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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 33-13789 LA
YOU BET INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
Delaware 87-0422246
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1950 Sawtelle Boulevard, Suite 180
Los Angeles, California 90025
(Address of principal executive office)
Registrant's telephone number, including area code
(310) 444-3300
Securities registered pursuant to Section 12(g) of the Act:
(Title of each class) (Name of each exchange
Common Stock, .001 par value on which registered)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Issuer's revenue for the fiscal year ended December 31, 1996: $7,725
As of April 6, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $9,736,149.
As of April 6, 1997 the Registrant had 8,283,333 shares of its common stock
("Common Stock"), $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into Parts I, II or III.
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PART I
ITEM 1: BUSINESS
THE COMPANY
You Bet International, Inc. (the "Registrant" and together with its
consolidated subsidiaries, the "Company"), is a provider of entertainment
technology and services. The Company believes that the proliferation of
multimedia personal computers (PCs), the advancement of technologies for data
compression and the production of sophisticated interactive software have
spurred a demand in the market for interactive entertainment products. The
Company plans to focus on services that require access to live events and
databases interactively. The Company's principal executive offices are located
at 1950 Sawtelle Boulevard, Suite 180, Los Angeles, CA 90025, and its telephone
number at that address is 310-444-3300.
RECENT DEVELOPMENTS
1. Liquidity Problems As of April 6, 1997, the Company had cash and cash
equivalents of approximately $270,000 and short term obligations of
approximately $2,636,000. The short term payables include $975,000 in bridge
notes (See 1996 offerings) which may be converted into common stock at the note
holders option. Accordingly, the Company is experiencing certain liquidity
problems that are expected to continue until the Company completes some form of
additional financing. The Company has commenced discussions with a number of
investment banking, venture capital and other financial enterprises regarding
obtaining additional financing. The Company believes that its current resources
will enable it to operate at current expenditure levels through June, 1997. If a
financing is not completed at that date, the Company will have to significantly
curtail its planned testing of You Bet, the Company's first product, which is
contemplated for May 1997, and other planned expansion activities. In any event,
it is not likely that the Company will be able to finance its contemplated
operations beyond the next six months with out obtaining significant financing,
at which time the Company may be forced to cease all ongoing development and
marketing operations. No assurance can be given that the Company will be able to
find such financing, that such financing, if available, will be on terms
acceptable to the Company. See "Management's Discussion and Analysis and Results
of Operations-Liquidity and Capital Resources".
2. Introduction of First Product
In January 1997, after completing the construction of the first product and
software and installing necessary processes and procedures to administer the
product, the Company entered Alpha testing. The Company also scheduled
approvals with the New York Racing and Wagering Board and the New York State
Tax Department. These approvals are necessary for the product certification.
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The Company anticipates entering the limited release of approximately 400
users in the second quarter of 1997. During the limited release, the entire
service functionality will be operational to test and validate the system with
live bets. Consumers will not be charged for on-line time or for information
purchases during the limited release. Based on testing throughout the limited
release, the Company will schedule a national roll-out where it will begin to
charge subscription fees, on-line time and information purchases. This is
anticipated for the third quarter of 1997.
THE COMPANY'S INITIAL SERVICE
The Company's first application - The You Bet! Racing Network (YBRN) - will
enable subscribers to gather a substantial amount of information on horse racing
events, witness the events live, and transmit wagering data on the events to
licensed account wagering entities, by accessing the Company's private computer
network. The proprietary software developed by the Company gives the experienced
handicapper and novice an all inclusive package, through a computer based
network for the horse racing experience which include: (FLP)
o Real time audio and video feeds from multiple tracks
o Immediate transmission of wagering information from a PC to a
licensed account wagering facility
o Complete historical and race day information
o Live odds and results
o Convenient account management
(1)
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(1) Forward Looking Statements. The symbols "FLS" and "FLP" refer to a
"forward looking statement" or "forward looking paragraph". The information
contained herein is subject to various risks, uncertainties and other factors
that could cause actual results to differ materially from the results
anticipated in such forward looking statements or paragraphs. Included among the
important risks, uncertainties and other factors are those hereinafter
discussed.
The business of the Company is dependent upon successful deployment of
the Company's initial product You Bet! Such deployment is subject to all of the
inherent risks in software development, including programming errors, and
conflicts with other software or computer equipment. Additionally, as the
Company is concurrently establishing an on-line network to implement its
product, the Company will be subject to other related risks, such as delays (or
failures) in transmission of data, under-capacity and the inability to access
the network, and general lack of support personnel. The Company's success will
be largely dependent on the ability of the software application and network to
perform as anticipated, as well as market acceptance of the product.
Secondly, the Company will be largely dependent upon negotiating
agreements with third parties, including various track and information
providers. Those third parties will have different business objectives than
those of the Company. Unless the Company and such third parties are able to
compromise their respective objectives in a manner that is mutually acceptable,
agreements and arrangements will not be consummated.
Assuming the Company's product can be developed as anticipated, the
Company will need additional capital to market the product. The Company's need
for additional capital will be dependent
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The Company developed The You Bet! Racing Network to satisfy a perceived
market need in the horseracing industry because of the following:
o The market is substantial - $14.7 billion domestically and $100
billion internationally.
o The wagering trend is to off track sources such as the YBRN.
Wagering on domestic horse racing wagering, has continued to grow
principally because of the explosive growth from off-track sources.
From 1993 to 1995, the estimated percentage of off-track betting has
grown from 44.7% to 68.3% of all domestic wagers placed ($10 billion
in 1995).
o Horse racing wagering data is currently being transmitted from
interstate account holders to account wagering entities from five
states via telephone lines. Those entities use that information to
place wagers from the account holders' balance into the wager pools
of the host tracks. The current systems in place do not enable
account holders to experience the race or interactively access data
or the account wagering facility from one source. (See Business
Guide - Government Regulation; Legality)
o The Company's experience in horse racing (See Company History).
The Company believes that its You Bet! Racing Network will be well received
in the horse racing industry: (FLP)
o The fan has a more convenient way to experience horse races.
o The licensed account wagering facility will benefit from more
account holders and activity. They will also benefit from
streamlining the transmission of the wagering process.
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upon a number of factors, including the rate at which the Company's products are
utilized and the level of effort needed to develop and commercialize additional
applications. The unavailability of additional funds when needed could have a
material adverse affect on the Company. The availability of debt and or equity
financing, as well as financing from joint venture sources, is affected by,
among other things, world wide economic conditions, interest rates, and the
general competition for funds. No assurance can be given that the Company will
be successful in obtaining additional financing.
Finally, the Company's software will be affected by the changing and
dynamic nature involving the gaming industry, which is subject to extensive
regulation by both state and federal governments, as well as the current
environment in which Internet and on-line services are offered to computer
users. The gaming industry is heavily regulated, and the policies of the
agencies and legislatures which regulate the gaming industry are subject to
changing political and economic concerns. No assurance can be given that the
Company will not be subject to additional legislation which could materially
impact the Company's planned operations. Moreover, the entire on-line,
Internet-based, communications and entertainment industry is newly emerging and
is rapidly developing, thus subjecting the Company to a variety of volatile
changes, any one of which could have a material adverse affect on the Company's
ability to effectively deploy its products and compete in the marketplace.
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o The host tracks (tracks where the races are run) receive increased
wagering activity as a result of their races reaching fans from
outside their geographic area.
o The horse racing industry benefits from increased access and
promotion of their sport.
o State governments will receive increased tax revenues through
increased purses.
The Company believes that the convenience and availability of off-track
sources has had a major impact on the industry. The ability to transmit wagering
data to licensed wagering facilities by using a customer's personal computer
from home, office or elsewhere would extend this trend and accelerate the
industry's growth. The Company intends to enter this market with its computer
network service and derive revenue from subscription fees, on-line time charges,
data delivery charges, and fees from the account wagering facility for the
transmission of the wagering data (FLP)
STAGE OF DEVELOPMENT
The Company has entered into an agreement with the New York Racing
Association to introduce a limited release of its proprietary service beginning
in May, 1997. The Company expects the limited release will be in effect until
July 1997 when a national release of the service is planned (FLP).
STRATEGIC PARTNERSHIPS
Account Wagering Entity
The New York Racing Association operates three of the top six race tracks in
the United States, offers full-cards simulcasting to "witness" the event, and
already has an established, legal interstate telephone account wagering system.
Data Provider
The Company has entered into a five-year agreement with Equibase, of the
premier horse racing data providers to receive a copy of the official
thoroughbred database. This agreement will enable the Company to provide
customers, via their PC, with remote access to critical racing information and
statistics including handicapping information, last minute odds, jockey
substitution, weather conditions and live audio/video of the races. (FLP)
Private Network Provider
The Company has also entered into a partnership with a major data network
provider, which will allow bettors using the Company's private network to
transmit confidently wagering data at the last minute with more efficiency than
the current phone wagering process where last minute bets are subject to
operator error or busy signals. Wagering results will also be transmitted
through the system and the licensed wagering facility automatically debiting or
crediting the bettor's pre-established, existing account based upon the success
of the wager.
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COMPETITIVE ADVANTAGES & BARRIERS TO ENTRY
Proprietary Technologies
The Company has developed a number of proprietary software technologies that
provide key competitive advantages and barriers to entry including, but not
limited to:
(i) A national multicast network allowing for reliable and economical
delivery of audio, video, and information updates to a virtually unlimited
audience. (FLP)
(ii) Open architecture capable of providing multi-currency and multi-lingual
games including horse racing and other high-level participation games (i.e.
use with international sporting events). (FLP)
(iii) A distributed high speed transaction platform capable of handling the
extreme peak loads of interactive wagering. (FLP)
(iv) Proprietary security technologies and techniques. (FLP)
Totalisator System
The totalisator system consists of a complex computer software and hardware
that calculates wagering odds, facilities infield scorebroads and numerous types
of customer ticket issuing machines at horse racing tracks. There is limited
knowledge in this niche industry, and it will be difficult for technology
companies to acquire this expertise. The Company's prior experience (with PC
Totes see Company History) in all aspects of developing, deploying, and running
totalisator systems provides a key competitive advantage and barrier to entry
(FLP).
MARKETING AND SALES
It is management's belief that the introduction, availability and ease of
use of its computer network service will create a meaningful opportunity to
attract a significant portion of the existing horse racing market and to reach
out to many new potential customers. Initially, the Company intends to target
U.S. handicappers who already use a computer for racing information. The Company
believes this market segment alone is sufficient to generate positive cash flow.
Moreover, the Company intends to develop vigorously the use of its computer
network service in international markets as well by utilizing the Company's
favorable affiliations with individuals and organizations familiar with such
markets.(FLP)
The You Bet! Racing Network (YBRN) has two principal target markets:
existing handicappers and individuals with access to a personal computer and
modem. The
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Company's marketing to existing handicappers is expected to focus on YBRN
providing convenient, current and more detailed information than that available
from traditional sources. The other target market is those individuals who
otherwise have access to PC/Modems but have not previously exhibited a
substantial interest in racing. The Company will attempt to interest PC users on
the basis of the intellectual and financial challenge of either simulated
betting or actual betting. Both of these groups consists of large populations of
individuals with generally high levels of discretionary income, and the former
group has evidenced serious interest in wagering and gaming. (FLP)
Although these groups can be reached through traditional print and broadcast
means, the Company plans to employ a strategy that leverages the low cost and
wide reach of on-line services and the Internet. The Company plans to allow free
access to YBRN software on-line for download.(FLP)
COMPANY HISTORY
On December 6, 1995, the Company (which concurrently changed its name to You
Bet International, Inc. and which was formerly known as Continental Embassy
Acquisition, Inc. ("CEA")) completed the acquisition (the "Acquisition") of You
Bet! Inc. ("YBI", which was formerly known as PC Totes, Inc.) a privately held
Delaware corporation. The Acquisition was completed concurrently with the
closing of a private placement of securities of YBI.
Upon the consummation of the Acquisition, the shareholders of MiddleWare
Telecom Corporation, a California corporation ("MTC"), who were also the
principal shareholders of YBI, contributed the stock of MTC to YBI without
additional consideration.
At the time of the Acquisition, YBI had been offering (and the Company, as
successor, continued to offer) securities in private placements to accredited
investors and in offshore transactions to persons who were not U.S. persons.
Gross proceeds to the Company from the combined offering, which continued into
1996, were approximately $4.8 million, including approximately $650,000 which
was in the form of the cancellation of certain indebtedness. The remaining
proceeds have been used by the Company for expenses related to the merger with a
public company and the costs of the private placement, product development and
other general corporate purposes.
YBI has over eight years of experience developing computer-based wagering
systems. In 1987, YBI developed a personal computer ("PC") based "totalisator"
system that is used to operate the wagering systems at horse and dog racing
tracks. The totalisator system is called the "PC Tote" and includes facilities
for infield scoreboards, closed circuit television, and numerous types of
customer ticket issuing machines. The system is currently in use at several
racetracks in the Far East. Through the implementation of this horse and dog
racing pari-mutuel wagering system, YBI was one of the first companies worldwide
to employ PC based technology in a real-time, transaction processing
environment.
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COMPETITION
Numerous Internet and other interactive gaming ventures have been announced
over the past several months. The Company expects to compete with these
entities, as well as other established gaming companies which may engage in
computer-based gaming activities. Competition on the Internet with companies
providing entertainment activities, as well as competition with interactive
gaming, is and is expected to continue to be intense. (FLS) The Company's
competitors range from small companies with limited resources to large companies
with greater financial, technical and marketing resources than those of the
Company. The Company considers its principal competitors in the interactive
pari-mutuel gaming market to be ODS and IWN, among others.
o ODS is developing an in-home pari-mutuel wagering system that requires an
ODS television set-top box and interactive technology. The system is
currently being tested in Kentucky.
o IWN is a division of NTN Communication, a publicly traded company that
provides interactive trivia entertainment in sports bars, hotels, and
other hospitality environments. IWN has announced that it will release an
in-home pari-mutuel wagering system based on PCs in 1996. Until recently,
YBI was the technology development partner of IWN, providing all technical
expertise and manpower. IWN and YBI signed a Separation and Settlement
agreement, providing IWN with what management believes is an early and
incomplete version of the PC client software. IWN has no rights or access
to YBI's interactive host technology. In addition, YBI retained all
personnel involved in the development of the interactive wagering products
and devices and has since gone on to develop the second generation client
software.
Because the market for interactive software products is still emerging and
the cost barriers to entry into this market are relatively low, the Company
expects the number of competitors to increase. Companies with greater financial
resources than the Company may be able to carry larger inventories, undertake
more extensive marketing campaigns, invest more in the development of production
technology and communication networks, adopt more aggressive pricing policies
and make higher offers or guarantees than the Company. In addition, the Company
believes that potential new competitors, including large software companies,
media companies, and gaming companies, are increasing their focus on the
interactive software market and network connectivity. Competition for the
Company's product is influenced by the timing of competitive product releases
and the similarity of such products to those of the Company, which may result in
significant price competition or reduced profit margins. (FLP)
GOVERNMENT REGULATION; LEGALITY
The gaming industry, which is subject to extensive statutory and regulatory
control by both state and federal agencies, may be affected by changes in the
political climate and
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economic and regulatory policies, which changes may impact the operations of the
Company. To the extent that the Company facilities are used by subscribers to
place intrastate or interstate wagers or the Company receives commissions in
respect thereof, such statutes and regulations could have a direct and material
effect on the business and indirectly could have a material effect on the public
demand for the Company's products and services.
Currently, all 50 states have statutes or regulations restricting gambling
activities, and two states have absolute prohibitions on gambling. In most
states it is illegal for anyone either to accept or make a wager with certain
statutory exceptions. The Federal Interstate Wire Act contains provisions which
may make it a crime for anyone in the business of gambling to use an interstate
or international telephone line to transmit information assisting in the placing
of bets, unless the betting is legal in the jurisdictions from which and into
which the transmission is made. Other federal laws impacting gaming activities
include the Interstate Wagering Paraphernalia Act, the Travel Act and the
Organized Crime Control Act. Various regulatory and legislative agencies are
conducting studies of interstate and interactive wagering. No assurance can be
given that new legislation will not be adopted which limits either (i) the
intrastate or interstate activities the Company proposes or hopes to engage in
with respect to actual wagering, or (ii) the type of activities (initially
pari-mutuel horse racing) associated therewith. Any change in either the
substance or the enforcement of the applicable rules and regulations in these
areas could have a material effect on the Company's business and prospects.
The Company has been advised by counsel that it can legally provide the
facilities through which subscribers communicate interstate wagers in the five
states that allow interstate telephone account wagering (30% of the domestic
market) and the other states that allow parimutuel wagering subject to state and
local requirements. The Company also believes that it can operate (or license
technology) in numerous countries that allow telephone and account wagering,
including Canada, Mexico, the United Kingdom, Australia, and Hong Kong.
In connection with its proposed activities, the Company might be considered
to be engaged in the gaming business. The Company will not actually be placing
or accepting any wagers. The Company will transmit the wagering data on behalf
of the subscriber to the licensed account wagering facilities with which the
Company has appropriate contractual relationships. These facilities will take
the data to make a wager from the subscriber's account with that facility. The
results will be transmitted to the subscriber through the YBRN and the transfer
of funds into and out of the subscribers account will be performed by the
licensed account wagering facilities. Although the Company intends to obtain
indemnification from each such account wagering entities, no assurance can be
given that such indemnification will be available or, if obtained, that such
provisions will be enforceable or adequate from a financial standpoint.
The Company has adopted a policy (referred to herein as its "Business
Guidelines") pursuant to which it will not engage in any proposed activity
unless (i) the Company has received an opinion of legal counsel (experienced in
gaming or other relevant matters) that it is such counsel's opinion that,
although not necessarily free from doubt, the proposed
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activity of the Company is permitted under applicable law, or (ii) the Company's
Board of Directors including a majority of the independent directors, after
reasonable inquiry including consultation with independent legal counsel
experienced in gaming or other relevant matters, determines with a high degree
of confidence that although the matter is not necessarily free from doubt the
Company will not be found to have been violating applicable law by reason of
engaging in the proposed activity.
Since the Company's Business Guidelines permit the Company to engage in
activities as to which it has not received a legal opinion that the activities
are permitted under applicable law, the possibility of violation of applicable
law is enhanced. In addition, the uncertain application of existing laws to
interactive gaming and the lack of applicable precedents suggest that legal
opinions in this field may be qualified on the basis that the matters expressed
therein are not free from doubt. Even when the Company is operating in
accordance with the advice of counsel, a risk exists that the Company may be
found to have violated applicable law. A failure to comply with applicable
regulations could result in the initiation of civil or criminal proceedings
against the Company. The results of such proceedings could include substantial
litigation expense, fines, incarceration of Company executives, diversion of the
attention of key Company employees, disqualification of the Company from
licensure, and injunctions or other prohibitions preventing the Company from
engaging in various anticipated activities.
Distribution of the Company's products in countries other than the United
States may be subject to regulation in those countries. There can be no
assurance that the Company will obtain the approvals necessary to market in such
territories.
EMPLOYEES
As of March 31, 1996, the Company engaged thirty-six employees and two
consultants. Of the employees, six are administrative or support personnel. The
Company believes that its relationship with its employees is good. Additional
employees will be hired to help maintain and operate the You Bet Racing Network
and to market to the consumer and horse racing industry.
ITEM 2: PROPERTIES
In February, 1996, the Company entered into a lease for 7,779 square feet of
space in an office building located at 1950 Sawtelle Boulevard in Los Angeles,
California, which houses the Company's executive offices. The lease is for a 26
month term, expiring March 31, 1998, with expenses per month of $7,688. The
Company prepaid the $193,220 aggregate lease payments. The Company believes that
this property is adequate for its present purposes.
ITEM 3: LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to Section 228 of the General Corporation Law of the State of
Delaware, the Company adopted the following resolutions:
The Company had adopted two stock option plans, the 1995 Stock Option Plan
(the "Employee Plan") and the 1995 Stock Option Plan for Non-Employee Directors
(the "Non-Employee Directors Plan") (the "Employee Plan and the Non-Employee
Directors Plans are referred to as the "Plans");
The Company amended such Plans so that (i) the Employee Plan shall relate to
the grant of option equaling 13.5% of the Company's outstanding Common Stock and
(ii) the Non Employee Directors Plan relates to the grant of options equaling
1.5% of the Company's Common Stock.
There were 5,007,950 (60.4%) votes cast in favor of these resolutions.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Stock: The Company's Common Stock has been traded on the electronic
bulletin board under the symbol "UBET". The following table sets forth for the
periods shown, the high and low bid prices as reported by NASDAQ. The bid prices
reflect interdealer prices without retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions. Prior to the Acquisition,
the Company's stock traded irregularly. Since the Acquisition, the limited
number of shares of free trading stock may have impacted the market for the
Company's shares.
<TABLE>
<CAPTION>
Common Stock
- ------------
High Low
---- ---
<S> <C> <C> <C>
1997:
First Quarter..................................... 3.75 2.50
1996:
Fourth Quarter.................................... 5.75 2.50
Third Quarter..................................... 4.75 3.25
Second Quarter.................................... 5.00 1.00
First Quarter..................................... 5.75 3.00
</TABLE>
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<TABLE>
<S> <C> <C> <C>
1995:
Fourth Quarter (From December 7, 1995)............. 7.00 5.00
</TABLE>
On April 6, 1997 the closing bid price for the Common Stock was $3.00 and the
closing asked price was $3.50 per share. The approximate number of holders of
record of Common Stock on that date was 206.
The Company has never paid a dividend on its Common Stock and presently
intends to retain all earnings for use in its business.
b. Warrants: Registrant issued and sold 970,000 Series A Warrants, and
517,188 Series B Warrants (collectively, the "Warrants") in connection with the
Acquisition and the concurrent and subsequent placement by the Company of its
securities to accredited and offshore investors. Each of the Series A and Series
B Warrants is exercisable for one share of Common Stock. There is currently no
public market for the Warrants. The Series A Warrants are exercisable for shares
of Common Stock at a price of $5.25 per share, and expire on the earlier of (a)
two years from the later of (i) the date of issuance of the last Series A
Warrant to be issued or (ii) the date of effectiveness of a registration
statement under the Securities Act covering the issuance and sale of the shares
of Common Stock upon issuable exercise of such Warrants or resale of such shares
by the holder, which period shall be extended day-for-day for any time that a
prospectus meeting the requirements of the Securities Act is not available, or
(b) the date specified in a notice of redemption from the Registrant (subject to
the prior right of the holder to exercise the Warrants for at least 30 trading
days following the date of such notice), which notice can only be given if the
closing price of the Common Stock for the twenty consecutive trading days
preceding such notice exceeds $7.50 per share and a current prospectus covering
the underlying shares is then available and the Company has a good faith belief
that it will remain available during said period of at least 30 trading days. A
Series A Warrant may not be exercised during the first year following issuance,
and the Company may not call the Series A Warrants for redemption during the 15
months immediately following the initial issuance of Series A Warrants or while
any Series A Warrant may not be exercised. The Series B Warrants are
substantially similar to the Series A Warrants, except that (i) the Series B
Warrants are exercisable for shares of Common Stock at a price of $3.125 per
share; (ii) the Series B Warrants expire three years after they are first
issued, and (iii) the Company may not call the Series B Warrants for redemption.
ITEM 6: SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the three
years ended December 31, 1996 have been derived from the audited consolidated
financial statements of the Company. The following financial information should
be read in conjunction with Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated Financial
Statements of the Company and the notes thereto, included in Item 8.
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SUMMARY OF SELECTED FINANCIAL DATA
(in thousands except per share)
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: 1996 1995 1994
- ------------------------------------------- ------- ------- -----
<S> <C> <C> <C>
REVENUES
$ 8 $ 152 $ 186
------- ------- -----
EXPENSES:
Research and development 1,610 318 2
Sales and Marketing 664 0 0
General and administrative 1,657 235 107
------- ------- -----
Total Expenses: 3,931 553 109
------- ------- -----
(LOSS) INCOME FROM OPERATIONS $(3,923) $ (401) $ 77
INTEREST INCOME (EXPENSE), NET 63 (20) (24)
------- ------- -----
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES AND
EXTRAORDINARY ITEM (3,860) (421) 53
PROVISION FOR INCOME TAXES (Note 5) 4 2 2
------- ------- -----
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (3,864) (423) 51
------- ------- -----
EXTRAORDINARY ITEM -- 20 --
------- ------- -----
NET (LOSS) INCOME $(3,864) $ (403) $ 51
======= ======= =====
WEIGHTED AVERAGE COMMON
STOCK AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,730 678 343
PER SHARE AMOUNTS:
NET (LOSS) INCOME PER SHARE
BEFORE EXTRAORDINARY ITEM $ (.67) $ (.62) $ .15
EXTRAORDINARY ITEMS -- .03 --
------- ------- -----
NET (LOSS) INCOME $ (.67) $ (.59) $ .15
======= ======= =====
BALANCE SHEET DATA
WORKING CAPITAL (DEFICIT) $(1,346) $ 3,339 $ 85
TOTAL ASSETS $ 1,311 $ 3,417 $ 85
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
LONG-TERM DEBT AND
OBLIGATIONS UNDER CAPITAL
LEASES (including current portions) $ 427 $ 0 $ 0
STOCKHOLDERS' (DEFICIT) EQUITY $ (405) $ 3,105 $(258)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Registrant has for the past year, used its resources to focus on
developing its product software, computer network service and establishing
alliances inside of horse racing. The Company's computer network service is
ready for deployment, key partnerships have been established and the product is
scheduled for beta testing in May 1997. However the Company is currently
experiencing cash flow difficulties, which has impacted the ability of the
Company to implement its business plan.
In September 1996, the Company announced its intention to seek, on a best
efforts basis, up to $4,500,000 through a private placement of Regulation D
Units, to "accredited investors", as defined in Rule 501 of Regulation D, and
the concurrent offering of the Regulation S Units to persons other than "U.S.
persons", as defined in Regulation S promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Each Regulation S Unit and Regulation D
Unit were priced at $22,500 per share and were to consist of 5,000 shares of the
Company's common stock.
The Company, having been unable to complete the above described placement,
that it was terminated the Offering around December 5, 1996. Since that time,
the Company has been offering to accredited investors (the "Bridge Offering")
certain Bridge Units, each such Bridge Unit consisting of $50,000 principal
amount of 15% Secured Convertible Notes (the "15% Notes"or "Bridge Notes") and
20,000 Common Stock Purchase Warrants (the "Warrants"). As of April 6, the
Company has been able to effectuate the sale of $975,000 principal amount of
Bridge Units. (see Liquidity and Capital Resource section).
Management believes that the historical financial information relating to the
Company is not indicative of the operations of the Company in the future for the
following reasons:
o In 1994 and 1995, the Company has pursued most of its ongoing business
activity through consulting projects relating to on-line marketing and
wagering. It is not anticipated that consulting assignments will be sought
or significant consulting revenue will be received in the current year or
subsequent periods.
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<PAGE> 15
o In mid-1995 and fiscal year 1996 the Company focused exclusively on the
research and development of The You Bet! Racing Network and the
recruitment of key employees.
o It is anticipated that future years (1997 and beyond) that costs
associated with providing the service will be much more significant with
relation to development costs (FLS).
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Revenues decreased $144,000 from $152,000 in 1995 to $8,000 in 1996 as a
result of the cessation of consulting business in 1995 and the focus on the
development of The You Bet! Racing Network.
Expenses increased $3,378,000 to $3,931,000 in 1996 from $553,000 in 1995 as
the Company continued its development efforts on the product and the virtual
private network, recruited and hired the management, horse racing, and technical
teams, and attracted strategic partners. The components of the increase in
expenses were payroll and consulting expense of $1,898,000 as the management,
horse racing, and technical teams were hired, other product and network
development costs of $311,000, marketing costs of $228,000 to promote the
product and the Company, and increased general and administrative costs of
$941,000 associated with the increased number of employees and legal, accounting
and other expenses related to failed September 1996 private placement offering.
Interest income increased $64,000 from $14,000 in 1995 to $78,000 in 1996
primarily from the short-term deployment of funds raised from the Company's
private placement in late 1995.
Interest expense decreased $19,000 to $15,000 in 1996 from $34,000 in 1995,
primarily resulting from a decrease in short-term borrowings.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
Revenues declined $36,000 to $152,000 in 1995 from $186,000 for 1994 as a
result of the cessation of consulting business in the fourth quarter of 1995 in
connection with the Company's decision to focus exclusively on the research and
development of The You Bet! Racing Network. During 1995, the Company signed a
termination agreement with its principal consulting customer.
Operating expenses increased $444,000 to $553,000 in 1995 from $109,000 in
1994 because of costs incurred in developing The You Bet! Racing Network. The
components of the increase were payroll and consulting expense of $279,000 as
more programmers and development personnel were added, other development costs
of $69,000, marketing costs of $68,000 to promote the product and the Company,
and increased general and administrative costs of $28,000 associated with the
increased number of employees.
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<PAGE> 16
Interest income of approximately $14,000 was earned in 1995, primarily from
the short term deployment of funds raised from the Company's private placement
in late 1995. The Company did not earn any interest income in 1994.
Interest expense increased approximately $10,000 to $34,000 in 1995 from
$24,000 in 1994, primarily resulting from an increase in short-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Current Cash Position
The Company is currently experiencing certain liquidity problems that are
expected to continue until the Company completes some form of long term
financing. In response to this situation, the Company has reduced the number of
its employees, agreed to defer compensation to certain of its senior officers,
and otherwise reduced operating and capital expenditures. The Company has
$270,000 in cash and cash equivalents and $2,636,000 of short-term payables as
of April 6, 1997. The short term payables include $975,000 in bridge notes (See
1996 offerings) which may be converted into common stock at the note holders
option.
The Company is dependent upon the proceeds of long term financing (see 1997
offering) for the continuation of its current testing and marketing efforts
relating to The You Bet! Racing Network (YBRN) software and for the continuation
and expansion of the Company's development activities and planned marketing
expenditures. If adequate funds are not available to satisfy short-term or
long-term requirements, management will be required to consider a variety of
other options including seeking joint venture partners, selling or licensing all
or a portion of its proprietary technology, curtailing product development and
delaying the roll-out of its first product, as well as other cost cutting
actions, including suspending all or a portion of its activities.
The Company expects that the cash on hand coupled with the cash to be raised
from the new private placement (see 1997 offering), assuming it will be
successful, will be sufficient for operating expenses and capital expenditures
through at least June 1998. No assurance can be given that the Company will be
successful in raising additional funds. If the Company is not successful in
raising this additional financing, management will be required to consider a
variety of other options including seeking joint venture partners, selling or
licensing all or a portion of its proprietary technology, curtailing product
development and delaying the roll-out of its first product, as well as other
cost cutting actions, including suspending all or a portion of its activities.
(FLS)
The Company's need for capital (beyond that contemplated in the anticipated
private placement) during the next year or more will vary based upon a number of
factors, including the rate at which demand for products expands, the level of
sales and marketing activities for its products, and the level of effort needed
to develop and commercialize additional applications. In addition, the Company's
business plans may change or unforeseen events may occur which require the
Company to raise additional funds. Additional funds may not
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<PAGE> 17
be available on terms acceptable to the Company when the Company needs such
funds. The unavailability of additional funds when needed could have a material
adverse effect on the Company. (FLP)
1996 Offerings
In September 1996, the Company announced its intention to seek, on a best
efforts basis, up to $4,500,000 through a private placement of Regulation D
Units, to "accredited investors", as defined in Rule 501 of Regulation D, and
the concurrent offering of the Regulation S Units to persons other than "U.S.
persons", as defined in Regulation S promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Each Regulation S Unit and Regulation D
Unit were priced at $22,500 per share and were to consist of 5,000 shares of the
Company's common stock. The Company having been unable to complete the above
described placement, terminated the Offering in December 1996.
Since that time, the Company has been offering to accredited investors (the
"Bridge Offering") certain Bridge Units, each such Bridge Unit consisting of
$50,000 principal amount of 15% Secured Convertible Notes (the "15% Notes"or
"Bridge Notes") and 20,000 Common Stock Purchase Warrants (the "Warrants"). No
minimum subscription is required and the Company intends to accept any qualified
subscriptions. The principal amount of, and interest on, the 15% Notes shall be
due and payable on the earlier to occur of (i) a public or private financing
raising in excess of $5,000,000 of net cash proceeds to the Company (ii) the
first anniversary of the Initial Closing Date, and shall be secured by
substantially all of the assets of the Company. Each Warrant (the "Bridge
Warrants") entitles the holder thereof to acquire one share (each such share, a
"Warrant Share") of Common Stock at the exercise price per share of $2.50 during
the period commencing two business days following the effective date (the
"Effective Date") of the registration statement relating to a sale of the
Company's securities.
The Company has been able to continue operations on a limited basis by
deferring salaries, delaying payable payments and funding from the bridge
facility. To date, the Company has been able to effectuate the sale of $975,000
principal amount of Bridge Units.
1997 Offering
On March 17, 1997 the Company initiated a private placement where the Company
is seeking to raise up to $10,000,000 in gross proceeds before deduction of
expected placement fees and expenses, through a private placement of Units to
persons who are not U.S. persons, as defined in Regulation S, in offshore
transactions, as defined in Regulation S (the "Offering").
Concurrently, the Company is also seeking to offer in the United States
identical Units as is offered for this Offering for the same Unit price of
$25,000 per Unit, each Unit consisting of 10,000 Shares of the Company's $.001
par Common Stock and 5,000 callable Series D Warrants, each Warrant allowing its
holder to purchase a Share of Common Stock for $5.25 per Share for a period of
up to two years from the date of issue (the "Domestic Offering"). The
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<PAGE> 18
concurrent Domestic Offering in the United States will only be to accredited
investors as defined in Rule 501 of Regulation D promulgated under the
Securities Act. In no event, however, will the aggregate amount of subscriptions
for this Offering and for the Domestic Offering be accepted for an amount in
excess of the maximum $10,000,000 (4,000,000 Shares of Common Stock and
2,000,000 Series D Warrants) amount of this Offering (without regard for the
Over-Allotment option).
The Company intends to have an initial closing ("Initial Closing") of this
Offering under this Private Placement Memorandum when an aggregate of at least
240 Units have been subscribed for at an aggregate price of at least $6,000,000.
See "Description of Securities" herein for a more detailed description of the
Shares and Warrants included in the Units. After such Initial Closing, the
Offering may continue with the intent of raising up to an aggregate of
$10,000,000 from the sale of up to an aggregate of 400 Units, not including any
Over-Allotment amount, from either the Domestic Offering and/or this Offering.
The net proceeds available for use by the Company from the sale of the Units
being offered hereby will vary depending on the number of Units sold. If only
the minimum aggregate number of Units is sold, the net cash proceeds to the
Company are estimated to be $5,275,000 after deducting the placement fee and
expenses estimated at an aggregate of $725,0000. If the maximum aggregate number
of Units is sold, the net cash proceeds to the Company are estimated to be
$9,100,000 after deducting the placement fee and expenses estimated at an
aggregate of $900,000. The net proceeds are expected to be used for the final
stage development of the You Bet! Racing Network software; Private Network
installation, expansion and usage; marketing activities such as service launch,
customer acquisition, website creation and maintenance, and promotional programs
for frequent users, repay short-term loans; certification for the product
software and service; new accounting and management software; and for general
corporate purposes.
The private placement documents requires David Marshall to transfer the
present job functions of the Company's CEO and President positions when a
suitable candidate with appropriate experience can be recruited. (See Item 10 -
Management)
1996 Use of Cash
During the year ended December 31, 1996, the Company's cash position
decreased $3.2 million to $87,000 compared to $3.3 million at December 31, 1995.
In December 1995, the Company closed a portion of a private offering, issuing
1,290,000 shares and warrants to purchase an additional 645,000 shares of Common
Stock at an exercise price of $5.25 and receiving net proceeds of approximately
$3.0 million after payments of commissions and other offering expenses. The
private placement offering generated an additional $950,000 after commissions
and expenses in 1996 from the issuance of 650,000 additional shares and warrants
to purchase 325,000 additional shares of Common Stock. Substantially all of the
Company's then existing indebtedness (aggregating $650,000) was retired.
Net cash used by operating activities totaled $2,843,000 during 1996, which
was used for continued development efforts on the product and the virtual
private network, recruitment
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<PAGE> 19
and employment of the management, horse racing, and technical teams, costs
incurred to attract strategic partners. In addition, the Company incurred
increased legal, accounting and other expenses related to failed September 1996
private placement offering.
Cash flows used in investing activities totaled $780,000 for capital
expenditures principally for the test and production environment and the virtual
private network.
The Company has entered into a capital lease that provides for a $100,000
sale and leaseback of equipment previously purchased by the Company and a
$150,000 line for new equipment purchases in the third quarter 1996. The lease
terms are 30 month, 20% security deposit of which 1/3 is returned after each
year with an effective interest rate of approximately 15% per annum.
The Company also entered into a capital lease that provides a $160,000 line
for new equipment purchases in the first quarter 1997. The lease terms are 36
month, with no security deposits and an effective interest rate of approximately
15% per annum.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a board meeting on January 15, 1996 the Board of Directors of the Company
(the "Board") authorized the Company's executive officers to engage new auditors
for the fiscal year ended December 31, 1995. As of February 28, 1996 the Company
engaged the accounting firm of Deloitte & Touche LLP as independent accountants
for the Company for the fiscal year ended December 31, 1995. The firm of
Robinson, Hill & Co. (sometimes referred to herein as "Prior Firm") was replaced
because the Prior Firm was located in Salt Lake City and the Company has moved
its offices to Los Angeles, California after its December 6, 1995 Acquisition of
YBI. The Board's decision to retain Deloitte & Touche LLP was based primarily on
its national reputation, partner availability and familiarity with the Company's
general business in the computer software industry. During the fiscal year ended
December 31, 1994 and the interim period beginning January 1, 1995 through
February 28, 1996 there were no disagreements with the Prior Firm on matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
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PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
First Became a
Name Age Director or Officer
- ---- --- -------------------
<S> <C> <C>
David Marshall, Chairman 34 1989
and CEO
Russell Fine, Executive 33 1989
Vice President, Chief
Technology Officer, Director
Ron Luniewski, Chief
Operating Officer 33 1996
Barry Peters, Chief
Financial Officer 38 1996
Steve Molnar, Executive
Vice President, Racing 53 1995
Jeff Franklin, Executive
Director/Racing Product 43 1995
Development
Jess Rifkind, Director 65 1995
</TABLE>
DAVID MARSHALL, CEO AND PRESIDENT
Marshall was the CEO and co-founder of PC-Totes, Inc. (PC-Totes) and
MiddleWare Telecom Corporation (MTC), both of which now comprise You Bet!, Inc.
In 1987, PC-Totes developed the world's first fault tolerant, PC based computer
totalisator system that is now used to operate wagering at horse and dog racing
tracks in Thailand, Malaysia, Guam and other countries in the Pacific Rim.
Presently, while Marshall intends to remain an active officer of the Company, he
also intends to transfer the present job functions of the
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Company's CEO and President positions when a suitable candidate with appropriate
experience can be recruited. When such replacement occurs, Marshall intends to
focus his efforts on strategic matters and pursuing appropriate joint ventures.
RUSSELL FINE, EXECUTIVE VICE-PRESIDENT AND CHIEF TECHNOLOGY OFFICER
Fine was the Chief Technology Officer and co-founder of MiddleWare Telecom
Corporation (MTC) and Vice-President of Research and Development at PC-Totes
Inc. (PC-Totes). Fine has been instrumental in ensuring the exceptional success
of these companies within the interactive system development industry. For
example, at PC-Totes, he spearheaded the innovative design and overall
development of one of the world's high-speed, fault tolerant, real-time
transaction processing systems to use PC technology. Similarly, while at MTC,
Fine designed and managed the development of interactive wagering software,
including the development of real-time metering and billing systems, data
translation software and multimedia CD-ROM content development.
RON LUNIEWSKI, CHIEF OPERATIONS OFFICER
Luniewski comes to You Bet! from EDS where he has more than 11 years of
experience directing large software development efforts. Most recently,
Luniewski was VP of GM Marketing & Advertising, and was responsible for
providing information technology and consulting services to his GM clients. This
included the development and implementation of the largest integrated Internet
project in the world.
BARRY PETERS, CHIEF FINANCIAL OFFICER
Peters is a senior financial executive with experience in start-ups,
interactive service companies, and large multinational corporations. Peters was
previously employed as Chief Financial Officer/Senior Vice President of
Interactive Cable Systems (ICS Communications). He was a founding member of
ICS's executive team. At ICS, he started a company that pioneered providing
cable television, telephone and security services to apartment building
residents. The Company's market capitalization grew from $4 to $250 million, and
revenue from $1 million to $20 million in less than two years. Previously,
Peters started his interactive career at Spectradyne where he was Financial
Director of field operations, responsible for 400 employees. Prior to
Spectradyne, Peters was responsible for reviews of United Technologies
international joint ventures - specifically in the Pacific Rim
STEVE MOLNAR, EXECUTIVE VICE-PRESIDENT, RACING
Molnar held the positions of Director of Marketing, and then President and
Chief Operations Officer of McKinnie Systems. Under his leadership, McKinnie
Systems implemented a nationwide licensing system based on Smart Card
technology. The company also became the number one computer software supplier to
racetracks throughout North America.
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JEFF FRANKLIN, EXECUTIVE DIRECTOR/RACING PRODUCT DEVELOPMENT
Previously in his role as jockey agent, Franklin has represented such icons
as Gary Stevens, Patrick Valenzuela and Jose Santos, winning more than fifteen
riding titles throughout the country. In addition, he helped build and develop
some of racing's most successful stables. Brookside Farms (owned by Allen E.
Paulson) received the prestigious Eclipse Award as the country's leading breeder
during Jeff Franklin's term as racing manager.
ITEM 11: EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each fiscal year ended
December 31, 1996 and 1995 individual compensation for services to the Company
and its subsidiaries of the President and Executive Vice President (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------- ------------------------
OTHER
ANNUAL SECURITIES
COMPEN- RESTRICTED UNDERLYING LTIP ALL OTHER
SALARY BONUS SATION STOCK OPTIONS/ PAYOUTS COMPENSATION
NAME YEAR ($) ($) ($) AWARD(S)($) SARS (#) ($) ($)
- -------------- ------- ------------ ----------- ----------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DAVID 1996 130,000 --- --- --- --- --- ---
MARSHALL 1995 72,800 --- --- --- --- --- ---
RUSSELL FINE 1996 120,000 --- --- --- --- --- ---
1995 52,558 --- --- --- --- --- ---
STEVE MOLNAR 1996 74,750 --- --- --- --- --- ---
1995 19,750 --- --- --- 80,000 --- ---
RON LUNIEWSKI 1996 98,885 --- --- --- --- --- ---
1995 0 --- --- --- 100,000 --- ---
BARRY PETERS 1996 111,654 --- --- --- 100,000 --- ---
JEFF FRANKLIN 1996 66,300 --- --- --- --- --- ---
1995 0 60,000
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
SHOWN BELOW IS INFORMATION ON GRANTS OF STOCK OPTIONS PURSUANT TO THE
1995 STOCK OPTION PLAN DURING THE FISCAL YEAR ENDED DECEMBER 31, 1996 TO THE
OFFICERS WHICH ARE LISTED IN THE SUMMARY COMPENSATION TABLE ABOVE.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZED VALUE AT ASSIGNED
ANNUAL RATES OF STOCK PRICE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN 1996
------------------------------------------
NUMBER OF
SECURITIES
UNDER- POTENTIAL REALIZED VALUE AT ASSIGNED
LYING PERCENTAGE OF EXERCISE ANNUAL RATES OF STOCK PRICE
OPTIONS TOTAL OPTIONS/ OR BASE ------------------------------------------
SARS /GRANTED TO EM- PRICE PER STOCK DOLLAR STOCK DOLLAR
GRANTED PLOYEES IN SHARE EXPIRATION PRICE GAINS PRICE GAINS
NAME (#) FISCAL YEAR ($) DATE ($5%) ($) ($10%) ($)
- ---- ---------- -------------- --------- ---------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Marshall 0 --- --- --- --- --- --- ---
Russell Fine 0 --- --- --- --- --- --- ---
Steve Molnar 0 --- --- --- --- --- --- ---
Ron Luniewski 0 --- --- --- --- --- --- ---
Barry Peters 100,000 22% $2.50 1/06 $4.07 $157,000 $6.48 $398,000
Jeff Franklin 0 --- --- --- --- --- --- ---
</TABLE>
DIRECTOR COMPENSATION
Directors holding salaried positions with the Company do not receive
compensation for their services as directors. It is the intention of the Company
that each non-employee director will receive options to purchase 5,000 shares
per year, retroactive to each year of service rendered by such director. See
"Item 13 - Certain Transactions" for a discussion of consulting fees paid to
Jess Rifkind, a director of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee. The Board of
Directors has designated David Marshall and Russell Fine to serve as the members
of the Stock Option Committee for purposes of administering the 1995 Employee
Stock Option Plan, including designating participants and the amounts of the
awards thereto. Messrs. Marshall and Fine are ineligible to receive awards under
this Plan. The compensation paid to Messrs. Marshall and Fine was approved by
Mr. Rifkind, the sole outside director.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
Employment Agreements:
Messrs. Marshall and Fine are parties to employment agreements providing for
terms of four years commencing as of December 6, 1995. The agreements provide
for annual compensation of $130,000, and $120,000, respectively; a car allowance
of $500 per month;
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<PAGE> 24
and other usual and customary benefits. In addition, each is entitled to such
bonuses as may be declared from time to time by the Company's Board of
Directors.
In the event of a "Change of Control" (as defined below) of the Company, each
of Mr. Marshall and Mr. Fine shall have the right, but not the obligation, to
consider such event to be a termination of his employment agreement. In such
event, neither Mr. Marshall nor Mr. Fine shall have a duty, either express or
implied, to mitigate any damages under his agreement, and the Company shall
remain liable for all compensation (whether salary, bonus or other benefits)
provided for under the terms of the agreements. Moreover, any compensation
earned by either Messrs. Marshall or Fine in any capacity after the date of such
termination will not reduce or mitigate the amounts payable by the Company under
the applicable agreement. For purposes of their employment agreements, "Change
of Control" shall mean (i) any sale of all or substantially all of the assets of
the Company; (ii) any stock sale, merger or other business combination in which
the members of the management of the Company (a) no longer are affiliates of the
surviving entity, (b) no longer are in control of the surviving entity or (c) no
longer own in excess of 20% of the outstanding stock of such surviving entity.
Option Plans
In August 1996, the Company's Board of Directors approved, and recommended
for adoption by the shareholders, an amendment to the You Bet 1995 Stock Option
Plan (the "Employee Plan") and the 1995 Stock Option Plan for Non-Employee
Directors (the "Non-Employee Directors Plan" and together with the Employee
Plan, the "1995 Plans"). The number of shares available to the employee plan was
formerly limited to 12% of the aggregate amount of shares of Common Stock of
the Company then outstanding and the director plan was formerly limited to 3%
of the aggregate amount of shares of Common Stock of the Company then
outstanding. These percentages were adjusted to relect 13.5% for the employees
and 1.5% for the directors.
As of April 6, 1997, options to purchase 1,022,614 shares of Common Stock
were outstanding under the 1995 Plans, of which 176,735 are vested. The options
vest ratably over four years. Common Stock purchased upon the exercise of such
options are subject to restrictions which prohibit the resale of such Shares for
a 24 month period commencing from the issuance of the options.
The following summary is qualified in its entirety by reference to the full
text of the 1995 Plans. Unless otherwise indicated, the summary is applicable to
each plan.
The 1995 Plans. The 1995 Plans provide for the granting of awards of
incentive stock options ("ISOs") within the meaning of Section 422 of the Code,
Nonqualified stock options ("NSOs"), and stock appreciation rights ("SARs")
(awards of ISOs, NSOs, and SARs sometimes hereinafter collectively referred to
herein as "Awards"). The aggregate number of shares of Common Stock available
for issuance under the 1995 Plans is 15% of the total number of shares of Common
Stock issued and outstanding from time to time.
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<PAGE> 25
Purpose. The purpose of the 1995 Plans is to provide key employees, officers
(other than Messrs. Marshall and Fine) and directors with an additional
incentive to promote the success of the Company's business and to encourage
employees to remain in the employ of the Company.
Administration -- Employee Plan. The Employee Plan is administered by a
committee (the Employee Plan Committee"), which consists of at least two
directors of the Company appointed by the Board. The members of the Employee
Plan Committee are not eligible to receive Options except pursuant to a formula
contained in the Non-Employee Directors Plan and must be "disinterested persons"
as defined in Rule 16b-3(d)(3) promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The aggregate number of shares of Stock that
may be granted to non-employee members of the Board pursuant to the Plan may not
exceed 13.5% of the aggregate amount of shares of Common Stock of the Company
then outstanding.
Administration -- Non-Employee Directors Plan. The Plan is administered by a
committee (the "Non-Employee Plan Committee") of not less than two persons,
appointed by the Board and serving at the pleasure of the Board. However, the
Non-Employee Plan Committee has no discretion as to the issuance of Options
under this Plan. Directors initially will receive options to purchase 10,000
shares when first elected to the Board. On the day after (i) the 1996 annual
stockholders' meeting of the Company and on the day after each annual
stockholders' meeting of the Company thereafter during the term of the Plan or
(ii) if there shall be no annual meeting during the preceding thirteen months,
on June 30 of such year, each non-employee member of the Board shall be granted
a Non-Qualified Stock Option to purchase 5,000 shares of Common Stock. The
option price per share of Common Stock purchasable under such Stock Options
shall be 100% of the fair market value on the date of grant. Such options shall
be exercisable immediately on the date of grant by payment in full of the
purchase price in cash. The aggregate number of shares of Stock that may be
granted to non-employee members of the Board pursuant to the Plan may not exceed
1.5% of the aggregate amount of shares of Common Stock of the Company then
outstanding.
Incentive Stock Options. The Employee Plan authorizes the Employee Plan
Committee to grant ISOs to any key employee of the Company or any affiliate of
the Company and to determine the terms and conditions of each grant, including
without limitation, the number of shares subject to each ISO. The ISO exercise
price would also be determined by the Committee and would not be less than the
fair market value of the Common Stock on the date of grant. The exercise price
would not be less than 110% of such fair market value and the exercise period
would not exceed five years if the recipient of such ISO was the holder of more
than 10% of the Company's outstanding voting securities.
Nonqualified Stock Options. The Employee Plan provides that the Employee Plan
Committee has the authority to grant NSOs to any key employee of the Company or
its affiliates. The Committee is authorized to grant NSOs to any qualified
participant and to determine the terms and conditions of each such grant,
including the number of shares subject to each NSO, the option period and the
option exercise price. The exercise price for
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<PAGE> 26
NSOs would not be less than the fair market value of the shares subject to the
NSO on the date of grant.
The Manner of Exercise. The exercise price for options granted under the 1995
Plans may be paid in cash or shares of Common Stock, including shares of Common
Stock which the Plan participants received upon the exercise of one or more
options provided that, with respect to the exercise of ISOs, such shares, if
acquired through the exercise of an option, have been held by such participant
for a period not shorter than the later of two years from the date the option
was granted and one year after the shares of Common Stock were acquired by the
participant through the exercise of options.
The option exercise price may also be paid by the participant's delivery of
an election directing the Company to withhold shares of Common Stock from the
Common Stock otherwise due upon exercise of the option.
Vesting. Unless the Employee Plan Committee establishes a different vesting
schedule at the time of grant, awards under the Employee Plan will vest ratably
over 4 years.
Nontransferability. Awards are not transferable other than by will or the
laws of descent and distribution. During a participant's lifetime, his options
may be exercised only by the participant.
Discretionary Awards. It is not possible to state the amount of discretionary
awards that will be received by any of the participants under the Employee Plan
since the grant of awards are within the discretion of the Committee.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as of
April 6, 1997. The table shows the beneficial ownership of each person known to
the Company who beneficially own more than 5% of the shares of the Company's
Common Stock, each current director, and all directors and officers as a group.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Name and Address Shares Percent
of Beneficial Beneficially of
Owner* Owned Class(6)
--------------------------- -------------- -------------
<S> <C> <C>
David Marshall(1) 2,517,375 30.39%
Russell Fine(1) 2,490,575 30.07%
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C>
Trafina Privatbank 800,000 9.66%
Marshall Gift Trust (2) 428,500 5.17%
Sid Marshall (3) 40,000 .48%
Ron Luniewski (4) 0 0
Barry Peters (4) 0 0
Jess Rifkind (5) 30,000 **
All Directors and
Officers as a group
(5 persons)(1) (2) 5,037,950 60.8%
</TABLE>
(1) Includes 1,156,250 Divestment Shares (as hereinafter defined) for each of
Messrs. D. Marshall and R. Fine. If the Divestment Shares are all forfeited,
Messrs. D. Marshall and Fine would own 16.42% and 16.22% respectively.
(2) Includes 187,500 Divestment Shares for the Marshall Gift Trust. If the
Divestment Shares are all forfeited, Marshall Gift Trust would own 2.91%.
(3) Does not include Shares held by the Marshall Gift Trust, of which Mr. Sid
Marshall is co-trustee. See Note 2 and related information.
(4) The options held by Messrs. Luniewski and Peters are not exercisable during
1996.
(5) Includes currently exercisable options to acquire 10,000 shares at $ 2.50 a
share, as well as 10,000 shares owned by Mr. Rifkind and 10,000 shares
owned by his wife.
(6) Based upon 8,283,333 shares of Common Stock, which were outstanding as of
July 26, 1996.
* The address for Messrs. D. Marshall, R. Fine, Luniewski and Peters is c/o
the Company, 1950 Sawtelle Boulevard, Suite 180, Los Angeles, California
90025. The address for Trafina Privatbank is Rennweg 50 CH-4020 Basel,
Switzerland. The address for Sid Marshall and the Marshall Gift Trust is
11770-M Pacific Coast Highway, Malibu, CA. 90265. The address for Jess
Rifkind is 5227 Bianca Avenue, Encino, California 91316.
** Less than 1%
27
<PAGE> 28
DIVESTMENT SHARES
Upon completion of the Offerings, David Marshall and Russell Fine, who are
respectively the President and Executive Vice President of the Company, own, in
the aggregate 5,007,950 shares of the Company's common stock. Of this amount,
2,312,500 shares of Company Common Stock owned by such shareholders, plus
187,500 shares of Common Stock owned by Marshall Gift Trust (collectively, the
"Divestment Shares") are subject to forfeiture and cancellation by the Company
if certain conditions are not satisfied. Forfeiture of the Divestment Shares
will occur if either the Company does not achieve the subscription levels
indicated below or the market price of the Company's Common Stock does not
exceed $5.25 per share. The possibility of forfeiture will terminate, regardless
of the share price or the level of subscriptions, upon a sale of substantially
all of the assets of the Company, or upon a merger or other business combination
involving the Company, provided either (i) such transaction has been approved by
holders of a majority of the outstanding shares of the Company which are not
owned by beneficial holders of Divestment Shares and their affiliates or (ii)
the consideration to be received by the holders of Company Common Stock shall be
in the form of cash or marketable securities (valued as of the date of the
shareholder vote with respect thereto) having a value of not less than $7.50 per
share of Common Stock.
Divestment Shares will no longer be subject to the risk of forfeiture
according to the following schedule, assuming the market price condition is
satisfied:
Forfeiture Schedule
2,500,000 shares subject to forfeiture
Based on subscribers
<TABLE>
<CAPTION>
Incremental Aggregate
Minimum Shares No Shares No
Number of Longer Subject Longer Subject Time Frame
Subscribers To Forfeiture To Forfeiture
- --------------- -------------------- --------------------- -----------------
<S> <C> <C> <C>
12,500 500,000 500,000 December 5, 1998
25,000 500,000 1,000,000 December 5, 1998
37,500 500,000 1,500,000 December 5, 1998
50,000 500,000 2,000,000 December 5, 1998
100,000 500,000 2,500,000 December 5, 1999
</TABLE>
The termination of the possibility of forfeiture with respect to the
Divestment Shares will be deemed to be the payment of compensation to the
recipients and will result in a charge to the earnings of the Company in the
year or years the possibility of forfeiture terminates, in an amount equal to
the fair market value of the Divestment Shares at the time such possibility
terminates. This charge to earnings, if required, could have a substantial
negative impact on the earnings of the Company in the year or years in which the
compensation
28
<PAGE> 29
expense is recognized and could adversely affect the Company's qualifications
for listing on various securities exchanges. In no event, however, may the
possibility of forfeiture terminate unless the then current trading price for
the Company's common stock exceeds $5.25 per share, provided that the market
price condition may be satisfied within six months after the expiration of the
time frame indicated above with respect to the relevant subscription level. The
market price requirement for the Divestment Shares will be satisfied when the
closing price for Common Stock on the principal national securities exchange on
which it is then listed, or if not so listed, the mean between the highest
closing bid and lowest closing asked prices, exceeds $5.25 for twenty
consecutive trading days after the relevant subscriber level is achieved and
maintained.
The effect of the charge to earnings associated with the termination of the
possibility of forfeiture with respect to the Divestment Shares could place the
Company in a net loss position for the relevant year. Moreover, there is no
assurance that the operations of the Company will be profitable either in the
year or years in which possibility of forfeiture of the Divestment Shares
terminates or in any prior or subsequent periods. The management of the Company
may have the discretion to accelerate or defer or otherwise influence certain
transactions that could affect the number of subscribers. For purposes of the
foregoing, a person utilizing the Company's products will be considered a
"subscriber" only if such person is paying for such subscription at bona fide
commercial rates approved by a majority of the Company's independent directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jess Rifkind, who is a non-employee director, receives $2,400 per month from
the Company as consulting fees.
See "Item- 12: Security Ownership of Certain Beneficial Owners and
Management" for a discussion of the Divestment Shares currently owed by Messrs.
Marshall and Fine.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this annual report:
1. FINANCIAL STATEMENT SCHEDULES:
NONE REQUIRED.
2. FINANCIAL STATEMENTS:
THE FINANCIAL STATEMENTS LISTED IN THE ACCOMPANYING INDEX TO FINANCIAL
STATEMENTS ARE FILED AS PART OF THIS ANNUAL REPORT.
29
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - years ended December 31, 1996 and 1995 F-2
Consolidated Statements of Operations - years ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Shareholders' (Deficit) Equity - years ended
December 31, 1996, 1995 & 1994 F-4
Consolidated Statements of Cash Flows December 31, 1996, 1995 and 1994 F-5
Notes to the Consolidated Financial Statements F6-F11
</TABLE>
3. EXHIBITS:
THE EXHIBITS LISTED BELOW ARE FILED AS A PART OF THIS ANNUAL REPORT.
2.1 ACQUISITION AGREEMENT, DATED AS OF DECEMBER 6, 1995
BETWEEN THE COMPANY AND CEA ACQUISITION CORP. (1)
3.1 RESTATED ARTICLES OF INCORPORATION. (1)
3.2 BY-LAWS OF THE COMPANY. (1)
4.1 FORM OF SERIES A WARRANT AGREEMENT DATED AS OF DECEMBER 6,
1995 BETWEEN THE COMPANY AND U.S. STOCK OF TRANSFER
CORP.(2)
10.1 EMPLOYMENT AGREEMENT, DATED AS OF DECEMBER 6, 1995,
BETWEEN THE COMPANY AND DAVID MARSHALL. (2)
10.2 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND RUSSELL FINE,
DATED AS OF DECEMBER 6, 1995. (2)
10.3 LEASE BETWEEN THE COMPANY AND STORAGE TEK. (2)
10.4 1995 EMPLOYEES STOCK OPTION PLAN (2)
10.5 1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN (2)
21.1 LIST OF SUBSIDIARIES OF REGISTRANT (2)
(1) FILED AS EXHIBIT 1 TO FORM 10K, FILED AS OF JULY 26, 1996.
(2) INCLUDED HEREWITH.
30
<PAGE> 31
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF LOS ANGELES,
STATE OF CALIFORNIA, ON THE 15TH day of April, 1997.
YOU BET INTERNATIONAL, INC.
BY:___S/___________________
DAVID MARSHALL
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
___S/________________ CHAIRMAN OF THE BOARD, APRIL 15, 1997
DAVID MARSHALL PRESIDENT, CHIEF EXECUTIVE
OFFICER AND DIRECTOR
___S/________________ EXECUTIVE VICE PRESIDENT, APRIL 15, 1997
RUSSELL FINE DIRECTOR
___S/________________ CHIEF FINANCIAL OFFICER APRIL 15, 1997
BARRY PETERS
___S/________________ DIRECTOR APRIL 15, 1997
JESS RIFKIND
</TABLE>
31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
You Bet International, Inc.
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of You Bet
International, Inc. and subsidiary (the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of You Bet International, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and current liquidity problems raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Los Angeles, California
April 4, 1997
F-1
<PAGE> 33
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 6) $ 87,000 $ 3,298,000
Prepaid and other current assets (Note 7) 156,000 41,000
------------ ------------
Total current assets 243,000 3,339,000
PROPERTY AND EQUIPMENT, Net (Note 3) 1,013,000 78,000
OTHER ASSETS 55,000
------------ ------------
TOTAL $ 1,311,000 $ 3,417,000
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 828,000 $ 259,000
Accrued salaries and related items 192,000 45,000
Other accrued expenses 265,000 6,000
Bridge loan payable (Note 5) 200,000
Income taxes payable (Note 8) 4,000 2,000
Current portion of capitalized lease obligations (Note 4) 100,000
------------ ------------
Total current liabilities 1,589,000 312,000
CAPITALIZED LEASE OBLIGATIONS (Note 4) 127,000
------------ ------------
Total liabilities 1,716,000 312,000
------------ ------------
COMMITMENTS (Note 7)
SHAREHOLDERS' (DEFICIT) EQUITY (Note 6):
Common stock, $.001 par value; authorized
50,000,000 shares; issued and issuable and
outstanding 8,283,333 (1996) and 8,071,333 (1995) 8,000 8,000
Additional paid-in capital 4,411,000 4,031,000
Accumulated deficit (4,547,000) (683,000)
Deferred compensation (277,000) (251,000)
------------ ------------
Total shareholders' (deficit) equity (405,000) 3,105,000
------------ ------------
TOTAL $ 1,311,000 $ 3,417,000
============ ============
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-2
<PAGE> 34
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CONSULTING REVENUES (Note 9) $ 8,000 $ 152,000 $ 186,000
------------ ------------ ------------
EXPENSES:
Research and development 1,610,000 318,000 2,000
Sales and marketing 664,000
General and administrative 1,657,000 235,000 107,000
------------ ------------ ------------
Total expenses 3,931,000 553,000 109,000
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (3,923,000) (401,000) 77,000
INTEREST EXPENSE (Notes 4 and 5) (15,000) (34,000) (24,000)
INTEREST INCOME 78,000 14,000
------------ ------------ ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM (3,860,000) (421,000) 53,000
PROVISION FOR INCOME TAXES (Note 8) 4,000 2,000 2,000
------------ ------------ ------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (3,864,000) (423,000) 51,000
EXTRAORDINARY ITEM, Forgiveness of debt (Note 9) 20,000
------------ ------------ ------------
NET (LOSS) INCOME $ (3,864,000) $ (403,000) $ 51,000
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 5,730,000 678,000 343,000
============ ============ ============
PER SHARE AMOUNTS:
(Loss) income before extraordinary item $ (0.67) $ (0.62) $ 0.15
Extraordinary item 0.00 0.03 0.00
------------ ------------ ------------
Net (loss) income $ (0.67) $ (0.59) $ 0.15
============ ============ ============
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-3
<PAGE> 35
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 343,333 $ 1,000 $ 21,000 $ (331,000) $ (309,000)
Net income 51,000 51,000
------------ --------- ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1994 343,333 1,000 21,000 (280,000) (258,000)
Issuance of shares in reverse
merger (Note 1) 5,800,000 6,000 (522,000) (516,000)
Shares issued in private
placement, net of offering
costs (Note 6) 1,490,000 1,000 3,148,000 3,149,000
Shares and options issued for
services (Note 6) 200,000 789,000 $(289,000) 500,000
Shares issued in exchange for
debt (Note 6) 238,000 595,000 595,000
Amortization of deferred
compensation (Note 6) 38,000 38,000
Net loss (403,000) (403,000)
------------ --------- ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1995 8,071,333 8,000 4,031,000 (683,000) (251,000) 3,105,000
Shares issued in private
placement, net of offering
costs (Note 6) 212,000 252,000 252,000
Options issued for services
(Note 6) 128,000 (128,000)
Amortization of deferred
compensation (Note 6) 102,000 102,000
Net loss (3,864,000) (3,864,000)
------------ --------- ------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1996 8,283,333 $ 8,000 $ 4,411,000 $(4,547,000) $ (277,000) $ (405,000)
============ ========= ============ ============ ============ ============
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-4
<PAGE> 36
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,864,000) $ (403,000) $ 51,000
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Amortization of deferred compensation 102,000 38,000
Extraordinary item - forgiveness of debt (20,000)
Depreciation and amortization 112,000 3,000
Changes in operating assets and liabilities:
Prepaid and other current assets (115,000) (6,000) 50,000
Other assets (55,000)
Accounts payable 569,000 259,000 (83,000)
Accrued salaries and related items 147,000 45,000
Due to officers/stockholders (13,000) (35,000)
Income taxes payable 2,000 2,000 1,000
Other accrued expenses 259,000 (12,000) 13,000
------------ ------------ ------------
Net cash used in operating activities (2,843,000) (107,000) (3,000)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES -
Acquisition of equipment (780,000) (81,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 530,000 3,725,000
Offering costs (278,000) (581,000)
Proceeds from bridge loan 200,000
Proceeds from loan payable - related parties 286,000 12,000
Proceeds from loan payable 20,000
Payments on capitalized lease obligations (40,000)
------------ ------------ ------------
Net cash provided by financing activities 412,000 3,430,000 32,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,211,000) 3,242,000 29,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,298,000 56,000 27,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 87,000 $ 3,298,000 $ 56,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for -
Income taxes $ 2,000 $ 800 $ 800
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-5
<PAGE> 37
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(SEE INDEPENDENT AUDITORS' REPORT)
1. BUSINESS AND PRINCIPLES OF CONSOLIDATION
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of You Bet International, Inc., its wholly owned subsidiary,
You Bet!, Inc. and Middleware Telecom, Inc., a wholly owned subsidiary of
You Bet!, Inc. (collectively, the "Company"). All significant intercompany
transactions have been eliminated in consolidation.
BUSINESS - The Company is an online communications company located in Los
Angeles, California, that is developing interactive software and services
for consumer use to be provided over its secure private network.
GOING CONCERN - The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has had recurring
losses and is currently experiencing certain liquidity problems that are
expected to continue until the Company completes some form of long-term
financing. In response to this situation, the Company has reduced the
number of its employees, agreed to defer compensation to certain of its
senior officers, and otherwise reduced operating and capital expenditures.
The Company is dependent upon the proceeds of long-term financing (see Note
10) for the continuation of its current testing and marketing efforts
relating to The You Bet! Racing Network software and for the continuation
and expansion of the Company's development activities and planned marketing
expenditures. If adequate funds are not available to satisfy short-term or
long-term requirements, management will be required to consider a variety
of other options, including seeking joint venture partners, selling or
licensing all or a portion of its proprietary technology, curtailing
product development and delaying the roll-out of its first product, as well
as other cost-cutting actions, including suspending all or a portion of its
activities.
The Company expects that the cash on hand coupled with the cash to be
raised from the new private placement (see Note 10), assuming it will be
successful, will be sufficient for operating expenses and capital
expenditures through at least June 1998. No assurance can be given that the
Company will be successful in raising additional funds.
The Company's need for capital (beyond that contemplated in the anticipated
private placement) during the next year or more will vary based upon a
number of factors, including the rate at which demand for products expands,
the level of sales and marketing activities for its products, and the level
of effort needed to develop and commercialize additional applications. In
addition, the Company's business plans may change or unforeseen events may
occur which require the Company to raise additional funds. Additional funds
may not be available on terms acceptable to the Company when the Company
needs such funds. The unavailability of additional funds when needed could
have a material adverse effect on the Company. The consolidated financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
F-6
<PAGE> 38
ACQUISITION - Continental Embassy Acquisition, Inc. ("CEA") was organized
in the state of Utah in 1987 for the purpose of raising capital and
acquiring any suitable assets, properties and businesses by means of
completing a merger with, or acquisition of, any privately held business
enterprises seeking to obtain the perceived advantages of being a publicly
owned company. On December 6, 1995, CEA reorganized in the state of
Delaware, renamed itself You Bet International, Inc. and completed the
acquisition of the Delaware corporation, You Bet!, Inc. (the
"Acquisition"). The Acquisition was completed through the issuance of
5,800,000 shares of CEA common stock in exchange for all of the outstanding
shares of You Bet!, Inc. Concurrent with the Acquisition, CEA changed its
name to You Bet International, Inc., and the management of You Bet!, Inc.
became the management of the consolidated Company. The Acquisition has been
reflected for accounting purposes as the acquisition of You Bet
International, Inc. by You Bet!, Inc. (a reverse acquisition). The
operating results reflected in the accompanying consolidated financial
statements do not include CEA's operating activities prior to the
Acquisition, as the amounts are not significant.
Concurrent with the Acquisition, the shareholders of Middleware Telecom,
Inc. ("Middleware"), which are substantially the same as the shareholders
of You Bet!, Inc., contributed their shares of Middleware to You Bet!, Inc.
for no consideration. The historical financial information presented
includes the combined financial statements of You Bet!, Inc. and Middleware
due to the common control, management and operations of the companies. All
intercompany transactions have been eliminated in the combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all investments with
original purchased maturities of three months or less to be cash
equivalents.
SOFTWARE DEVELOPMENT COSTS - The Company's initial software development
costs have been charged to operations as research prior to the commencement
of a working model. Costs incurred subsequent to demonstrating
technological feasibility will be capitalized and amortized over the
estimated product life.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Equipment and furniture are depreciated using the straight-line method over
their estimated useful life of three to five years. Leasehold improvements
are amortized over the term of the lease.
REVENUE RECOGNITION - Revenue is primarily derived from various software
consulting agreements and is recognized upon rendering of services.
NET (LOSS) INCOME PER SHARE - Net (loss) income per share is computed using
the weighted average common shares outstanding during the year and the
dilutive effect of common share equivalents (stock options and warrants).
For the years ended December 31, 1996 and 1995 the effect of common share
equivalents was antidilutive. There were no common share equivalents in
1994. A total of 2,500,000 shares, which are subject to a divestiture of
shares agreement (see Note 6), have been excluded from the earnings per
share calculation in 1996 and 1995, as the amounts are antidilutive.
F-7
<PAGE> 39
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 and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash equivalents, accounts payable and capitalized
lease obligations. The book values of the cash equivalents and accounts
payable are representative of their fair value due to their short-term
maturity. The book values of the capitalized lease obligations approximate
fair value, as such leases were recently negotiated.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Computer equipment $ 637,000 $ 81,000
Assets under capitalized leases (Note 4) 267,000
Office furniture and equipment 162,000
Leasehold improvements 62,000
----------- -----------
1,128,000 81,000
Accumulated depreciation (including $18,000 in 1996 for
assets under capital leases) (115,000) (3,000)
----------- -----------
$ 1,013,000 $ 78,000
=========== ===========
</TABLE>
4. CAPITALIZED LEASE OBLIGATIONS
In 1996, the Company entered into capitalized lease obligations for
computer equipment in the amount of $267,000. The leases have been
discounted at interest rates implicit in the leases of approximately 16%.
At December 31, 1996, the leases mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1997 $ 129,000
1998 129,000
1999 12,000
-----------
270,000
Less amount representing interest 43,000
-----------
Present value of minimum lease payments $ 227,000
===========
</TABLE>
F-8
<PAGE> 40
5. BRIDGE LOANS PAYABLE
In December 1996, the Company obtained bridge financing through a private
placement in the amount of $200,000 from a shareholder. For each unit of
bridge financing sold, the purchaser receives a note in the face amount of
$50,000 and 20,000 warrants. The notes bear interest at the rate of 15% per
annum, were convertible at the rate of $2.50 per share, and are convertible
only if there is a current registration statement in effect for the shares
underlying the notes. The notes are secured by substantially all of the
assets of the Company and contain restrictive provisions on the Company's
ability to pay dividends, change its line of business, enter into a merger
or consolidation, or liquidate the business. Accrued interest on these
notes at December 31, 1996 totaled $1,000.
The warrants issued in connection with this financing are exercisable at
$2.50 per share (see Note 10) and expire five years from the date of grant.
In addition, the warrants contain antidilutive provisions. Management
believes the value of the warrants issued to be immaterial to the
consolidated financial statements. The Company has agreed to register the
warrants and conversion shares.
Subsequent to December 31, the Company obtained an additional $775,000 in
bridge loans and in connection therewith issued 310,000 warrants.
6. COMMON STOCK
PRIVATE PLACEMENTS - Concurrent with the closing of the Acquisition in 1995
(see Note 1), the Company completed a private placement offering to new
investors of 149 units for $25,000 per unit, each consisting of 10,000
shares of common stock, and Series A warrants to purchase 5,000 shares of
the Company's common stock. A total of 1,490,000 shares and 745,000 Series
A warrants were issued with proceeds totaling $3,730,000. The Series A
warrants are exercisable at $5.25 per share and expire on the later of the
second anniversary of the date of issuance or two years from the date on
which a registration statement registering the warrants is declared
effective. Total costs of the offering of $581,000 were charged against the
proceeds. Included in cash at December 31, 1995 was $505,000 held in escrow
pending the issuance of 200,000 of the total shares sold.
The Company issued 200,000 shares of its common stock and Series B warrants
to purchase an additional 417,188 shares as commission to the underwriter
of the 1995 offering. The Series B warrants are exercisable at $3.125 and
expire December 6, 1998.
In 1996, the Company sold an additional 21 units with proceeds totaling
$530,000. A total of 212,000 shares and 106,000 Series A warrants were
issued. Offering costs incurred during 1996 of $278,000 were charged
against the proceeds.
CONVERSION OF DEBT - Concurrent with the closing of the Acquisition (see
Note 2), bridge financing in the amount of $250,000 was exchanged for 10 of
the units offered in the private placement and 100,000 Series B warrants
exercisable at $3.125 per share, and additional loans in the amount of
$345,000 were exchanged for 138,000 shares of common stock.
F-9
<PAGE> 41
STOCK OPTIONS PLANS - In November 1995, the Company's Board of Directors
approved the 1995 Stock Option Plan and the 1995 Stock Option Plan for
Non-Employee Directors (collectively, the "1995 Plans"). The 1995 Plans
provide for the granting of awards of incentive stock options, nonqualified
stock options and stock appreciation rights. The aggregate number of shares
of common stock available for issuance under the 1995 Plans is 15% of the
total number of shares of common stock outstanding from time to time. The
options vest in four equal installments. A total of 176,735 options have
vested at December 31, 1996. Deferred compensation totaling $128,000 in
1996 and $289,000 in 1995 was recorded upon the issuance of the options
granted at exercise prices less than current market value of the Company's
common stock and is being amortized over the vesting period of the options.
Transactions under the 1995 Plans are as follows:
<TABLE>
<CAPTION>
OPTION PRICE
OPTIONS PER SHARE
<S> <C> <C>
Options granted 589,700 $ 2.50
Options terminated (21,500)
----------- -----------
Balance, December 31, 1995 568,200 2.50
Options granted 497,714 2.50-3.50
Options terminated (43,300) 2.50
----------- -----------
Balance, December 31, 1996 1,022,614 $2.50-$3.50
=========== ===========
</TABLE>
The weighted average fair values of the stock options during 1996 and 1995
were $2.61 and $2.50, respectively. The Company applies Accounting
Principles Board Options No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, except as discussed above, no
compensation costs have been recognized. Had compensation cost for the
Company's Option Plan been determined based on the fair value at the grant
dates for awards during 1996 and 1995 consistent with the method of
Financial Accounting Standards Board Statement No. 123, the Company's net
loss and loss per share for the years ended December 31, 1996 and 1995
would have been increased to the pro forma indicated below:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net loss:
As reported $ (3,864,000) $ (403,000)
Pro forma $ (4,138,000) $ (419,000)
Net loss per share:
As reported $ (0.67) $ (0.59)
Pro forma $ (0.72) $ (0.62)
</TABLE>
The fair value of options granted under the Company's 1995 Plans was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used: expected life of five
years; risk free interest rate of 5.7%; and expected volatility of 100.0 %.
F-10
<PAGE> 42
DIVESTITURE OF SHARES - A total of 2,500,000 of the issued shares of the
Company, which are owned by two officers of the Company and a third
shareholder, are subject to forfeiture by the shareholders and cancellation
by the Company if certain conditions are not satisfied. Forfeiture of such
divestment shares will occur if either the Company does not achieve certain
subscriber levels or the Company's stock does not exceed $5.25 by certain
target dates. These contingent shares are excluded from the calculation of
weighted average shares outstanding in the accompanying financial
statements and, upon termination of the forfeiture restrictions, will be
reflected as compensation expense and the issuance of capital in the period
the forfeiture restrictions are terminated.
7. COMMITMENTS
EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements
with two of its officers providing for base compensation totaling $250,000
per year through December 1999.
LEASE - Through December 31, 1995, the Company leased office space on a
month-to-month basis. In January 1996, the Company entered into a lease for
office space which expires in March 1998. The lease agreement required the
Company to prepay the entire lease. The prepaid rent is being amortized to
rent expense on a straight-line basis over the term of the lease. Rent
expense for the years ended December 31, 1996 and 1995 totaled $90,000 and
$5,000, respectively.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current - state $ 4,000 $ 2,000 $ 2,000
Deferred income taxes 1,800,000 275,000 (11,000)
Change in deferred tax asset valuation allowance (1,800,000) (275,000) 11,000
----------- ----------- ------------
Provision for income taxes $ 4,000 $ 2,000 $ 2,000
=========== =========== ============
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate (35.0%) (35.0%) 35.0%
State taxes, net of federal benefit (6.0%) (6.0%) 6.0%
Use of net operating loss carryforwards (38.0)%
Effects of losses without current year benefit (41.0%) 40.5%
----------- ----------- ------------
0.0% (0.5%) 3.0%
=========== =========== ============
</TABLE>
F-11
<PAGE> 43
Deferred income taxes are computed annually for differences between the
financial statement and income tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future. Such deferred
income tax asset and liability computations are based on enacted laws and
rates applicable to periods in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the income tax payable or refundable for the period plus or
minus the change during the period in deferred income tax assets and
liabilities. Net deferred tax assets, consisting primarily of the net
operating loss carryforwards, have been reduced to zero by valuation
allowances due to the uncertainty of their recoverability.
9. EXTRAORDINARY ITEM
In May 1995, the Company entered into a settlement with IWN, Inc. ("IWN").
The Company had been performing consulting services for IWN in connection
with the joint development of certain interactive wagering software. In
connection with this arrangement, the Company was paid $119,000 by IWN in
1994 and was loaned $20,000 by IWN. On May 18, 1995 the Company and IWN
entered into a separation and settlement agreement whereby the loan was
forgiven.
10. SUBSEQUENT EVENTS
On March 17, 1997 the Company initiated a private placement whereby the
Company is seeking to raise up to $10,000,000 in gross proceeds before
deduction of expected placement fees and expenses, through a private
placement of units. Each unit will cost $25,000 and will consist of 10,000
shares of the Company's common stock and 5,000 callable Series D or
Series S warrants, each warrant allowing its holder to purchase a share
of common stock for $5.25 per share for a period of up to two years
from the date of issue.
******
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000814055
<NAME> YOU BET INTERNATIONAL, INCORPORATED
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 87,000
<SECURITIES> 0
<RECEIVABLES> 156,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 243,000
<PP&E> 1,183,000
<DEPRECIATION> (115,000)
<TOTAL-ASSETS> 1,311,000
<CURRENT-LIABILITIES> 1,589,000
<BONDS> 127,000
0
0
<COMMON> 8,000
<OTHER-SE> (413,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,311,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,845,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,000
<INCOME-PRETAX> (3,860,000)
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,864,000)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> (.67)
</TABLE>
