers to become a Consumer Network Member. Class B Shares will be offered to Members at $1.00 per share, which may only be paid with rebates a Member may earn by making purchases on our Consumer Network. A holder of our Class A Shares shall not, directly or indirectly, offer, sell, pledge, grant any option to purchase, or otherwise sell or dispose of any Class A Shares for a period of 12 months after the Offering (the "Lock-Up Period"). Prior to this Offering, there has been no public market for the Securities, and there can be no assurance that such a market will develop or be sustained. See "Risk Factors - -No Prior Public Market for Securities." A brief description of our Securities can be found under "SUMMARY" in this prospectus. WE URGE YOU TO READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 7, ALONG WITH THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Per Class A Per Class B Share Total Share Total ----- ----- ----- ----- Initial public Offering price... $0 $0 $1.00 $1.00 Proceeds before expenses to YouNetwork.................... $0 $0 $1,000,000 $1,000,000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT DISTRIBUTE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. THE DATE OF THIS PROSPECTUS IS ________ __, 1999 We have not employed any brokers, dealers or underwriters in connection with the distribution of the Securities included in this Registration Statement and no underwriters commission, fees or discounts will be paid in connection with this Offering. We are not currently a reporting company under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and therefore we have not filed any reports with the Securities and Exchange Commission ("Commission"). Upon completion of this offering, we intend to register under the Exchange Act and 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. 2 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with the more detailed information including "Risk Factors" and financial statements and the notes relating thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information included in this prospectus has been adjusted to reflect the recapitalization and exchange of each share of Common Stock of YouNetwork Corp., a New York corporation for 330,000 shares of Class C Common Stock of the Registrant, YouNetwork. The discussion in this Prospectus contains certain forward-looking statements. The outcome of events described in such forward-looking statements is subject to risks and uncertainties. YouNetwork's actual results may differ materially form those discussed in such forward-looking statements. Factors that may cause or contribute to such differences include those discussed in "Risk Factors," "Management's Discussion And Analysis" and "Business" as well as those discussed elsewhere in this Prospectus YOUNETWORK CORPORATION YouNetwork is a development stage company which is poised to launch a unique and novel on line Consumer Network. By combining the virtues of cooperative marketing with incentives designed to reward a Member's purchasing influence, the Consumer Network will seek to develop a sizeable membership base (without entry fees), and to distinguish itself from the emerging wave of direct Internet marketing companies which are seeking to tap the rapidly developing market for Internet commerce. The Consumer Network will offer Members a tiered incentive rebate program for a broad based variety of branded consumer products and services offered at competitive and discounted prices. Incentive rebates will be awarded to Consumer Network Members based on our proprietary tracking technology ("Tracking"). Tracking will monitor each consumer who registers on the YouNetwork site for their influence on the network as well as the influence of other Members they may refer. For each Member of the Consumer Network ("Identified Member") Tracking will account for: (i) Purchases by the Identified Member; (ii) "Lineage" of the Identified Member (i.e. each new Member ("New Member") referred by an Identified Member (first level referral), each Member referred by the New Member (second level referral) and further levels of referral down through the fifth level of referral); and (iii) Purchases by the Member's Lineage. Tracking will quantify a Member's influence on the Network by a factor ("Net Value") based upon the Member's Lineage. The Net Value factor will in turn determine the rebate rate which will be credited to the Member's account on all purchases made by the Member as well as purchases made by the Member's Lineage. Members will have the option to receive their accumulated rebates ("Rebate Balance") in cash, to apply their Rebate Balance to future purchases or for the purchase of Class B Shares. The registration statement, of which this Prospectus forms a part, includes the Class B Shares. By offering our Securities to each consumer who registers to become a Consumer Network Member, and by offering competitively priced products and purchase incentives in the form of cash rebates, we believe that we can develop an innovative online sales channel with low customer acquisition costs. The key elements of our approach are: (i) to utilize the cost-effective direct marketing capabilities of the Web to sell products to our customer base; (ii) to offer equity 3 participation to rapidly attract a sizeable membership base; (iii) to develop a detailed member database; (iv) to continue to grow online reach and membership utilizing our proprietary Tracking technology; and (v) to provide customer convenience and competitive prices to encourage purchasing. All product fulfillment and post sale services will be provided by our vendor affiliates ("Vendors"). We will not maintain an inventory in any product line which we market. We believe that promoting repeat usage and membership loyalty through equity ownership in YouNetwork will help establish us as a preferred destination among Web users. This Prospectus contains product names, trade names and trademarks of other organizations, which are the property of their respective owners. YouNetwork was incorporated in the State of New York on January 14, 1998, and was subsequently merged into YouNetwork, Corporation, a Delaware corporation on February 3, 1999. The principal executive offices of YouNetwork are located at 220 East 23rd Street, Suite 607 New York, New York 10010, and its telephone number at this address is (212) 576-2030. YouNetwork maintains a website at www.YouNetwork.com. Nothing contained on such website should be construed as a part of this Prospectus. This Prospectus includes statistical data regarding the Internet industry. Such data is taken or derived from information published by sources including Jupiter Research ("Jupiter Research"), Visa International Studies ("Visa), and Ziff-Davis Marketing Intelligence ("Ziff-Davis"). Although YouNetwork believes that such data are generally indicative of the matters reflected therein, such data may be imprecise and investors are cautioned not to place undue reliance on such data. These Securities are being offered and sold only in ________________. This is neither a solicitation to buy nor an offer to sell to persons in the following jurisdictions: Alaska, South Carolina, Florida and West Virginia, and no purchase of these securities by persons in these jurisdictions is authorized. 4 THE OFFERING SECURITIES OFFERED............... 1,000,000 shares of Class A Common Stock and 1,000,000 shares of Class B Common Stock. The Class A Common Stock will be distributed to New Members of our Consumer Network at no cost. The Class B Shares are offered to our Members at a price of $1.00 per share, which may only be paid with rebates accumulated by Members in connection with purchases made on our Consumer Network. See "Description of Securities." SHARES OF COMMON STOCK OUTSTANDING BEFORE OFFERING..... 33,000,000 SHARES OF COMMON STOCK OUTSTANDING AFTER OFFERING..... 35,000,000 LOCK UP PERIOD .................. A holder of our Class A Shares shall not, directly or indirectly,. offer, sell, pledge, grant any option to purchase, or otherwise sell or dispose of any Securities for a period of 12 months after the Offering USE OF PROCEEDS.................. The net proceeds to YouNetwork, aggregating approximately $872,800 from the sale of Class B Shares will be used to expand our Network capacity and for general working capital. RISK FACTORS..................... The Securities offered hereby are highly speculative and involve a high degree of risk. Prospective investors should carefully review and consider the factors set forth under "Risk Factors" as well as all other information contained herein. 5 SUMMARY FINANCIAL INFORMATION The summary financial information presented below as of December 31, 1998, and for the period from inception (January 14, 1998), to December 31, 1998, was derived from the audited financial statements of YouNetwork Corporation (formerly known as YouNetwork Corp.) appearing elsewhere herein. The summary should be read in conjunction with Management's Discussion and Analysis, the financial statements of YouNetwork and the related notes to the financial statements, each appearing elsewhere in this prospectus. FOR THE PERIOD FROM INCEPTION (JANUARY 14, 1998) TO DECEMBER 31, 1998(1) -------------------- OPERATING STATEMENT INFORMATION: REVENUES ........................................................$ - EXPENSES ...................................................(160,848) OPERATING LOSS ............................................ (160,848) INTEREST EXPENSE..............................................(1,975) NET LOSS DURING THE DEVELOPMENT STAGE......................$(162,823) NET LOSS PER COMMON SHARE, BASIC AND DILUTED.................. $(.01)(2) WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING BASIC AND DILUTED..................................... 24,798,750 (2) BALANCE SHEET INFORMATION: DECEMBER 31, 1998 ----------------- CASH........................................................$178,068 WORKING CAPITAL DEFICIT......................................(57,363) TOTAL ASSETS.................................................299,034 CAPITAL LEASE OBLIGATIONS, EXCLUDING CURRENT PORTION......... 25,554 STOCKHOLDERS' EQUITY..........................................37,377 (1) On February 3, 1999, YouNetwork Corp., a New York corporation merged into the registrant, YouNetwork. All shareholders of YouNetwork Corp. exchanged their shares of Common Stock in YouNetwork Corp. for shares of Class C Common Stock of the registrant, YouNetwork at $.0001 par value per share on a basis of 330,000 shares of YouNetwork for each outstanding share of YouNetwork Corp. (2) These amounts have been retroactively adjusted to reflect the merger on February 3, 1999. 6 RISK FACTORS The Securities offered hereby are highly speculative in nature and involve a high degree of risk. Therefore each prospective investor should consider very carefully certain risks and speculative factors inherent in and affecting the business of YouNetwork prior to the purchase of any of the Securities offered hereby, as well as all of the other matters set forth elsewhere in this Prospectus. LACK OF OPERATING HISTORY; ANTICIPATED FUTURE LOSSES. YouNetwork was incorporated on January 14, 1998, under the name YouNetwork Corp., a New York corporation. Pursuant to a Merger effective February 3, 1999, YouNetwork Corp. merged into the registrant, YouNetwork Corporation, a Delaware corporation. YouNetwork has not yet generated any revenue. To date, we have devoted our efforts to various organizational activities, including our effort to build out our web site and to develop our proprietary Tracking technology. As a result, we have no operating history upon which you can evaluate YouNetwork. Our business must be considered in light of the risks, expenses and problems frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as online commerce and the Internet. Set forth below is a brief summary of risks, expenses and problems frequently encountered by companies such as YouNetwork: (i) Our inability to develop, maintain and/or increase levels of traffic on the YouNetwork site; the failure by us to develop the YouNetwork brand; our inability to attract or retain Members; our inability to generate significant Web-based commerce revenue from our Members; our failure to anticipate and adapt to a developing market; and the level of use of the Internet and online services for the purchase of consumer products. (ii) YouNetwork's ability to upgrade and develop a system and infrastructure and our ability to attract new personnel in a timely and effective 7 manner; the inability to effectively manage rapidly expanding operations; the level of traffic on our Web site; the failure of our server and networking systems to efficiently handle our Web traffic; technical difficulties and system downtime or Internet brownouts; and the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure. (iii) The level of merchandise returns experienced by YouNetwork; its competition and dependence on the Internet; and the introduction and development of different or more extensive electronic-commerce networks by direct and indirect competitors, particularly in light of the fact that most of such competitors are much larger and have greater financial, technical and marketing resources than YouNetwork. (iv) Governmental regulation and general economic conditions and economic conditions specific to the Internet and the online commerce industry. To address these risks, YouNetwork must, among other things, develop, maintain and increase its membership base, continue to develop and upgrade its technology, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance we will be successful in addressing such risks, and any failure to do so could have a material adverse effect on our business, results of operations and financial condition. As of December 31, 1998, YouNetwork had an accumulated deficit of $162,823 and we anticipate that we will incur net losses for the foreseeable future. The extent of these losses will be dependent, in part, on our ability to attract and build a membership base, to generate sales, and to offer products and services at competitive prices. We expect our operating expenses to increase, especially in the areas of sales and marketing and brand promotion, and, as a result, we will need to generate additional revenue if profitability is to be achieved. Although we intend to develop and expand our marketing of products and services, no assurance can be given that we will be able to achieve these objectives or that, if these objectives are achieved, we will ever be profitable. To the extent that net revenue does not grow at anticipated rates, or that increases in operating expenses are not followed by commensurate increases in net revenue, or that we are unable to adjust operating expense levels accordingly, YouNetwork's business, results of operations and financial condition will be materially and adversely affected. There can be no assurance that our operating losses will not increase in the future or that we will ever achieve or sustain profitability. The establishment of our operations is contingent upon our success in establishing markets for our products and services and achieving profitable operations. 8 UNPREDICTABILITY OF FUTURE NET REVENUE. We have not generated any revenue to date and will not generate any revenue until we commence sales of products and services to persons who become Members of our Consumer Network. We believe that once we commence our marketing operations, future operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control. These factors include demand for the products and services we sell through the Consumer Network, consumers' acceptance of electronic commerce and, in particular, direct e-mail marketing as a medium for the purchase of goods and services, the level of traffic on the YouNetwork site, the amount and timing of capital expenditures and other costs relating to the expansion of our operations, the introduction of new or enhanced services by us or our competitors, the availability of desirable products and services for sale through our Web site, the loss of a key Vendor contract or relationship by us, technical difficulties with the YouNetwork site, general economic conditions, and economic conditions specific to the Internet or all or a portion of the technology market. As a result of our lack of operating history, we have no meaningful historical financial data upon which to base planned operating expenses. Therefore, our expense levels are based in part on our expectations as to future revenue from sales of products and services, and anticipated growth in membership. Sales and operating results from product sales generally depend on the volume, timing and ability to fulfill orders received, which are difficult to forecast. In addition, there can be no assurance that we will be able to accurately predict our net revenue, particularly in light of the intense competition for the sale of products and services on the Web, and the uncertainty as to the broad acceptance of the Web as a commerce medium. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any failure by us to accurately make such predictions would have a material adverse effect on our business, results of operations and financial condition. RISKS OF CAPACITY CONSTRAINTS; SYSTEM FAILURES; TECHNOLOGICAL RISKS. The performance of our server and networking hardware and software infrastructure is critical to our business and our ability to attract Web users and New Members to YouNetwork's Web site is unknown. Any system failure that causes an interruption in service or a decrease in responsiveness of our Web site could impair our ability to attract and retain Members. Any disruption in Internet access or any failure of our server and networking systems to handle Member orders would have a material adverse effect on our business, results of operations and financial condition. Despite our implementation of network security measures, our servers will be vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering. The occurrence of any of these events could result in interruptions, delays or cessations in service, which could have a material adverse effect on our business, results of operations and financial condition. In addition, our reputation and the YouNetwork brand could be materially and 9 adversely affected. See "Management Of Growth And Relationships; Brief Tenure Of Management; Dependence On Key Personnel." RISK OF RELIANCE ON INTERNALLY DEVELOPED SYSTEMS. We will use an internally developed system for our Web site and substantially all aspects of our transaction processing and order management systems. Reliability and efficiency of our system remains untested since we have not, with the exception of beta testing, commenced operating our Consumer Network. Moreover, our lack of operational experience and our inability to modify this system as necessary to accommodate increased traffic on our Web site or increased volume through our transaction processing systems may result in system disruptions, slow response times, impaired quality and speed of order fulfillment, and delays in reporting accurate financial information. Any of these events could have a material adverse effect on our business, results of operations and financial condition. DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE; DEPENDENCE ON DIRECT SALES. Our future success is substantially dependent upon continued growth in the use of the Internet and the Web. Use of the Internet as a means of effecting retail transactions is at an early stage of development, and demand and market acceptance for retail marketing over the Internet is uncertain. We will be dependent on electronic-commerce revenue as our sole source of revenue. We cannot predict the extent to which consumers will be willing to shift their purchasing habits from traditional retailers to online retailers. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including lack of acceptable security technologies, inconsistent quality of service and lack of availability of cost-effective, high-speed service. If the use of the Internet does not continue to grow or grows more slowly than expected, YouNetwork's business, financial condition and results of operations may be adversely affected. RELIANCE ON VENDOR AFFILIATIONS. We will be totally dependant on Vendors and distributors for all of our product and service fulfillment, and we have no fulfillment operation or facility of our own. As a result, we will need to establish and maintain relationships and affiliations with a broad array of Vendors and distributors in order to offer our Members a broad based product mix at competitive and discounted prices. There can be no assurance that we will successfully establish and, if established, maintain relationships and affiliations with Vendors and distributors on terms satisfactory to us. An unanticipated termination of our relationship with any Vendor or distributor could materially adversely affect our results of operations even if we were able to establish a relationship with an alternative Vendor. To the extent that Vendors and distributors do not have sufficient capacity and/or are unable to satisfy on a timely basis our requirements, our business may be materially adversely affected. 10 In addition, the success of our Consumer Network will be dependent upon the ability of Vendors and distributors who will supply our products and services to supply adequate amounts of inventory on a timely basis. We will not maintain an inventory in any product line which we market. The failure of Vendors and distributors to meet their commitments would have a material adverse effect on YouNetwork's business, results of operations and financial condition. SALE TAX COLLECTION. We do not intend to collect sales or other similar taxes in respect to shipments of goods into states other than New York State. However, one or more states may seek to impose sales tax collection obligations on an out-of-state company such as YouNetwork which engage in online commerce. A successful assertion by one or more states that we should collect sales or other similar taxes on the sale of merchandise could have a material adverse effect on our business, prospects, financial condition and results of operations. See "--Government Regulation And Legal Uncertainties." MANAGEMENT OF GROWTH AND RELATIONSHIPS; BRIEF TENURE OF MANAGEMENT; DEPENDENCE ON KEY PERSONNEL. We may experience rapid growth, which may place a significant strain on our managerial, financial and operational resources. We will be required to manage multiple relationships with various Members, Vendors and other third parties. These requirements will be strained in the event of rapid growth of YouNetwork or in the number of third party relationships, and there can be no assurance that our systems, procedures or controls will be adequate to support our operations or that our management will be able to manage any growth effectively. Our performance will be substantially dependent on the performance of our executive officers, Kyle S. Taylor and Don S. Senerath who have worked together only a short period of time, and on merchandising and marketing personnel we intend to hire. The loss of Messrs. Taylor or Senerath would have a material adverse effect on YouNetwork. We do not currently have "key person" life insurance policies on any of our employees. The loss of the services of either of our executive officers could have a material adverse effect on our business, results of operations and financial condition. Competition for senior management, experienced media sales and marketing personnel, qualified Web engineers and other employees is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our failure to successfully manage our personnel requirements would have a material adverse effect on our business, results of operations and financial condition. 11 DEPENDENCE ON WEB INFRASTRUCTURE. Our success will depend in large part upon the development of a Web infrastructure, with the necessary speed, data capacity and security, and timely development of complementary products for providing reliable Web access and services. Because global commerce and online exchange of information on the Web and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance whether the Web will support increasing use or will prove to be a viable commercial marketplace. The Web has experienced, and is expected to continue to experience, significant growth in the number of users and the amount of content. To the extent that the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users, there can be no assurance that the Web infrastructure will continue to be able to support the demands placed on it by this continued growth or that the performance or reliability of the Web will not be adversely affected by this continued growth. In addition, the Web could lose its viability or effectiveness due to delays and the development or adoption of new standards and protocols to handle increased levels of activities or due to increased government regulation. There can be no assurance that the infrastructure necessary to make the Web a viable commercial marketplace will be developed, or, if developed, that the Web will achieve broad acceptance. If the necessary infrastructure standards, protocols or complementary products, services or facilities are not developed, our business, results of operations and financial condition will be materially and adversely affected. RISKS ASSOCIATED WITH BRAND DEVELOPMENT. We believe that establishing and maintaining the YouNetwork brand will be critical to attracting and expanding our Member base and Web traffic and commerce relationships. We also believe that the importance of brand recognition will increase due to the growing number of Internet sites and the low barriers to entry. If Members, visitors to the YouNetwork site or businesses do not perceive YouNetwork 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 Web site to such parties. SECURITY RISKS. We may experience attempts by experienced programmers or "hackers" to penetrate our network security, some of which may succeed. If successful, such actions could have a material adverse effect on our business, results of operations and financial condition. A party who is able to penetrate our network security could misappropriate proprietary information or cause interruptions in our Web site. We may be required to expend significant capital and resources to protect against the threat of such security breaches or to alleviate problems caused by such breaches. Concerns over the security of 12 Internet transactions and the privacy of users may also inhibit the growth of the Internet generally, particularly as a means of conducting commercial transactions. Security breaches or the inadvertent transmission of computer viruses could expose the us to a risk of loss or litigation and possible liability. There can be no assurance that contractual provisions attempting to limit our liability in such areas will be successful or enforceable, or that other parties will accept such contractual provisions as part of our agreements which could have a material adverse effect on our business, results of operations and financial condition. INTENSE COMPETITION. The market for electronic commerce networks on the Internet is new and rapidly evolving, and competition for members, consumers visitors and Vendors is intense and is expected to increase significantly in the future. Barriers to entry are relatively insubstantial. We believe that the principal competitive factors for companies seeking to create electronic commerce networks on the Internet are critical mass, functionality, brand recognition and member affinity and loyalty. We could also face competition in the future from Web directories, search engines, shareware archives, content sites, commercial online service providers ("OSPs"), sites maintained by Internet service providers ("ISPs"), traditional media companies and other entities that attempt to or establish electronic commerce networks on the Internet by developing their own community or acquiring one of our competitors. There can be no assurance that our competitors and potential competitors will not develop electronic commerce networks that are equal or superior to ours or that achieve greater market acceptance than YouNetwork electronic commerce networks. Most of our existing and potential competitors have relatively long operating histories in the Web market, name recognition, large customer bases and significantly greater financial, technical and marketing resources. Such competitors are able to undertake more extensive marketing campaigns for their brands and services, adopt more aggressive advertising pricing policies and make more attractive offers to potential employees, commerce companies, and Vendors. Our competitors will be perceived by Vendors as having more desirable Web sites for placement of their goods or services. In addition, we expect all of our current Vendors will have established collaborative relationships with certain of our competitors or potential competitors, and other high-traffic Web sites. Therefore, there can be no assurance that we will be able to grow our membership base, traffic levels and Vendor customer base to the extent necessary to generate sufficient net revenues to successfully operate our Consumer Network or that competitors will not experience greater growth in traffic than YouNetwork as a result of such relationships which could have the effect of making their Web sites more attractive to Vendors, or that Vendors will not sever or elect not to renew their relationships with YouNetwork. There can also be no assurance we will be able to compete successfully against our current or future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition. See "Business--Competition." 13 DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT AND LIABILITY FOR ONLINE CONTENT. We regard our technology such as Tracking and Net Value, as proprietary and will attempt to protect it by relying on trademark, service mark and trade secret laws and other methods. We also intend to enter into confidentiality agreements with our employees and consultants. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. We have recently submitted an application to register the servicemark, "YouNetwork" with the United States Patent and Trademark Office. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving, and no assurance can be given as to the future viability or value of any proprietary rights of YouNetwork. There can be no assurance that the steps we take have prevented or will prevent misappropriation or infringement of our proprietary information. Any such infringement or misappropriation, should it occur, might have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that our business activities will not or have not infringed upon the proprietary rights of others, or that other parties will not assert infringement claims against YouNetwork. Such claims and any resultant litigation, should it occur, might subject YouNetwork to significant liability for damages and might result in invalidation of YouNetwork's proprietary rights and even if not meritorious, could be time consuming and expensive to defend and could result in the diversion of management time and attention, any of which might have a material adverse effect on our business, results of operations and financial condition. We currently license from third parties certain databases incorporated into our Web site. As we continue to introduce new services that incorporate new technologies, we may be required to license additional technology from others. There can be no assurance that these third-party technology licenses will continue to be available to YouNetwork on commercially reasonable terms, if at all. Our inability to obtain any of these technology licenses could result in delays or reductions in the introduction of new services or could adversely affect the performance of our existing services until equivalent technology is identified, licensed and integrated. Insurance carried by YouNetwork may not be sufficient to offset liability arising from delays or resolutions in our services, and any liability in excess of such coverage could have a material adverse effect on YouNetwork. See "Business--Intellectual Property And Proprietary Rights." 14 YEAR 2000 COMPLIANCE. Our systems are built upon multiple layers of third party software and hardware components. A systems failure that originates in one or more of these layers may affect the performance and accuracy of computations carried out by our systems as a whole. No assurances have been given to us regarding the Y2K compliance of some such third party components. We are currently conducting a survey on such potential vulnerabilities and may or may not uncover a potential source of a Y2K related problem. As such we do not represent that our systems are fully and completely Y2K compliant although efforts are being made to minimize the possibility of such a failure. Our efforts to identify potential points of Y2K failures have lead us to several separate initiatives: 1. Where data corruption issues are concerned, we have instituted a full scale archival process where the data archives are maintained on a 24 hour basis. 2. Windows NT bios y2k compliance is being currently investigated with respect to several versions that were previously known to be vulnerable. 3. Compliance and certification is being sought from Database vendors and third party applications server software vendors. Although no assurances have been given to us regarding full certification by any of the vendors, we will be maintaining readiness data and upgrading where possible and deemed necessary. 4. At present we have estimated the cost of system re-engineering based on any vulnerabilities to reach a maximum of $2,000,000, excluding any compensatory damages that may result from potential systems corruption. The cost estimates were based on hardware purchases and application of software patches as well as the worst case replacement of the YouNetwork infrastructure systems within a one month period. 5. Our ongoing investigation is expected to conclude by the second quarter of 1999. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to commerce on the Internet. However, due to the increasing popularity and use of the Internet, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign 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. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, obscenity, libel and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business, results of operations and financial condition. Government legislation could hamper the growth in use of the Web generally and decrease the acceptance of the Web as a communications and commercial medium, and could, thereby, have a material adverse effect on our business, results of operations and financial condition. In addition, a number of proposals have been made at the federal, state and local level that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Because materials may be downloaded by Members and other users of the our Web site and subsequently distributed to others, there is a potential that claims will be made against YouNetwork for defamation, negligence, copyright or trademark infringement, personal injury or other theories based on the nature, content, publication and advertising of such materials. Such claims have been brought, sometimes 15 successfully, against OSPs in the past. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could impact the overall growth of Internet use. We could also be exposed to liability with respect to the offering of third party content that may be accessible through our Web site. Such claims might include, among others, that by directly or indirectly providing hyperlink text links to Web sites operated by third parties, we are liable for copyright or trademark infringement or other wrongful actions by such third parties through such Web sites. It is also possible that if any third-party content information provided on our Web site contains errors, third parties could make claims against YouNetwork for losses incurred in reliance on such information. Even to the extent such claims do not result in liability, we could incur significant costs in investigating and defending against such claims. The imposition on YouNetwork of potential liability for information carried on or disseminated through our systems could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources and limit the attractiveness of our services to members and users. Although we carry general liability insurance, it may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could impact the overall growth of Internet use. The Federal Trade Commission and most states prohibit certain types of multi-level sales programs. The statutes in question generally prohibit sales promotions that require a participant to give consideration in exchange for the opportunity to receive remuneration for soliciting more participants or buyers. We believe such laws have no application to our Consumer Network rebate program; however, there are certain states namely: Alaska, South Carolina, Florida and West Virginia, which prohibit the sharing of any consideration among participants in multi-level sales programs. Although residents of such states will not be accepted as Members of our Consumer Network, there can be no assurance that the YouNetwork rebate program will not be subject to challenge in other states where we intend to do business. 16 NO PRIOR PUBLIC MARKET FOR SECURITIES, POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public market for the Securities, and we presently do not intend to apply to have the Securities listed. The initial public offering price of the Class B Shares has been arbitrarily determined by YouNetwork and is not necessarily related to our assets, book value, results of operations, or any other established criteria of value. There can be no assurance that an active trading market for the Class A Shares (which are subject to a Lock-Up Period of 12 months) or the Class B Shares will develop or be sustained, following the closing of the Offering or that the market price of the Class B Shares will not decline below the initial public offering price. In addition, the stock market in general and the technology and Internet sectors in particular have experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of YouNetwork and which have been unrelated to the operating performance of these companies. These market fluctuations, as well as general economic, political and market conditions, may have a material adverse effect on the market price of our Securities. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such companies. Such litigation, if instituted, and irrespective of the outcome of such litigation, could result in substantial costs and a diversion of management's attention and resources and have a material adverse effect on our business, results of operations and financial condition. PENNY STOCK REGULATION. We have not applied to have the Securities listed on any market and do not presently intend to do so. However, we may in the future apply to have the Securities listed on the Nasdaq Small Cap market. If we do not satisfy Nasdaq listing or maintenance requirements then we may list the shares of Common Stock to be traded in the over-the-counter market and reported by the National Daily Quotation Service ("Pink Sheets") published by the National Quotation Bureau, Inc. and the Electronic Bulletin Board maintained by the NASD. As a result, we will be subject to certain "penny stock" rules promulgated by the Securities and Exchange. Under such rules, brokers-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share. The Commission has adopted regulations that generally define a "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share subject to certain exceptions. Such exceptions include equity securities listed on AMEX and equity securities issued by an issuer that has: (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for more than three years, or (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a risk of disclosure schedule explaining the penny stock market and the risks associated therewith. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this Offering, YouNetwork will have outstanding 35,000,000 shares of Common Stock Consisting of: (a) 1,000,000 shares of Class A Common Stock; (b) 1,000,000 shares of Class B Common Stock; and (iii) 33,000,000 shares of Class C Common Stock. Of the 35,000,000 issued and outstanding shares of our Common Stock, approximately 33,000,000 shares of Class C Shares of Common stock may be deemed "restricted shares." The "restricted" shares were issued by YouNetwork in private transactions in reliance upon one or more exemptions contained in the Securities Act of 1933, as amended (the "Act"). Restricted securities may, in the future, be sold in compliance with Rule 144 under the Act. Rule 144 provides that a person holding restricted securities for a period of one year may sell in brokerage transactions an amount equal to 1% of our outstanding Common Stock every three months. A person who is a "non-affiliate" of YouNetwork and who has held restricted securities for over two years is not subject to the aforesaid volume limitations as long as the other conditions of the Rule are met. Possible or actual sales of our Common Stock by certain of our present Stockholders under Rule 144 may, 17 in the future, have a depressive effect on the price of our Common Stock in any market which may develop for such shares. See "Description of Capital Stock-Shares Eligible for Future Sale." CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS. Upon completion of the Offering the directors, executive officers and principal stockholders of YouNetwork, will in the aggregate, beneficially own approximately 93% of the outstanding Common Stock. As a result, these stockholders will possess significant influence over YouNetwork, giving them the ability, among other things, to elect a majority of our Board of Directors and approve significant corporate transactions. Such share ownership and control may also have the effect of delaying or preventing a change in control of YouNetwork, impeding a merger, consolidation, takeover or other business combination involving YouNetwork or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of YouNetwork which could have a material adverse effect on the market price of our Common Stock. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. We currently anticipate that to meet our anticipated needs for working capital and capital expenditures for at least the next 6 months. YouNetwork will need to raise additional funds in the future in order to fund its operations while it builds its customer base. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the Stockholders of YouNetwork will be reduced, Stockholders may experience additional dilution and such securities may have rights, preferences or privileges senior to those of the rights of YouNetwork's Common Stock. There can be no assurance that additional financing will be available on terms favorable to YouNetwork, or at all. If adequate funds are not available or not available on acceptable terms, YouNetwork may not be able to fund its future operations, promote its brand as it desires, take advantage of unanticipated acquisition opportunities, develop or enhance services or respond to competitive pressures. Any such inability could have a material adverse effect on our business, results of operations and financial condition. We currently have no revenue and do not expect to have any revenue until we commence operations, following this offering. USE OF PROCEEDS. The net proceeds to YouNetwork from the sale of the Class B Shares is estimated to be approximately $872,800 at an assumed initial public offering price of $1.00 per shares. The net proceeds will be used to expand our Network capacity and for general working capital. 18 DIVIDEND POLICY. We have never declared or paid any cash dividends on our capital stock to date and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. 19 CAPITALIZATION The following table sets forth: (1) the actual capitalization of YouNetwork Corp. as of December 31, 1998 and YouNetwork Corporation as of February 3, 1999; (2) pro forma capitalization after giving effect to the merger of YouNetwork Corp. into YouNetwork Corporation on February 3, 1999 and issuance of 330,000 shares of Class C Common Stock of YouNetwork Corporation for each share of Common Stock of YouNetwork Corp. then outstanding; and (3) as adjusted for: (a) the issuance of 1,000,000 shares of Class A Common Stock at no cost, and (b) the issuance of 1,000,000 shares of Class B Common Stock for net proceeds of $900,000. This table should be read in conjunction with the financial statements of YouNetwork Corp. and the related notes thereto and other financial information included in this Prospectus. See "Use of Proceeds", "Dividend Policy", and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
YouNetwork YouNetwork Corp. Corporation Actual Actual Pro Forma As Adusted ---------- ----------- --------- ---------- Long-term liabilities: Capital lese obligation $ 25,554 $ -- $ 25,554 $ 25,554 Stockholders' Equity: Common Stock, no par value; 200 shares authorized; 100 shares issued and outstanding actual, no shares issued and outstanding as adjusted 200,200 -- -- -- Class A Common Stock, $.0001 par value, 1,500,000 shares authorized; 1,000,000 shares issued and outstanding as adjusted -- -- -- 100 Class B Common Stock, $.0001 par value, 1,500,000 shares authorized; 1,000,000 shares issued and outstanding as adjusted -- -- -- 100 Class C Common Stock, $.0001 par value, 247,000,000 shares authorized; 33,000,000 shares issued and outstanding -- -- 3,300 3,300 Additional-paid-in-capital -- -- 196,900 1,069,500 Accumulated Deficit (167,823) -- (167,823) (167,823) -------- ------ -------- ---------- Total stockholder's equity 32,377 -- 32,377 905,177 -------- ------ -------- ---------- Total capitalization $ 57,931 -- $ 57,931 $ 930,731 -------- ------ -------- ----------
20 DILUTION The following table illustrates the per share dilution to investors in the Class B Common Stock upon the issuance of 1,000,000 shares of Class A Common Stock at no cost and 1,000,000 shares of Class B Common Stock for net proceeds of $900,000, included in this registration statement, for which this prospectus forms a part: Per Share --------- Assumed offering price $1.00 Net tangible book value at December 31, 1998 (1) $0.00 Effect attributable to investors in this prospectus 0.03 ---- Pro forma net tangible book value after this Offering 0.03 ----- Dilution to new investors in this prospectus $0.97 ----- - ------------------------- (1) Adjusted to reflect the merger of YouNetwork Corp. into YouNetwork Corporation on February 3, 1999 and the issuance of 330,000 shares of Class C Common Stock of YouNetwork Corporation for each share of Common Stock of YouNetwork Corp. then outstanding. The following table summarizes on a pro forma basis as of December 31, 1998, after giving effect to this prospectus, the number of shares of Common Stock issued by us, the total consideration paid to us and the average consideration paid to us and the average consideration paid per share by the existing stockholders and by the new investors in this prospectus.
Shares Purchased Total Consideration ---------------- ------------------- Average Price Number Percent Amount Percent Per Share ------ ------- ------ ------- --------- Existing Stockholders(1) 33,000,000 94.28% $200,200 16.68% $0.01 Investors in this Offering: Class A Common Stock 1,000,000 2.86% -- -- -- Class B Common Stock 1,000,000 2.86% $1,000,000 83.32% $1.00 ---------- ------- ---------- ------- ----- 35,000,000 100.00% $1,200,200 100.00% $0.03 ---------- ------- ---------- ------- -----
- ------------------------- (1) Adjusted to reflect the merger of YouNetwork Corp. into YouNetwork Corporation on February 3, 1999, and the issuance of 330,000 shares of Class C Common Stock of YouNetwork Corporation for each share of Common Stock of YouNetwork Corp., then outstanding. 21 RISKS ASSOCIATED CERTAIN WITH FORWARD LOOKING STATEMENTS Certain statements in this prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). We desire to avail ourself of certain "safe harbor" provisions of the Reform Act and are therefore including this special note to enable us to do so. Forward-looking statements in this Prospectus involve known and unknown risks, uncertainties and other factors which could cause YouNetwork's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to, risks associated with the intense competition in the internet, on line commerce industry, as well as other risks which are detailed below which could adversely affect our business and the accuracy of the forward-looking statements contained herein. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis of the financial condition and results of operations of YouNetwork should be read in conjunction with, and is qualified in its entirety by, the more detailed information including the "Summary Financial Information" and our Financial Statements and the Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that may cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere in this Prospectus. 22 OVERVIEW. YouNetwork is a development stage company which expects to launch an on line Consumer Network. The Consumer Network will offer Members a tiered incentive rebate program for a broad based variety of branded consumer products and services offered at competitive and discounted prices. Incentive rebates will be awarded to Consumer Network Members based on our proprietary tracking technology ("Tracking"). Tracking will monitor each consumer who registers on the YouNetwork site (the "Tracked Member") for their influence on the network as well as the influence of other Members they may refer. For each Member of the Consumer Network ("Identified Member") Tracking will account for: (i) Purchases by the Identified Member; (ii) "Lineage" of the Identified Member (i.e. each new Member ("New Member") referred by an Identified Member (first level referral), each Member referred by the New Member (second level referral) and further levels of referral down through the fifth level of referral); and (iii) Purchases by the Member's Lineage. Tracking will quantify a Member's influence on the Network by a factor ("Net Value") based upon the Member's Lineage. The Net Value factor will in turn determine the rebate rate which will be credited to the Member's account on all purchases made by the Member as well as purchases made by the Member's Lineage. Members will have the option to receive their accumulated rebates ("Rebate Balance") in cash, or to apply their Rebate Balance to future purchases or for the purchase of Class B Shares. The registration statement, of which this Prospectus forms a part, includes the Class B Shares. All product fulfillment and post sale services will be provided by our Vendors. 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 deployment, 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. By offering our Class A Shares at no cost to each consumer who registers to become a Consumer Network Member; offering our Class B shares to each Member for a purchase price of $1.00, which Class B Shares may only be paid with rebates a Member may earn by making purchases on our Consumer Network; and by offering competitively priced products and purchase incentives in the form of cash rebates, we believe that we can develop an innovative online sales channel with low customer acquisition costs. The key elements of our approach are: (i) to utilize the cost-effective direct marketing capabilities of the Web to sell products to our customer base; (ii) to offer equity participation to rapidly attract a sizeable membership base; (iii) to develop a detailed member database; (iv) to continue to grow online reach and membership 23 utilizing our proprietary Tracking technology; and (v) to provide customer convenience and competitive prices to encourage purchasing. We believe that promoting repeat usage and membership loyalty through equity ownership in YouNetwork will help establish us as a preferred destination among Web users. We were incorporated in January 14, 1998 (formerly known as YouNetwork Corp.), and have not yet commenced offering products for sale. Since our inception we have been primarily engaged in the development of our computer software programs, negotiating agreements with our Vendors and raising capital, and initial planning and development of the YouNetwork site and operations.. As a result, there has not been any operating revenue generated by utilization of our services and\or products through December 31, 1998. We have funded our activities to date primarily from equity financing in the amount of $200,000 and from an advance commissions from Qwest International Inc. in the approximate amount of $175,000. We will continue to require substantial funding to continue development of activities and to commence sales and marketing efforts. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by development stage companies; the progress and costs associated with our development of our computer software, future research, marketing or other funding arrangements; the availability of qualified personnel; the success of our sales and marketing programs; and changes in economic, regulatory or competitive conditions of our planned business. Our future net revenues will be generated from electronic-commerce, primarily through the sale of products and services on our Web site through our Vendor affiliations. Our increase in total net revenue will be primarily due to expansion in our Membership base, resulting in electronic-commerce revenue; and Web-based Vendor revenue. As we grow, our operating expenses will increase, and we expect that our operating expenses will continue to increase as a result of increased sales and marketing efforts, increased funding of site development, technology and operating infrastructure, and the increased general and administrative staff needed to support our growth. As of December 31, 1998, we had an accumulated deficit of $162,823. Moreover, we anticipate that we will incur net losses for the foreseeable future. The extent of these losses will be contingent, in part, on the amount and rates of growth in our net revenue from electronic-commerce and our Vendor affiliations. We expect our operating expenses to increase significantly, especially in the areas of sales and marketing and brand promotion, and, as a result, we will need to generate increased quarterly net revenue if profitability is to be achieved. We believe that our operating results are not meaningful and that the results for any period should not be relied upon as 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 24 financial condition will be materially and adversely affected. There can be no assurance that our operating losses will not increase in the future or that we will ever achieve or sustain profitability. See "Risk Factors--Limited Operating History; No Assurance Of Profitability; Anticipated Losses." To date, we have entered into Vendor affiliations, license arrangements and strategic alliances in order to build our electronic commerce networks. We have executed an agreement, dated March 6, 1998, with Qwest International Inc., a successor in interest to LCI International Telecom Corp. ("Qwest") to promote the sale of and solicit orders for certain services offered in the form of communication long distance service. The term of this Agreement is for three years, and is renewed automatically on a year to year basis. In consideration of providing such service on our Web site we receive certain commissions. 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 a certain agreed upon monthly revenue volume. In July 1998, we entered into a non-exclusive license with Baker & Taylor, Inc. ("B&T"), which distributes books, spoken word audio products and provides certain value added services. B&T gives us the ability to provide access its proprietary data base to our Members. We can terminate this agreement for any reason by giving 30 days prior written notice, and it is automatically renewed for two consecutive periods of one year. In January 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. In order to increase reach and membership, we intend to continue to seek additional strategic relationships with our license arrangements and Vendor affiliates, including alliances that create co-branded sites through which YouNetwork markets its services. Vendor affiliations carry numerous risks and uncertainties, including risks of entering business markets in which we have none or limited prior experience. No assurance can be given as to our ability to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future, and the failure to do so could have a material adverse effect on our business, results of operations and financial condition. In addition, there can be no assurance that we will be successful in identifying potential Vendor affiliation candidates. Our Vendor affiliations provide for order fulfillment directly to our customers. We will not maintain an inventory in any product line which we market. There are inherent risks coordinating with Vendors for order fulfillment, including but 25 not limited to, product obsolescence, excess inventory, inventory shortages resulting in unfulfilled orders, which could materially adversely affect operating results in the future. See "Risk Factors--Reliance On Vendor Affiliations" and "--Risk Of Reliance On Internally Developed Systems." HISTORICAL RESULTS OF OPERATIONS. From inception, operations have been in the early stages of development. YouNetwork had no revenues for the period ended December 31, 1998. The Company incurred expenses of $162,823, consisting of compensation expense, system development costs and other general and administrative expenses. Compensation expenses has been related to establishing strategic relationships through license arrangements and vendor affiliations to market the business. In addition, YouNetwork incurred costs in developing its proprietary Tracking system as well as other general and administrative expenses since inception. As of December 31, 1998, we had a U.S. net operating loss carry forwards for federal income tax purposes of approximately $162,000. There can be no assurance that we will realize the benefit of the net operating loss carryforwards. The federal net operating loss carryforward will expire in the fiscal year 2013. We have established a valuation allowance with respect to these federal and state carryforwards. "See Notes to Financial Statements, Note 6." We expect operating results to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include demand for the products we sell through our Web site, consumers' acceptance of electronic commerce and, in particular, direct e-mail marketing as a medium for the purchase of goods and services, the level of traffic on the YouNetwork site, the amount and timing of capital expenditures and other costs relating to the expansion of our operations, the introduction of new or enhanced services by YouNetwork or our competitors, the timing and number of new hires, the availability of desirable products and services for sale through our Web site, the accuracy of our predictions regarding optimal inventory levels for products, the loss of a key Vendor affiliations or relationship by YouNetwork, changes in our pricing policy or those of our competitors, the mix of products and services sold by us, engineering or development fees that may be paid in connection with adding new Web site development and publishing tools, technical difficulties with the YouNetwork site, incurrence of costs relating to general economic conditions, and economic conditions specific to the Internet or all or a portion of the technology market. As a strategic response to changes in the competitive environment, we may from time to time make certain pricing, service or marketing decisions or business combinations that could have a material adverse effect on our business, results of operations and financial 26 condition. In order to accelerate the promotion of the YouNetwork brand, we intend to significantly increase our marketing budget, which could materially and adversely affect our business, results of operations and financial condition. We expect to experience seasonality in our business, with user traffic on the YouNetwork site potentially being lower during the summer and year-end vacation and holiday periods when overall usage of the Web is lower. Because Web-based commerce is an emerging market, additional seasonal and other patterns may develop in the future as the market matures. Any seasonality is likely to cause quarterly fluctuations in our operating results, and there can be no assurance that such patterns will not have a material adverse effect on our business, results of operations and financial condition. LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 1998, our principal commitments consisted of obligations outstanding under operating and capital leases. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. Our capital requirements depend on numerous factors, including market acceptance of our services, the amount of resources we devote to investments in YouNetwork electronic-commerce networks, the resources we devote to marketing and selling our services and our brand promotions, and other factors. We have experienced a substantial increase in our capital expenditures since our inception consistent with the growth in our operations and staffing, and anticipate that this will continue for the foreseeable future particularly relating to our Web site and systems infrastructure. We believe that our current cash will be sufficient to meet our anticipated needs for working capital and capital expenditures and business expansion for the next 6 months. Thereafter, if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. See "Risk Factors--Future Capital Needs; Uncertainty Of Additional Financing." YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. 27 YEAR 2000 COMPLIANCE. Our systems are built upon multiple layers of third party software and hardware components. A systems failure that originates in one or more of these layers may affect the performance and accuracy of computations carried out by our systems as a whole. No assurances have been given to us regarding the Y2K compliance of some such third party components. We are currently conducting a survey on such potential vulnerabilities and may or may not uncover a potential source of a Y2K related problem. As such we do not represent that our systems are fully and completely Y2K compliant although efforts are being made to minimize the possibility of such a failure. Our efforts to identify potential points of Y2K failures have lead us to several separate initiatives: 1. Where data corruption issues are concerned, we have instituted a full scale archival process where the data archives are maintained on a 24 hour basis. 2. Windows NT bios y2k compliance is being currently investigated with respect to several versions that were previously known to be vulnerable. 3. Compliance and certification is being sought from Database vendors and third party applications server software vendors. Although no assurances have been given to us regarding full certification by any of the vendors, we will be maintaining readiness data and upgrading where possible and deemed necessary. 4. At present we have estimated the cost of system re0engineering based on any vulnerabilities to reach a maximum of $2,000,000, excluding any compensatory damages that may result from potential systems corruption. The cost estimates were based on hardware purchases and application of software patches as well as the worst case replacement of the YouNetwork infrastructure systems within a one month period. 5. Our ongoing investigation is expected to conclude by the second quarter of 1999. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal periods beginning after June 15, 1999. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. Management of the Company anticipates that due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations. BUSINESS This Prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in these forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Risk Factors." 28 OVERVIEW. YouNetwork is a development stage company which is poised to launch a unique and novel on line Consumer Network. We were formed in January, 1998, and have since been engaged in the development of our web site for direct internet marketing through a consumer network and membership program. By combining the virtues of cooperative marketing with incentives designed to reward a Member's purchasing influence, the Consumer Network will seek to develop a sizeable membership base (without entry fees), and to distinguish itself from the emerging wave of direct Internet marketing companies which are seeking to tap the rapidly developing market for Internet commerce. The Consumer Network will offer Members a tiered incentive rebate program for a broad based variety of branded consumer products and services offered at competitive and discounted prices. Incentive rebates will be awarded to Consumer Network Members based on our proprietary tracking technology ("Tracking"). Tracking will monitor each consumer who registers on the YouNetwork site (the "Tracked Member") for their influence on the network as well as the influence of other Members they may refer. For each Member of the Consumer Network ("Identified Member") Tracking will account for: (i) Purchases by the Identified Member; (ii) "Lineage" of the Identified Member (i.e. each new Member ("New Member") referred by an Identified Member (first level referral), each Member referred by the New Member (second level referral) and further levels of referral down through the fifth level of referral); and (iii) Purchases by the Member's Lineage. Tracking will quantify a Member's influence on the Network by a factor ("Net Value") based upon the Member's Lineage. The Net Value factor will in turn determine the rebate rate which will be credited to the Member's account on all purchases made by the Member as well as purchases made by the Member's Lineage. Members will have the option to receive their accumulated rebates ("Rebate Balance") in cash, to apply their Rebate Balance to future purchases, or to purchase Class B Shares. The registration statement, of which this Prospectus forms a part, includes the Class B Shares. By offering our Class A Shares at no cost to each consumer who registers to become a Consumer Network Member, offering our Class B shares to each Member for a purchase price of $1.00, which Class B Shares may only be paid with rebates a Member may earn by making purchases on our Consumer Network; and by offering competitively priced products and purchase incentives in the form of cash rebates, we believe that we can develop an innovative online sales channel with low customer acquisition costs. The key elements of our approach are: (i) to utilize the cost-effective direct marketing capabilities of the Web to sell products to our customer base; (ii) to offer equity participation to rapidly attract a sizeable membership base; (iii) to develop a detailed member database; (iv) to continue to grow online reach and membership 29 utilizing our proprietary Tracking technology; and (v) to provide customer convenience and competitive prices to encourage purchasing. 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. For example, studies by Jupiter Research report that total electronic-commerce for the calendar year 1998 will reach approximately $200 billion, with consumer commerce estimated at 10 to 15% of that total. Visa International studies suggest that consumer electronic commerce alone will reach $100 billion by 2001. Recent studies by Ziff-Davis Market Intelligence report that more than 23 million United States households are connected to the Internet and almost 16 million of those are participating in electronic-commerce. This growth is expected to be driven by the large and growing number of PCs installed in homes and offices, the decreasing cost of PCs, easier, faster and cheaper access to the Internet, improvements in network infrastructure, the proliferation of Internet content and the increasing familiarity with and acceptance of the Internet by businesses and consumers. The Internet possesses a number of unique characteristics that differentiate it from traditional media: a lack of geographic or temporal limitations; real-time access to dynamic and interactive content; and instantaneous communication with a single individual or with groups of individuals. As a result of these characteristics, Web usage is expected to continue to grow rapidly. The proliferation of users, combined with the Web's reach and lower cost of marketing, has created a powerful direct sales and marketing channel. ELECTRONIC-COMMERCE. The growing adoption of the Web represents a significant opportunity for businesses to conduct commerce over the Internet. One factor in this projected growth is the increasing variety of transactions that take place on the Web. Initially, companies focused on facilitating Internet transactions between businesses. More recently, however, a number of companies have targeted business-to-consumer transactions. These companies typically use the Internet to offer standard products and services that can be easily described with graphics and text and that do not necessarily require a physical presence for purchase, such as software, books, music CDs, videocassettes, home loans, airline tickets and online banking and stock trading. The Internet allows these companies to develop one-to-one relationships with customers worldwide without making significant investments in traditional infrastructure such as retail outlets, Vendor networks and sales personnel. 30 THE DIRECT MARKETING OPPORTUNITY THE INTERNET. The same advantages that facilitate the growth of electronic-commerce and advertising make the Internet a compelling medium for direct marketing campaigns. Direct marketing over the Internet uses e-mail to reach potential buyers, potentially offering them a significantly broader selection of products and services than is available locally. Internet-based direct marketing also allows marketers to rapidly collect meaningful demographic information and feedback from consumers, and to use this information to tailor new messages quickly. Registration information typically collected by Web sites, and user involvement in topical electronic commerce networks of interest, provide additional demographic information. This offers businesses the chance to increase the effectiveness of their direct marketing campaigns, which may translate into higher sales. Further, the costs of direct marketing through e-mail are dramatically lower than those of traditional direct marketing techniques. As a result, Internet-based direct marketing campaigns can be profitable at response rates that are a fraction of the rates for traditional campaigns. THE YOUNETWORK SOLUTION. YouNetwork uses the unique characteristics of the Web to cost-effectively market products and services to our rapidly growing Member base. By offering our Members a variety of competitively priced branded products offerings, together with purchase incentives, rebates and equity participation in YouNetwork, we believe that we have created an innovative online sales channel with low customer acquisition costs. The key elements of the YouNetwork approach are: (a) Development of a Detailed Member Database. We expect to gather a significant base of information about our Members through registration information, responses to closed end beta tests and purchasing information obtained from third parties. As Members join YouNetwork, and as we obtain a purchasing history data, the level of information regarding YouNetwork's Members will continue to grow. We intend to use this growing database to target offers, increase our range of product offerings and encourage future transactions and involvement with the YouNetwork site. (b) Customer Convenience. YouNetwork intends to provide an attractive electronic-commerce opportunities for potential purchasers. Order processing services will be available 24 hours a day, seven days a week, which facilitates on-demand ordering. Purchasers will be able to reach the YouNetwork site from the home or office. Our Vendors will ship products directly to a Member's address, without the need to travel to a store, thereby enhancing 31 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 Class A Shares to each consumer (at no cost) upon becoming a Member, and Class B Shares to each Member for a purchase price of $1.00, which Class B Shares may only be paid with rebates a Member may earn by making purchases on our Consumer Network. (d) Net Value The Consumer Network will offer Members a tiered incentive rebate program for a broad based variety of branded consumer products and services offered at competitive and discounted prices. Incentive rebates will be awarded to Consumer Network Members based on our proprietary tracking technology ("Tracking"). Tracking will monitor each consumer who registers on the YouNetwork site (the "Tracked Member") for their influence on the network as well as the influence of other Members they may refer. For each Member of the Consumer Network ("Identified Member") Tracking will account for: (i) Purchases by the Identified Member; (ii) "Lineage" of the Identified Member (i.e. each new Member ("New Member") referred by an Identified Member (first level referral), each Member referred by the New Member (second level referral) and further levels of referral down through the fifth level of referral); and (iii) Purchases by the Member's Lineage. Tracking will quantify a Member's influence on the Network by a factor ("Net Value") based upon the Member's Lineage. The Net Value factor will in turn determine the rebate rate which will be credited to the Member's account on all purchases made by the Member as well as purchases made by the Member's Lineage. Members will have the option to receive their accumulated rebates ("Rebate Balance") in cash, to apply their Rebate Balance to future purchases, or to purchase Class B Shares. The registration statement, of which this Prospectus forms a part, includes the Class B Shares. By offering our Class A Shares at no cost to each consumer who registers to become a Consumer Network Member; Class B Shares to each Member for a purchase price of $1.00, which Class B Shares 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. 32 STRATEGY. Our objective is to develop a sizeable membership base and to create a network which will provide consumers with built in incentives to participate in on line commerce. Key strategies to achieve this objective include: (a) Focus on Membership Growth. We plan to increase membership by: (i) providing initial equity participation through the issuance of Securities in YouNetwork at no cost; (ii) offering a broad and expanding array of products and services at competitive reduced prices; and (iii) offering incentive rebates based on member purchases and purchases by a member's Lineage. (b) Build Strong Brand Recognition. We believe that establishing and leveraging the YouNetwork brand is critical to our ultimate success. We intend to develop our brand recognition through effective marketing and promotion and improved customer service. (c) Promote Repeat Usage and Member Loyalty. We believe that community-based Web sites have an inherent potential for creating and retaining a loyal membership base, particularly when combined with product and service offerings such as those provided by YouNetwork. We intend to promote repeat usage and Member loyalty by expanding our product offerings and by creating incentives to buy through our Network based upon our rebate program. (d) Offer New Products and Services. Our product offerings will include computer software, computer accessories and peripherals, consumer electronics, books and music and entertainment products. Additionally, we intend to enter into strategic alliances with a host of other vendors to provide additional brand name products and services to YouNetwork. (e) Maintain and Improve Technological Focus and Expertise. We believe that highly advanced functionality and performance of the YouNetwork site are critical to our ultimate success. We are committed to site reliability and accessibility, and intend to make continuous enhancements to our technology, such as upgrading and expanding server and networking infrastructure, increasing fault tolerance and improving Internet connections. In addition, we intend to increase the efficiency of our transaction processing and fulfillment operations and the sophistication of our direct marketing campaign management software. 33 (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. (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 Network. As our membership base grows, we will further develop our Member database enabling us to identify and effectively target consumers having an affinity for certain products and services. LICENSE AND VENDOR ARRANGEMENTS. In July 1998, we entered into a non-exclusive license and marketing agreement with Baker & Taylor, Inc. ("B&T"), which distributes books, video, music products and spoken word audio products and provides certain value added services. B&T gives us the ability to access to provide access to its proprietary data base for our Members and to market B&T products. We can terminate this agreement for any reason by giving 30 days prior written notice, and it is automatically renewed for two consecutive periods of one year. In January 1999, we also entered into a non-exclusive license for us to gain access to certain music, video and book databases of Muze, Inc. 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. On March 6, 1998, we entered into an agreement with Qwest Communications International, Inc. ("Qwest") to promote the sale of and solicit orders for certain services offered by Qwest in the form of communication long distance service. The term of this Agreement is for three years, and is renewed automatically on a year to year basis. In consideration of providing such service on our Web site we will receive certain commissions. Each party may terminate this Agreement at any time during a renewal term upon 30 days prior written notice. Qwest may also cancel this Agreement if we fail to attain a certain agreed upon monthly revenue volume. We view our strategic relationships as a key factor in our overall business strategy; however, there can be no assurance that our Vendor affiliates will view their relationships with us as significant to their own business or that they will not reassess their commitment to us in the future. There can be no assurance that any agreement with a Vendor would be specifically enforceable by YouNetwork. Our arrangements with our Vendors generally may be terminated by either party with little notice. Therefore, there can be no assurance that these relationships will be successful. In the event that any one or more of our strategic relationship is discontinued for any reason, YouNetwork's 34 business, results of operations and financial condition may be materially adversely affected. In addition, there can be no assurance that YouNetwork will be successful in establishing additional Vendor relationships. See "Risk Factors--Reliance On Strategic Relationships." SALES AND MARKETING. Our sales and marketing strategy is designed to strengthen awareness of the YouNetwork brand, increase online traffic, build Member loyalty, maximize repeat purchases, increase the size and frequency of electronic commerce transactions and develop additional revenue opportunities. (a) Marketing the YouNetwork Site. We expect that the marketing of our services will be primarily by word-of-mouth and indirect promotions by Members with links to the YouNetwork site and through the use of our services. We believe that such relationship marketing (along with our unique equity participation and rebate incentives) will generate a substantial amount of additional traffic and new members. To augment these marketing efforts, we intend to initiate a more formal, aggressive brand promotional campaign to enhance membership growth and draw additional advertisers and commerce partners. See "Risk Factors--Reliance On Strategic Relationships." (b) Product Marketing. YouNetwork will apply a direct marketing program, modeled after traditional direct mail campaigns, to generate product sales. As we gathers additional information about our Members, we intend to further target our offers and increase our range of product offerings. WAREHOUSING AND FULFILLMENT. We will be totally dependant on Vendors and distributors for all of our product and service fulfillment. We have no fulfillment operation or facility of our own; accordingly, we will need to establish and maintain relationships and affiliations with a broad array of vendors and distributors in order to offer our Members a broad based product mix at competitive and discounted prices. We will not maintain an inventory in any product line. We will use automated interfaces for accepting, sorting and processing orders to enable us to achieve the most rapid and economical purchase and delivery terms. All of our orders will be processed online. Once we receive an order, we will send a confirmation by e-mail to the customer. At the end of each day, we will send all orders to our Vendors and Distributors for processing. Our Vendors and Distributors will then pack and ship orders, providing confirmation to YouNetwork along with UPS shipping 35 information for all ground-shipped US orders. YouNetwork will forward shipping information by e-mail to customers, along with a link to UPS for package tracking. There can be no assurance that we will successfully establish and, if established, maintain relationships and affiliations with Vendors and distributors on terms satisfactory to us. See "Risk Factors-Vendor Affiliations."] TECHNOLOGY AND INFRASTRUCTURE. Our systems are designed for portability, efficiency and growth. Using state of the art technology from Windows NT and Unix technology we have created a custom solution that is based on high bandwith access, latest server technology and redundant storage systems. We have placed an emphasis on portability of our application modules in order to support the migration of systems as they encounter the added demand of a fast growing customer base. Our access to the internet is re-enforced with multiple support providers. The system is reinforced with 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 functioning of all systems. We continue to monitor and upgrade components of our infrastructure with the goal of providing highly productive user experience to our Members. See "Risk Factors--Risks Of Capacity Constraints; System Failures; Technological Risks" and "Risk Of Reliance On Internally Developed Systems." COMPETITION. The market for electronic-commerce direct selling channels on the Internet is new and rapidly evolving, and competition for members, consumers and visitors is intense and is expected to increase significantly in the future. Barriers to entry are relatively insubstantial. We believe that the principal competitive factors for companies seeking to create electronic-commerce networks on the Internet are critical mass, functionality, brand recognition, member affinity and loyalty, broad demographic focus and open access for visitors. Other established companies which are primarily focused on creating electronic-commerce networks on the Internet and with whom we will compete include companies such as Amazon.com, Value America, Shopping.com, Buy.com, the NetMarket division of Cendent Corporation, and Ebay.com. We could also face competition in the future from Web directories, search engines, shareware archives, content sites, commercial OSPs, sites maintained by ISPs, 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 the our competitors. Further, there can be no assurance that our competitors and potential competitors will not develop electronic-commerce networks that are equal or superior to us or that achieve greater market acceptance. Nearly all of our existing and potential competitors, including Web directories and search engines and large traditional media companies, have longer operating histories in the Web market, greater name recognition, larger customer bases and significantly 36 greater financial, technical and marketing resources than YouNetwork. Such competitors are able to undertake more extensive marketing campaigns for their brands and services, and make more attractive offers to potential employees, Vendor affiliates, commerce companies, and third-party content providers. There can also be no assurance that we will be able to compete successfully against our current or future competitors or that competition will not have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors--Competition." INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard our technology as proprietary and attempt to protect it by relying on trademark, service mark, copyright and trade secret laws and restrictions on disclosure and transferring title and other methods. We currently have no patents and we do not anticipate that patents will become a significant part of our intellectual property in the foreseeable future. We also will enter into confidentiality or license agreements with our employees and consultants, and we will attempt to limit access by Vendor of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. Policing unauthorized use of our proprietary information is difficult. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related businesses are uncertain and still evolving, and no assurance can be given as to the future viability or value of any proprietary rights of YouNetwork. EMPLOYEES. As of December 31, 1998, YouNetwork had three full-time employees and no part-time employees. Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. From time to time, we also employ independent contractors to support our research and development, marketing, sales and support and administrative organizations. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our relations with our employees are good. FACILITIES. Our headquarters are currently located in a leased facility in the Borough of Manhattan, New York, New York, consisting of approximately 1,000 square feet of office space, which is under a lease that expires April 3, 2003. 37 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The executive officers, directors and key employees of YouNetwork and their respective ages as of December 31, 1998, are as follows: NAME AGE POSITION Kyle S. Taylor.............41 President and Director Don S. Senerath............29 Chief Executive Officer, and Director Peter R. Silverman.........52 Director KYLE S. TAYLOR : Mr. Taylor has been President of YouNetwork since its inception in January 1998. After attending the University of Tennessee, Mr. Taylor spent twelve years in the retail apparel business both working as an executive with a division of Federated Corporation as well as owning and operation 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 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. Mr. Senerath has been Chief Executive Officer of YouNetwork since its inception in January 1998. Mr. Senerath is also the Chief Executive 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 two years, International Computing has developed large scale back-end E 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 media scientist 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 digital media with applications in marketing and distribution. PETER R. SILVERMAN Peter R. Silverman has been a director of YouNetwork since December 1998. Mr. Silverman has been a practicing attorney for over 27 years and has specialized in the development of start up companies in the Telecom industry. He is the founding member of the law firm Silverman, Collura, Chernis and Balzano, P.C. Mr. Silverman received a bachelor of arts degree from George Washington University in 1967, and a law degree from Brooklyn Law School in 1970. 38 All Directors hold office until the next annual meeting of the stockholders and until their successors have been duly elected and qualified. Executive Officers are elected by and serve at the direction of the Board of Directors. There are no family relationships among any of the Directors or Executive Officers of YouNetwork. DIRECTOR COMPENSATION. Our directors receive no cash compensation for their services as Board members or committee members and are not reimbursed for expenses incurred in connection with attending Board and committee meetings. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation of YouNetwork's Chief Executive Officer and each of the other most highly compensated executive officers of YouNetwork whose aggregate salary, bonus and other compensation exceeded $100,000 during the fiscal year ended December 31, 1998 (collectively, the "Named Executive Officers").
Annual Compensation Long-Term Compensation ------------------- ---------------------- Other Restricted Securities All Name and Principal Annual Stock Underlying LTIP other Position Year Salary Bonus Compensation Awards Options/SARs Payouts Compensation --- ------ ----- ------------ ------ ----------- ------- ------------ Don S. Senerath, CEO 1998 -0- -0- -0- -0- -0- -0- -0- Kyle S. Taylor, 1998 $65,251 -0- -0- -0- -0- -0- -0- President
AGREEMENTS. Pursuant to an agreement between Mr. Taylor and YouNetwork, if Mr. Taylor's employment with YouNetwork is terminated without substantial cause (as defined in the Agreement), he 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. Pursuant to an agreement between Don S. Senerath, the CEO of YouNetwork, if Mr. Senerath's employment with YouNetwork is terminated without substantial cause (as defined in the Agreement) he 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. 39 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. Our Certificate of Incorporation provides that the liability of the YouNetwork's directors for monetary damages shall be eliminated to the fullest extent permissible under the Delaware Business Corporations Act, as amended. We may enter into indemnification agreements with our directors and officers. This provision in the Certificate of Incorporation does not eliminate a director's duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available. Each director will continue to be subject to liability for breach of the director's duty of loyalty to YouNetwork, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of YouNetwork or its stockholders, for any transaction from which the director derived an improper personal benefit, for improper transactions between the director and YouNetwork and for improper loans to stockholders and loans to directors and officers. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of YouNetwork pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. There is no pending litigation or proceeding involving a director or officer of YouNetwork as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. CERTAIN TRANSACTIONS. Pursuant to a stockholders' agreement, dated as of December 4, 1998, among Kyle S. Taylor, Don S. Senerath (the "Management Stockholders"), Dalia Silverman and Kleopatra Georgiades (the "Investors") and the Company, the Board of YouNetwork shall consist of three directors one of whom is designated by the Investors and two of whom are designated by the Management Stockholders. The ratio of directors designated by the Investors to those designated by the Management Stockholders shall be maintained in the event the Board is increased in number. Each party to the stockholders' agreement has agreed to vote all shares of voting securities owned by them to cause the election to the Board of Directors of the individuals so designated by them. Pursuant to the stockholders' agreement, no significant transaction can be approved without the unanimous approval of all of the directors. A significant transaction is defined as: (i) any creation of any class of capital stock; (ii) the sale or issuance of shares of capital stock, warrants or other securities convertible into or exchangeable for capital stock; (iii) any declaration or issuance of any dividend; (iv) any transaction or contract with a value of $10,000 or more; (v) any amendment to or modification of any provision of the Certificate of Incorporation or By-laws of the Company; (vi) any change in the Companies auditors; (vii) any consolidation or merger of the Company; (viii); (ix) any executive employment contract; (x) payment of salaries to any officer at a rate of more than $85,000 per annum (xi) election of officers. The stockholders' agreement also provides for certain bring along rights and rights of first refusal among the Management Stockholders and the Investors with respect to any sale of their shares in YouNetwork. The stockholders' agreement terminates on December 1 2010, or such earlier time as either (i) the Investors no longer own at least 10% of the Common Stock of YouNetwork on a fully diluted basis; or (ii) YouNetwork has completed a public offering of its securities resulting in net proceeds to YouNetwork of at least $10,000,000. Pursuant to an agreement among YouNetwork, Dalia Silverman and Kleopatra Georgiades (the "Investors"), the Investors purchased from YouNetwork, for an aggregate purchase price of $200,000: (i) an aggregate of 8,910,000 shares of Common Stock (the "Purchased Shares") representing 27% of the issued and outstanding Common Stock, on a fully diluted basis; and (ii) Options (the "Purchase Options") to purchase in the aggregate such number of shares of Common Stock, at nominal consideration, as shall equal, in the aggregate when added to the Purchased Shares, 27% of the issued and outstanding Common Stock of YouNetwork on a fully dilluted basis, immediately following the sale of additional Common Stock by YouNetwork in consideration of the first $400,000 of Common Stock sale proceeds received by YouNetwork following December 4, 1998. 40 Pursuant to an agreement between Kyle Taylor and YouNetwork, if Mr. Taylor's employment with YouNetwork is terminated without substantial cause (as defined in the Agreement), he 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. Pursuant to an Agreement between Don S. Senerath, the Chief Financial Officer of YouNetwork, if Mr. Senerath's employment with YouNetwork is terminated without substantial cause (as defined in the Agreement), he 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. From inception, YouNetwork has retained the services of International Computing, LLC (formerly known as Digital Pulp Technologies, LLC) ("IC"), a corporation partially owned by Don S. Senerath. IC 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. Total consulting fees to IC for January 14, 1998 (inception period) to December 31, 1998, was approximately $89,400. YouNetwork entered into an agreement in March 1998, with Qwest International Inc., a successor in interest to LCI International Telecom Corp. ("Qwest") to promote the sale of and solicit orders for certain services offered in the form of communication long distance service. The term of this Agreement is for three years, and is renewed automatically on a year to year basis. In consideration of providing such service on our Web site YouNetwork receives certain commissions. Qwest advanced YouNetwork approximately $175,000 as of December 31, 1998. Commissions earned for the referral of customers are offsetable against these advances. Advances made in excess of commissions earned are offset against advances are payable by YouNetwork on the earlier of the termination of the Agreement or twelve months from the date of the Agreement. Each party may terminate this Agreement at any time during a renewal term upon 30 days prior written notice. Qwest may cancel this Agreement if YouNetwork fails to attain a certain agreed upon monthly revenue volume. In February 1999, YouNetwork agreed that it would issue to Raw Interactive Ltd. warrants to purchase 100,000 shares of Class C Common Stock in consideration of certain services to be rendered. The exercise price shall be the lesser of $2.00 per share of 50% of the offering price for which our Common Stock is sold in our first underwritten public offering of Class C Common Stock, provided said offering is consummated before the expiration of the exercise period, __________, __, 2001. To date, no warrants have been issued, and no warrants will be used until consummation of certain services to be rendered on or before __________, __, 1999. On February 3, 1999, YouNetwork, a New York corporation ("YNY") merged with and into YouNetwork, a Delaware corporation ("YDW"), the surviving corporation. Pursuant to the Agreement and Plan of Merger between YNY and YDW, dated February 3, 1999, all Shareholders of YNY exchanged their Common Stock in YNY for Common Stock of YDW at $.0001 par value, per share on a basis of 330,000 shares of YDW for each outstanding share of YNY. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. 41 PRINCIPAL STOCKHOLDERS The following table sets forth certain information known to YouNetwork with respect to beneficial ownership of YouNetwork's Common Stock as of February 3, 1999, and as adjusted to reflect the sale of the shares offered hereby, by: (i) each person known by YouNetwork to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of YouNetwork's directors, (iii) each of the Named Executive Officers, and (iv) all executive officers and directors of YouNetwork as a group.
Number Of Shares Percentage Of Shares Beneficially Owned Stock Beneficially Name Of Beneficial Owner Prior To Offering(1) Before Offering After Offering - ------------------------ -------------------- --------------- -------------- Kyle S. Taylor 12,045,000 36.5 34.4 Don S. Senerath 12,045,000 36.5 34.4 Dalia Silverman 4,095,000(2) 12.4 11.7 Kleopatra Georgiades 4,305,000(3) 13.0 12.3
* Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock which is issuable: (a) upon the exercise of a Warrant or Stock Option which is presently exercisable or which becomes exercisable within 60 days of December 31, 1998, or (b) upon the exercise of a Warrant or Stock Option which is presently exercisable or which becomes exercisable within 60 days of December 31, 1998, are deemed outstanding. Percentage of beneficial ownership is based upon 33,000,000 shares of Common Stock outstanding prior to the Offering and 35,000,000 shares of Common Stock outstanding after the Offering, as of [_____ __, 1999. To YouNetwork's knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name. Except as otherwise indicated, the address of each of the persons in this table is as follows: c/o YouNetwork, Inc., 220 East 23rd Street, Suite 607 New York, NY 10010. (2) Does not include Warrants owned by Dalia Silverman to purchase for nominal value an additional number of shares of Common Stock as shall equal when added to 4,455,000, an aggregate of 13.5% of the issued and outstanding Common Stock of YouNetwork on a fully dilluted basis, immediately following the sale of additional Common Stock by YouNetwork in consideration of the first $400,000 of Common Stock sale proceeds received by YouNetwork following December 4, 1998. Dalia Silverman is the wife of Peter R. Silverman, a director of YouNetwork. Mr. Silverman disclaims beneficial ownership as to the shares of Common Stock owned by his wife. (3) Does not include Warrants owned by Kleopatra Georgiades to purchase for nominal value an additional number of shares of Common Stock as shall equal when added to 4,455,000, an aggregate of 13.5% of the issued and outstanding Common Stock of YouNetwork on a fully dilluted basis, immediately following the sale of additional Common Stock by YouNetwork in consideration of the first $400,000 of Common Stock sale proceeds received by YouNetwork following December 4, 1998. 42 DESCRIPTION OF SECURITIES Upon the closing of the Offering, we will be authorized to issue up to: (a) 1,500,000 shares of Class A Common Stock; (b) 1,500,000 shares of Class B Common Stock; and 247,000,000 shares of Class C Common Stock, $.0001 par value per share. The following summary of certain provisions of the Common Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of YouNetwork's Restated and Amended Certificate of Incorporation, which is included as an exhibit to the registration statement of which this Prospectus is a part, and by the provisions of applicable law. COMMON STOCK. As of February 5, 1999, there were 33,000,000 shares of Class C Common Stock outstanding that were held of record by approximately 19 stockholders (assuming conversion of all Warrants outstanding as of February 5, 1999). There were no Class A Shares or Class B Shares outstanding as of February 5, 1999. The holders of Class A, Class B and Class C shares of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. YouNetwork does not have cumulative voting rights in the election of directors, and accordingly, holders of a majority of the shares voting are able to elect all of the directors. In the event of a liquidation, dissolution or winding up of YouNetwork, holders of Common Stock are entitled to share ratably in all assets of YouNetwork remaining after payment of liabilities. Security holders of Common Stock have no preemptive or other subscription of conversion rights. There are no redemption or sinking fund provisions applicable to the Common Stock. LOCK-UP PERIOD. A holder of our Class A shares shall not, directly or indirectly, offer, sell, pledge, grant any option to purchase, or otherwise sell or dispose of any Securities for a period of 12 months after the Offering . SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock after the Offering could adversely affect the market price of the Common Stock and could impair YouNetwork's ability to raise capital through the sale of equity securities. Upon completion of the Offering, YouNetwork will have outstanding 35,000,000 shares of Common Stock. The 33,000,000 shares of Class C Common Stock were sold by YouNetwork in private transactions in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended. Such shares would be 43 eligible for sale within one year under Rule 144 (subject to certain volume restrictions and other conditions imposed thereby) commencing February __, __, 2000. Prior to the Offering, there has been no public market for the Securities offered hereby. The purchase price of the Class B Shares has been arbitrarily determined by YouNetwork and is not necessarily related to our assets, book value, results of operations, or any other established criteria of value. There can be no assurance that an active trading market for the Securities will develop or be sustained following the closing of the Offering. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Section 145 of the Delaware General Corporation Law, as amended, authorizes the Company to indemnify any director or officer under certain prescribed circumstances and subject to certain limitations against certain costs and expenses, including attorneys' fees actually and reasonably incurred in connection with any action, suit or proceedings, whether civil, criminal, administrative or investigative, to which such person is a party by reason of being a director or officer of the Company if it is determined that such person acted in accordance with the applicable standard of conduct set forth in such statutory provisions. Article 9 of the Company's Certificate of Incorporation provides for the indemnification of directors and officers to the full extent permitted by Delaware law. The Company may also purchase and maintain insurance for the benefit of any director or officer which may cover claims for which the Company could not indemnify such person. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable. TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for YouNetwork's Securities is American Stock Transfer Co., its address is 147 W. Merrick Road Freeport, New York 11520, and its telephone number is (516) 379-8501. 44 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for YouNetwork by Silverman, Collura, Chernis & Balzano, P.C. ("SCCB") New York, New York. EXPERTS The financial statements included in this Prospectus and elsewhere in the registration statement as of December 31, 1998 and from January 14, 1998 (date of inception) to December 31, 1998, have been audited by Mahoney Cohen & Company, CPA, P.C., independent auditors, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The report of Mahoney Cohen & Company, CPA, P.C. covering the December 31, 1998 financial statements contains an explanatory paragraph that states that the Company has incurred losses since inception and expects to incur losses for the foreseeable future raises substantial doubt about the entity's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might result from the outcome of that uncertainly. ADDITIONAL INFORMATION With respect to the securities offered hereby, YouNetwork has filed with the principal office of the Securities and Exchange Commission ("Commission") in Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended ("Securities Act"). For purpose hereof, the term "Registration Statement" means the original Registration Statement and any and all amendments thereto. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto, to which reference hereby is made. Each statement made in this Prospectus concerning a document filed as an exhibit to the Registration Statement is not necessarily complete and is qualified in its entirety by reference to such exhibit for a complete statement of its provisions. Any interested party may inspect the Registration Statement and its exhibits without charge, or obtain a copy of all or any portion thereof, at prescribed rates, at the public reference facilities of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Information on the Operation of the Public Reference Room can be obtained by calling the Commission at 1-800-SEC-0330. The Registration Statement and exhibits may also be inspected at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York 10048. The website is www.sec.gov. 45 YOUNETWORK CORP. (A Development Stage Company) Financial Statements December 31, 1998 YOUNETWORK CORP. (A Development Stage Company) Index ----- Page ---- Independent Auditor's Report F-1 - F-2 Balance Sheet as of December 31, 1998 F-3 Statement of Operations for the Period from Inception (January 14, 1998) to December 31, 1998 F-4 Statement of Changes in Stockholders' Equity for the Period from Inception (January 14, 1998) to December 31, 1998 F-5 Statement of Cash Flows for the Period from Inception (January 14, 1998) to December 31, 1998 F-6 Notes to Financial Statements F-7 - F-13 INDEPENDENT AUDITOR'S REPORT The Board of Directors YouNetwork Corp. We have audited the accompanying balance sheet of YouNetwork Corp., a development stage company, as of December 31, 1998, and the related statements of operations, changes in stockholders' equity and cash flows for the period from inception (January 14, 1998) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of YouNetwork Corp., a development stage company, as of December 31, 1998, and the results of its operations and its cash flows for the period from inception (January 14, 1998) to December 31, 1998, in conformity with generally accepted accounting principles. F-1 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. New York, New York January 20, 1999, except for Note 11, as to which the date is February 3, 1999 F-2 YOUNETWORK CORP. (A Development Stage Company) Balance Sheet December 31, 1998 ASSETS Current assets: Cash $ 178,068 Other current assets 672 --------- Total current assets 178,740 Property and equipment, net (Notes 3 and 4) 47,369 Other assets: Software development costs (Notes 2 and 7) 69,425 Security deposit 3,500 --------- Total other assets 72,925 --------- $ 299,034 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Deferred revenue (Note 5) $ 175,000 Current portion of capital lease obligation (Note 4) 14,000 Due to related party (Note 7) 23,150 Accounts payable 9,224 Other current liabilities 14,729 --------- Total current liabilities 236,103 Capital lease obligation (Note 4) 25,554 Commitment (Note 10) Stockholders' equity (Note 9): Common stock, no par value: Authorized - 200 shares Issued and outstanding - 100 shares 200,200 Deficit accumulated during the development stage (162,823) --------- Total stockholders' equity 37,377 --------- $ 299,034 ========= See accompanying notes. F-3 YOUNETWORK CORP. (A Development Stage Company) Statement of Operations For the Period from Inception (January 14, 1998) to December 31, 1998 Revenue $ -- Expenses: Compensation 67,251 Development costs 20,000 General and administrative 66,089 Depreciation and amortization 7,508 Interest expense 1,975 ---------- Total expenses 162,823 ---------- Net loss during the development stage $ (162,823) ========== Net loss per common share, basic and diluted $(2,170.97) ========== Weighted average of common shares outstanding - basic and diluted 75 ===== See accompanying notes. F-4 YOUNETWORK CORP. (A Development Stage Company) Statement of Changes in Stockholders' Equity For the Period from Inception (January 14, 1998) to December 31, 1998 Deficit Accumulated Common Stock During the ------------------ Development Shares Amount Stage Total ------ -------- ----------- ------- Issuance of 73 shares of common stock on January 22, 1998 for cash (at $2.74 per share) 73 $ 200 $ -- $ 200 Issuance of 27 shares of common stock on December 4, 1998 for cash (at $7,407.41 per share) 27 200,000 -- 200,000 Net loss for the period from inception (January 14, 1998) to December 31, 1998 -- -- (162,823) (162,823) ------ -------- --------- -------- Balances, December 31, 1998 100 $200,200 $(162,823) $ 37,377 ====== ======== ========= ======== See accompanying notes. F-5 YOUNETWORK CORP. (A Development Stage Company) Statement of Cash Flows For the Period from Inception (January 14, 1998) to December 31, 1998 Cash flows from operating activities: Net loss during the development stage $(162,823) Adjustments to reconcile net loss during the development stage to net cash provided by operating activities: Depreciation and amortization 7,508 Change in assets and liabilities: Other current assets (672) Deferred revenue 175,000 Due to related party 23,150 Accounts payable 9,224 Other current liabilities 14,729 --------- Net cash provided by operating activities 66,116 --------- Cash flows from investing activities: Purchase of property and equipment (9,927) Software development costs (69,425) Payment of security deposit (3,500) --------- Cash used in investing activities (82,852) --------- Cash flows from financing activities: Proceeds from issuance of common stock 200,200 Payments of capital lease obligation (5,396) --------- Net cash provided by financing activities 194,804 --------- Net increase in cash and cash, end of year $ 178,068 ========= Supplemental Disclosure of Cash Flow Information Cash paid during the period for: Interest $ 1,975 ========= Supplemental Schedule of Non-Cash Investing and Financing Activities Capital lease obligation incurred for the acquisition of new equipment $ 44,950 ========= See accompanying notes. F-6 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 1 - The Company YouNetwork Corp. (the "Company") was incorporated in the State of New York on January 14, 1998. The Company is developing an on-line consumer network comprised of consumers who are Internet shoppers. The Company will market a wide range of branded consumer products and services provided through vendor affiliations at discounted prices to members of its network. 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 programs, negotiating agreements with its vendors and raising capital. As a consequence, there has not been any operating revenue generated by the utilization of the Company's services and/or products through December 31, 1998. 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. The Company is actively pursuing various options which include seeking additional equity financing, and believes that sufficient funding will be available to achieve its planned business objectives. 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. F-7 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Revenue Recognition The Company has entered into contracts with certain vendors whereby the Company will be paid commissions based on purchases by the members of its consumer network. The Company will recognize revenue at the time the goods are shipped or services are provided by its vendors. Property and Equipment Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method over the assets' estimated useful lives ranging from three to five years. Leasehold improvements will be amortized by the straight-line method over the lesser of the term of the related lease or the useful life. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations. Software Development Costs The Company accounts for its software development costs in accordance with the provisions of Statement of Position 98-1, "Accounting for Costs of Computer Software for Internal Use", issued by the American Institute of Certified Public Accountants ("SOP 98-1"). Under the provisions of SOP 98-1, certain costs incurred in developing internal use software principally in the software application development stage, are eligible for capitalization. Accordingly, during the period from inception (January 14, 1998) to December 31, 1998, the Company capitalized $69,425 related to software application development costs. Such costs will be amortized on a straight-line basis over three years commencing with the substantial completion of the software development. To date, all of the Company's software development has been conducted by an affiliate, International Computing, Inc., formerly Digital Pulp Technologies, Inc. ("Digital") (see Note 7). 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 F-8 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) New Accounting Pronouncement (Continued) derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a material impact on the Company's financial position or results of operations. Advertising and Promotion Costs Advertising and promotion costs are charged to operations during the period in which they are incurred. For the period from inception (January 14, 1998) to December 31, 1998, such costs were nominal. Computation of Net Loss per Common Share The Company adopted SFAS No. 128, "Earnings per Share". This statement requires that the Company report basic and diluted earnings (loss) per share for all periods reported. Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, adjusted for the dilutive effect of common stock equivalents, consisting of dilutive common stock options using the treasury stock method. For all periods presented, common stock warrants are not included in the computation as they would be anti-dilutive. In the event that the Company was to report net income in future periods, these warrants could have a dilutive effect on future earnings per share calculations in those periods. The Company's board of directors declared a 3.65 to 1 stock split of its common stock effective December 4, 1998. The stock split was effective prior to the issuance of shares discussed in Note 9. All share data has been retroactively adjusted for the effect of the split. 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. F-9 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 2 - Summary of Significant Accounting Policies (Continued) Computation of Net Loss per Common Share (Continued) The Company has elected to adopt the disclosure-only provision of SFAS No. 123, and as described above, will continue to apply APB No. 25 to account for stock options. Since there were no stock options outstanding at December 31, 1998, there is no pro forma effect on loss per share. Note 3 - Property and Equipment Property and equipment consists of: Computer equipment $ 4,071 Office equipment 3,706 Leasehold improvements 2,150 ---------- 9,927 Equipment held under capital lease 44,950 ---------- 54,877 Less: Accumulated depreciation and amortization 7,508 ---------- $ 47,369 ========== Note 4 - Capital Lease Obligation Capital lease obligation consists of: Capital lease obligation, payable in monthly installments of $1,472, including interest at 11%, maturing in July 2001, secured by specific equipment with a carrying value of approximately $38,700 $ 45,619 Less: Amount representing interest 6,065 ---------- 39,554 Less: Current portion 14,000 ---------- $ 25,554 ========== F-10 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 4 - Capital Lease Obligation (Continued) Minimum future lease payments under the capital lease as of December 31, 1998 are as follows: Year Ending December 31, ------------ 1999 $ 14,000 2000 15,620 2001 9,934 ---------- $ 39,554 ========== Note 5 - Deferred Revenue The Company entered into an agreement in March 1998 with a company which provides long-distance telephone service. The agreement includes provisions for advances to the Company totalling $250,000. At December 31, 1998, the Company had received advances of $175,000. Commissions earned by the Company for the referral of customers to the telephone company are offsetable against these advances. The initial term of the agreement is three years. Advances made in excess of commissions earned and offset against the advances are payable by the Company on the earlier of the termination of the agreement or twelve months from the date of full execution of the agreement. Note 6 - Income Taxes At December 31, 1998, the Company had a U.S. federal and New York State net operating loss carryforward of approximately $162,000 expiring in 2013. The Company has established a valuation allowance with respect to these federal and state carryforwards. Deferred tax assets: Net operating loss carryforwards $ 65,100 Valuation allowance (65,100) ---------- Net deferred tax assets $ -- ========== Note 7 - Related Party Transactions From inception, the Company has retained the services of Digital, a corporation that is partially-owned by one of the Company's significant stockholders. Digital has provided software and systems integration consultation services in connection with the Company's effort to develop F-11 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 7 - Related Party Transactions (Continued) its proprietary tracking technology. Total consulting fees paid by the Company for the period from inception (January 14, 1998) to December 31, 1998 were $89,425, of which $69,425 was capitalized and the balance charged to operations. At December 31, 1998, $23,150 was due to Digital by the Company. Note 8 - Concentration of Credit Risk The Company maintains cash balances at two banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. Note 9 - Stock Warrants On December 4, 1998, the Company issued 27 shares (the "Purchased Shares") of common stock and common stock purchase warrants (the "Purchase Warrants") for $200,000. These shares represented 27% of the issued and outstanding shares of common stock of the Company on a fully diluted basis. The Purchase Warrants can be used to purchase in the aggregate such number of shares of common stock, at nominal consideration, as shall equal, in the aggregate when added to the Purchased Shares, 27% of the issued and outstanding shares of common stock of the Company on a fully diluted basis, immediately following the sale of additional common stock by the Company in consideration of the first $400,000 of common stock proceeds received by the Company after December 4, 1998. During 1998, no warrants were exercised. Note 10 - Commitment Lease The Company leases office space under an operating lease expiring in April 2003. The future minimum lease payments, excluding escalation charges, are as follows: Year Ending December 31, ------------ 1999 $ 21,000 2000 21,000 2001 21,000 2002 21,000 2003 7,000 ---------- $ 91,000 ========== F-12 YOUNETWORK CORP. (A Development Stage Company) Notes to Financial Statements Note 10 - Commitment (Continued) Lease (Continued) Total rent expense charged to operations for the period from inception (January 14, 1998) to December 31, 1998 was approximately $12,100. Note 11 - Subsequent Event On February 3, 1999, the stockholders of Younetwork Corp., a New York corporation, exchanged each share of their common stock for 330,000 shares of Class C common stock of Younetwork Corporation, a recently formed Delaware corporation under common control. Since the entities are under common control, the transaction is to be accounted for in the same manner as a pooling of interest. F-13 No dealer, salesman or any other person is authorized to give any information or to represent anything not contained in this Prospectus. You must not rely on any unauthorized information or representations. This Prospectus is an offer to sell the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this Prospectus is current only as of this date TABLE OF CONTENTS Page Prospectus Summary................................... 3 Summary Financial Information........................ 6 Risk Factors......................................... 7 Capitalization....................................... 20 Dilution............................................. 21 Management's Discussion and Analysis................. 22 Business............................................. 28 Industry Background.................................. 30 Management........................................... 38 Executive Compensation Table......................... 39 Principal Stockholders............................... 42 Description of Securities............................ 43 Shares Eligible for Future Sale...................... 43 Disclosure of Compensation Position on Indemnification for Securities Act Liabilities....................... 44 Legal Matters........................................ 45 Experts.............................................. 45 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-13 Index to Financial Statements........................ F-1 Report of Independent Auditor........................ F-2 Financial Statements................................. F-3 - -------------------- Until , 1999 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Representatives and with respect to their unsold allotments or subscriptions. ------------------------------------ -------- 1,000,000 SHARES OF CLASS A COMMON STOCK AND 1,000,000 SHARES OF CLASS B COMMON STOCK YOUNETWORK CORPORATION _______________ PROSPECTUS _______________ ____________, 1999 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS YouNetwork's Certificate of Incorporation, as amended and Bylaws limit the liability of directors and officers to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, including gross negligence, except liability for (i) breach of the directors' duty of loyalty; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) the unlawful payment of a dividend or unlawful stock purchase or redemption, and (iv) any transaction from which the director derives an improper personal benefit. Delaware law does not permit a corporation to eliminate a director's duty of care, and this provision of our Certificate of Incorporation has no effect on the availability of equitable remedies, such as injunction or rescission, based upon a director's breach of the duty of care. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of LOA pursuant to the foregoing provisions, or otherwise, LOA has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Corporation Takeover Provisions Section 203 of the Delaware General Corporation Law We are subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). Under Section 203, certain "business combinations" between a Delaware corporation whose stock generally is publicly traded or held of record by more than 2,000 stockholders and an "interested stockholder" are prohibited for a three-year period following the date that such stockholder became an interested stockholder, unless (i) the corporation has elected in its original certificate of incorporation not to be governed by Section 203 (we did not make such an election) (ii) the business combination was approved by the Board of Directors of the corporation before the other party to the business combination became an interested stockholder (iii) upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to render or vote stock held by the plan) or, (iv) the business combination was approved by the Board of Directors of the corporation and ratified by two-thirds of the voting stock which the interested stockholder did not own. The three-year prohibition also does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during t he previous three years or who became an interested stockholder with the approval of the majority of the corporation's directors. The term "business combination" is defined generally to include mergers or consolidations between a Delaware corporation and an "interested stockholder," transactions with an "interested stockholder" involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally as a stockholder who, together with affiliates and associates, owns (or, within three years prior, did own) 15% or more of a Delaware corporation's voting stock. Section 203 could prohibit or delay a merger, takeover or other change in control of LOA and therefore could discourage attempts to acquire LOA. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee $ $200 Printing and Engraving Expenses $ 5,000* Legal Fees and Expenses (including blue sky fees and expenses) $ 100,000* Accounting Fees and Expenses $ 15,000* Transfer Agent's Fees and Expenses $ 5,000* Miscellaneous Expenses $ 2,000* ------------- TOTAL $ 127,200*
*Estimated ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following gives effect to the 330,000 to 1 exchange of Class C shares of Common Stock effected February 3, 1999, pursuant to an Agreement and Plan of Merger between YouNetwork, Corp., a New York corporation and the Registrant, YouNetwork. Pursuant to an agreement among YouNetwork, Dalia Silverman and Kleopatra Georgiades (the "Investors"), the Investors purchased from YouNetwork, for an aggregate purchase price of $200,000: (i) an aggregate of 8,910,000 shares of Common Stock (the "Purchased Shares") representing 27% of the issued and outstanding Common Stock, on a fully diluted basis; and (ii) Options (the "Purchase Options") to purchase in the aggregate such number of shares of Common Stock, at nominal consideration, as shall equal, in the aggregate when added to the Purchased Shares, 27% of the issued and outstanding Common Stock of YouNetwork on a fully dilluted basis, immediately following the sale of additional Common Stock by YouNetwork in consideration of the first $400,000 of Common Stock sale proceeds received by YouNetwork following December 4, 1998. The foregoing transaction was effected without registration under the Securities Act in reliance on the exemption from registration provided pursuant to Section 4(2) and Regulation D promulgated thereunder. ITEM 27. EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ------------ 2.1 Agreement and Plan of Merger Agreement, dated February 3, 1999, by and between YouNetwork Corp., a New York corporation and YouNetwork Corporation, a Delaware corporation. 3.1 Certificate of Incorporation of Registrant, as amended 3.2 By-laws of Registrant 4.1 Specimen certificate representing Registrant's Class A Common Stock 4.2 Specimen certificate representing Registrant's Class B Common Stock 5.1* Opinion of Silverman, Collura, Chernis & Balzano, P.C. with respect to legality of the securities of the Registrant being registered 10.1 Stockholders' Agreement, dated December 4, 1998 10.2 Stock and Warrant Purchase Agreement, dated December 4, 1998 10.3 Agreement between Muze, Inc. and YouNetwork , dated January 7, 1999 10.4 Agreement between Qwest International Inc. (a successor in interest to LCI International Telecom Corp.), dated March 6, 1998. 10.5 Agreement between Baker & Taylor, Inc. and YouNetwork, dated, July 9, 1998. 23.1* Consent of Silverman, Collura, Chernis & Balzano, P.C. (included in Exhibit 5.1) 23.2 Consent of Mahoney Cohen & Company, CPA, P.C. 27 Financial Data Schedule * to be filed by amendment b. Financial Statement Schedules. None ITEM 28. UNDERTAKINGS. (a) Rule 415 Offerings. The undersigned issuer hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Includes any additional or changed material information on the plan of distribution. provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the Registration Statement is on Form S-3 or Form S-8, and the information required in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Request for acceleration of effective date. (1) Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the issuer of expenses incurred or paid by a director, officer or controlling person of the issuer in the successful defense of any action, suit or proceedings) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such court. (2) For determining liability under the Securities Act, treat the information in the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus file by the small business issuer under rule 424(b)(1), or (4) or 457(h) under the Securities Act as part of this registration statement as at the time the Commission declares it effective. (3) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of New York, State of New York, on February 5, 1999. YOUNETWORK CORPORATION By: s/Kyle S. Taylor --------------------- Kyle S. Taylor, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in their respective capacities with YouNetwork and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- s/Kyle S. Taylor President February 5, 1999 - ---------------- Director Kyle S. Taylor s/Don S. Senerath Chief Executive Officer, February 5, 1999 - ----------------- Director Don S. Senerath S/Peter R. Silverman Director February 5, 1999 - -------------------- Peter Silverman
EX-2.1 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is made as of February 3, 1999, by and between YouNetwork Corp., a New York corporation ("NYYNW"), and YouNetwork Corporation, a Delaware corporation ("DYNW""); (NYYNW and DYNW collectively, the "Constituent Corporations"). The authorized capital stock of NYYNW consists of One Hundred (100) shares of Common Stock, no par value per share. The authorized capital stock of DYNW, upon effectuation of the transactions set forth in this Merger Agreement, will be Two-Hundred and Fifty Million (250,000,000) shares of Common Stock consisting of: (i) One Million and Five-Hundred Thousand (1,500,000) shares of Class A common stock, $.0001 par value per share; (ii) One Million and Five-Hundred Thousand (1,500,000) shares of Class B common stock, $.0001 par value per share; and (iii) Two Hundred and Forty Seven Million (247,000,000) shares of Class C common stock, $.0001 par value per share. The directors of the Constituent Corporations deem it advisable and to the advantage of the Constituent Corporations that NYYNW merge with and into DYNW upon the terms and conditions provided herein. NOW THEREFORE, the parties do hereby adopt the plan of reorganization encompassed by this Merger Agreement and do hereby agree that NYYNW shall merge with and into DYNW on the following terms, conditions and other provisions: 1. TERMS AND CONDITIONS 1.1 Merger. NYYNW shall be merged with and into DYNW (the "Merger"), and DYNW shall be the surviving corporation (the "Surviving Corporation") effective upon the time of filing of the Certificate of Merger. (the "Effective Date"). 1.2 Succession. On the Effective date, DYNW shall continue its corporate existence under the laws of the State of Delaware, and the separate existence and corporate organization of NYYNW except insofar as it may be continued by operation of law, shall be terminated and cease. 1.3 Transfer of Assets and Liabilities. On the Effective Date, the rights, privileges, powers and franchises, both of a public as well as of a private nature, of each of the Constituent Corporations shall be vested in and possessed by the Surviving Corporation, subject to all of the disabilities, duties and restrictions of or upon each of the Constituent Corporations; and all and singular rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, of each of the Constituent Corporations, and all debts due to each of the Constituent Corporations on whatever account, and all things in action or belonging to each of the Constituent Corporations shall be transferred to and vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all and every other interest, thereafter shall be the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate vested by deed otherwise in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger; provided, however, that the liabilities of the Constituent Corporations and of their stockholders, directors and officers shall not be affected and all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and any claim existing or action or proceeding pending by or against either of the Constituent Corporations may be prosecuted to judgment as if the Merger had not been consummated, except as they may be modified with the consent of such creditors, and all debts, liabilities and duties of or upon each of the Constituent Corporations shall attach to the Surviving Corporation, and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it. 1.4 Common Stock of NYYNW and DYNW . On the Effective Date, by virtue of the Merger and without any further action on the part of the Constituent Corporations or their respective stockholders, (i) each share of Common Stock of NYYNW issued and outstanding immediately prior thereto shall be combined, changed and converted into 330,000 shares of Class C Common Stock of DYNW in each case fully paid and nonassessable, and (ii) each share of Common Stock of NYYNW issued and outstanding immediately prior thereto shall be canceled and returned to the status of authorized but unissued shares. 1.5 Stock Certificates. On and after the Effective Date, all of the outstanding certificates that, prior to that time, represented shares of Common Stock of NYYNW shall be deemed for all purposes to evidence ownership of and to represent the shares of DYNW into which the shares of NYYNW represented by such certificates have been converted as herein provided and shall be so registered on the books and records of the Surviving Corporation or its transfer agents. The registered owner of any such outstanding stock certificate shall, until such certificate shall have been surrendered for transfer or conversion or otherwise accounted for to the Surviving Corporation or its transfer agent, have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distribution upon the shares of DYNW evidenced by such outstanding certificate as above provided. 1.6 Purchase Rights. On the Effective Date, the Surviving Corporation will assume the outstanding obligations of NYYNW to issue Common Stock or other capital stock pursuant to contractual purchase rights granted by NYYNW, and the outstanding and unexercised portions of all outstanding contractual rights to purchase Common Stock or other capital stock of NYYNW shall be changed and converted into contractual rights to purchase Common Stock or other capital stock, respectively, of DYNW such that a contractual right to purchase one (1) share of Common Stock or other capital stock of NYYNW shall be converted into a contractual right to purchase 330,000 shares of Class C Common Stock or other capital stock, respectively, of DYNW. No other changes in the terms and conditions of such contractual purchase rights will occur. 2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2 2.1 Certificate of Incorporation and Bylaws. The Certificate of Incorporation of DYNW in effect on the Effective date shall continue to be the Certificate of Incorporation of the Surviving Corporation without change or amendment until further amended in accordance with the provisions thereof and applicable law. The Bylaws of DYNW in effect on the Effective Date shall continue to be the Bylaws of the Surviving Corporation without change or amendment until further amended in accordance with the provision thereof and applicable law. 2.2 Directors. The directors of NYYNW immediately preceding the Effective Date shall become the directors of the Surviving Corporation on and after the Effective Date to serve until the expiration of their terms and until their successors are elected and qualified. 2.3 Officers. The officers of NYYNW immediately preceding the Effective Date shall become the officers of the Surviving Corporation on and after the Effective Date to serve at the pleasure of its Board of Directors. 3. MISCELLANEOUS 3.1 Further Assurances. From time to time, and when required by the Surviving Corporation or by its successors and assigns, the surviving Corporation shall execute and deliver, or cause to be executed and delivered, such deeds and other instruments, and the Surviving Corporation shall take or cause to be taken such further and other action as shall be appropriate or necessary in order to vest or perfect in or to conform of record or otherwise, in the Surviving Corporation the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of DYNW and otherwise to carry out the purposes of this Merger Agreement, and the officers and directors of the Surviving Corporation are authorized fully in the name and on behalf of DYNW or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 3.2 Amendment. At any time before or after approval by the stockholder of NYYNW, this Merger Agreement may be amended in any manner (except that, after the approval of the Merger Agreement by the stockholders of NYYNW, the principal terms may not be amended without the further approval of the stockholders of NYYNW) as may be determined in the judgment of the respective Board of Directors of DYNW and NYYNW to be necessary, desirable, or expedient in order to clarify the intention of the parties hereto or to effect or facilitate the purpose and intent of this Merger Agreement. 3.3 Conditions of Merger. The obligation of the Constituent Corporations to effect the transactions contemplated hereby is subject to satisfaction of the following conditions (any or all of which may be waived by either of the Constituent Corporations in its sole discretion to the extent permitted by law): (a) the Merger shall have been approved by the stockholders of NYYNW in accordance with applicable provisions of the New York Business Corporation Law; and 3 (b) NYYNW, as sole stockholder of DYNW, shall have approved the Merger in accordance with the General Corporation Law of the State of Delaware; and (c) any and all consents, permits, authorizations, approvals, and orders deemed in the sole discretion of NYYNW to be material to consummation of the Merger shall have been obtained. 3.4 Abandonment or Deferral. Notwithstanding the approval of this Merger Agreement by the stockholders of NYYNW or DYNW, at any time before the Effective Date, (a) this Merger Agreement may be terminated and the Merger may be abandoned by the Board of Directors of either NYYNW or DYNW or both or (b) the consummation of the Merger may be deferred for a reasonable period of time if, in the opinion of the board of Directors of NYYNW and DYNW, such action would be in the best interests of such corporations. In the event of termination of this Merger Agreement, this Merger Agreement shall become void and of no effect and there shall be no liability on the part of either Constituent Corporation or their respective Board of Directors or stockholders with respect thereto, except that NYYNW shall pay all expenses incurred in connection with the Merger or in respect to this Merger Agreement or relating thereto. 3.5 Counterparts. In order to facilitate the filing and recording of this Merger Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original. IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved by the Board of Directors of NYYNW and DYNW, hereby is executed on behalf of each such corporations and attested by their respective officers thereunto duly authorized. YOUNETWORK CORP., a New York Corporation By:s/ Kyle S. Taylor ---------------------- ATTEST: Kyle S. Taylor, President S/ Don S. Senerath - --------------------------- Don S. Senerath, Secretary YOUNETWORK CORPORATION, a Delaware Corporation By:s/ Kyle S. Taylor ------------------------ Kyle S. Taylor, President 4 ATTEST: S/ Don S. Senerath - -------------------- Don S. Senerath , Secretary 5 EX-3.1 3 CERTIFICATE OF INCORPORATION OF YOUNETWORK CORP. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF YOUNETWORK CORPORATION YouNetwork Corporation, a corporation organized and existing under the law of the State of Delaware (?Corporation?), hereby certifies as follows: . This Amended and Restated Certificate of Incorporation restates, integrates and amends the provisions of the Certificate of Incorporation of the Corporation, originally filed with the Secretary of State of Delaware on January 14, 1999, and has been duly adopted by the Corporation?s directors in accordance with Section 141(f) of the General Corporation Law of the State of Delaware and by the Corporation?s shareholders in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. Prompt written notice of the adoption of the amendment and restatement of the Certificate of Incorporation herein certified has been given to those stockholders who have not consented in writing thereto, as provided in Section 228 of the General Corporation Law of the State of Delaware. The text of the Amended and Restated Certificate of Incorporation is hereby restated and amended to read in its entirety as follows: FIRST: The name of the Corporation is YouNetwork Corporation. SECOND: The address of the registered office of the Corporation in the State of Delaware is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent, and the name of the registered agent of the Corporation in the State of Delaware at such address is National Registered Agents, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: A. The aggregate number of shares which the Corporation shall have authority to issue is Two-Hundred and Fifty Million (250,000,000) shares of all classes of stock, consisting of: 1. One Million and Five-Hundred Thousand (1,500,000) shares of Class A common stock, $.0001 par value per share; 2. One Million and Five-Hundred Thousand (1,500,000) shares of Class B common stock, $.0001 par value per share; and 1 3. Two Hundred and Forty Seven Million (247,000,000) shares of Class C common stock, $.0001 par value per share. B. No holder of any of the shares of any class or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any preemptive right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, or bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series. FIFTH: The Corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors, or any class of them, and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all of the creditors or class of creditors, and/or on all of the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. SEVENTH: A. The business affairs of the Corporation shall be managed by or under the direction of the Board of Directors consisting of not less than one director. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-laws. The phrase "whole board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies; and B. A director shall hold office until the annual meeting when his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any position on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, and any other vacancy occurring in the Board of Directors may be filled by a majority of the 2 directors then in office, although less than a quorum, or by a sole remaining director. EIGHTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director to the Corporation shall be limited or eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. No repeal or modification of this ARTICLE EIGHTH, directly or by adoption of an inconsistent provision of this Certificate of Incorporation, by the stockholders of the Corporation shall be effective with respect to any cause of action, suit, claim or other matter, that, but for this ARTICLE EIGHTH, would accrue or arise prior to such repeal or modification. NINTH: The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented (the "GCL"), indemnify any and all persons whom it shall have power to indemnify under said section (the "Indemnitee") from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation shall pay in advance of the final disposition of such Indemnitee upon the receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this ARTICLE NINTH. TENTH: The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability, or loss, whether or not the Corporation would have the power to indemnity such person against such expense, liability or loss under the Delaware General Corporation Law. ELEVENTH: Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called (A) upon the written request of the Chairman of the Board, the President or the Secretary; or (B) at the written request of a majority of Directors. TWELTH: A. For business to be properly brought before an annual or special meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the 3 Secretary of the Corporation. A stockholder's notice related to a proposal to be presented at an annual or special meeting, to be timely, must be received at the Corporation's principal executive offices not less than 60 days nor more than 90 days prior to the meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which a notice of the date of the annual or special meeting, as the case may be, was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. B. Only persons who are nominated in accordance with the procedures set forth in this ARTICLE TWELTH shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be received at the Corporation's principal executive offices not less than 60 days nor more than 90 days prior to the meeting; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any of the information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such persons' written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the 4 nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Article, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. THIRTEENTH: The original by-laws of the Corporation shall be adopted by the Incorporator. Thereafter, the power to make, alter, or repeal the by-laws; and to adopt any new by-law, shall be vested in the Board of Directors. FOURTEENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this ARTICLE FOURTEENTH. IN WITNESS WHEREOF, the undersigned do hereby execute this certificate as of January 27, 1999. /s/ Kyle S. Taylor --------------------------- Kyle S. Taylor, President Attest: /s/ Don S. Senerath - ------------------------------ Don S. Senerath, Secretary 5 EX-3.2 4 BY-LAWS OF REGISTRANT BYLAWS OF YOUNETWORK COPORATION ARTICLE I OFFICES Section 1. The registered office shall be located in the City of Wilmington, State of Delaware. Section 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors of directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders shall be held at such place within or without the State as may be from time to time fixed or determined by the Board of Directors. Section 2. An annual meeting of the stockholders, commencing with the year 1999, shall be held on a date and at a time and place to be determined by the Board of Directors, when they shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 3. Special meetings of the stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called at any time by the Board of Directors pursuant to a resolution adopted by a majority of total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Such resolution shall state the purpose or purposes of the proposed meeting. Upon delivery to the secretary of the Corporation of said resolution, it shall be the duty of the secretary to call a special meeting of the stockholders to be hold at such time, not more than sixty days thereafter, as the secretary may fix. if the secretary shall neglect to issue such call, the person or persons making the request may issue the call. Section 4. Written notice of every meeting of the stockholders, specifying the place, date, and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting in called, shall be served upon or mailed, postage prepaid, not less than ten nor more 1 than sixty days before the date of the meeting unless a different period of notice is required by statute, to each stockholder entitled to vote thereat. Section 5. The officer who has charge of the stock ledger of the Corporation shall prepare and make at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 6. Business transacted at all special meetings of stockholders shall be limited to the purposes stated in the notice. Section 7., The holders of a majority of the issued and outstanding shares entitled to vote, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws. The stockholders present in person or by proxy at a duly convened meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum. Section 8. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the shares having voting powers, present in person or represented by proxy, shall decide any question brought before such meeting, unless the. question is one upon which, by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 9. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share having voting power hold by such stockholder, but no proxy shall be voted an after three years from its date, unless the proxy provides for a longer period; and, except where the Board of Directors has fixed, in advance, a record date, which shall not be more than sixty, nor less than ten days before the date of such meeting, the record date for determining stockholders entitled to vote at a meeting of stockholders shall be at the close of business on the next day preceding the day on which the meeting is hold. 2 ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the Board of Directors shall not be less than one (1) nor more than eight (8) directors, which Board of Directors shall be elected by the stockholders at their annual meeting. The Board of Directors may, by a vote of not less than a majority of the authorized number of directors, increase or decrease the number of directors from time to time without a vote of the stockholders provided, however, that any such decrease shall not eliminate any director then in office. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors shall be filled by a majority of the remaining number of, the Board of Directors, though less than a quorum. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of shares at the time outstanding having the right to vote for such directors, summarily order an election to be hold to fill any such vacancies or newly created directorships, or to replace the directors chosen by directors then in office as aforesaid, which election shall be governed by the provision of Article II, Section 2, as far as applicable. Section 3. The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised and, done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected Board of Directors shall be held at the same place as, and immediately following, the annual meeting of the stockholders unless the stockholders shall otherwise fix the time and place of such meeting at the annual meeting of stockholders at which such directors were elected, in which case such meeting shall be hold at the time and place so fixed. No notice of such meeting shall be necessary to the newly elected directors in order to legally constitute such meeting, provided a majority of the whole Board of Directors shall be present. In the event such meeting is not hold at such time and place as provided for above, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for such meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors, 3 Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of at least a majority of the Board of Directors at a duly governed meeting, or by unanimous written consent. Section 7. Special meetings of the Board of Directors may be called by the president on five (5) days' notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors. Section 8. At all meetings of the Board of Directors, a majority of the directors in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or the Certificate of Incorporation. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice, other than announcement at the meeting, until a quorum shall be present. Section 9. If all the directors shall severally or collectively consent in writing to any action to be taken by the Corporation, and if the writing or writings are filed with the minutes of the proceedings of the Board of Directors, such action shall be as valid a corporate action as though it had been authorized at a meeting of the Board of Directors. Section 10. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of two or more of the directors of the Corporation. The Board of Directors may designate alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise the powers of the Board of Directors in the management of the business affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. The committee or committees designated -shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 11. Directors shall not receive any stated salary for their services but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors or at meetings of the executive committee; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 4 REMOVAL OF DIRECTORS Section 12. The entire Board of Directors or any individual director may be removed from office at any time, but only for cause and only by an affirmative vote of the holders of at least 80% of the then outstanding shares of capital stock entitled to vote generally in the election of directors. ARTICLE IV NOTICES Section 1. Notices to directors and stockholders shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the Corporation shall be chosen by the Board of Directors and shall be a chairman of the Board of Directors, a president, a vice president,-a secretary and a treasurer. The Board of Directors may also choose additional vice presidents and one or more assistant secretaries and assistant treasurers. Any of the aforesaid offices may be held by the same person. The Board of Directors, in its discretion, may leave vacant for such period of time as it may doom appropriate any office provided for in these Bylaws. Section 2. The Board of Directors, at their first meeting, shall elect a president, who may but need not be a director, and, the Board of Directors shall also annually choose a vice president, a secretary and a treasurer who need not be members of the Board of Directors. Section 3. The Board of Directors may appoint such other officers and, agents as it shall doom necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 4. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors. 5 Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. CHAIRMAN OF THE BOARD Section 6. The chairman of the Board of Directors shall preside at all meetings of the Board of Directors and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE PRESIDENT Section 7. The president shall preside at all meetings of the stockholders, shall have general and active management of the business, of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 8. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be-expressly delegated by the Board of Directors to some other officer or agent of the Corporation. THE CHIEF EXECUTIVE OFFICER Section 9. The Chief Executive Officer, shall, in the absence or disability of the president, perform the duties and exercise the powers of the president, and shall perform such other duties and have much other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARIES Section 10. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the executive committee when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of an assistant secretary. Section 11. The assistant secretary or, if there shall be more than one, the assistant secretaries, in the order determined by the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform 6 such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 12. The treasurer shall have custody of the corporate funds and securities, shall keep full and accurate. accounts of receipts and disbursements in books belonging to the Corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. Section 13. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors at its regular meetings or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 14. If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 15. The assistant treasurer or, if there shall be more than one, the assistant treasurers, in the order determined by the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATES OF SHARES Section 1. The certificates of shares of the Corporation shall be numbered and registered in a share register as they are issued. They shall exhibit the name of the -registered holder and the number and class of shares and the -series, if any, represented thereby and the par value of each share or a statement that such shares are without par value as the case may be. Section 2. Every share certificate shall be signed by the president and the secretary and shall be sealed with the corporate seal which may be facsimile, engraved or printed. Section 3. In case any officer who has signed or whose facsimile signature has been placed. upon any share certificate, shall have ceased to be such officer because of death, resignation or 7 otherwise before, the certificate is issued, it maybe issued, by the Corporation with the same of fact as if the officer had not ceased to be such at the date of its issue. LOST CERTIFICATES Section 4. The Board of Directors shall direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, destroyed or wrongfully taken, upon the making of an affidavit of that fact by the person claiming the share certificate to be lost, destroyed or wrongfully taken. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, destroyed or wrongfully taken certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, destroyed or wrongfully taken. TRANSFER OF SHARES Section 8. Upon the surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. CLOSING OF TRANSFER BOOKS. Section 6. The Board of Directors may fix a time, not more than sixty nor less than ten days, prior to the date of any meeting of stockholders or the date fixed for the payment of any dividend or distribution or the date for the allotment of rights or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to receive payment of any such dividend or distribution or to receive any such allotment of rights or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case only such stockholders an shall be stockholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of such period and in such case written or printed notice thereof shall be mailed at least ton days before the closing thereof to each stockholder of record at the address appearing on the records of the Corporation or supplied by him to the Corporation for the purpose of notice. 8 REGISTERED STOCKHOLDERS Section 7. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, and shall not be liable for any registration or transfer of shares which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee of a fiduciary is committing a breach of trust in requesting such registration or transfer, or with knowledge of such facts that its participation therein amounts to bad faith. ARTICLE VII INDEMNIFICATION AND INSURANCE INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS Section 1. The Corporation shall, to the fullest extent now or hereafter permitted by law,.indemnify any person who was or is a party or in threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys fees, judgments, fines and-amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contenders or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. The Corporation shall, to the fullest extent now or hereafter permitted by law, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation. No such indemnification against expenses shall be made, however, in respect of any claim, issue or matter as to which such person shall have 9 been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery in which such action or suit was brought shall determine upon application that despite the adjudication of liability, but in view of all the circumstances of the came, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall doom proper. Section 3. Indemnification under Sections 1 and 2 of this Article shall be made by the Corporation when ordered by a court or upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct at forth in those sections. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or (b) if such quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. Section 4. Expenses incurred in defending a civil or criminal action, suit or proceeding of the kind described in sections 1 and 2 of this Article shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking, by or on behalf of the person who may be entitled to indemnification under those Sections, to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Section 5. The indemnification provided in this Article shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a parson. Section 6. Nothing herein contained shall be construed as limiting the power or obligation of the Corporation to indemnify any person in accordance with the Delaware General Corporation Law, as amended from time to time, or in accordance with any similar law adopted in lieu thereof. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 7. The Corporation shall also indemnify any person against expenses, including attorneys' fees, actually and reasonably incurred by him in enforcing any right to indemnification under this Article, under the Delaware General Corporation Law, as amended from time to time, or under any similar law adopted in lieu thereof. Section 8. Any person who shall serve as a director, officer, employee or agent of the Corporation or who shall serve, at the request of the Corporation, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be 10 deemed to do so with knowledge of and in reliance upon the rights of indemnification provided in this Article, in the Delaware General Corporation Law, as amended from time to time, and in any similar law adopted in lieu thereof. INSURANCE Section 9. The Corporation shall have power but not the obligation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability. ARTICLE VIII GENERAL PROVISIONS EMERGENCY BYLAWS Section 1. The Board of Directors of the Corporation may adopt emergency Bylaws, subject to repeal or change by action of the stockholders, which shall be operative during any emergency resulting from warlike damage or attack on the United States or any nuclear or atomic disaster. The emergency Bylaws may make any provision that may be practical and necessary for the circumstances of the emergency. INTERESTED DIRECTORS Section 2. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are also directors or officers, or have a financial interest, shall be void or voidable solely for such reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his interest and as to the contract or transaction are disclosed or known to the Board of Directors and the Board of Directors in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested director or directors; or (b) The material facts as to his interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by a vote of the shareholders; or 11 (c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors or the stockholders. Section 3. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors which authorized a contract or transaction in the preceding section. DIVIDENDS Section 4. Dividends upon the shares of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in its shares, subject to the provisions of the Certificate of Incorporation. Section 5. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors, from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 6. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 7. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SEAL Section 8. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "YouNetwork Corporation Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 12 ARTICLE IX AMENDMENTS Section 1. These Bylaws may be altered, amended or repealed by a resolution of a majority of the Board of Directors. 13 EX-4.1 5 SPECIMEN CERTIFICATE CLASS A - ------------------------------------------------------------------------------- [YOUNETWORK CORPORATION] Class A Common Stock This is to certify that ___________________________________ is the _________ of _______________________________________________________________________________ Fully Paid and Non-Assessable Shares of Class A Common Stock of YOUNETWORK CORPORATION transferable only on the books of the Corporation by the holder thereof in person or by a duly authorized Attorney upon surrender of this Certificate properly endorsed. Witness, the seal of the Corporation and the signatures of its duly authorized officers. Dated [SEAL] - ------------------------------------------------------------------------------- THESE SECURITIES WERE ORIGINALLY ISSUED IN TRANSACTIONS EXEMPT UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") PURSUANT TO THE EXEMPTION PROVIDED BY SECTION 4(2) OF THE ACT, AND HAVE BEEN REGISTERED UNDER THE ACT FOR SALE ON BEHALF OF THE HOLDER. THESE SECURITIES MAY NOT OFFERED, SOLD OR TRANSFERRED EXCEPT, (I) PURSUANT TO THE REGISTRATION STATEMENT IF A CURRENT PROSPECTUS WITH RESPECT TO THESE SECURITIES IS DELIVERED IN CONNECTION THEREWITH, OR (II) PURSUANT TO AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAW. EX-4.2 6 SPECIMEN CERTIFICATE CLASS B - ------------------------------------------------------------------------------- [YOUNETWORK CORPORATION] Class B Common Stock This is to certify that ___________________________________ is the _________ of _______________________________________________________________________________ Fully Paid and Non-Assessable Shares of Class B Common Stock of YOUNETWORK CORPORATION transferable only on the books of the Corporation by the holder thereof in person or by a duly authorized Attorney upon surrender of this Certificate properly endorsed. Witness, the seal of the Corporation and the signatures of its duly authorized officers. Dated [SEAL] - ------------------------------------------------------------------------------- The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. UNIF GIFT MIN ACT -- Custodian ------- --------- (Cust) (Minor) under Uniform Gifts to Minors Act -------------------------- (State) For value received hereby sell assign and transfer unto ------ PLEASE INCEPT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OR ASSIGNEE - -------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNER) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares represented by the within Certificate, and do hereby irrovcably constitute and appoint - ------------------------------------------------------------------------Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the promises Dated ----------------------- In presence of ------------------------------------- - ----------------------------- THESE SECURITIES WERE ORIGINALLY ISSUED IN TRANSACTIONS EXEMPT UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT") PURSUANT TO THE EXEMPTION PROVIDED BY SECTION 4(2) OF THE ACT, AND HAVE BEEN REGISTERED UNDER THE ACT FOR SALE ON BEHALF OF THE HOLDER. THESE SECURITIES MAY NOT OFFERED, SOLD OR TRANSFERRED EXCEPT, (I) PURSUANT TO THE REGISTRATION STATEMENT IF A CURRENT PROSPECTUS WITH RESPECT TO THESE SECURITIES IS DELIVERED IN CONNECTION THEREWITH, OR (II) PURSUANT TO AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAW. EX-10.1 7 STOCKHOLDERS AGREEMENT DATED DECEMBER 4, 1998 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of December 4, 1998, by and among YOUNETWORK CORPORATION, a New York corporation (the "Company"), and each of the Parties signatory hereto. R E C I T A L S: WHEREAS, the Company is authorized by its Amended Certificate of Incorporation to issue 200 shares of common stock, no par value ("Common Stock"); WHEREAS, the Company has issued 36.5 shares of Common Stock to each of Kyle Taylor and Don S. Senerath (collectively, the "Management Shareholders") for a total of 73 shares of Common Stock, such shares being all the shares of Common Stock issued and outstanding; WHEREAS, pursuant to a Stock Purchase Agreement, dated as of December __, 1998 (the "Stock Purchase Agreement"), between the Company, Dalia Silverman and Kleopatra Georgiades ^ (collectively, the "Investors"), the Investors are purchasing from the Company, for an aggregate purchase price of $200,000 (i) an aggregate of 27 shares of Common Stock (the "Purchased Shares") representing 27% of the issued and outstanding Common Stock, on a fully diluted basis; and (ii) Common Stock purchase warrants (the "Purchase Warrants") to purchase in the aggregate such number of shares of Common Stock, at nominal consideration, as shall equal, in the aggregate when added to the Purchased Shares, 27% of the issued and outstanding Common Stock of 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 sale proceeds received by the Company following the date of the Stock Purchase Agreement; WHEREAS, the Company, the Investors and the Management Shareholders desire to set forth their agreement concerning the management of the Company and such other matters as are set forth herein; NOW, THEREFORE, in consideration of the foregoing and the mutual and dependent promises set forth in this Agreement, the Company, the Investors and the Management Shareholders agree as follows: ARTICLE I DEFINITIONS AND OTHER GENERAL MATTERS SECTION 1.01. Definitions. The following terms shall be used in this Agreement with the meanings set forth in this Section 1.01: "Affiliate" means, with respect to any person or entity, any other person or entity that directly or indirectly through one or more intermediates controls, is controlled by or is under common control with the first specified person or entity. "Board" means the Board of Directors of the Company. 1 "Business" means the development, marketing and operation of an on line Internet consumer buying network. "By-laws" means the restated by-laws of the Company. "CEO" means the officer elected by the Board to the post designated in the By-laws as the chief executive officer of the Company. Donald Senerath will be the initial CEO and Chairman of the Board. "Certificate of Incorporation" means the Restated Certificate of Incorporation of the Company. "Closing" shall have the meaning given in the Stock Purchase Agreement, dated as of December __, 1998, between the Company and the Investors. "Common Stock" means the common stock, no par value, of the Company. "Consenting Stockholder" means any beneficial owner of shares of Voting Securities that is a party to this Agreement. "Significant Transaction" means, with respect to the Company or any affiliates, any of the following actions: (A) conducting any business other than the Business; (B) (i) any creation of (x) any additional class of capital stock or (y) any security having a direct or indirect equity participation in the Company or any affiliate or (ii) the sale or issuance of shares of capital stock or warrants, options or rights to acquire shares of capital stock or securities convertible into or exchangeable for capital stock or any security having a direct or indirect equity participation in the Company or any affiliate; (C) any declaration or issuance of any dividend or other distribution on any shares of capital stock or any payment on account of the purchase, redemption, retirement or other acquisition for value of any shares of capital stock; (D) any transaction or contract with a value of $10,000 or more; (E) any amendment to or modification of any provision of the Certificate of Incorporation or By-laws of the Company; (F) any change in the auditors for, or in the accounting policies or procedures of, the Company; (G) entering into any agreement or obtaining any license or franchise which restricts the transfer of shares of Common Stock or Preferred Stock; (H) any consolidation or merger of the Company or its affiliates with any other entity: (I) any sale of all or substantially all of the assets of the Company or its affiliates; (J) any executive employment contract; (K) payment of salaries to any officer at a rate of more than $85,000 per annum. (L) change of required signatories on the Company's bank accounts; 2 (M) election of officers. "Voting Securities" means the Common Stock. ARTICLE II VOTING SECTION 2.01. Voting; Written Consent. (a) Any agreement by the Consenting Stockholders herein to vote their shares of Voting Securities in a certain manner shall be deemed, in each instance, to include an agreement by each Consenting Stockholder to use such Consenting Stockholder's best efforts and to take all actions necessary to call, or cause the Company and the appropriate officers and directors of the Company to call, as promptly as practicable, a special or annual meeting of stockholders or to act by written consent. (b) When any action is required to be taken by a Consenting Stockholder pursuant to this Agreement, such Consenting Stockholder shall take all steps necessary to implement such action, including, without limitation, executing or causing to be executed, as promptly as practicable, a consent in writing in lieu of an annual or special meeting of the stockholders pursuant to Section 615 of the Business Corporation Law of New York or any successor statute thereto to effect such stockholder action. (c) Unless expressly stated to the contrary herein, any action requiring the vote of the directors (or any committee thereof) may be effected by consent in lieu of a meeting of the directors or committee members, as the case may be, pursuant to Section 708 of the Business Corporation Law of New York or any successor statute thereto. ARTICLE III BOARD OF DIRECTORS AND STOCKHOLDERS SECTION 3.01. Composition of the Board of Directors. (a) General. The Board shall initially consist of three directors, of which (i) the Investors shall have the right to designate one individual to serve as a director and (ii) the Management Shareholders shall have the right to designate two individuals to serve as directors. In no event shall the Board be composed of fewer than three directors. The ratio of directors designated by the Investors to those designated by the Management Shareholders shall be maintained as set forth in this Section 3.01 should the Board be increased in number. (b) Election of Directors. Each Consenting Stockholder hereby agrees to vote all shares of Voting Securities owned by such Consenting Stockholder to cause the election to the Board of Directors of the individuals designated by the Consenting Stockholders in accordance with this Section 2.01. SECTION 3.02. Conflicting Charter or By-law Provisions. Each Consenting Stockholder shall vote its shares of Common Stock, and shall take all other actions necessary, to ensure that the Certificate of Incorporation and By-laws facilitate and do not at any time conflict with the provisions of this Agreement. SECTION 3.O3. Action By the Board of Directors. (a) Except as otherwise provided in Sections 3.03(b), all actions of the Board of Directors shall require the affirmative vote of the 3 majority of directors present at a duly convened meeting of the Board at which a quorum is present or, in lieu of a meeting, by the unanimous written consent of the members of the Board of Directors. (b) Neither the Company nor any entity controlled by the Company shall take, and no party to this Agreement shall cause the Company or any entity controlled by the Company to take, any action with respect to any Significant Transaction without (i) providing to the directors at least 2 business days' notice of any meeting of the Board at which a Significant Transaction is proposed to be approved, which notice shall describe such proposed Significant Transaction and (ii) the unanimous approval of all of the directors. ARTICLE IV TRANSFERS SECTION 4.01. Restrictions on Transfers. Management Shareholders may transfer Common Stock only if a sale or transfer ^ shall include a cash offer to bring the Investors along on the same terms for that percentage of their ownership ^ as the sale represents of the total Management Shareholders holdings, and provided that the Management Shareholders shall retain ownership interest of at least 40% of the equity securities of the Company prior to a Public Offering. SECTION 4.02. First Refusal. The Investors pro rata to their respective share ownership shall have a right of first refusal on all shares held by Management Shareholders, excluding shares transferred in accordance with Section 4.01. ^ Management Shareholders pro rata to their respective share ownership shall have a right of first refusal on all shares held by the Investors ^^. The foregoing right of first refusal shall not apply to sales in Public Offerings or to sales in the public market subsequent to such a Public Offering. In the event that any Management Shareholder or any Investor Shareholder shall desire to sell his shares pursuant to a bona fide offer ("Offer") to purchase such shares, he shall first give written notice of such Offer and the terms and conditions thereof to the Investor Shareholders in the case of a proposed sale by a Management Shareholder or to the Management Shareholders in the case of a proposed sale by an Investors Shareholder. The Shareholders receiving such notice shall have a right within a period of ten business days to purchase the offered shares on the same terms and conditions as set forth in the Offer. In the event such right is not exercised, the offered shares may be sold pursuant to the terms of the Offer within a period of sixty days thereafter, provided that as a conditions to such sale, the purchasers shall agree to be bound by the terms of this Agreement SECTION 4.03 Permitted Transfers. Notwithstanding anything provided in Sections 4.01 or 4.02 to the contrary, any Consenting Shareholder may transfer his shares, at any time during the term of this Agreement, to either a family member, or to a family trust or a corporation or partnership in which such shareholder has a majority controlling interest, providing that any such transferee, as a condition to such transfer, shall first agree to be subject to the terms and conditions of this agreement. SECTION 4.04 Officers. The officers of the Company shall be as follows, subject to removal and/or change by the Board of Directors: Chief Executive Officer Don S. Senerath President Kyle Taylor Secretary Peter R. Silverman SECTION 4.05 Bank Accounts. All bank accounts maintained by the Company shall be established pursuant to resolution adopted by the Board of Directors, 4 which resolution shall provide that the Chief Executive, President and Secretary shall each be authorized signatories on any such account and that any check for an amount in excess of $5,000 shall require the signatures of at least two officers, one of whom shall be the Secretary. SECTION 4.06. Legend. Each certificate evidencing outstanding shares of Voting Securities held by a Consenting Stockholder shall bear the following legend: "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS SUCH TRANSFER IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH ACT DOES NOT APPLY. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN A STOCKHOLDERS' AGREEMENT, DATED AS OF DECEMBER __, 1998, AS IT MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH." All certificates evidencing shares of Voting Securities hereafter issued by the Company to a Consenting Stockholder shall bear the legend set forth above. Upon termination of this Agreement or upon registration of such shares of Voting Securities in accordance with this Agreement and then upon surrender to the Company of any certificates bearing the legend set forth above, the Company shall reissue such certificates to the owner thereof without such legend. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. Right of Audit. The Investors shall have rights upon reasonable notice to inspect the Company books and records during normal business hours and to audit at its own expense provided that such inspection or audit shall not unduly interfere with the conduct of the Company's business. ARTICLE VI MISCELLANEOUS SECTION 6.01. Representations. Each of the parties hereto represents that this Agreement has been duly authorized, executed and delivered by such party and constitutes a legal, valid and binding obligation of such party, enforceable against it in accordance with the terms of this Agreement. SECTION 6.02. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of their terms hereof, in addition to any other remedy at law or in equity. 5 SECTION 6.03. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any such term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Investors. Each Consenting Stockholder shall be bound by any amendment or waiver authorized by this Section 6.03, whether or not such Consenting Stockholder shall have consented thereto. SECTION 6.04. Notices. All notices and other communications provided for herein shall be in writing and shall be delivered by hand, telecopied or sent by certified or registered mail, return receipt requested, postage prepaid, addressed in the manner set forth on the signature pages of this Agreement (or in such other manner for a party as shall be specified in a notice given in accordance with this Section 6.04). All such notices shall be conclusively deemed to be received and shall be effective, if sent by hand delivery or telecopied, upon receipt, or if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. SECTION 6.05. Benefit: Successors and Assigns. Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that this Agreement shall not inure to the benefit of any prospective transferee unless such prospective transferee shall have agreed in writing to be bound by the terms of this Agreement. No Consenting Stockholder may assign any of its rights hereunder to any person other than a transferee that has complied with the requirements of this Section 6.05 in all respects. Nothing in this Agreement either express or implied is intended to confer on any person other than the parties hereto and their respective successors and permitted assigns, any rights, remedies or obligations under or by reason of this Agreement. SECTION 6.06. Termination. This Agreement shall terminate on December 1, 2010, or such earlier time as either (i) the Investors collectively no longer own at least 10% of the Common Stock of the Company on a fully diluted basis; or (ii) the Company has completed a public offering of its securities resulting in net proceeds to the Company of at least $10,000,000. SECTION 5.07. Miscellaneous. This Agreement sets forth the entire agreement and understanding among the parties hereto, and supersedes all prior agreements and understandings, relating to the subject matter hereof. If any term or other provision of this Agreement is held invalid, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect, unless the term or provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement and shall not limit or otherwise affect the meaning hereof. This Agreement shall be governed by the law of the State of New York. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one instrument IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in their individual capacity or caused it to be duly executed by their respective authorized signatories thereunto duly authorized as of the day and year first above written. YOUNETWORK CORPORATION By:/s/ Kyle Taylor ---------------------------------- - ------------------------------------- Name: Kyle Taylor Title: 6 Kleopatra Georgiades By: /s/ Achilles Georgiades /s/ Don S. Senerath - --------------------------------------- --------------------------- Achilles Georgiades, Don S. Senerath her Attorney in Fact /s/ Dalia Silverman --------------------------- Dalia Silverman 7 EX-10.2 8 STOCK AND WARRANT PURCHASE AGREEMENT This Stock and Warrant Purchase Agreement ("Agreement"), dated as of December 4, 1998, by and among YOU NETWORK, CORPORATION, a New York corporation, having an office at 220 East 23rd Street, Suite 607, New York, NY 10016 ("The Company"); DALIA SILVERMAN, residing at 200 West 58th Street, New York, NY 10019 ("Silverman"); KLEOPATRA GEORGIADES, having an address at 44 Andromahis Street, Nicosia, Cyprus ("Georgiades" and together with Silverman the "Buyers and each a "Buyer"); KYLE TAYLOR, the President of the Company residing at 115 East 72nd Street, New York, NY 10021 ("Taylor"); and DON SENERATH, the Chief Executive Officer of the Company, residing at 155 East 31st, New York, NY 10016 ("Senerath" and collectively with Taylor The "Management Shareholders"). R E C I T A L S WHEREAS, the Company is engaged in the development of an Internet consumer buying network; WHEREAS, each Buyer has agreed to purchase and the Company has agreed to sell to each Buyer 13.5 shares of Common Stock of the Company, no par value (an aggregate of 27 shares of Common Stock referred to herein as the "Purchased Shares") pursuant to the terms and conditions hereinafter set forth in this Agreement which Purchased Shares shall, upon issuance equal 27% of all issued and outstanding common stock of the Company on a fully diluted basis;. WHEREAS, the Company has agreed to issue to the Buyers Common Stock purchase warrants ("Purchase Warrants") to purchase in the aggregate such number of shares of Common Stock, at nominal consideration, as shall equal, in the aggregate when added to the Purchased Shares, 27% of the issued and outstanding Common Stock of 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 sale proceeds received by the Company following the date of the Stock Purchase Agreement; WHEREAS, the Company and the Buyers have agreed that in the event that either Sterling Capital LLC and/or Peter Sahagen (the "Additional Investors") shall purchase common stock (the "Additional Common Stock") in the Company within 30 days following the Closing Date herein, the Buyers and the Management Shareholders shall surrender a portion of their outstanding shares to the Company as provided herein and the Buyers shall exchange their Purchase Warrants for new warrants as provided herein. NOW, THEREFORE, in consideration of the premises and mutual representations, warranties and covenants contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings specified or referred to in this Article I: "NOVEMBER 11, BALANCE SHEET" -- the balance sheet for the Company at November 11, 1998 and for the ten months then ended. "BALANCE SHEET DATE" - November 11, 1998. "BREACH" -- a "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been (a) any material inaccuracy in or breach of, or any failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision, or (b) any true and valid claim (by any Person) or other occurrence or circumstance that is or was inconsistent with such representation, warranty, covenant, obligation, or other provision, and the term "Breach" means any such inaccuracy, breach, failure, claim, occurrence, or circumstance. "CLOSING" -- as defined in Section 2.03. "CLOSING DATE" -- the date and time as of which the Closing actually takes place. "COMPANY" -- as defined in the Recitals hereto. "CONSENT" -- any approval, consent, ratification, waiver, or other authorization (including, but not limited to, any Governmental Authorization). "CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by and/or in connection with this Agreement. "ENCUMBRANCE" -- any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, 2 including any restriction on use, voting, transfer (other than restrictions imposed by applicable federal or state securities laws), receipt of income, or exercise of any other attribute of ownership. "ERISA" -- the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and any regulations and rules issued thereunder. "FINANCIAL STATEMENTS" -- the balance sheet for the Company . "GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement, including, but not limited to, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "GOVERNMENTAL BODY" -- any: (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "IRC" -- the Internal Revenue Code of 1986, as amended, or any successor law, and any rules or regulations thereunder . "IRS" -- the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a particular fact or other matter if (I) such individual is actually aware of such fact or other matter; or (ii) if such individual upon the exercise of due inquiry would be expected to be aware of such fact or matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, executive, manager, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or matter. 3 "LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign, international, multinational, Order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty in effect and applicable to the companies as of the date of this Agreement. "LIABILITIES". -- As determined in accordance with GAAP. "ORDER" -- any award, decision, injunction, writ, judgment, order, stipulation, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. "ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person. "ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of incorporation (or similar organizational documents) and the bylaws (or similar document) of a corporation; (b) the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (d) the operating agreement and certificate of formation of a limited liability company; (e) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (f) any amendment to any of the foregoing. "PERSON" -- any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body. "PROCEEDING" -- any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "PURCHASE WARRANTS" -- as defined in the Recitals to this Agreement. "RELATED PERSON" -- with respect to a particular individual: (a) each other member of such individual's immediate Family; (b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's immediate Family; (c) any Person in which such individual or members of such individual's immediate Family hold (individually or in the aggregate) a Material Interest; and 4 (d) any Person with respect to which such individual or one or more members of such individual's immediate Family serves as a director, officer, partner, member, executor, or trustee (or in a similar capacity). With respect to a specified Person other than an individual: (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, member, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; (e) any Person with respect to which such specified Person serves as a partner, manager or a trustee (or in a similar capacity); and (f) any Related Person of any individual described in clause (b) or (c). For purposes of this definition, (a) the "Family" of an individual includes (I) the individual, (ii) the individual's spouse, (iii) any other natural person who is related to the individual or the individual's spouse as a mother, father, brother or sister, and (iv) any other natural person who resides with such individual, other than a natural person employed by or rendering services for consideration to such individual or his/her family and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of voting securities or other voting interests representing at least 5% of the outstanding voting power of a Person or equity securities or other equity interests representing at least 5% of the outstanding equity securities or equity interests in a Person. "SUBSIDIARY" -- with respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect (either directly or indirectly) a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct (either directly or indirectly) the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries. "TAX" -- any tax however denominated, including any interest, penalties or other additions to tax that may be payable in respect thereof, imposed by any Governmental Body, including, without limitation, all income or profit taxes, payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, 5 franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and any other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, required to be paid, withheld or collected. "TAX RETURN" -- any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. ARTICLE II PURCHASE AND SALE 2.01 PURCHASE AND SALE OF SHARES AND WARRANTS. Upon the terms and subject to the conditions of this Agreement and in consideration of the Purchase Price, the Company shall sell, assign, transfer and deliver to each Buyer and each Buyer shall purchase from the Company (I) thirteen and one half (13.5) shares of Common Stock of the Company, and in the aggregate, twenty seven (27) shares of Common Stock ("the Shares"); and the Purchase Warrants. 2.02 PURCHASE PRICE. The aggregate purchase price ("Purchase Price") for the Shares and the Purchase Warrants shall be $200,000 ($100,000 for each Buyer) the ("Purchase Price"). 2.03 CLOSING. The Closing shall take place upon the execution of this Agreement at the offices of Silverman, Collura, Chernis & Balzano, P.C. ARTICLE III AGREEMENT TO RESTRUCTURE 3.01 The Company, the Buyers and the Management Shareholders agree that in the event that either Sterling Capital LLC and/or affiliates thereof, or Peter Sahagen and/or his affiliates (collectively and /or singularly referred to herein as the "Additional Investors") shall, within 30 days of the Closing purchase additional common stock in the Company (the "Additional Common Stock"), the capital stock of the Company shall be restructured in order that following the issuance and sale of the Additional Common Stock, the shareholders of the Company shall respectively own the following percentages of outstanding common stock: (I) in the event the Additional Investors shall pay $100,000 for the Additional Common Stock: Management Shareholders - 70% Buyers - 20% Additional Investors - 10% 6 (ii) in the event the Additional Investors shall pay $200,000 for the Additional Common Stock: Management Shareholders - 60% Buyers - 20% Additional Investors - 20% 3.02 In the event that $200,000 of Additional Common Stock is sold by the Company to the Additional Investors, the Purchase Warrants shall expire and be of no further force or effect. 3.03 in the event that $100,000 of Additional Common Stock is sold by the Company to the Additional Investors, upon sale of such Additional Common Stock to the Additional Investors, the Buyers shall surrender the Purchase Warrants to the Company in exchange for new warrants (the "New Warrants") which shall be issued to the Buyers and to the Additional Investors. The New Warrants will entitle the Buyers and the Additional Investors, pro rata to their respective shareholdings, 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 and the Additional Shares: 30% of the issued and outstanding common stock of the Company on a fully diluted basis immediately following the sale of the first $400,000 of common Stock following the date of sale of stock to the Additional Investors. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE COMPANIES The Company and each of the Management Shareholders represent and warrant to the Buyers as follows: 4.01. ORGANIZATION- CHARTER AND BY-LAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has the corporate power and authority to own and lease its properties, conduct its business, to enter into this Agreement and the Contemplated Transactions and perform its obligations hereunder. The Company has furnished to Buyer a complete and correct copy of its Organizational Documents, each as amended to date, each of which is in full force and effect. The Company is not in violation of any of the provisions of its Organizational Documents except where such violations would not, taken as a whole, have a material adverse effect on the business of the Company. 4.02. AUTHORIZATION AND ENFORCEABILITY. This Agreement has been duly executed and delivered by, and when executed and delivered by the Company shall constitute, the legal, valid and 7 binding obligation of the Company, enforceable against it in accordance with its respective terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws now or hereafter in effect relating to creditors' rights, and equitable principles. 4.03. SHARES; CAPITALIZATION. (a) The authorized capital stock of the Company consists solely of the following:
Authorized Shares Shares of Issued and Par No. of Shares Common Stock Outstanding Value (a) Shareholders of Record Owned of Record - ------------ ----------- ----- -------------------------- --------------- 200 73 None Kyle Taylor 36.5 Don Senerath 36.5
(b) None of the Shares are held in treasury. All of the Shares will be conveyed to the Buyers free and clear of any and all liens, claims or encumbrances. All of the Shares will be validly issued, fully paid and nonassessable. There are no options, warrants or other rights, agreements, arrangements for commitments of any character to which the Company is a party or obligating the Company to issue or sell any shares of capital stock of, or other equity interests in, the Company. There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any of the capital stock of the Company or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. The Company is not a party to any agreement granting registration rights to any Person with respect to any equity or debt securities of the Company. 4.04. SUBSIDIARIES AND INVESTMENTS. The Company does not own any shares of capital stock of or equity interests in any subsidiary, corporation, partnership, joint venture or other entity. 4.05. NO VIOLATION OF LAWS OR AGREEMENTS; CONSENTS. (a) None of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby or thereby will: (I) contravene any provision of the Organizational Documents of the Company, (ii) result in an event of default (or an event that would, with the passage of time or the giving of notice or both, constitute an event of default) under the terms of any material indenture, mortgage or other material Contract to which the Company is a party, or (iii) violate any law or violate any judgment, Order or Legal Requirement to which the Company is subject. No material consent which has not been received or which will not be obtained prior to closing is required in connection with the execution and delivery by any Seller and any Company of this Agreement and the completion of the Contemplated Transactions; No consent or approval by or notice to any Person is required in a connection with the consummation of this agreement and/or change of control of the Company. 4.06. FINANCIAL STATEMENTS. Attached hereto are the Financial Statements. The Financial Statements present fairly the financial condition, results of operations and cash flows of the Company as of the dates thereof or for the periods covered thereby. 8 4.07. ABSENCE OF UNDISCLOSED LIABILITIES. The Company has no liability or obligation which would be required to be reflected on the Financial Statements and would have a material adverse effect on the business of the Company. 4.08. NO CHANGES. Since the Balance Sheet Date, each of the Companies has conducted its business only in the Ordinary Course of Business. Without limiting the generality of the foregoing sentence, since the Balance Sheet Date, except as disclosed in this Agreement, there has not been any: (I) material uninsured damage to any property owned or leased by the Company; (ii) labor strike; (iii) declaration or payment of any dividend or redemption of any shares of capital stock; (iv) increases in the salaries or bonuses of any employee of the Company outside of the Ordinary Course of Business or payment of any bonuses to officers of the Company; (v) capital expenditures or other asset acquisition or expenditure out of the Ordinary Course of Business; (vi) issuance or sale of stock of the Company or options to purchase stock of the Company; (vii) contract entered into by the Company which is material to its operations; (viii) any material encumbrance attaching to assets of the Company; (ix) any agreement or commitment to do any of the foregoing. 4.09. TAX MATTERS. The Company has duly filed with the appropriate federal, state and local governmental agencies all Tax Returns and reports which are required to be filed, and have paid in full, or made adequate provision for, all Taxes, interest, penalties. assessments and deficiencies owed by it. Adequate accrual has been made in the Financial Statements for all the accrued and unpaid federal, state and local Taxes (including interest and penalties) of the Company for the period then ended whether or not yet due and payable and whether or not disputed. The Company has not executed or filed with the IRS or any other taxing authority, any agreement extending the period for assessment or collection of any taxes. In the last five tax years none of the Tax Returns of the Company has been audited by any governmental agency and the Company has not received notice of any intention to audit any of such returns. The Company is not party to any pending action or Proceeding, nor to the knowledge of Seller, is any action or Proceeding threatened, by any Governmental Body for assessment or collection of taxes, and no claim for assessment or collection of taxes, has been asserted against the Company. 4.10. TITLE TO AND CONDITION OF PROPERTIES AND ASSETS. All machinery and equipment and fixtures owned or leased by the Company, are described in Schedule 4.10 hereto. The Company has good and marketable title to all of its properties and assets including those reflected in the Financial Statements and Schedule 4.10 hereto, subject to no mortgage, pledge, lien, conditional sale agreement, security interest, Encumbrance or other charge. 4.11. NO PENDING LITIGATION OR PROCEEDINGS. There are no actions, suits, investigations, claims or proceedings (collectively, "Claims") of any nature or kind whatsoever pending or, to the best knowledge of the Sellers and the Companies, no Claims are threatened, nor is the Company or the Management Shareholders aware of any occurrence or set of facts which with the passage of time could give rise to a Claim which would have a Material Adverse Effect on the Company, the Shares, the Contemplated Transactions or the material Contracts of the Company, at law or in equity, by or before any Governmental Body. There are presently no material outstanding judgments, decrees or orders of any governmental body against or affecting the Company. 9 4.12. CONTRACTS. Schedule 4.12 identifies each material lease, contract, indenture, mortgage or other agreement to which the Company is a party, each of which is a legal, valid and binding obligation of the Company and is in full force and effect. 4.13. CONTRACT COMPLIANCE. The Company is not in default in any material respect under any material lease, contract, indenture, mortgage or other agreement (collectively, the "Contracts"). 4.14. TRANSACTIONS WITH RELATED PARTIES. Neither the Management Shareholders nor any Related Persons thereof, is party to any agreement with the Company, is indebted to the Company, or is due any debt or obligation from the Company. 4.15. BANKING RELATIONS. All of the bank accounts letters of credit, loans and other transactions which the Company has with any banking institution are described in Schedule 4.15 hereto, indicating with respect to each of such arrangement the type of arrangement maintained and the person or persons authorized to act on behalf of the Company in respect thereof and identification of each account maintained by the Company. The Company has not given any person a power of attorney to act on its behalf with respect to such arrangements. 4.16. BROKERS AND FINDERS FEES. Neither the Management Shareholders nor the Company has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the Contemplated Transactions. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Sellers as follows: 5.01. NO VIOLATION OF LAWS OR AGREEMENTS. None of the execution and delivery of this Agreement, or the consummation of the Contemplated Transactions will: (I) result in an event of default (or an event that would, with the passage of time or the giving of notice or both, constitute an event of default) under any of the terms of any material indenture, mortgage or other contract to which any Buyer is a party, or (ii) violate any law or violate any judgment or order of any governmental body to which any Buyer is subject. No material consent is required in connection with the execution and delivery by any Buyer of this Agreement. 5.02. INVESTMENT REPRESENTATIONS -- (I) Each Buyer has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering, and all such questions, if any, have been answered to the full satisfaction of each Buyer; (ii) Each Buyer has such knowledge and expertise in financial and business matters that he is capable of evaluating the merits and risks involved in an investment in the Company; (iii) Except as set forth herein, no representations or warranties have been made by the Company, or any agent, employee or affiliate of the Company, to any Buyer and in entering 10 into this transaction each Buyer is relying solely upon information developed from his independent investigation of the Company; (iv) Each Buyer understands that (A) the Common Stock and Purchase Warrants issued hereunder (collectively, the "Shares") have not been registered under federal securities laws or the securities laws of any state, based upon an exemption from such registration requirements for non-public offerings to "accredited investors"; (B) the Shares are and will be "restricted and securities", as said term is defined in Rule 144 of the Rules and Regulations promulgated under the Act; (c) the Shares may not be sold or otherwise transferred unless they have been first registered under the federal securities laws and all applicable state securities laws, or unless exemptions from such registration provisions are available with respect to said resale or transfer; (D) the Company is under no obligations to register the Shares, or to take any action to make any exemption from any such registration provisions available; (E) the certificates for the Shares will bear a legend to the effect that the transfer of the same represented thereby is subject to the provisions hereof; and (F) sop transfer instructions will be placed with the transfer agent for the Shares; (v) Each Buyer is acquiring the Shares solely for his own account, for investment purposes only, and not with a view towards the resale or distribution thereof; (vi) Each Buyer is an "accredited investor", as such term is defined in Regulation D of the Rules and Regulations promulgated under the Securities Act of 1933, as amended. 5.03. BROKERS AND FINDERS FEES. None of the Buyers has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the Contemplated Transactions. ARTICLE VI CERTAIN COVENANTS 6.01. KEY MAY LIFE INSURANCE POLICIES. Within 30 days of the Closing Date the Company shall use its best efforts to purchase a key man life insurance policy on the life of Senerath in the amount of $500,000. 6.02. LEGENDS. It is understood that the certificates evidencing the Shares shall bear the following legends: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THESE SECURITIES MAY NOT BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. 6.03. COVENANT NOT TO COMPETE. 11 (a) For a period of two (2) years from the date of termination of employment of any Management Shareholder with the exception of termination by the Company without substantial cause, such Management Shareholder agrees for himself that he will not, directly or indirectly, (I) 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 the Company; (ii) solicit or endeavor to entice away from the Company, any Person who is, or was during the then most recent 6 month period, employed by or associated with the Company,; (iii) solicit or endeavor to entice away from the Company, any person or entity who is, or was within the then most recent 6 month period, a customer, client or prospect of the Company, or (iv) be a member of a partnership or stockholder, investor, creditor, officer, director, employee, agent, associate or consultant of any person, partnership or corporation which does any of the acts described herein. Management Shareholders acknowledge and agree that the remedies available to the Company and Buyers at law in the event of a breach of any of her covenants in this section will be inadequate, and Buyers and the Company or any successor shall be entitled to injunctive relief for the enforcement of this section, in addition to all other remedies which may be available to Buyers or the Company. (b) In the event a Management Shareholder is terminated by the Company without substantial cause, as a condition to the enforcement of Section 6.03(a), he 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. For purposes of this Section, a termination of a Management Shareholder for substantial cause shall mean a termination for one or more of the following reasons: (1) Fraud, misappropriation or embezzlement; or (2) Gross neglect of duties or an act of gross misconduct which has a detrimental effect on the Company; or (3) Conviction by a court of competent jurisdiction of a felony or a crime involving moral turpitude; or (4) Material breach of Section 6.04 of this Agreement; or (5) Any act of dishonesty or disloyalty constituting a violation of Executive's fiduciary responsibility to the Company. 6.04. CONFIDENTIALITY. (a) The Management Shareholders and the Buyers acknowledge that certain proprietary and/or confidential information concerning the Company ("Information") has or may be disclosed to them in the course of their association with the Company as employee, shareholder, officer and/or director. The Management Shareholders and the Buyers covenant and agree that they shall: (I) hold the Information in confidence, exercising a degree of care not less than the care used by Management Shareholders to protect their own proprietary 12 or confidential Information that Management Shareholders do not wish to disclose; and (ii) restrict disclosure of the Information solely to those employees, agents representatives and consultants with a need to know in order to complete the Contemplated Transactions, and not disclose it to any other person; (b) The Information shall be deemed the property of the Company and, upon request, the Management Shareholders and/or Buyer will return all Information received in tangible form to the disclosing party or will destroy all such Information at the Company"s direction. (c) The Management Shareholders and/or Buyers acknowledge that in the event of any unauthorized disclosure, the damages incurred by the Company and the Buyers may be difficult if not impossible to ascertain; and that the Company may seek injunctive relief as well as monetary damages for such improper disclosure. ARTICLE VII CONDITIONS TO CLOSING 7.01. DELIVERIES AND PROCEEDINGS AT CLOSING. (a) DELIVERIES BY SELLERS. The Company shall deliver or cause to be delivered to the Buyers at the Closing: (I) Certificates representing the Shares and Warrants duly endorsed in negotiable form. (ii) Certificates of the appropriate public officials to the effect that the Company is validly existing corporation in good standing under the laws of the state of incorporation. (iii) Certificate of the Secretary of the Company setting forth all resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the performance by the Company of the Contemplated Transactions. (b) DELIVERIES BY THE BUYERS. Each of the Buyers shall deliver or cause to be delivered to the Company at the Closing: (I) The Purchase Price, by check or wire transfer of good funds to an account designated by the Company; ARTICLE VIII INDEMNIFICATION 8.01. INDEMNIFICATION BY COMPANY AND MANAGEMENT SHAREHOLDERS. (a) The Company and Management Shareholders shall jointly and severally indemnify, defend, save and hold Buyers harmless from and against all demands, claims, expenses 13 (including reasonable attorneys' fees but excluding indirect, incidental or consequential damages incurred by Buyer), losses or actions (collectively "Claims") incurred by Buyer or the Company in connection with (I) any material inaccuracy or breach of the representations and warranties or schedules made by Management Shareholders or the Company in this Agreement or any material breach of any of the covenants or agreements made by Management Shareholders or the Company in this Agreement; or (ii) any Claims listed or referred to in the Schedules incorporated therein unless and to the extent that such Claims are paid by applicable insurance. (b) The indemnification provided for in subparagraph (a) shall be limited to Claims which are made within two years from the date of Closing. 8.02. INDEMNIFICATION BY BUYERS (a) The Buyers shall severally indemnify, defend, save and hold the Company harmless from and against all demands, claims, expenses (including reasonable attorneys' fees but excluding indirect, incidental or consequential damages incurred by the Company), losses or actions (collectively "Claims") incurred by the Company in connection with (I) any material inaccuracy or breach of the representations and warranties made by Buyers in this Agreement or any material breach of any of the covenants or agreements made by Buyers in this Agreement. (b) The indemnification provided for in subparagraph (a) shall be limited to Claims which are made within two years from the date of Closing. ARTICLE IX MISCELLANEOUS 9.01 CONSTRUCTION. As used herein, unless the context otherwise requires: (I) references to "Article" or "Section" are to an article or section hereof; (ii) all "Exhibits" and "Schedules" referred to herein are to Exhibits and Schedules attached hereto and are incorporated herein by reference and made a part hereof; (iii) "include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import; (iv) "knowledge" means actual knowledge; (v) the headings of the various articles, sections and other subdivisions hereof are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. 9.02. COSTS AND EXPENSES. Buyers and the Company shall each pay their respective expenses incurred in connection with this Agreement and the Contemplated Transactions hereby, except as otherwise specifically provided herein. 9.03. GOVERNING LAW AND JURISDICTION. This Agreement will be governed by, and construed in accordance with, the laws of the State of New York, without regard to conflict of law principles. The Buyer, the Sellers and the Company submit to the jurisdiction of the courts of the state of New York located in New York City, the courts of the United States of America for the Eastern District of New York, and appellate courts from any thereof, and agree that such courts are convenient forums with respect to any dispute arising in connection with or under the terms of this Agreement. 14 9.05. FURTHER ASSURANCES. The Company shall, at any time and from time to time on and after the Closing Date, upon request by Buyers and without further consideration, take or cause to be taken such actions and execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments, documents, transfers, conveyances and assurances as may be required or desirable for the better conveying, transferring, assigning, delivering, assuring and confirming the Shares to Buyer and execute any documents required with respect to the sale of the Shares pursuant to this Agreement. 9.06. NOTICES. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed to have been duly given or made (I) the second business day after the date of mailing, if delivered by registered or certified mail, postage prepaid, return receipt requested, (ii) upon delivery, if sent by hand delivery, (iii) upon delivery, if sent by prepaid overnight carrier, with a record of receipt, or (iv) the next day after the date of dispatch, if sent by cable, telegram, overnight carrier, facsimile or telecopy (with a copy simultaneously sent by registered or certified mail, postage prepaid, return receipt requested), to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): (I) if to Buyers, to: Dalia Silverman 200 West 58th Street New York, NY 10019 Kleopatra Georgiades c/o Stallion Inc. 150 West 30th Street New York, NY 10001 Sterling Capital LLC 350 Park Avenue 14th Floor New York, NY 10022 with a required copy to: Peter Silverman, Esq. 381 Park Avenue South Suite 1601 New York, NY 10016 Fax: (212) 779-8858 (ii) if to the Company: You Network, Inc. 220 East 23rd Street, Suite 607 New York, NY 10016 Attn: Kyle Taylor 15 9.07. ASSIGNMENT; GOVERNING LAW. This Agreement and all the rights and powers granted hereby shall bind and inure to the benefit of the parties hereto and their respective permitted successors, heirs, personal representatives and permitted assigns. This Agreement and the rights, interests and obligations hereunder may not be assigned by any party hereto without the prior written consent of the other parties hereto provided that Buyer may assign this Agreement to an affiliate of the Buyer. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to its conflict of law rules. 9.08. AMENDMENT AND WAIVER; CUMULATIVE EFFECT. To be effective, any amendment or waiver under this Agreement must be in writing and be signed by the party against whom enforcement of the same is sought. The rights and remedies of the parties hereto are cumulative and not exclusive of the rights and remedies that they otherwise might have now or hereafter, at law, in equity, by statute or otherwise. 9.09. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement and the schedules and exhibits hereto set forth all of the promises, covenants, agreements, conditions and undertakings between the parties hereto with respect to the subject matter hereof, and supersede all prior or contemporaneous agreements and understandings, negotiations, inducements or conditions, express or implied, oral or written, including the letter of intent, as amended. This Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 9.10. SEVERABILITY. If any term or other provision of this Agreement is held by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced under any rule of law in any particular respect or under any particular circumstances, such term or provision shall nevertheless remain in full force and effect in all other respects and under all other circumstances, and all other terms, conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Contemplated Transactions hereby is not affected in any manner materially adverse to any party. Upon final determination by a court of competent jurisdiction that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the Contemplated Transactions hereby are fulfilled to the fullest extent possible. 9.11. COUNTERPARTS. This Agreement may be executed in two or more facsimile counterparts, each of which shall be deemed to be an original but all of which together shall be deemed to be one and the same instrument followed by exchange of original execution documents between the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and Year first above written. YOU NETWORK, INC. 16 By: /s/ Kyle Taylor ------------------------- ---------------------------- Kyle Taylor /s/ Don Senerath /s/ Dalia Silverman - ----------------------------- ---------------------------- Don Senerath Dalia Silverman Kleopatra Georgiades By: /s/ Achilles Georgiades ------------------------- Achilles Georgiades, her Attorney in Fact EX-10.3 9 AGREEMENT BETWEEN MUZE INC. AND YOUNETWORK ATTACHMENT 1 TERMS AND CONDITIONS EFFECTIVE DATE: o January 4, 1999 TERM: o One (1) years from effective date. o Agreement will renew automatically for successive one (1) year periods unless either of the parties notifies the other in writing of its desire to terminate the Agreement at least sixty (60) days before the end of the term or any successive term. o Upon thirty (30) days written notice to Muze that licensee is no longer in the business of selling products listed in the Muze database Products, Licensee may terminate this Agreement. Any such termination shall not extinguish any of Licensee's obligations accrued prior to the termination date. PRODUCTS, FORMAT, MEDIUM: o CHECK ALL THAT APPLY o [X] Muze for Music (database only), on-line version o [X] Muze for Video (database only), on-line version o [X] Muze for Books (database only), on-line version o [ ] Encyclopedia of Popular Music (database only), on-line version SITES, HARDWARE, AND OTHER LIMITATIONS: o Licensee's use of the Products shall be limited to the following website(s) for on-line sales transactions (a separate license fee may be due for each site; see below for definition of single site): o List URL(s): www.younetwork.com o The Products may only run on a single server. Multiple URL's linked to the same site for on-line sales transactions generally constitute a single site, as do mirrored on-line sales transactional sites. o Licensee shall not offer, or knowingly permit others to offer, public internet access terminals at any retail location where its products are sold. o Licensee shall not display to end users the catalog numbers (except for catalog numbers for classical music) or UPC numbers that may be contained in the Products. PAYMENT AND TERMS: o Fees shall be payable beginning the earlier of the date Licensee's site (URL listed above) is running the Products and is accessible to Licensee's end users via the internet, or March 1, 1999. Attachment 1 to License Agreement Muze Confidential Page 1 of 3 o The minimum monthly license fee is $1,000.00 per Product for each of Muze for Music, Muze for Video and Muze for Books. Minimum fees shall be paid on the first day of each month for which they are due. o For each Product licensed, if greater than the monthly minimum, the monthly license fee shall be calculated based on the following rates, and shall be due by the fifteenth day of the following month, with a credit for the minimum already paid: o for each on-line sale of any Licensee product listed in the database of the Muze for Music Product (plus the premium if the Agreement also covers ): --------------------------------------------------------------- ON-LINE SALES PRICE PER UNIT (PER MONTH) SOLD --------------------------------------------------------------- Sale of first 0-14,999 units $.25 --------------------------------------------------------------- Sale of succeeding 15,000 - 24, 999 units $.22 --------------------------------------------------------------- Sale of succeeding 25,000 - 34,999 units $.19 --------------------------------------------------------------- Sale of succeeding 35,000 units and over $.15 --------------------------------------------------------------- [By way of explanation, in each calendar month, on-line product sales of 0-14,999 units are billed at $.25 per; on-line product sales of 15,000-24,999 units are billed at $.22 per unit); on-line product sales of 25,000-34,999 units are billed at $.19 per unit and on-line product sales of 35,000 units and over are billed at $.15 per unit] o for each on-line sale of any Licensee product listed in the database of the Muze for Video Product: --------------------------------------------------------------- ON-LINE SALES PRICE PER UNIT (PER MONTH) SOLD --------------------------------------------------------------- Sale of first 0-14,999 units $.25 --------------------------------------------------------------- Sale of succeeding 15,000 - 24, 999 units $.22 --------------------------------------------------------------- Sale of succeeding 25,000 - 34,999 units $.19 --------------------------------------------------------------- Sale of succeeding 35,000 units and over $.15 --------------------------------------------------------------- o for each on line sale of any Licensee product listed in the database of the Muze for Books Product: two percent (2%) of Licensee's retail price of all such sales o If Licensee delivers any of its products by digital download (as opposed to physical delivery on a tangible medium), the license fee for such sales shall be separately accounted for as follows: o Digital download sales shall not affect the minimum fees set forth above. o The monthly license fee for such sales shall be two percent (2%) of the retail price of all such sales, due the fifteenth day of the following month. o Licensee shall report its sales to Muze monthly by number of items sold. Licensee shall maintain records (including title, artist and format) sufficient to back up such reports for a rolling three-year period. o Muze may audit Licensee's records once each year. If an audit shows an underpayment of more than five percent (5%) for any month, Licensee shall pay the reasonable costs of the audit. o Licensee shall not have any interest in any other website that engages in the sale or fulfillment of products listed in the Product databases, unless Licensee ensures that Muze receives all fees which would otherwise be due Muze based on transactions (as set forth above) at such alternative locations. Attachment 1 to License Agreement Muze Confidential Page 2 of 3 SERVICES: o For so long as Licensee is in compliance with its obligations under the o Agreement, Muze will provide updates of data and/or software relevant to the licensed Products approximately every week for Muze for Music, every two weeks for Muze for Video and every month for Muze for Books. o Muze will provide the updates in one of Muze's standard formats/media, as agreed by the parties. Licensee shall return each update (unless updates are downloaded by agreement with Muze) before receiving the next update. o Any custom work provided by Muze shall be at Muze's standard rates pursuant to an authorized work order. RIGHTS NOTICES: o Licensee shall ensure that the following credits and rights notices appear on each page of its website from which end users may access the Products: o For Muze for Music: "Copyright 1948-(current year) Muze Inc. For personal non-commercial use only. All rights reserved." o For Muze for Video: "Copyright 1981-(current year) Muze Inc. For personal non-commercial use only. All rights reserved." o For Muze for Books: "Copyright 1995-(current year) Muze Inc. For personal non-commercial use only. All rights reserved." o On all pages from which the Products may be accessed: The Muze logo, as supplied electronically with the Products. Attachment 1 to License Agreement Muze Confidential Page 3 of 3 LICENSE AGREEMENT Based on their respective representations, warranties, covenants, rights, and responsibilities, set forth below, Muze Inc., at 304 Hudson Street, 8th Floor, New York, NY 10013, Fax No. 212.741.1246, a New York corporation, and YouNetwork Corp. at 220 East 23rd St., Suite 607,New York, NY 10010, Fax No. 212.576.2039 a New York corporation, enter into this License Agreement as follows: 1. DEFINITIONS "Agreement" means this License Agreement, including its attachment(s). "Terms and Conditions" means the specific additional terms and conditions of this Agreement set forth in Attachment 1 (as may be amended from time to time). "Effective Date" means the date this Agreement enters into force, noted in the Terms and Conditions. "Hardware" means the computer and other hardware on which the Products run (the Hardware is listed in Attachment 1 unless Muze supplies any of the Hardware, in which case Hardware and the terms of purchase are set forth in an Attachment 2). "Licensee" means YouNetwork Corp. "Muze" means Muze Inc. "Products" means data and/or software and periodic updates licensed by Muze to Licensee under this Agreement, as set forth in the Terms and Conditions. "Services" means the services provided by MUZE to Licensee under this Agreement, if any, as described or provided for in the Terms and Conditions. 2. GRANT OF LICENSE Muze grants Licensee a non-exclusive, non-transferable, limited right to use the Products strictly in accordance with all the provisions of this Agreement. This license shall be immediately terminable by Muze for any material breach by Licensee of its obligations under this Agreement. Unless terminated by Muze as provided for above, the license and this Agreement shall continue in force for the time period set forth in the Terms and Conditions. Should Muze terminate this Agreement because of a material breach by Licensee, it will not refund any portion of the license fees or other fees (as provided for in the Terms and Conditions) already paid by Licensee or already accrued at the time of termination. Unless otherwise provided in the Terms and Conditions, this Agreement shall automatically be extended for successive one-year periods at the end of the initial term. All ownership rights in the Products and any related know-how, and in any works that may be created by Muze as part of the Services, shall remain with Muze. Licensee shall not contest Muze's ownership rights in the Products or any such works. 3. LICENSEE'S OBLIGATIONS Licensee shall: a. Use the Products only on the Hardware, at the locations, and according to the conditions specified in the Terms and Conditions. b. Make all payments required by the Terms and Conditions in a timely manner. c. Comply with all applicable laws and regulations regarding use of the Products, including any laws or regulations relating to sale of goods and services and to privacy rights. Licensee shall be responsible for determining the existence and applicability of any such laws and regulations and for obtaining any necessary permits or approvals for use of the Products. d. Restrict its end users to non-commercial use of the Products and notify each of its end users of the Products that the Products are owned by Muze and may not be copied or used without Muze's consent. Licensee shall incorporate the rights notices set forth in the Terms and Conditions in its end-user interface. e. Keep confidential all of Muze's proprietary information provided to it under this Agreement (or under any previous Confidentiality Agreement) during the term of this Agreement and for ten (10) years after termination. This obligation shall apply to any information identified by Muze as confidential and any information that Licensee knows, or should know under the circumstances, is proprietary. Muze proprietary information may include the Products, documentation, technical information, business or technical concepts or designs. Licensee's obligation Muze Confidential Page 1 of 3 shall not apply to information: (a) lawfully in the public domain, (b) Licensee lawfully possessed before disclosure by Muze, or (c) lawfully disclosed to Licensee by a third party without obligation of confidentiality. Upon termination of this Agreement, Licensee shall return or destroy, at Muze's election, any Muze proprietary information still in its possession. f. Upon termination of this Agreement, return or destroy, at Muze's election, the Products and any copies, as well as any matter that incorporates any other Muze proprietary or confidential information. g. Permit Muze to use Licensee's name as a customer reference and prominently feature a link to Muze's web site if the Products are available to end users on the internet pursuant to the Terms and Conditions. h. Indemnify Muze against any claims made against Muze (or its affiliates, officers, directors, employees, or contractors) by third parties (including by any of Licensee's employees or contractors) arising out of (a) content, software, or hardware not provided by Muze, (b) Licensee's breach of any of its obligations under this Agreement, or (c) any illegal or unauthorized use of the Products by Licensee, its employees, contractors, or end users. Muze shall promptly notify Licensee of any such claim. Licensee shall conduct the defense of any such claim, at its own expense, subject to Muze's right to participate and to approve any settlement that purports to bind Muze in any way. Licensee shall not: a. Use the Products other than at the sites and in the manner set forth in the Terms and Conditions. b. Reverse engineer, decompile, or disassemble the Products, nor shall it modify the Products or create any derivative works. c. Assign, sell, rent, timeshare or use the Products in any way not expressly permitted in this Agreement. d. Sublicense the Products to any party, including to its affiliates, unless specifically authorized to do so in the Terms and Conditions. e. Make any copies of the Products, except (a) as necessary to run the Products on the Hardware and (b) one copy for archival or backup purposes. f. Intentionally or negligently permit any third party to copy the Products or extract data or code from them. g. Remove any Muze copyright or other proprietary rights notices included in or on any of the Products. h. Use Muze's trademarks without written consent. Licensee represents and warrants that: a. It is authorized to enter into this Agreement. b. It is free to fully perform its obligations under this Agreement and will comply with each of them. 4. MUZE'S OBLIGATIONS Muze shall: a. Indemnify Licensee from any claim by a third party that proper use of the Products infringes a U.S. intellectual property right of that third party. This indemnity is conditioned on Licensee's (a) prompt notification of Muze of any such claim and (b) compliance with its negative covenants. This indemnity shall not apply to (i) graphical, audio, video, or other media content, or third-party software, supplied with or as part of the Products or (ii) any software or systems not provided by Muze. Muze shall have the right to conduct the defense of any such claim, subject to Licensee's reasonable right to participate in any settlement thereof that may affect it in any way not related to its use of the Products. Should any such claim by a third party result in a material limitation of Licensee's rights to use the Products, Muze shall, at its election: (a) provide a functionally equivalent, non-infringing substitute for the Product(s); (b) procure at its own expense the necessary licenses or rights for Licensee to continue using the Product(s); or (c) refund any license fees paid by Licensee for the period beginning upon such material limitation of Licensee's rights. In no case shall Muze's liability under this Agreement exceed the total license and other fees paid by Licensee. b. Perform the Services, if any, (specified in the Terms and Conditions) in a professional manner and to a professional standard of quality and effectiveness. Muze represents and warrants that: a. It is authorized and has the right to enter into this Agreement and is free to fully perform its obligations hereunder. b. It shall comply with all of its obligations hereunder. Muze Confidential Page 2 of 3 5. DISCLAIMER OF WARRANTIES; LIMITATION ON LIABILITY EXCEPT AS SET FORTH ABOVE, Muze MAKES NO WARRANTIES, EXPRESS OR IMPLIED (BY LAW OR OTHERWISE) AS TO ANY MATTER WHATSOEVER. THE PRODUCTS ARE PROVIDED "AS IS," AND ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED. EXCEPT AS SET FORTH ABOVE, Muze SHALL NOT BE LIABLE FOR ANY CLAIMS AGAINST Licensee BY ANY THIRD PARTY (INCLUDING BY Licensee's EMPLOYEES OR CONTRACTORS). IN NO CASE SHALL ANY LIABILITY OF Muze EXCEED THE TOTAL LICENSE AND OTHER FEES PAID TO Muze BY Licensee HEREUNDER. FURTHERMORE, Muze SHALL UNDER NO CIRCUMSTANCES (OTHER THAN WILLFUL MISCONDUCT) BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL OR INDIRECT DAMAGES. 6. OTHER PROVISIONS Press Releases: Muze and Licensee shall each have the reasonable right to approve the other's press releases concerning the business relationship of the parties. If one party does not respond to the other party's request for approval within five (5) business days of receiving any such request, approval shall be deemed granted. Governing law and dispute resolution: This Agreement shall be governed by New York law, as though executed and fully performed in New York, and without reference to New York's conflicts of laws principles. Licensee consents to venue and personal jurisdiction in the State and Federal courts located in New York County for the resolution of any disputes arising out of this Agreement. Licensee acknowledges that any breach by it of its obligations under this Agreement may cause Muze irreparable harm for which there may be no adequate remedy at law, and that Muze may therefore be entitled to equitable relief by injunction or otherwise. Amendment or waiver: Any amendment to this Agreement must be in writing and signed by both parties. No provision of this Agreement may be waived except in writing signed by the party against whom enforcement of the waiver is sought. Notices: Notices shall be sent by courier or by certified mail to the addresses set forth above, or to any succeeding address that may be provided. Independent Contractors: Both parties acknowledge that they are independent contractors and that no joint venture, partnership, agency, or employment agreement is created by this Agreement. Entire Agreement: This Agreement and its Attachment(s) constitute the parties' entire agreement with respect to the subject matter hereof and supersede all prior and contemporaneous oral and written representations with respect thereto. Signed: Muze Inc. YouNetwork Corp. By /s/ Anthony Laudico By /s/ /s/ Kyle S. Taylor --------------------------- --------------------------- Name: Anthony Laudico Name: Title: Chief Executive Officer Title: Muze Confidential Page 3 of 3 EX-10.4 10 AGREEMENT BETWEEN QUEST INTERNATIONAL INC. RESIDENTIAL DISTRIBUTOR PROGRAM AGREEMENT It is agreed on this 6 day of March, 1998 by and between LCI International Telecom Corp. (hereinafter "LCI"), a Delaware Corporation with its principal place of business at 4650 Lakehurst Court, Dublin, Ohio 43016 and YouNetwork, Corporation (hereinafter "Representative"), whose address is 11 Maiden Lane, Suite 8E New York, New York 10038. 1. GRANT OF AUTHORITY a.) LCI appoints Representative as a non-exclusive representative in the territory set forth in Exhibit A to promote the sale of and solicit orders for the services defined in Exhibit A ("Services")' all subject to the terms and conditions of this Agreement. Representative agrees to use its best efforts in selling LCI's services to Customers, including having each Customer sign or electronically approve a Letter Of Agency ("LOA") substantially in the form set forth in Exhibit C of this Agreement. Representative agrees to provide a copy of Exhibit C and other documentation regarding LCI to Customers. LCI reserves the right to add to or delete from the Services as may be required from time to time. Such additions or deletions will be specified in writing by LCI. Tariffs relating to the Services and the LOA may be changed by LCI at its sole discretion. Representative further agrees to secure and use at its own expense within 30 days, for the purpose of communication and electronic download of LOAs to LCI, the equipment or its equivalent as outlined in Exhibit E. b.) Notwithstanding the foregoing, Representative will only use those means of marketing and selling LCI services, provided under this Agreement, which are mutually acceptable to LCI and Representative and agreed to in writing. Accordingly, Representative agrees to submit a sales and marketing plan within thirty (30) days of execution of this Agreement for approval by LCI. Representative agrees to submit any changes in the sales and marketing plan to LCI for written approval, prior to any implementation by Representative. Solicitation by direct mail, by telemarketing, sweepstakes, contests, or drawings is not permitted by Representative, its employees, agents, or contractors under this Agreement without prior written approval by LCI. c.) Representative shall send a verification by email to each customer that electronically agrees to switch to LCI via Representative's website. 2. COMMISSION Representative shall receive commissions in accordance with the commission structure set forth in Exhibit B (attached), provided however, no commission shall be paid on existing LCI account conversions or new accounts that call LCI directly to subscribe to LCI services (other than inbound programs previously approved by LCI in writing). usly approved by LCI in writing). 1 3. RELATIONSHIP The parties agree and understand that Representative is an independent contractor and there is no employer-employee relationship, joint venture or agency created hereby. During the term of this Agreement and for twenty-four (24) months following the termination of this Agreement, Representative shall not, directly or indirectly, convert any LCI account to any other interlata telecommunications carrier. Representative shall not enter into any oral or written agreement with a competitor of LCI similar to this Agreement nor shall Representative, directly or indirectly, market, solicit or sell services of a competitor of LCI. Representative has no authority to act for, or on behalf of LCI. Representative is not authorized to incur any obligation on behalf of LCI or to bind LCI in any manner whatsoever. Representative will not make any representations of rates, terms or conditions of the Services that conflict with the applicable tariffs or information provided by LCI. LCI shall incur no obligation to employees, contractors or other parties utilized by Representative in selling services to customers for LCI. Such individuals shall at all times remain employees, agents or contractors of Representative. Representative is responsible for all expenses and obligations incurred by it as a result of its efforts to solicit customers for LCI. Representative shall be responsible for payment of all taxes due as a result of payments made to Representative by LCI. 4. CUSTOMER SERVICE a.) Representative shall not provide customer service to any customers solicited by Representative, including billing, collections or repair service. Customers attracted by Representative are customers of LCI and shall remain customers of LCI after termination of this Agreement. b.) LCI shall provide initial training to a limited number of Representative's employees, staff and agents with the intent that said employees, staff and agents will train the remainder of the employees, staff and agents affiliated with Representative and all other training and support shall be at Representative's expense unless otherwise agreed in writing by the parties hereto. The number of persons to be trained by LCI as well as date and location of training shall be upon mutual agreement of parties. LCI, at its sole discretion, reserves the right to charge Representative for LCI providing training or support to employees, staff and agents if any of the same contact LCI directly to request product information, sales support, training, account status, commission information or other related matters. LCI may charge Representative for such support at a rate of $45.00 per hour, billed to Representative. LCI will notify Representative, in writing, prior to the implementation of such billing. LCI will provide to the Representative, the name, telephone number, and nature of the request of employee, agent, or contractor for which any charge for the aforementioned support is incurred by the Representative. 2 5. PRODUCT LITERATURE AND MARKETING a.) LCI agrees to assist Representative in designing a master subscription form (LOA) for printing, to include specific language required for authorizing the change in a customer's Primary Interexchange Carrier (PIC) to LCI. Other sales materials may also be developed by and purchased from LCI by Representative at prices normally charged to LCI's residential distributors, representatives, and contractors. Representative, the Representative's agents, contractors or franchises shall not develop or use any other product literature other than that provided by LCI without the prior written consent of LCI. At least fifteen (15) days prior to any publication, Representative shall submit to LCI for approval, all materials to be used in advertising or promoting LCI services. 6. ORDER PROCESSING, BILLING AND COLLECTION a.) LCI shall have the sole right to accept or reject all orders, to fix the prices of the Services, the terms and conditions of the Service or other adjustments and to discontinue offering or selling any service, without liability to Representative. Representative agrees that all orders submitted to LCI are subject to verification and approval by LCI, at its sole discretion. b.) Representative shall obtain a signed or electronically authorized PIC authorization (LOA), in a format approved by LCI, for each customer sold hereunder. If Representative submits service order information electronically to LCI then upon an oral or written request by LCI, Representative shall produce a copy of the LOA within forty-eight (48) hours for the customer telephone number requested. If Representative does not comply with the request for LOA, LCI reserves the right not to accept all additional service order information until Representative complies. c.) Representative will safeguard against the submission of invalid PIC authorizations (LOAs). If LCI receives invalid LOAs totaling more than two percent (2%) of the total LOAs submitted by Representative in any month, then LCI may suspend accepting LOAs and/or service order information or terminate this Agreement immediately. d.) In the event a local telephone company (LEC) or any regulatory entity assesses LCI any charges for improper or inadequate PIC authorizations relating to LCI services ordered through Representative, Representative shall promptly reimburse LCI for all LEC or regulatory charges, plus an LCI management fee of twenty-five dollars ($25.00) per customer telephone number ordered through Representative that is deemed to lack proper PIC authorization. In addition, LCI shall chargeback to Representative all Installation Commissions and Usage Commissions and any other payments previously made to any other payments previously made to Representative in 3 connection with the sale with the improper or inadequate PIC authorization. Payment for said charges may be withheld from payable commissions. e.) Upon the request of LCI, Representative will provide to LCI or the LEC, at Representative's expense, any documentation required by the LEC regarding PIC selections or authorizations for customers sold hereunder. In addition, Representative shall promptly and in good faith cooperate with LCI and all LEC's in attempting to resolve all PIC selection and authorization disputes. f) Representative shall provide, at Representative's cost, a copy of "LCI's POLICIES AND PROCEDURES REGARDING SLAMMING PREVENTION" including an "Acknowledgment" form as set forth in Exhibit D, to all employees, agents, contractors, or independent distributors involved in the selling of LCI services. Representative shall have the employee, agent, contractor, or independent distributor review the aforementioned policy and return to the Representative a signed "Acknowledgment" form, indicating they understand and will comply with the LCI policy. Representative further agrees to produce a copy of the signed "Acknowledgment" form within forty-eight (48) hours, upon LCI's request, for any employee, agent, contractor, or independent distributor. If Representative does not comply with the request for providing a signed "Acknowledgment" form, then LCI may suspend accepting LOAs hereunder and/or service order information or terminate this Agreement immediately. 7. CONFIDENTIALITY All information disclosed by either party to the other party pursuant to this Agreement, other than such information as may be generally available to the public or the industry, is and will be disclosed to it in confidence solely for its use in the conduct of its business. Each party agrees to keep such information secret and confidential indefinitely and not to disclose it to any other person or use it during the term of this Agreement or after its termination except in carrying out its obligations hereunder or in response to obligations imposed by tariff or order of a court or regulatory body. Neither party shall disclose the terms and conditions of this Agreement to any person or entity without the prior written consent of the other party. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS Representative represents, warrants and covenants to LCI that as of the date of this Agreement and continuing for the term of this Agreement that: a.) Representative is a (check one): (x) Corporation ( ) Partnership ( ) Sole Proprietorship 4 duly organized, validly existing and in good standing under the laws of New York State, with a Federal EIN of 13-13990305 and is qualified to do business in the state of New York ______________ and has full and unrestricted power and authority to execute and perform under this Ageement. b.) Representative has obtained all licenses, permits and other authorizations necessary to perform its obligations under this Agreement and shall maintain same, as required, in full force and effect during the term of this Agreement. Representative shall comply with all applicable tariffs and orders of judicial and regulatory bodies and all local, state and federal laws. c.) Representative shall not participate in any pyramid or multilevel marketing system in conjunction with any person who has an agreement with LCI. Representative shall 1) appoint a single point of contact for LCI regarding all matters pertaining to this Agreement, 2) commit no act which would reflect unfavorably upon LCI. d.) Representative shall not solicit any existing LCI account not originally sold by Representative, for the purposes of selling, upgrading or converting such account to LCI service. Representative shall not solicit any existing LCI account for the purposes of converting such LCI account to a competitor of LCI. e.) Representative Rather realizes that LCI may be selling and marketing its Affinity Program to a variety of organizations. Representative agrees to identify to LCI all organizations it solicits or will solicit pursuant to this Agreement and agrees to not knowingly sell and/or market any similar affinity program to organizations who have a relationship with LCI or to organizations who have received verbal or written proposals from LCI regarding its "All America Plan" Affinity Program. f.) Representative hereby represents and warrants that Representative is not subject to any consent decree, judgment, injunction, restraining order, settlement agreement, or agreement or order similar in nature relating to the conduct of its business. g.) In addition to its obligations under this Section 8 of this Agreement, Representative hereby covenants and agrees that during the term of this Agreement that it will notify LCI in writing within three (3) business days of: i.) Representative becoming aware of any investigation or threatened investigation of Representative's sales or marketing activities by any federal, state, or local governmental body or agency, or ii.) Representative becoming subject to or entering into any consent decree, judgment, injunction, restraining order, settlement agreement or agreement or order relating to the conduct of its business. 5 h.) Notwithstanding anything in the Agreement to the contrary, it shall be a material breach of the Agreement, without regard to any cure rights hereof or otherwise, in the event Representative breaches any representation or warranty hereunder, or if Contractor breaches any obligations under Section 8 of the Agreement. i.) LCI may, at its sole discretion, exercised in a commercially reasonable manner, suspend the acceptance of orders from Representative in any state where there is an investigation, or threatened investigation or decree as described in Section 8 following the receipt of any notice issued by Representative pursuant to Section 8. or if no notice is sent following LCI becoming aware of any such investigation or threatened investigation or decree. LCI, at its sole discretion, exercised in a commercially reasonable manner, will determine if any order suspensions will be lifted. 9. INSURANCE Representative shall secure and maintain Worker's Compensation Comprehensive General Liability and Automobile Insurance sufficient amounts to comply with law and to cover its respective obligations under this Agreement. Upon request, each party shall furnish insurance certificates as evidence of such coverage. 10. TRADEMARKS AND TRADE NAMES a.) LCI hereby grants to Representative a non-exclusive, non-transferable, royalty-free license to use during the term of this Agreement, in the Territory, LCI's trademarks "LCI", "LCI Authorized Distributor" and "LCI International" (the "Marks") in connection with Representative's marketing and sale of the Services. Representative agrees to state in appropriate places on all of Representative's products of marketing tools or devices using the Marks that the marks are trademarks of LCI, and agrees to include the symbol (Tm) or (R) as appropriate. LCI grants no trademark or service mark rights other than expressly granted hereunder, and Representative acknowledges that LCI claims exclusive ownership of the Marks. Representative agrees not to take any action inconsistent with such claim of ownership by LCI. Representative shall not adopt, use or attempt to register any trademarks or trade names that are confusingly similar to the marks in the field of telecommunications or computer equipment or software or in such a way as to create combination marks. LCI may terminate, in whole or in part, Representative's license to use the Marks if, in LCI's reasonable discretion, Representative's use of the Marks does not conform to LCI's standards for such usage as provided to Representative in writing, and provided that such non-conforming use is not cured within thirty (30) days after the Representative receives written notice that such use does not conform to LCI's standards. 11. TERM OF AGREEMENT AND TERMINATION a.) The initial term of this Agreement shall be three (3) years, and the Agreement shall be renewed thereafter automatically on a year-to-year basis, unless sooner terminated as hereinafter provided, subject to and upon the terms and conditions herein specified. Either party may terminate this Agreement at any time during a renewal term upon giving the other party thirty (30) days prior written notice. b.) LCI may cancel this Agreement upon written notice to Representative in the event of: i.) Representative's failure to attain the monthly Revenue volume commitment level specified in Exhibit B. ii.) Breach of any provision of this Agreement by Representative, or if Representative defaults, fails to perform its obligations or participates or engages in any activity relating to fraud against LCI. iii.) Insolvency, bankruptcy, receivership or dissolution of Representative. iv.) Representative's assignment of the Agreement without LCI's prior written consent or any significant change in Representative's ownership or management without LCI's prior written consent. No commission shall be payable following any termination pursuant to this Section 11.B.Ii.), iii.), or iv.). All notices under this Agreement, whether addressed to LCI or Representative, shall be sent by Certified Mail, Return Receipt Requested. If to LCI: LCI International Telecom Corp. 4650 Lakehurst Court Dublin, Ohio 43016-3254 ATTN: General Counsel If to Representative: YouNetwork Corporation 11 Maiden Lane Suite 8E New York, New York 10038 7 Fax 212 679 0643 ATTN: Kyle Taylor President 12. INDEMNIFICATION Each party shall indemnify, defend and hold the other party (and all officers, directors, employees, agents and affiliates thereof) harmless from and against any and all claims, demands, actions, losses, damages, assessments, charges, liabilities, costs and expenses (including, without limitation, interest, penalties, and attorney's fees and disbursements) which may at any time be suffered or incurred by, or be asserted against, any or all of them, directly or indirectly, on account of or in connection with: a.) The indemnifying party's default under any provision herein, breach of any warranty or representation herein, or failure in any way to perform any obligation hereunder; or b.) Bodily injury or damage to property (including death) to any person (including, without limitation, any employee of either party and any third person), and any damage to or loss of use of any property, arising out of or in any way relating to the services or pursuant, directly or indirectly, to this Agreement. Each party shall hold harmless and indemnify the other from and against any claim, cause of action, judgment, liability or expense relating to or arising out of the acts or omissions of the indemnifying party's employees, contractors and agents. 13. LIABILITY In no event shall either party be liable for special, indirect, incidental, or consequential damages, including loss of profits, arising from the relationship or the conduct of business contemplated herein. Without limiting the previous sentence, in no event shall LCI's liability in connection with this Agreement exceed one month's average commission paid to Representative. 14. MISCELLANEOUS Representative shall not assign this Agreement or any interest therein without LCI's prior written consent. The terms of this Agreement shall be governed by and construed in accordance with the laws of New York. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Provisions of this Agreement identified by the context to survive the termination or expiration of this Agreement shall so survive. This Agreement (including any Exhibits hereto) constitutes the entire Agreement between the parties hereto with respect to the subject matter hereof, and it supersedes all prior oral or written agreements, commitments or understandings, with respect to the matters provided for herein. 8 15. SECURITY Representative acknowledges that the advance described in Exhibit B shall be used to develop certain software to assist Representative in connection with performing its obligations hereunder ("Software"). Representative shall promptly disclose to LCI all material (including the Software itself related to documentation, reports, programs, source code, manuals, updates, flow charts, tapes, card decks, listings and any other programming materials relating to such Software, updates and improvements (and all of the foregoing shall be included in the term "Software"). The parties agree that all copyrightable material related to such Software is a work made for hire, that all portions of the Software created or acquired by Representative including all copyrights, any extension or renewals, and all related work, shall be the exclusive property of LCI, and that LCI shall have the right, at its own expense, to obtain and to hold in its own name copyrights, registrations, patents, or such other protection as may be appropriate to said Software. Representative warrants and shall provide LCI and its assigns the full, sole and continuing right (without any payments or liabilities to any person) to use the Software and to publish, perform, reproduce and distribute throughout the world any or all portions of the Software, either as a complete unit or in segments, in any way LCI sees fit and for any purpose whatsoever. Notwithstanding the previous two sentences, as long as Representative is not in default of any obligation hereunder, Representative shall have an exclusive license to use the Software for its business and LCI shall not use the Software in any way. Representative shall insert a proper statutory copyright notice at an appropriate location on copyrightable material, and on all portions and on all related items which may be subject to copyright protection, which copyright notice shall specify LCI, as the sole copyright owner. Representative further agrees to give LCI or any person designated by LCI, at LCI's expense, all such information and to execute all such additional documents including, without limitation, patent applications, as may be reasonably required to perfect the rights referred to herein. In the event Representative or a third party is deemed to be the author for copyright purposes of any such materials under this Agreement, Representative agrees to assign or cause such third party to assign, and assigns to LCI whatever copyrights exist in copyrightable materials and Work. Representative agrees to execute and have its employees, agents and contractors, execute any documents (including patent applications and assignments) reasonably requested by LCI, at LCI's expense, to provide LCI the right to own, use and protect the Software under this Section. Upon full recovery of the advance pursuant to Section 1 of Exhibit B or upon repayment in cash of the advance, LCI shall transfer and assign to Representative all right, title and interest (including copyrights) in the Software free and clear of all liens and encumbrances. 16. This Agreement shall become effective only upon approval and signature of an officer of LCI. 9 17. SURVIVABILITY. Provisions that by their context are intended to survive the termination or expiration of this agreement, shall so survive. 18. LCI shall have the right of first refusal to have Representative market ancillary telecommunications services such as paging, internet and cellular. IN WITNESS WHEREOF, the parties have executed this Agreement intending to be legally bound. LCI INTERNATIONAL TELECOM CORP. -------------------------------------- ("YouNetwork Corporation") By: /s/ By: /s/ Kyle S. Taylor ----------------------------------- ----------------------------------- Title: SVP Title: President -------------------------------- -------------------------------- Date: 3-18-98 Date: 3-6-98 --------------------------------- --------------------------------- 10 EXHIBIT A I. Representative's nonexclusive territory shall be the contiguous forty-eight states of the Continental U.S. (excluding exchanges of members of the National Exchange Carrier Association, commonly known as "NECA", and the United States Independent Telephone Company organization, commonly known as "USINTELCO"). II. Services: 1. LCI Difference 2. Option S and Option T 3. WorldCard Plus 4. Home 800 5. Residential base International 6. Residential international Tell the World III. All services and rates will be provided in accordance with LCI's tariffs and are subject to change. Day, Evening and Night/Weekend periods are as defined in LCI's tariffs. 11 EXHIBIT B PAGE 1 OF 3 PAGES COMMISSIONS 1. INSTALLATION COMMISSION During the term of this Agreement, LCI shall pay Representative $5.00 for each newly installed LCI Dial 1 subscriber in the Territory upon said subscriber's first usage, provided said first usage is within ninety (90) days from installation ("Installation Commission(s)"). "First Usage" shall be defined as any activity on any LCI Services defined in Exhibit A, Section II, other than Home 800. Neither Installation Commissions nor Usage Commissions shall be paid on LOA's submitted from customers who are existing LCI customers or for stand alone World Card Plus or Home 800 accounts. LCI, shall not pay Installation Commissions or Usage Commissions for upgrades for service, and shall not pay more than one Installation Commission on the sale of any particular telephone number during the term of this Agreement. LCI will recover 100% of any and all monies advanced to Representative as defined in Exhibit B 2d at a rate of 100% holdback of Installation Commissions until such time that all advanced funds have been recovered by LCI. If on the earlier of termination of this Agreement or 12 months from the date of full execution of this Agreement, the amount of Installation Commissions so recovered is less than the amount advanced ("Shortfall"), Representative shall pay to LCI in cash the amount of such Shortfall upon receipt of invoice therefor. 2. USAGE COMMISSION LCI shall pay Representative a commission as specified below on "Collected Revenue" for sales of the Services in the Territory pursuant to this Agreement ("Usage Commission(s)") for those LCI customers who remain on LCI service a minimum of thirty (30) days. "Collected Revenue" is defined as interexchange toll actually collected by LCI relating to the Services sold by Representative (excluding taxes, installation charges, subscription fees, and local loops). Usage Commissions shall be payable only during the term of this Agreement and a maximum of twenty-four (24) months following termination provided that this Agreement is terminated by LCI pursuant to Section 11.a. or Section 11.b.i.) hereof. If, in any month, disconnects of ANI's sold within 30 days by Representative meet or exceed 15% of active ANI's sold within 30 days by Representative and if, after written notification to Representative of such unacceptable Disconnect Percentage, Representative fails to meet the established Disconnect Percentage standard in the thirty days following such notice, LCI may, at its sole discretion, take any one or all of the following actions: reduce Usage Commissions or terminate this Agreement without further liability hereunder (such termination shall be deemed to occur pursuant to Section 11.b.ii.) of this Agreement). LCI may change the Disconnect Percentage up to two (2) times in any twelve (12) month period 12 upon thirty (30) days prior written notice to Representative. No Usage Commission shall be payable following any termination pursuant to Section 11.b.ii.)., iii.), or iv.). hereof. EXHIBIT B PAGE 2 OF 3 PAGES a. LCI, at its sole option, may pay Usage Commissions based on billed revenue less a percentage related to estimated uncollectables and LEC holdbacks ("Percent") as opposed to actual collected revenue, which Percent is currently nine percent (9%) (hereinafter "Billed Revenue"). For example, if the amount billed for LCI service is $100 and the commission rate is 5%, than the commission paid hereunder would be $4.55 ($100-(9% X $100) X 5% = $4.55). LCI may change the Percent up to two (2) times in any twelve (12) month period upon thirty (30) days prior written notice to Representative. b. In the event LCI pays commission based on Billed Revenue, LCI may periodically perform a "true up" covering a period not to exceed 180 days to compare collected revenue to Billed Revenue and "charge back" or pay Representative the difference between commissions paid on Billed Revenue and what would have been paid on actual collected revenue. The last month's payment of commissions hereunder may be withheld no more than three (3) months so that the final "true up" may be performed. LCI reserves the right to set off from commissions any amount due to LCI by Representative under this Agreement or otherwise. c. Commissions for residential long distance service shall be paid to Representative at 10% based upon total monthly Collected Revenue d. Advance Commission: LCI will advance Representative a total of $250,000 in the form of a recoverable draw against Installation Commission as defined in Installation Commission section at a rate of 100% of Installation Commissions. The payment of these funds will be contingent based upon accomplishing the major activities as listed below and as scheduled in no less than 30 day periods: First Payment: $100,000 Upon full execution of this Agreement. Representative shall use this payment for the Advance-Beta Program with LCI Beta sign-up, and have Beta membership in place Second Payment: $75,000 Upon accomplishing the obligations under the First Payment. Representative shall use this payment for Advance-Beta in full test mode, integration of additional Marketing Partners, with a minimum of 250 members in network. Third Payment: $75,000 Upon accomplishing the obligations under the Second Payment. Representative shall use this payment for Advance-Beta Program completion, with aggressive membership and LCI subscriber program in place and a minimum of 1500 members in network. 2. PAYMENT OF COMMISSIONS 13 Usage Commissions will be paid by LCI approximately forty-five (45) days following the end of the month in which the Collected Revenue is collected, or Billed Revenue is billed, as applicable. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. LCI INTERNATIONAL TELECOM CORP. YOUNET CORPORATION By: /s/ By: /s/ Kyle S. Taylor ----------------------------------- ----------------------------------- Title: SVP Title: President -------------------------------- -------------------------------- Date: 3-18-98 Date: 3-6-98 --------------------------------- --------------------------------- 15 EXHIBIT D PAGE 1 OF 4 PAGES "LCI'S POLICIES AND PROCEDURES REGARDING SLAMMING PREVENTION" ADVISORY TO ALL REPRESENTATIVES SELLING LCI INTERNATIONAL LONG DISTANCE SERVICES: All Representatives/Distributors selling LCI International Telecom Corporation's (LCI) long distance service must carefully read the contents of this document. It will explain LCI's policies and procedures for the sale of LCI long distance services. The purpose of this document is to explain what can cause unauthorized switching of a customer, the importance of preventing such switching, and the seriousness of the matter to LCI, its authorized Representatives, and their independent distributors. This document includes an "Acknowledgment" that must be read, signed, and returned to the Representative/Distributor by each individual selling LCI services. Representatives/Distributors must make a signed copy of this document available to LCI, upon request. A. COMMON CAUSES OF SLAMMING: o Incorrect telephone number on submitted LOAs - means that incorrect telephone number is switched without the customer's written consent. o The submitted LOA is illegible and directly causes the person that keys the order into the system to enter the wrong name and/or phone number. o The person who "authorized" switching carriers really didn't have the authority to make the switch. Sometimes receptionists, secretaries or assistants authorize a switch to qualify for some sort of premium or other inducement. o A simple misunderstanding when one partner doesn't tell the other partner about selecting a new long distance service. This is especially true when it is the other person who reviews or pays the bills. The bill-paying partner sees a new long distance carrier name and thinks something is wrong. Please ask your customers to inform the appropriate persons about changing long distance carriers. o Signing someone up just to "get the sale" or reach a qualification or commission level. o Signing someone up, without the customer's knowledge, as a result of spending a lot of time with a company decision-maker and assuming that the person would be satisfied with LCI service. B. EFFECTS OF SLAMMING: o It is illegal and will not be tolerated by LCI! o Creates a bad image and adversely affects LCI's and the Sales Agent/Distributor's reputation. o Takes time to investigate and correct. o If we can get information verified (correct), it will save on: 1. Order rejects 2. Returned mail 3. Time to process valid and accurate orders. o Frustrating experience for the company that was slammed. o Usually the local telephone company levies a charge to make the initial switch to LCI and then charges again to switch the affected customer back to the original long distance company. LCI and then the distributor and its sales agents are billed for these costs. These LCI charges will probably be billed by distributors to their sales agent. This leads to serious consequences for the agent, including termination of the sales agent relationship with LCI. 16 EXHIBIT D PAGE 2 OF 4 PAGES LCI AS WELL AS FEDERAL, STATE, AND LOCAL REGULATORY AGENCIES VIEW "SLAMMING" AS A VERY SERIOUS PROBLEM. THE FCC CAN IMPOSE SIGNIFICANT FINES ON A PER VIOLATION BASIS. C. HOW CAN A REPRESENTATIVE/DISTRIBUTOR PROTECT AGAINST SLAMMING: o You are strongly encouraged to verify information against each new customer's actual telephone bill for each LOA. o The person signing the LOA should be a person with authority to act on behalf of the company or the person whose name appears on the telephone bill. It is essential that the person signing the LOA has authority to change long distance carriers. Note that children, roommates, receptionists, secretaries and assistants typically do not have the authority to change long distance carriers for an individual or a company. If the person signing the LOA is different from the person with the actual authority to do so, you should attempt to contact the other person. While this policy might jeopardize some sales orders, it should give you a chance to retain sales by demonstrating your concern and professionalism. o Take your time. Review the LOA for accuracy and legibility, especially the telephone number. Confirm the person's telephone number. o NEVER sign someone else's name on an LOA or any other document! o Don't force a sale that is not there. 17 EXHIBIT D PAGE 3 OF 4 PAGES ACKNOWLEDGMENT THIS WILL VERIFY THAT I HAVE RECEIVED, READ, UNDERSTAND, AND WILL COMPLY WITH THE DOCUMENT ENTITLED "LCI'S POLICIES AND PROCEDURES REGARDING SLAMMING PREVENTION". I FULLY UNDERSTAND AND APPRECIATE MY OBLIGATIONS AS AN LCI SALES AGENT OR INDEPENDENT CONTRACTOR NOT TO ENGAGE IN OR FACILITATE THE PRACTICE OF "SLAMMING" CUSTOMERS. I UNDERSTAND THAT LCI WILL NOT TOLERATE FURTHER OCCURRENCES OF "SLAMMING", AND THAT LCI WILL TAKE WHATEVER ACTIONS ARE NECESSARY TO PROTECT AGAINST SLAMMING INCLUDING, WITHOUT LIMITATION, TERMINATION OF THE SALES AGENT RELATIONSHIP AND ENFORCEMENT AND ENFORCEMENT OF ALL APPLICABLE LEGAL RIGHTS AND REMEDIES. /s/ Kyle S. Taylor, President - ------------------------------------------------------------------- SIGNATURE OF REPRESENTATIVE SELLING LCI INTERNATIONAL LONG DISTANCE DATE 3/6/98 -------- KYLE S. TAYLOR - ------------------------------- PRINT NAME PHONE NUMBER 212 679-0676 x229 ------------------- YouNetwork Corporation - ------------------------------- PRINT NAME OF COMPANY CHANNEL CODE ------------------- ORGANIZATION CODE -------------- 18 EXHIBIT D PAGE 4 OF 4 PAGES ACKNOWLEDGMENT BY SALES AGENT THIS WILL VERIFY THAT ON BEHALF OF , I HAVE RECEIVED, READ, UNDERSTAND, AND WILL DISTRIBUTE THE DOCUMENT ENTITLED "LCI'S POLICIES AND PROCEDURES REGARDING SLAMMING PREVENTION" TO THE INDIVIDUALS RESPONSIBLE FOR SELLING LCI INTERNATIONAL LONG DISTANCE SERVICE. WE FULLY UNDERSTAND AND APPRECIATE OUR OBLIGATIONS AS AN LCI SALES AGENT NOT TO ENGAGE IN OR FACILITATE THE PRACTICE OF "SLAMMING" CUSTOMERS. WE UNDERSTAND THAT LCI WILL NOT TOLERATE FURTHER OCCURRENCES OF "SLAMMING", AND THAT LCI WILL TAKE WHATEVER ACTIONS ARE NECESSARY TO PROTECT AGAINST SLAMMING INCLUDING, WITHOUT LIMITATION, TERMINATION OF THE SALES AGENT RELATIONSHIP AND ENFORCEMENT OF ALL APPLICABLE LEGAL RIGHTS AND REMEDIES. DATE - ---------------------------------------- ----------------------- SIGNATURE OF REPRESENTATIVE - ---------------------------------------- PRINT NAME BUSINESS PHONE NUMBER ------------------- - ------------------------------- PRINT NAME OF COMPANY CHANNEL CODE ------------------- ORGANIZATION CODE -------------- PLEASE REMIT THIS FORM WITHIN FOURTEEN DAYS OF RECEIPT TO: LCI INTERNATIONAL, INC., 4650 LAKEHURST COURT, DUBLIN, OHIO 43016, ATTN: SHERRI RONNEBAUM, LEGAL DEPT. SIGNATURE OF REPRESENTATIVE FOR . ------------------------------- 19 EXHIBIT D PAGE 1 OF 1 PAGES MINIMUM COMPUTER EQUIPMENT I. The following IBM compatible equipment shall be used by Representative for the purpose of account information and the electronic transfer of LOAs to LCI. All reporting to the Representative by LCI shall be done via electronic files. A. Hardware 1. PC Compatible with a Pentium 100+ Mhz, recommended; 486 66 MHz, minimum 2. 16 Meg of RAM on board, minimum 3 520 MB IDE Hard Drive, minimum 4. 28.8 internal/external FAX modem, recommended; 14.4 modem, minimum 5. VGA color Monitor, minimum 6. 101 keyboard style 7. A working printer for reports. A wide carriage type (EPSON FX) is preferred but not necessary. B. Software 1. DOS 6.20 or better 2. Windows 3.11 for work groups (Windows 95 is also supported) 3. Communications package (Quicklink or PROCOMM PLUS is preferred, but not necessary.) 4. Microsoft Office (Optional) 5. Microsoft Access, Version 2.0 (Office 97 version not supported) if using current versions of LCI provided data entry software. 6. Microsoft Internet Explorer, most recent version, recommended; Netscape, Optional 7. Wildcat browser - LCI provided II. Distributor may use its own or other programs for electronic submission of LOAs, as long as files meet LCI file type and layout requirements. III. THE ABOVE LISTING IS A MINIMUM GUIDELINE AND IS SUBJECT TO CHANGE BY LCI. LCI SHOULD BE CONTACTED PRIOR TO ANY PURCHASES OF EQUIPMENT OR SOFTWARE FOR CONFIRMATION OF LATEST STANDARDS. IV. LCI does not currently support an Apple/Macintosh or UNIX environment. 20 EX-10.5 11 AGREEMENT BETWEEN BAKER & TAYLOR INC. DATABASE LICENSE AGREEMENT (SINGLE SERVER/INTERNET) THIS IS AN AGREEMENT, dated as of July 9, 1998 by and between BAKER & TAYLOR, INC. ("B&T"), a Delaware corporation having a place of business at Five Lake Pointe Plaza, Suite 500, 2709 Water Ridge Parkway, Charlotte, North Carolina and YouNetwork Corporation ("Licensee"), a New York State Corporation having a place of business at 220 East 23rd Street, Suite 607, New, York, New York 10010. W I T N E S S E T H: WHEREAS, B&T, through its unincorporated operating unit Baker & Taylor Books ("Books") distributes books, spoken word audio products and other similar products and provides value-added services; and WHEREAS, B&T, through its unincorporated operating unit Electronic Business and Information Services, grants limited access to its Database (hereinafter defined) to specified users; and WHEREAS, Licensee desires B&T to grant to Licensee a license, under the terms and conditions set forth herein, to use the Licensed Data or any portion thereof and CD-EXPORT (hereinafter defined); and WHEREAS, B&T is willing to grant such a license in accordance with the terms and conditions set forth below. ACCORDINGLY, in consideration of the covenants, promises and undertakings provided for herein and for other valuable consideration, the receipt and legal sufficiency of which the parties acknowledge, the parties agree as follows: 1.00 DEFINITIONS As used throughout this Agreement the following terms have the following meanings: 1.01 "CD-EXPORT" means B&T's specialized software application which allows Licensee to search the Database without using any other application screen interfaces; 1.02 "Database" means B&T's complete title file database containing the bibliographic records consisting of, among other things, the Licensed Data or any portion thereof, as the same from time to time may be modified by B&T during the Term of this Agreement (hereinafter defined), for books and spoken word audio products (sometimes hereinafter collectively referred to as "Books Products"). 1.03 "Effective Date" means the date of this Agreement. 1.04 "Licensed Data" means (a) the data elements in electronic database form which are more particularly set forth on Schedule 1.04 attached hereto and made a part hereof, for each title on the Database, (b) any updates provided by B&T to such data elements from time to time, and (c) such other data elements as B&T at its sole discretion from time to time hereafter may agree to add without further consideration by Licensee; [[1.05 "Year" means the twelve (12) month period beginning at 12:00 (Eastern U.S. Time) on the Effective Date and terminating at 11:59 P.M. (Eastern U.S. Time) on the day immediately preceding the anniversary of the Effective Date or any one (1) twelve (12) month period subsequent thereto.]] 2.00 LICENSE 2.01 Subject to the terms and conditions of this Agreement and extent of the license which Licensee is granted hereby, and based upon B&T's receipt of its license fee payments then currently due, B&T hereby grants to Licensee and Licensee hereby accepts from B&T a non-exclusive, nontransferable and revocable license: (a) to display all or a portion of the Licensed Data on Licensee's Internet web site for viewing by users in "read only" access; (b) to use CD-EXPORT solely for the purpose of utilizing the Licensed Data or any portion thereof at Licensee's Internet web site; and (c) to display all or a portion of the Licensed Data on Licensee's in-house database system by means of a single server for viewing by users. (d) to display Baker & Taylor's name and logo as the supplier of the database and/or books and related product. Licensee will not make all or any portion of the Database, the Licensed Data and/or CD-EXPORT accessible to any persons other than persons specifically authorized for the purposes above. Licensee will use its best efforts to take all reasonable steps to prevent or restrict the downloading, transmission, display or copying of the information contained in all or any portion of the Database and/or the Licensed Data to a degree which is not necessary for purposes of ordering the products listed thereon. Such steps may include, but will not be limited to, the following: the use of passwords, encryption/de-encryption algorithms used in the security process and similar tools. The license granted hereby is personal to the Licensee. Licensee may use the license solely for the purposes specified above. Nothing contained in this Agreement will, or will be deemed to, convey any title or will, or will be deemed to, convey any title or 2 ownership interest in all or any portion of the Database, the Licensed Data and/or CD-EXPORT regardless of whether any portion thereof is used by Licensee or other users. 2.02 B&T reserves all rights with respect to all or any portion of the Database, the Licensed Data and/or CD-EXPORT not expressly granted to Licensee, nor expressly contemplated, herein. This reservation specifically applies, but is not limited, to any media, mode or method of distribution or transmission or other technology that may be commercialized or developed in the future. 3.00 TERM [3.01 (a) Subject to the terms and conditions hereof, this Agreement will be effective for a period (the "Term") beginning on the Effective Date and ending at 11:59 P.M. (Eastern U.S. Time) on the day preceding the first anniversary of the Effective Date (as the case may be, the "Termination Date"). (b) Despite the statements in the preceding clause (a) of this Section 3.01, Licensee may terminate this Agreement for any reason whatsoever during the Term by giving notice to B&T not less than thirty (30) days prior to the date on which Licensee wishes to terminate this agreement. In such an event, this Agreement automatically will terminate on the date set forth in Licensee's notice as if it were the Termination Date. If Licensee wishes to terminate this Agreement pursuant to this clause (b), none of the annual licensee fees payable with respect to the period of time after which this Agreement is terminated will be refunded to Licensee.] [[3.01 (a) Subject to the terms and conditions hereof, this Agreement will be effective for a period (the "Initial Term") beginning on the Effective Date and ending at 11:59 P.M. (Eastern U.S. Time) on the day preceding the [first][second][third] anniversary of the Effective Date (the "Initial Termination Date"). (b) Unless one of the parties (the "Notifying Party") to this Agreement notifies the other party not less than 60 days prior to the Initial Termination Date or any subsequent Termination Date (hereinafter defined) that the Notifying Party desires that this Agreement not be renewed, and if this Agreement otherwise is in full force and effect and no Event of Default has occurred, this Agreement automatically may be renewed for not more than two (2) consecutive periods of one (1) Year each (each such period, a "Renewal Term", and the Initial Term or any Renewal Term being hereinafter referred to as the "Term"). Each such renewal will be under the terms and conditions as set forth in this Agreement, except that the annual license fee for each Renewal Term may be increased by B&T at its option on notice given to Licensee not 3 less than 75 days prior to the Initial Termination Date or any subsequent Termination Date. If the Notifying Party desires that this Agreement not be renewed, this Agreement automatically will expire on the Initial Termination Date or on the Termination Date of the Term, as the case may be. As used in this Agreement, "Termination Date" means the anniversary of the Initial Termination Date in a Renewal Term to which the same relates.]] 3.02 Immediately upon termination of this Agreement, whether or not pursuant to this Article, the following will occur: (a) all rights and licenses granted to Licensee hereunder automatically will terminate; (b) Licensee promptly will permanently delete all or any portion of the Database, the Licensed Data and/or CD-EXPORT and any copies thereof from all computers, all database and other systems and/or any storage medium of Licensee in any location, whether backup or otherwise (including persons and/or entities within Licensee's direct control, such as non-Internet users having access by, through or under Licensee); (c) Licensee will not use, or permit any user having access by, through or under Licensee to use, all or any portion of the Database, the Licensed Data and/or CD-EXPORT in any way; and (d) Licensee will return all Database, Licensed Data and/or CD-EXPORT media received from B&T, together with any copies made from the same. For a period of not less than ten (10) consecutive days immediately following the date on which this Agreement terminates, Licensee will post the following notice at Licensee's Internet web site so that it is visible by all users thereof: "Effective immediately, [insert Licensee's name used at its web site) will no longer be using Baker & Taylor, Inc.'s database of books and spoken word audio products at this web site." Licensee will certify in writing that the terms contained in the preceding clauses (a)-(d) have been complied with. 4.00 THE PARTIES' OBLIGATIONS 4.01 Licensee will: (a) pay B&T according to the terms of this Agreement; (b) not directly or indirectly duplicate, copy, transmit, publish, provide access to (by electronic or any other means) exchange, throw away, or incorporate with, or as part of another database, package, program, record or system, all or any portion of the Database, the Licensed Data and/or CD-EXPORT for any purpose except as provided in Section 2.01 of this Agreement; 4 (c) use its best efforts to take all reasonably necessary steps to ensure compliance with Licensee's obligations under this Agreement by users of its Internet web site and its employees, agents, representatives and customers. Such best efforts will include, but not be limited to, taking such steps as directed pursuant to this Agreement and pursuant to any instruction made by B&T at any time during the effective period and after termination of this Agreement; (d) except to display the same as expressly provided herein at Licensee's Internet web site and/or on Licensee's in-house database system at a single location for viewing by users at such location, not sell, offer for re-sale, distribute, rent, sublicense or lease all or any portion of the Database, the Licensed Data and/or CD-EXPORT, nor use all or any portion of the Database, the Licensed Data and/or CD-EXPORT in a network, timesharing, multiple central processor unit or multi-user arrangement; (e) not combine or incorporate all or any portion of the Database, the Licensed Data and/or CD-EXPORT with any other program, database, record or system which will be sold, offered for re-sale, distributed, rented, sublicensed or leased; (f) not utilize all or any portion of the Database and/or the Licensed Data in connection with any sales by Licensee, by any partner or affiliate of Licensee or by any enterprise or entity in which Licensee has any interest, except for sales to retail consumers; (g) pay all sales, use, value-added, excise or similar taxes associated with Licensee's or its users' use of all or any portion of the Database, the Licensed Data and/or CD-EXPORT; (h) reproduce, incorporate and maintain each and every B&T proprietary, trade secret or copyright notice in any copy or partial copy of ail or any portion of the Database, the Licensed Data and/or CD-EXPORT or in any database containing any element of the Database and/or the Licensed Data, and not remove or obscure any B&T proprietary, trade secret or copyright notice or other legend with respect to all or any portion of the Database, the Licensed Data and/or CD-EXPORT; (i) comply with all laws and regulations relating to or pertaining to the sale, distribution, export or use of all or any portion of the Database, the Licensed Data and/or CD-EXPORT and maintain high quality and standards associated with B&T; (j) promptly notify B&T in writing if Licensee becomes aware of the unauthorized reproduction, manufacture or sale of, or of any acts that are prohibited in this section with respect to, all 5 or any portion of the Database, the Licensed Data and/or CD-EXPORT by anyone having access to the Licensed Data or any portion thereof by means of Licensee's Internet web site or Licensee's in-house database system. 4.02 B&T will deliver CD-EXPORT to Licensee contemporaneously with the software which contains the Database and any updates to the Database so that Licensee may access the Licensed Data from the Database. 5.00 FEES AND PAYMENTS 5.01 (a) Licensee will pay B&T a $1,000 license fee for the Database and the Licensed Data in consideration of the license of the same [[for each Year]] during the Term. (b) Licensee will pay B&T a $1,650 subscription fee for a one (1) year subscription of the weekly edition of THE TITLE SOURCE [[for each Year during the Term]]. 5.02 (a) Payment of the license and subscription fees will be made in full prior to delivery of THE TITLE SOURCE, the Licensed Data and/or CD-EXPORT to Licensee at the beginning of the [[Initial]] Term [[and, if this Agreement is renewed beyond the Initial Term, prior to the first day of each Year thereafter]]. B&T has no obligation to deliver all or any portion of THE TITLE SOURCE, the Licensed Data and/or CD-EXPORT until Licensee pays the license and subscription fees. All fees are non-refundable. (b) B&T will send all billing invoices to Licensee at the address from time to time specified in writing by Licensee. (c) All payments to B&T will be made in U.S. Dollars and by delivery to the address set forth in B&T's billing invoice to Licensee. 6.00 DEFAULT AND REMEDIES 6.01 The following will be an Event of Default: Licensee's failure to perform any of its obligations, or failure to comply with any of its agreements, hereunder which failure is not cured within ten (10) business days after notice from B&T (including, but not limited to, Licensee's use of all or any portion of the Licensed Data and/or CD EXPORT in a manner or form not expressly authorized by this Agreement). 6.02 If an Event of Default occurs, B&T will have all rights and remedies available to it under applicable law or in equity. In addition to such rights and remedies, B&T also may: 6 (a) declare this Agreement and the license granted herein immediately terminated; (b) sue Licensee for the fulfillment of its obligations under this Agreement; and/or (c) seek an injunction against Licensee to compel Licensee to comply with the terms of this Agreement and/or to cease activities which constitute a default of Licensee's obligations hereunder. In addition to B&T's rights set forth above in subsections (a)-(c), Licensee also will cease use and/or display of all or any portion of the Licensed Data within 36 hours after receipt of B&T's notice that an event of Default has occurred. 6.03 If an Event of Default occurs in which Licensee is either using, or providing access to, all or any portion of the Database, the Licensed Data and/or the CD-EXPORT, in breach of the terms of this Agreement then, in addition to any other remedies which B&T may seek hereunder, Licensee will be obligated to promptly pay B&T, as and for liquidated damages, an amount equal to the product of $10,000 and each day in which such Event of Default remains unremedied. For the purposes of calculating liquidated damages under this Section 6.03, a portion of a day will constitute a full day. 7.00 NO WARRANTY 7.01 THE DATABASE, THE LICENSED DATA OR ANY PORTION THEREOF AND/OR CD-EXPORT ARE PROVIDED "AS IS" WITHOUT WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND. EXPRESSLY EXCLUDED ARE ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Licensee will advise all users that B&T makes no warranties with respect to the Database, the Licensed Data or any portion thereof and/or CD-EXPORT. 7.02 NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY B&T, ITS AGENTS OR EMPLOYEES WILL CREATE A WARRANTY AND LICENSEE MAY NOT RELY ON ANY SUCH INFORMATION OR ADVICE. 7.03 B&T's sole liability and Licensee's exclusive remedy with respect to a defect in the medium on which the Database and/or the Licensed Data is delivered to Licensee will be replacement of such medium, as long as the defective medium is returned to B&T with a copy of the receipt which accompanied delivery of the medium to Licensee. If failure of the medium results from accident, abuse or misapplication, B&T will have no responsibility to replace the medium. 8.00 INDEMNIFICATION 7 8.01 As long as Licensee promptly notifies B&T in writing of such a claim, B&T at its own expense will defend any action brought and pay any final judgement against Licensee to the extent that such action is based on a claim that all or any portion of the Database, the Licensed Data and/or CD-EXPORT infringes any copyright or subscription rights in existence as of the effective date of this Agreement. B&T will have the right to control the defense of all such claims, lawsuits or proceedings without Licensee's prior written approval. If, because of any claim of infringement against any copyright or subscription right which is based on a claim that all or any portion of the Database, the Licensed Data and/or CD-EXPORT infringes any copyright or subscription rights, either B&T or Licensee is enjoined from using all or any portion of the Database, the Licensed Data and/or CD-EXPORT, or if B&T believes that all or any portion of the Database, the Licensed Data and/or CD-EXPORT is likely to become the subject of such a claim of infringement, B&T may, at its sole option and expense, may do the following: (a) obtain the right for Licensee to continue to use the Database, the Licensed Data or any portion thereof and/or CD-EXPORT; or (b) replace or modify all or any portion of the Database, the Licensed Data and/or CD-EXPORT so as to make it non-infringing. If neither of these two options is reasonably practicable, B&T may terminate this Agreement by written notice to Licensee. The foregoing states the entire liability of B&T with respect to infringement of any copyright or subscription rights by the Database or the Licensed Data. 8.02 The indemnity set forth in Section 8.01 will not extend to any claims of infringement resulting from (i) modification of all or any portion of the Database, the Licensed Data and/or CD-EXPORT by Licensee or any user having access to the same, (ii) modification of all or any portion of the Licensed Data and/or CD-EXPORT by, through or under Licensee, (iii) the use of all or any portion of the Database, the Licensed Data and/or CD-EXPORT in combination with any other software, hardware or server or (iv) the use of the same by Licensee or any user in a manner for which all or any portion of the Database, the Licensed Data and/or CD-EXPORT are not designed, or from any product which incorporates any of the modifications noted above. 8.03 Licensee will indemnify and hold harmless B&T, its officers, employees and directors from any loss, liability, damage, cost or expense, including reasonable attorneys' fees and expenses, arising out of (a) Licensee's breach of its obligations under this Agreement; and/or (b) any modifications, however slight, made by or on behalf of Licensee to all or any portion of the Database, the Licensed Data and/or CD-EXPORT. Licensee expressly acknowledges that B&T will not be liable to Licensee or any of its customers for any damage incurred by any of them arising from such modifications. 8 9.00 NOTICES All communications, notices, and the like required or given pursuant to any provision of this Agreement, must be given by Express Mail or by Certified Mail, Return Receipt Request and will be deemed to have been properly made or given, if by Express Mail, when received by the addressee and, if by certified mail, five (5) days after deposit, postage prepaid, with the U.S. Postal Service, addressed as follows: If to B&T: Baker & Taylor, Inc. 501 S. Gladiolus Momence, Illinois U.S.A. 60954 Attn.: ITG Distribution Coordinator If to Licensee: YouNetwork Corporation 220 East 23rd Street, Suite 607, New York, New York 10010. Attention: Kyle S. Taylor Either party may change its address as set forth above by notification in writing to the other party, however any such notification will only become effective upon actual receipt thereof. 10.00 MISCELLANEOUS 10.01 The waiver or failure of either party hereto to exercise in any respect any right provided for herein will not be deemed a waiver of any further right hereunder. 10.02 Dates or terms by which either party is required to perform under this Agreement will be postponed automatically to the extent that either party is prevented from meeting them by causes beyond its reasonable control and for the duration of any such cause. 10.03 (a) This Agreement and the transactions provided for herein will be governed, construed and enforced according to the laws of the State of New Jersey (excluding any conflict-of-law provisions thereof). (b) Licensee and B&T hereby agree to bring any dispute, controversy or claim arising out of this Agreement or the matters provided for in this Agreement and which has not been resolved by the parties through an informal process within 45 days after 9 either party notifies the other that a matter is in dispute, for settlement in Newark, New Jersey in accordance with the Rules of American Arbitration Association (the "Rules") . Each party will bear its own legal expenses, attorneys' fees and disbursements and costs of all experts and witnesses. However, if the claim of either party is upheld by the arbitrators in all material respects, then the prevailing party will be promptly reimbursed by the other party for its legal expenses, attorneys' fees and disbursements and costs of its experts and witnesses and the prevailing party also will pay all fees, costs and expenses of the arbitration. Any award rendered will be final and conclusive upon the parties. Any judgment thereon may be enforced in any court having jurisdiction. Both parties will continue to perform their respective obligations under this Agreement during any arbitration proceedings. Notwithstanding the Rules, the arbitrator's determination will only be in favor of one party's position. 10.04 For a period of time not to exceed two (2) years after the date on which this Agreement expires or terminates, Licensee will maintain accurate records at one office of Licensee within the continental United States concerning Licensee's use of, including without limitation all records of access to, all or any portion of the Database, the Licensed Data and/or CD-EXPORT under this Agreement. During the Term, and for a two (2) year period after the date on which Agreement expires or terminates, on reasonable prior notice to Licensee and during Licensee's normal business hours, B&T will have the right to audit Licensee's records with respect to such use and with respect to Licensee's compliance with the terms hereof. As soon as Licensee uses any portion of the Licensed Data at its Internet web site, Licensee also will provide B&T at no expense to B&T with any passwords and access codes necessary to enable B&T to have access to the same in order to confirm Licensee's compliance with the terms of this Agreement. 10.05 Licensee agrees in advance that this Agreement may be assigned by B&T. Licensee will not assign this Agreement, by operation of law or otherwise, without B&T's prior written consent, which may be withheld in B&T's sole discretion. Notwithstanding the preceding sentence, on notice given to B&T contemporaneously with such assignment, Licensee may assign this Agreement to an affiliate of Licensee who will remain an affiliate of Licensee during the term of this Agreement. As used herein, "affiliate of Licensee" means (a) a corporation which controls, is controlled by or is under common control with Licensee; the term "control" meaning ownership of not less than 51% of the outstanding voting stock of a corporation; or (b) a partnership in which Licensee is a general partner and of which Licensee owns not less than 51% of the legal and equitable interest. 10.06 English will be the official text for this Agreement. 10 No translation will be used to construe the meaning or intent hereof. 10.07 If any of the terms or provisions of this Agreement are ruled to be invalid or unenforceable in an arbitration proceeding or by a court or administrative bureau of competent jurisdiction, the remainder of the Agreement will not be affected thereby. If an arbitrator, court or bureau does not replace a provision in this Agreement ruled to be invalid or unenforceable with a valid and enforceable one which accomplishes the same general purpose to the maximum extent possible, the parties will reasonably try to negotiate a replacement for the provision which accomplishes the same general purpose to the maximum extent possible. 10.08 This Agreement constitutes the complete and exclusive statement of the terms and conditions between the parties and supersedes and merges all prior proposals, understandings and all other agreements, oral and written, between the parties relating to the subject matter of this Agreement. This Agreement may not be modified or altered except by written instrument duly executed by both parties. This Agreement will be binding upon, and will inure to the benefit of, the parties hereto and their respective successors, permitted assigns and legal representatives. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. LICENSEE: YouNetwork Corporation ------------------------------- By: /s/ Kyle S. Taylor ------------------------------------- Title: President ---------------------------------- BAKER & TAYLOR, INC., by Electronic Business and Information Services By: /s/ ------------------------------------- Title: ---------------------------------- 11 SCHEDULE 1.04 LICENSED DATA TITLE SOURCE FILE FORMAT - ---------------------------------------------- FIELD LENGTH NAME (BYTES) - ---------------------------------------------- ISBN 10 Title 150 Author 70 Binding 3 Status 2 Price 9 Subject 30 1 Subject 30 2 Subject 30 3 Subject 30 4 Subject 30 5 Pub 5 Date Publisher 11 Code Publisher 150 Name Bookstore 3 Sub. Code - ---------------------------------------------- EX-23.2 12 CONSENT OF MAHONEY COHEN & COMPANY [TO COME] EX-27 13 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-14-1998 DEC-31-1998 178,068 0 0 0 0 178,740 54,877 7,508 299,034 236,103 0 0 0 200,200 0 299,034 0 0 168,848 0 0 0 1,975 (162,823) 0 (162,823) 0 0 0 (162,823) (2,170.97) (2,170.97)
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