<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999
REGISTRATION NO. 333-76029
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
YOUBET.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4627253
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
1950 SAWTELLE BOULEVARD, SUITE 180
LOS ANGELES, CALIFORNIA 90025
(310) 444-3300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
ROBERT M. FELL
CHIEF EXECUTIVE OFFICER
1950 SAWTELLE BLVD., SUITE 180
LOS ANGELES, CALIFORNIA 90025
(310) 444-3300
(Name, address, including zip code, and telephone number, including
area code, of agent of service)
--------------------------
COPIES TO:
GARY N. JACOBS, ESQ. JONATHAN K. LAYNE, ESQ.
CHRISTENSEN, MILLER, FINK, JACOBS, GIBSON, DUNN & CRUTCHER LLP
GLASER, WEIL & SHAPIRO, LLP 333 SOUTH GRAND AVENUE
2121 AVENUE OF THE STARS, 18TH FLOOR LOS ANGELES, CALIFORNIA 90071
LOS ANGELES, CALIFORNIA 90067 (213) 229-7000
(310) 553-3000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities At of
1933, other than the securities offered only in connection with dividend or
interest reinvestment plans, check the following box / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number on the earlier effective registration statement
for the same offering / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box / /
--------------------------
CALCULATION OF REGISTRATION FEES
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER UNIT(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share..... 4,022,750 shares $18 $72,409,500 $16,826
</TABLE>
(1) Includes 506,250 shares of Common Stock covered by an option granted to the
Underwriters to cover over-allotments, if any.
(2) Based on a last reported sale price for the common stock on the
over-the-counter bulletin board of $18 on June 10, 1999.
(3) Includes $16,118 previously paid by the registrant in connection with the
registration of 3,851,250 shares of common stock at a proposed maximum
offering price per unit of $14.9375 pursuant to the Registration Statement
filed on April 9, 1999 and $708 paid in connection with the registration of
an additional 141,500 shares of common stock at a proposed maximum offering
price per unit of $18 registered pursuant to this Amendment No. 2 to the
Registration Statement.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 11, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
YOUBET.COM, INC.
3,486,500 SHARES
COMMON STOCK
Youbet.com, Inc. is offering 2,811,500 shares of common stock and 675,000
shares are being offered by certain selling stockholders on the exercise of
outstanding stock purchase warrants. Youbet.com's common stock is currently
traded on the over-the-counter bulletin board under the symbol "UBET."
Youbet.com's common stock has been approved for quotation on the Nasdaq National
Market under the symbol "UBET" upon completion of the offering. The closing bid
for Youbet.com's common stock on June 10, 1999 on the over-the-counter bulletin
board was $17.9375.
------------------------
INVESTING IN YOUBET.COM'S COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public Offering Price........................................................... $ $
Underwriting Discounts and Commissions.......................................... $ $
Proceeds to Youbet.com.......................................................... $ $
Proceeds to Selling Stockholders................................................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The selling stockholders have granted the underwriters a 30-day option to
purchase up to an additional 506,250 shares of common stock to cover
over-allotments. The underwriters expect to deliver the shares of common stock
to purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS ING BARING FURMAN SELZ LLC
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
handicap,
wager & watch
live horseracing
directly over a personal computer...
only with Youbet.com
[Photo of two people using the You Bet Network on a computer]
getting the world on track [Youbet.com's logo]
<PAGE>
REVIEW PAST PERFORMANCES You can access detailed past performances on your
computer for the races you want to handicap. The You Bet Network past
performances are compiled from information by Equibase and the Thoroughbred
Sports Network, America's leading suppliers of horseracing data.
[Picture of the You Bet Network computer screen with a Past Performance
display.]
The You Bet Network is America's
Horseracing is one of first dedicated online horseracing
the largest sports markets in the world. service. The You Bet Network
U.S. horseplayers wagered over offers live video streams,
$15.4 billion in 1997, and worldwide real-time odds, track programs and
horse wagering during the same period past performances, and secure
exceeded $100 billion, with over 75% wagering directly into horse race
of U.S. horse wagering coming form track pools - right up until post
off-track betting. time - through a licensed wagering
Source: IGWB & The Jockey Club Fact Book facility.
<TABLE>
<S><C>
"YOU BET DELIVERS ALL THE TRACK VIEW-TM-
ACTION YOU GET AT THE IS THE GATEWAY TO
TRACK STRAIGHT TO YOUR YOU BET ACTION!
COMPUTER. I USE THE YOU The You Bet Network's
BET NETWORK ALL THE TIME, innovative TrackView-TM- PLACE YOUR BET ON THE
AND I THINK IT'S THE BEST puts all the horseracing YOU BET WAGERPAD...
THING TO HIT HORSE RACING action at your fingertips. Once you've picked
SINCE THE CREATION OF THE Track controllers allow your horse, the You
TRIPLE CROWN." you to move easily from Bet Network lets you
track to track with one place secure online [Picture of the You Bet
simple click, while wagers directly into Network computer screen
[PHOTO OF CHRIS MCCARRON] showing the current race [Picture of the You horse race track with a WagerPad
number and real-time Bet Network computer wagering pools display]
CHRIS MCCARRON minutes to post. Live screen with a horse through a licensed
- -------------- track odds are updated race in progress wagering facility.
hall of fame jockey, directly from the track display] Win, place, show and
spokesperson & instantly. Video streams exotic wagers can be
product advisor of the live simulcast easily transmitted and
feed run right beside confirmed within
the track odds. Track seconds of post time.
programs and past
performances allow for
fast handicapping right
up to the last moment.
</TABLE>
<PAGE>
You should rely only on the information contained in this prospectus.
Youbet.com has not authorized anyone to provide you with information different
from that contained in this prospectus. Youbet.com and the selling stockholders
are offering to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus.
Until [ ], 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade Youbet.com's common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 34
Management................................................................ 50
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 66
Selling Stockholders...................................................... 68
Underwriting/Plan of Distribution......................................... 68
Legal Matters............................................................. 71
Experts................................................................... 71
Incorporation of Documents by Reference................................... 71
Available Information..................................................... 72
Index to Financial Statements............................................. F-1
Appendix 1................................................................ A-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK
FACTORS" AND THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEFORE DECIDING TO
INVEST IN YOUBET.COM'S COMMON STOCK. UNLESS OTHERWISE INDICATED, ALL INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE
THEIR OVER-ALLOTMENT OPTION. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. YOUBET.COM'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
YOUBET.COM
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Wagering on live events such as horse track racing,
car racing, soccer, football, etc., is a large industry. Youbet.com has focused
its efforts primarily on the United States horse track racing industry and
believes that its principal product, the You Bet Network, is currently the only
legal system available for online wagering in the United States. Youbet.com
intends to pursue an aggressive marketing program to build a horse track racing
subscriber base and brand awareness in the United States. At the same time,
Youbet.com plans to pursue the much larger opportunities for live event wagering
offered in international markets.
Youbet.com believes that online communication is an ideal medium for live
event wagering. First, online communication allows bettors instant access to
vast amounts of historical performance data used in assessing potential wagers.
Second, online communication offers the ability to sort and analyze such data in
ways and at speeds that are unachievable manually. Third, online communications
technology allows wagers to be placed from virtually any location within a
jurisdiction where wagering is legal, thus freeing bettors from traditional
site-specific wagering locations. In addition, the speed of electronic
communications allows wagers to be placed and acknowledged in seconds. This
represents a dramatic improvement over alternative methods such as standing in
line at an event venue or waiting on the telephone for a voice transaction. This
shortening of response time is critically important in wagering, since it allows
bettors to place their wager seconds before the closing of the wagering pool.
Finally, online technologies such as streaming audio and video allow an event to
be displayed in real time on a user's PC as it is actually occurring, thereby
allowing the user to experience the event without actually attending in person.
For these reasons, Youbet.com believes that the online-capable PC is the ideal
appliance for wagering.
Youbet.com has chosen to focus initially on horse track racing in the United
States because it is the most widely permitted form of live event wagering.
General sports wagering is legal only in Nevada and to persons physically
located in Nevada. Such wagers may not be taken (by phone or otherwise) from any
bettor outside Nevada. In contrast, 42 states permit pari-mutuel wagering on
horse track racing. Furthermore, certain states provide for "account wagering"
where wagers on horse races are taken from out-of-state bettors, with wins and
losses settled in an account maintained for the bettor by a licensed wagering
entity located in the host state. It is this account wagering activity which
forms the core of Youbet.com's United States business.
Youbet.com's initial product, the You Bet Network, is a PC-based system
which utilizes the communications backbone of the Internet and a closed-loop
private network with Internet access to provide up-to-the minute detailed
information on races taking place at horse tracks nationwide and at selected
international venues. Youbet.com also delivers a live simulcast of selected
horse races directly to the subscriber's computer. In addition, subscribers can
use the You Bet Network to fill out an electronic wagering ticket with a brief
series of mouse-clicks and transmit this information electronically to an
account wagering entity. Youbet.com currently has an account wagering agreement
with Mountain Laurel Racing, Inc., and Washington Trotting Association, Inc.,
both of which are subsidiaries of
4
<PAGE>
Ladbroke USA (collectively "Ladbroke"). Ladbroke accepts and processes wagers
into the particular horse track pari-mutuel pool from its hub in Pennsylvania.
Youbet.com transmits electronic information related to wagers to Ladbroke from
the 40 states where Ladbroke currently accepts telephone wagers. After
processing the wager, Ladbroke sends an electronic confirmation to the bettor
through the You Bet Network. The time for the entire process from information
submission to acknowledgment is usually less than three seconds.
YOUBET.COM DOES NOT ACTUALLY ACCEPT OR PLACE ANY WAGERS. Wagers are
accepted and placed only by a state licensed wagering facility, currently
Ladbroke. Youbet.com's role in the wagering process is limited to transmitting
information related to the wagers to the licensed wagering facility.
Youbet.com is not aware of any United States based competitor currently
offering another online or Internet-based wagering product for horse track
racing, and the only prospective competitor of which it is aware is at the
prototype stage of development. Thus, Youbet.com believes that it has a lead
time advantage in the United States horse track racing market. Youbet.com
intends to significantly increase its marketing expenditures in order to further
develop the "Youbet.com" brand name and increase its subscriber base before any
competitor has an opportunity to establish a rival product.
Youbet.com currently derives revenue from the You Bet Network in three ways.
First, it charges a monthly subscription fee, currently $5.95 per month. Second,
it receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Youbet.com believes its opportunities internationally are dramatically
larger and less restricted than in the United States. Youbet.com believes that
sports wagering on live events is legal in most parts of Europe, Asia, Australia
and Latin America and that wagering on horse track racing is also legal in most
jurisdictions. In many of these jurisdictions, such as Hong Kong and Japan, the
annual amount wagered on horse track racing per capita is several times larger
than is wagered in the United States. Youbet.com also believes that it has a
significant opportunity overseas because overseas markets have embraced Internet
gaming to a greater degree than the United States. While there are significantly
more wagering competitors overseas, Youbet.com believes that the market is large
enough to support many competitors profitably.
Youbet.com's strategy is to be the dominant global brand for online live
event wagering. Youbet.com believes that it must significantly increase
expenditures on marketing in order to maximize consumer awareness and increase
the size of its subscriber base before its competitors can respond. To fund this
marketing program, Youbet.com has recently raised significant new capital, and
will use such capital, together with the proceeds of this offering, primarily
for marketing. In addition, Youbet.com intends to establish strategic
relationships with important partners, including content, Internet and
telecommunications providers.
Youbet.com's executive offices are located at 1950 Sawtelle Boulevard, Suite
180, Los Angeles, CA 90025. Youbet.com's telephone number is (310) 444-3300 and
its World Wide Web site is http://www.youbet.com. INFORMATION CONTAINED IN
YOUBET.COM'S WEB SITE SHOULD NOT BE CONSIDERED A PART OF THIS PROSPECTUS.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Youbet.com........... 2,811,500 shares
Common Stock offered by the selling
stockholders............................... 675,000 shares
Total.................................. 3,486,500 shares
Common Stock to be outstanding after the
offering*.................................. 18,922,831 shares
Common Stock fully diluted after the
offering*.................................. 31,710,292 shares
Use of Proceeds.............................. Brand development, marketing expenditures and
development of Youbet.com's infrastructure
worldwide. The balance of the proceeds will
be used for general corporate purposes,
including working capital. See "Use of
Proceeds."
Market Symbol................................ UBET
</TABLE>
- ---------
Common stock to be outstanding after the offering includes 1,041,100 shares
issuable upon conversion of the outstanding Series A Convertible Preferred Stock
which will occur immediately after the offering.
Common stock fully diluted immediately after the offering includes 2,175,596
shares issuable upon exercise of outstanding options, 6,939,014 shares issuable
upon exercise of the remaining outstanding warrants after 675,000 warrants are
exercised in the offering and 3,672,851 shares issuable upon conversion of the
11% Senior Convertible Discount Notes. (The interest accruing on the 11% Senior
Convertible Discount Notes will be added to principal for the first two years.
Therefore, the number of shares issuable upon conversion will increase ratably
from approximately, 3,672,851 on the date of this prospectus to 4,550,000 shares
of common stock on or after April 5, 2001.)
Youbet.com's common stock currently trades on the over-the-counter bulletin
board. Youbet.com's common stock has been approved for quotation on the the
Nasdaq National Market upon completion of the offering.
Youbet.com expects that the number of shares of common stock offered by the
selling stockholders will be 675,000. In the event that fewer shares are offered
by the Selling Stockholders, Youbet.com will increase the number of shares of
common stock offered by Youbet.com so that the total number of shares of common
stock offered hereby will equal 3,486,500.
* Assuming the underwriters' over-allotment option is not exercised.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is the statement of operations data and operating data for
the years ended December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999, and the balance sheet data, as of March 31, 1999, on an
actual basis, a pro forma basis and a pro forma as adjusted basis. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Youbet.com's
financial statements and the related notes appearing elsewhere in this
prospectus. The selected statement of operations data for the years ended
December 31 1996, 1997 and 1998 are derived from Youbet.com's audited financial
statements. The selected balance sheet data as of March 31, 1999 and the
selected statement of operations data for the three months ended March 31, 1998
and 1999 and 1995 through March 31, 1999 are derived from Youbet.com's unaudited
financial statements. The unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, that are
considered necessary for a fair presentation of the financial position and
results of operations for the respective periods. Results for the three months
ended March 31, 1999 are not necessarily indicative of results for the year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ -- $ -- $ 264 $ -- $ 461
Loss from operations............................... $ (3,941) $ (6,918) $ (11,096) $ (2,277) $ (2,155)
Net loss........................................... $ (3,865) $ (19,417) $ (13,862) $ (2,830) $ (2,147)
Net loss per share--basic and diluted.............. $ (0.67) $ (3.06) $ (1.32) $ (0.29) $ (0.15)
Weighted average shares outstanding................ 5,730 6,355 10,535 9,604 14,059
OPERATING DATA:
Pari-mutuel handle................................. $ -- $ -- $ 4,505 $ -- $ 8,209
Commission on pari mutuel handle................... $ -- $ -- $ 264 $ -- $ 435
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- ------------
BALANCE SHEET DATA:
Cash.......................................................................... $ 2,543 $ 37,662 $ 85,578
Working capital............................................................... $ 792 $ 35,910 $ 83,826
Total assets.................................................................. $ 3,790 $ 40,870 $ 88,786
Long-term debt................................................................ $ 48 $ 36,776 $ 36,776
Total stockholders' equity.................................................... $ 1,846 $ 2,198 $ 50,114
</TABLE>
The pro forma amounts reflect the issuance on April 5, 1999 of 11% Senior
Convertible Discount Notes payable with a principal amount of $45,500,000 for
cash proceeds of $36,728,510 generating net proceeds of approximately
$35,119,000.
The pro forma as adjusted amounts include (1) 1,041,100 shares issuable upon
conversion, immediately after the offering, of the outstanding Series A
Convertible Preferred Stock, (2) the sale of the 11% Senior Convertible Discount
Notes, (3) the sale of 2,811,500 shares of common stock in this offering at an
assumed public offering price of $17.9375 per share, after deducting the
underwriting discounts and estimated offering expenses payable by Youbet.com,
and the application of the net proceeds from this offering, and (4) the exercise
of approximately 675,000 warrants with an average exercise price of
approximately $3.30 per share.
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE DECIDING WHETHER TO INVEST IN SHARES OF COMMON
STOCK OF YOUBET.COM. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS REFER TO FUTURE PLANS AND MAY
USE WORDS SUCH AS "EXPECT," "INTEND," "ANTICIPATE" AND "PLAN". ANY SUCH
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF MANY UNCERTAINTIES AND OTHER FACTORS.
RISKS RELATED TO WAGERING STATUTES AND REGULATIONS
LEGAL ISSUES CONCERNING ONLINE WAGERING MAY ADVERSELY AFFECT YOUBET.COM
To the extent that Youbet.com's facilities are used by subscribers to place
intrastate or interstate wagers or Youbet.com receives commissions derived from
such wagers, various federal and state statutes and regulations could have a
direct and material adverse effect on Youbet.com's business and indirectly could
have a material adverse effect on the public's demand for Youbet.com's services.
Gaming activities are subject to extensive statutory and regulatory regulation
by both state and federal authorities, and are likely to be significantly
affected by any changes in the political climate and changes in economic and
regulatory policies. Such effects could be materially adverse to Youbet.com.
All 50 states currently have statutes or regulations regarding gaming
activities, and three states have no gaming at all. In most states it is illegal
to place or accept a wager, with specific state-by-state statutory exceptions.
For example, pari-mutuel wagering of some kind is permitted in 42 states. Eight
of these 42 states have statutes which provide for account wagering, and five of
these eight states allow accounts for pari-mutuel wagers to be established from
bettors outside of their state. The adoption of laws or regulations affecting
pari-mutuel wagering or adoption of anti-pari-mutuel wagering policies by any
jurisdiction could have a material adverse effect on Youbet.com's business.
The Federal Interstate Wire Act contains provisions which make it a crime
for anyone in the business of gaming to use an interstate or international
telephone line to transmit information assisting in the placing of wagers,
unless the wagering is legal in the jurisdictions from which and into which the
transmission is made.
Other federal laws impacting gaming activities include the Interstate Horse
Racing Act, the Interstate Wagering Paraphernalia Act, the Travel Act and the
Organized Crime Control Act. Various regulatory and legislative agencies
including the National Gambling Impact Study Commission are conducting studies
of interstate and interactive wagering, and any anti-gaming conclusions they may
reach are likely to be influential.
Federal legislation has been proposed which could limit either the
intrastate or interstate activities Youbet.com engages in or the type of
activities associated with such wagering. Any change in either the substance or
the enforcement of the applicable rules and regulations in these areas could
have an adverse effect on Youbet.com's business and prospects.
Youbet.com believes that its activities are in compliance with all
applicable gaming laws and regulations as currently applied. Youbet.com has been
advised by counsel that a reasonable conclusion can be drawn that Youbet.com's
activities do not violate the gaming laws of the United States or the 40 states
(plus the District of Columbia) in which it operates. However, because there is
little clear statutory and case law authority, this conclusion is not free from
doubt. While it is possible to compare Youbet.com's activities to applicable
statutes, the wording of many such statutes is ambiguous. Furthermore, there is
little case law to rely upon for interpretation of these ambiguities. Thus, it
is possible that Youbet.com may be alleged to be in violation of an applicable
statute based on an interpretation of the statute which differs from
Youbet.com's and its counsel's or based on a future change of law or
interpretation or enforcement policy. Such allegations could result in either
civil or
8
<PAGE>
criminal proceedings brought by governmental or private litigants. As a result
of such proceedings, Youbet.com could incur substantial litigation expense,
fines, diversion of the attention of key Youbet.com employees, and injunctions
or other prohibitions preventing Youbet.com from engaging in various anticipated
business activities. Also, if it were finally determined that Youbet.com did
violate applicable law, then civil damages or criminal penalties could be
imposed and Youbet.com might be barred from pursuing that activity. Such an
outcome would have a material adverse effect on Youbet.com.
INCREASED GOVERNMENT REGULATION OF INTERNET COMMERCE AND GAMING MAY ADVERSELY
AFFECT YOUBET.COM
Various state legislatures, Congress, and federal and state executive
authorities have proposed laws and regulations directly applicable to online and
Internet gaming which could have a material adverse effect on Youbet.com. Most
prominently, in 1998, a bill sponsored by U.S. Senator Jon Kyl of Arizona and
adopted by a wide margin in the Senate (but ultimately not enacted) would have
prohibited online and Internet gaming, with specified exceptions, including
exceptions for certain horse race wagering and certain "closed-loop" online
systems. However, the latter exceptions were narrow and this 1998 bill, had it
been enacted, would have had a material adverse effect on Youbet.com's business.
Other online and Internet gaming bills have been considered in recent years in
both the Senate and the House of Representatives. Senator Kyl has reintroduced a
new version of his online and Internet Gambling Prohibition Act of 1999. This
1999 Kyl bill (S. 692) contains more broadly drafted exceptions than the 1998
Kyl bill and, if it were enacted in the form in which it was introduced on March
23, 1999, Youbet.com does not believe that the bill would have a material
adverse effect on Youbet.com's business. However, a proposal such as the 1998
Kyl bill could emerge again in Congress; many states are considering Internet
gaming legislation and regulations which may or may not be worded so as to
permit Youbet.com's business to continue in such states; and the National
Gambling Impact Study Commission or other legislative or regulatory bodies may
reach influential anti-gaming conclusions which could form the basis for new
laws, regulations, or enforcement policies that could have a material adverse
effect on Youbet.com's business.
TAXES ON WAGERS MAY BE IMPOSED
If one or more governmental authorities successfully asserts that Youbet.com
should collect taxes on wagers it could adversely affect Youbet.com's business.
Youbet.com does not currently collect taxes for wagers, as all wagering
transactions by Youbet.com subscribers are currently processed by Ladbroke at
its facility in Pennsylvania. Ladbroke pays all applicable taxes to the State of
Pennsylvania. However, one or more local, state or foreign jurisdictions may
seek to tax online and Internet wagering when a subscriber is physically within
their jurisdiction at the time the wager is placed. Such taxes if imposed might
have a materially adverse effect on Youbet.com's business.
RISKS RELATED TO YOUBET.COM'S OPERATIONS
YOUBET.COM HAS A LIMITED OPERATING HISTORY
Youbet.com's limited operating experience may not form a sufficient basis on
which to predict future results. Youbet.com commenced development in 1995 of
PC-based proprietary communications software for online entertainment. Its first
service, the You Bet Network, has only recently been introduced and it is a new
business in a rapidly changing field.
YOUBET.COM HAS A HISTORY OF LOSSES AND ANTICIPATES FUTURE LOSSES
Youbet.com has experienced significant losses since its inception and has
financed its operations from the sale of its securities and short-term debt.
Youbet.com incurred net losses of approximately $13.9 million and $2.1 million
for the fiscal year ended December 31, 1998 and the three months ended
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<PAGE>
March 31, 1999, respectively. Youbet.com expects operating losses and negative
cash flow to continue at least through 1999 and possibly later. These losses are
expected to increase as Youbet.com increases its levels of spending to implement
its business plan and it is possible that such increases in spending may not
generate sufficient increases in revenue to permit profitable operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Loss from Operations."
YOUBET.COM'S FUTURE OPERATING RESULTS ARE UNPREDICTABLE
Due to Youbet.com's short operating history, results are unpredictable and
may vary on a quarterly basis as a result of a variety of factors. Many of these
factors are outside of Youbet.com's control. These factors include:
- Youbet.com may not be able to attract and retain subscribers to the You
Bet Network;
- Youbet.com may not be successful in maintaining good relations with horse
tracks and other content and information suppliers;
- The introduction of competing wagering services from interactive gaming or
leisure companies may have an adverse effect on Youbet.com's business;
- Youbet.com may not succeed in its brand-building and marketing campaigns;
- Price competition from competing services may become more intense;
- The level of use of online and Internet interactive services, both
domestically and internationally, may not grow as expected;
- There may be a lack of consumer confidence in and acceptance of online and
interactive services for leisure and wagering;
- Youbet.com may not experience the expected increases in volume, size,
timing and completion rates for wagers transmitted through the You Bet
Network;
- There may be technical difficulties or lengthy interruptions in the You
Bet Network;
- Youbet.com may not be able to adequately update and upgrade the You Bet
Network with technological innovations and infrastructure to accommodate
growth;
- Federal or local governmental controls and regulation may change and
become less favorable; and
- General economic conditions and economic conditions specific to online and
Internet interactive activity may be depressed.
YOUBET.COM MAY NEED ADDITIONAL CAPITAL
Youbet.com intends to establish Youbet.com as a brand name by significantly
increasing expenditures on marketing, advertising and product development both
domestically and internationally. To the extent that such increases in
expenditures are not followed by increases in revenues, Youbet.com will be
adversely affected financially.
Youbet.com currently anticipates that the net proceeds of this offering,
together with existing capital resources, will be sufficient to meet
Youbet.com's capital requirements for the next 12 months. In the event
additional capital is required to fund operating losses or other capital needs,
Youbet.com may not be able to obtain such capital or such capital may be
available on terms which are unfavorable to Youbet.com or its stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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<PAGE>
YOUBET.COM FACES STRONG COMPETITION FROM THE TELEVISION GAMES NETWORK AND OTHERS
Youbet.com expects that competition from an interactive cable channel known
as the "Television Games Network" and others will become more intense and that
new companies will enter the market. The Television Games Network is owned by TV
Guide, Inc. and has access to substantial resources.
The Television Games Network has announced that it has formed exclusive
relationships with a number of major United States horse tracks. Further
expansion of the Television Games Network's exclusive relationships may make it
difficult for Youbet.com to obtain quality racing content to supply the You Bet
Network. If such exclusive relationships account for a significant number of
horse tracks, the Television Games Network may be able to secure additional
horse tracks at more favorable terms than Youbet.com.
Worldwide, numerous Internet and other interactive ventures have been
announced. Youbet.com expects to compete with these entities, as well as other
established companies which may enter the interactive, pari-mutuel gaming
market. Many of Youbet.com's other current and potential competitors have far
greater resources than Youbet.com. See "Business--Competition."
YOUBET.COM CURRENTLY RELIES HEAVILY ON ITS RELATIONSHIP WITH LADBROKE
Youbet.com expects to obtain a majority of its future revenues from fees
derived as a percentage of Ladbroke's net commissions on amounts wagered through
the You Bet Network. Accordingly, Youbet.com is highly dependent on maintaining
its online connection with Ladbroke's wagering system. Any system interruption
or malfunction at Ladbroke which inhibits its ability to process wagers from the
You Bet Network may adversely affect Youbet.com's business. Additionally,
Ladbroke's termination of its agreement with Youbet.com, whether due to an
intentional breach or due to Ladbroke's inability to comply with its terms,
would also adversely affect Youbet.com's business. See "Business--Strategic
Relationships."
CREDIT CARD COMPANIES MAY REFUSE TO PROCESS YOUBET.COM ACCOUNTS OR WAGERING
ACCOUNTS
Due to perceived legal uncertainty surrounding online live event wagering,
credit card companies may as a policy refuse to process wagering account
transactions for Ladbroke or any other account wagering entities with whom
Youbet.com has a relationship. Additionally, although Youbet.com does not
actually accept or place any wagers, credit card companies may also be hesitant
to process fees and online transactions by Youbet.com subscribers for the You
Bet Network and other handicapping products. This would limit the methods of
payment available to Youbet.com subscribers, lowering the convenience of the You
Bet Network and may make competitive services more attractive. This may
adversely affect Youbet.com's business and its relationship with account
wagering entities.
YOUBET.COM RELIES ON CONTENT PROVIDERS
Youbet.com is largely dependent upon negotiating and maintaining agreements
with third party information providers and horse tracks for much of the audio,
video and other content presented on the You Bet Network. Youbet.com does not
have exclusive relationships with any content providers. Youbet.com and Ladbroke
may not be able to negotiate or renew acceptable agreements with such third
parties on a timely basis or under acceptable terms and conditions.
As of the date of this prospectus, Youbet.com and Ladbroke have agreements
which allow a subscriber to obtain simulcast audio and video signals from 26
horse tracks. These horse tracks may terminate the agreements. Youbet.com
strives to improve its content and may not be able to obtain such agreements for
such additional content from other providers or may lose providers, especially
in light of the efforts of competitors, such as the Television Games Network, to
enter into exclusive contracts with such providers.
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<PAGE>
YOUBET.COM MAY HAVE DIFFICULTY MAINTAINING ITS TECHNOLOGICAL POSITION
Youbet.com's performance depends on its ability to develop, license or
acquire new technologies to enhance its existing services in a time effective
manner. Youbet.com may not be able to maintain its competitive technological
position against current and potential competitors, especially those with
greater financial resources. Youbet.com relies on its software technology to
give it a competitive advantage. This software operates the You Bet Network and
runs on subscribers' PCs. Although Youbet.com is exploring the possibility of
additional intellectual property protection, its software is not currently
protected by patents or copyrights. Youbet.com's main technological advantage
versus potential competitors is its software lead-time in the market and
Youbet.com's experience in operating a wagering network. Therefore, if
competitors introduce new products and services which are based on the You Bet
Network, Youbet.com may have little recourse and its business could be adversely
affected.
INTERNATIONAL EXPANSION EFFORTS MAY NOT SUCCEED
Youbet.com is exploring international relationships and joint ventures to
facilitate the international deployment of sports wagering networks similar to
the United States launch of the You Bet Network. However, there are many risks
in doing business on an international basis, including:
- Potential online live wagering networks, offered by competitors with
greater resources;
- Satisfying different and possibly conflicting regulatory requirements;
- Foreign currency exchange rate fluctuations;
- Legal uncertainty regarding liability;
- Tariffs, and other trade barriers;
- Difficulties in staffing and managing foreign operations;
- Longer payment cycles and problems in collecting account receivables;
- Different accounting practices;
- Political instability;
- Seasonal reductions in business activity; and
- Potentially adverse tax consequences.
Any of these risks could affect the success of Youbet.com's international
expansion. Also, Youbet.com may not be able to successfully establish itself
internationally. See "Business--Youbet.com International Initiatives."
SYSTEM DAMAGE OR FAILURE MAY ADVERSELY AFFECT YOUBET.COM
Youbet.com's systems are vulnerable to damage from earthquake, fire, floods,
power loss, telecommunications failures, break-ins and other unforseen events.
Youbet.com's business is dependent upon its communications hardware and computer
hardware, substantially all of which are located at a leased facility in Los
Angeles, California. Youbet.com has built in certain redundancies in its systems
in case of a system failure or damage, but does not have duplicate geographic
locations for its site of operations. A substantial interruption in its systems
would adversely affect Youbet.com's business.
Youbet.com has property and business interruption insurance covering damage
or interruption of Youbet.com's systems. However, this insurance may not
compensate Youbet.com for all losses that may occur.
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<PAGE>
YOUBET.COM IS SUBJECT TO ONLINE SECURITY RISKS
If Youbet.com's systems and controls are unable to handle online security
risks, its business will be adversely affected. Youbet.com uses packet filters,
fire walls, and proxy servers which are all designed to control and filter the
data allowed to enter Youbet.com's data center. However, advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may make it easier for someone to compromise or breach the
technology used by Youbet.com to protect subscribers' transaction data. If such
a breach of security were to occur, it could cause interruptions in service and
loss of data or cessation in service to subscribers of Youbet.com. This may also
allow someone to introduce a "virus," or other harmful component to the You Bet
Network causing an interruption or malfunction.
To the extent that activities of Youbet.com involve the storage and
transmission of information such as credit card numbers, security breaches could
damage Youbet.com's reputation and expose Youbet.com to a risk of loss or
litigation and possible liability. Youbet.com's insurance policies may not be
adequate to reimburse Youbet.com for losses caused by such security breaches.
YOUBET.COM DEPENDS ON THE COMMUNICATIONS INFRASTRUCTURE OF THE INTERNET FOR
TRANSMITTING WAGERING INFORMATION
Youbet.com utilizes electronic communications and the Internet
infrastructure to send and receive information to and from subscribers, Ladbroke
and other suppliers. Youbet.com's future success will depend, in significant
part, upon the maintenance and growth of this infrastructure and any failure or
interruption may have a material adverse effect on Youbet.com's business. This
infrastructure is necessary to economically transmit the large amounts of audio
and video data which comprise a broadcast of a horse track racing event. To the
extent that this infrastructure continues to experience increased numbers of
users, increased frequency of use or increased bandwidth requirements of users,
Youbet.com cannot be certain that this infrastructure will be able to support
the demands placed on it or that the performance or reliability of this
infrastructure will not be adversely affected.
Outages and delays in sending or receiving data as a result of damage to
portions of this infrastructure could also affect Youbet.com's subscribers
ability to transmit wagering information or Ladbroke's ability to process such
information. This will also have an adverse effect on Youbet.com's business.
YOUBET.COM MAY FACE LIABILITY FOR CONTENT AND INFORMATION TRANSMITTED ON THE YOU
BET NETWORK
Youbet.com may face potential direct and indirect liability for negligence,
copyright, patent or trademark infringement, and other claims based upon the
content and data which Youbet.com makes available or sells to subscribers. If
Youbet.com were to be found liable, it would have an adverse effect on
Youbet.com's business. For example, by distributing an incorrect past
performance report, a subscriber may claim he relied on such information and
suffered a monetary loss. Computer failures may also result in incorrect data
being distributed. In these and other instances, Youbet.com may be required to
engage in long and expensive litigation, which could have the effect of
diverting management's attention and require the expenditure of significant sums
of money. Youbet.com's liability insurance may not cover all of these claims or
may not be adequate to protect against all liability that may be imposed. Any
such claims or resulting litigation could have a material adverse effect on
Youbet.com's business.
YOUBET.COM MAY EXPERIENCE PROBLEMS WITH RAPID GROWTH
In order to grow the You Bet Network, Youbet.com will be required to improve
existing transaction processing and operational systems and to train and grow
its number of employees. Youbet.com's current and planned management systems and
controls may not be adequate to support
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<PAGE>
such growth. Additionally, Youbet.com's management may not succeed in expanding
and exploiting existing and potential strategic relationships and market
opportunities. The failure of Youbet.com to expand effectively could have a
material adverse effect on Youbet.com's business, results of operations and
financial condition.
YEAR 2000 RISKS MAY ADVERSELY AFFECT YOUBET.COM
System failure or miscalculations resulting from the year 2000 risk could
disrupt Youbet.com's operations, resulting in, among other things, a temporary
inability to process transactions, send wagering confirmations or engage in
similar normal business activities. The year 2000 risk is the result of computer
programs being written using two digits rather than four digits to define the
applicable year. Computer programs that have sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.
Based on an internal assessment, Youbet.com believes that its software
programs, both those developed internally and purchased from outside vendors,
are already year 2000 compliant or will be by December 31, 1999. However, any
failure of Youbet.com's software to properly process dates for the year 2000
could require Youbet.com to incur unanticipated expenses. This could have an
adverse effect on Youbet.com's business. Also, Youbet.com may suffer a system
failure if any third party supplier of content or software, such as Ladbroke, is
not fully year 2000 compliant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000."
YOUBET.COM DEPENDS ON KEY PERSONNEL
Youbet.com depends on the services of its senior management, which if not
available might have a material adverse effect on Youbet.com. While certain
members of senior management are parties to employment or services agreements
with Youbet.com, none of these agreements are long-term, and none prohibit an
employee from terminating such an agreement. Additionally, Youbet.com has not
yet filled certain key positions in its management team, which management
believes are crucial to Youbet.com's development. Youbet.com's future success
depends on its ability to identify, attract, hire, train, retain and motivate
highly skilled technical, managerial, marketing and customer service personnel.
Competition for such personnel is intense and Youbet.com may not be able to
retain and attract such employees. Also, at the present time Youbet.com does not
carry any key personnel life insurance.
RISKS RELATED TO THE OFFERING
YOUBET.COM HAS A SIGNIFICANT AMOUNT OF DEBT
Youbet.com has a significant amount of debt outstanding consisting primarily
of $45.5 million principal amount of 11% Senior Convertible Discount Notes and
has approximately $2.2 million of stockholders' equity. The degree to which
Youbet.com is leveraged could have important consequences to the stockholders,
including the following:
- Youbet.com's ability to obtain additional financings for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired;
- Commencing in October 2001, Youbet.com must pay interest on its notes
leaving less funds for other purposes;
- Youbet.com may be at a competitive disadvantage to its less leveraged
competitors; and
- Youbet.com may be more vulnerable to a downturn in general economic
conditions.
If Youbet.com were to be in default under the notes for any reason, there can be
no assurance that any assets will remain for Youbet.com's stockholders after
payment of amounts owed to the noteholders.
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<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
WARRANTHOLDERS MAY ASSERT CLAIMS REGARDING THEIR REGISTRATION RIGHTS
Certain of the warrantholders have or may have registration rights with
respect to their warrants and/or shares of common stock underlying such warrants
and may assert claims against Youbet.com in connection with such rights.
Specifically, on June 4, 1999 a holder of 400,000 warrants filed a complaint
against Youbet.com alleging Youbet.com breached its obligation to register the
400,000 shares underlying such warrants. As the litigation is in its initial
stage, Youbet.com cannot predict its outcome, although if the claim is
determined adversely to Youbet.com it could have a material adverse effect on
Youbet.com. See "Description of Capital Stock--Registration Rights" and
"Business--Legal Proceedings."
YOUBET.COM'S OFFICERS AND DIRECTORS EXERCISE VOTING CONTROL OVER YOUBET.COM
In June, 1998 the Robert M. Fell Living Trust, David Marshall, Russell Fine
and other stockholders, entered into a stockholders agreement, whereby they
collectively exercise voting control over Youbet.com in the election of
directors. Under the agreement, the parties agreed to vote all shares of
Youbet.com's Series A Convertible Preferred Stock and common stock owned by them
for the election to the board of directors of four persons designated by Mr.
Fell and three persons designated by Messrs. Marshall and Fine. After completion
of this offering, assuming no exercise of the over-allotment option, the parties
to the stockholders agreement will beneficially own Youbet.com securities
representing approximately 22% of the voting power of Youbet.com. As a result of
the ability to designate four directors as provided in the stockholders
agreement, Robert M. Fell may be deemed to control Youbet.com. This stockholders
agreement terminates in June, 2000. Additionally, upon completion of the
offering, the officers and directors of Youbet.com as a group will control,
either directly or by reason of the stockholders agreement, 23% of the voting
power of Youbet.com. See "Principal Stockholders."
MANAGEMENT HAS BROAD DISCRETION OVER ALLOCATION OF PROCEEDS
Youbet.com's management will retain broad discretion as to the allocation of
the net proceeds of this offering, estimated at approximately $48 million, to
Youbet.com. Additionally, since the shares sold by the selling stockholders will
be purchased from Youbet.com on the exercise of warrants, Youbet.com anticipates
receiving approximately $2.2 million of proceeds from the exercise of such
warrants (assuming the over-allotment option is not exercised). The failure of
management to apply such funds effectively would have a material adverse effect
on Youbet.com's business. See "Use of Proceeds."
PURCHASERS OF COMMON STOCK WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
At the offering price of $17.9375 per share, purchasers of shares of common
stock will incur immediate and substantial dilution of $15.41 per share in the
net tangible book value of their purchased shares of common stock. See
"Dilution." Investors may also experience substantial additional dilution as a
result of the issuance and exercise of stock options or warrants. See "Shares
Eligible for Future Sale," and "Description of Capital Stock--Registration
Rights."
YOUBET.COM DOES NOT INTEND TO PAY DIVIDENDS
Youbet.com does not anticipate paying any cash dividends on its common stock
to its stockholders for the foreseeable future. Youbet.com intends to retain
future earnings, if any, for use in the operation and expansion of its business.
In addition, the 11% Senior Convertible Discount Notes contain, and it is
probable that any debt financing agreements entered into by Youbet.com in the
future will contain, restrictions on Youbet.com's ability to declare dividends.
See "Dividend Policy."
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<PAGE>
YOUBET.COM'S COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS
The stock markets in general, the Nasdaq National Market and the market for
Internet/online companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and reflect valuations
substantially above historical levels. These trading prices and valuations may
not be sustainable. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Such litigation, if instituted against
Youbet.com, could result in substantial costs which would have a material
adverse effect on Youbet.com's business.
SHARES ELIGIBLE FOR FUTURE SALE MAY NEGATIVELY AFFECT TRADING PRICE
After the offering, sales of Youbet.com's common stock in the public market
(including on the exercise of stock options and warrants), may negatively affect
the market price of the common stock. This could also lessen Youbet.com's
ability to sell equity or equity related securities at a future time. Presently,
Youbet.com has outstanding 14,395,231 shares of common stock and Series A
Convertible Preferred Stock which pursuant to the terms thereof will convert
into 1,041,100 shares of common stock, upon completion of this offering. Of
these shares of common stock, approximately 9,962,000 restricted shares of
common stock and common stock equivalents are eligible or will become eligible
for sale in the public markets under Rule 144 within the next six months. The
underwriters are requiring the officers and directors of Youbet.com to agree not
to sell any shares of common stock in the public market for 210 days following
completion of this offering without the consent of the underwriters. Youbet.com
has agreed to register by September 30, 1999 the common stock into which the 11%
Senior Convertible Discount Notes may be converted (approximately 4,550,000
shares at the present conversion rate, assuming conversion on April 5, 2001).
Additionally, the holders of the 11% Senior Convertible Discount Notes have
agreed not to sell any such shares in the public market for 180 days following
completion of this offering without the consent of the underwriters. Youbet.com
has outstanding 9,789,610 stock options and warrants. Youbet.com intends within
the next twelve months to register the common stock underlying such warrants and
options, so these additional shares may be available for resale and be an
"overhang" on the public market for Youbet.com's common stock.
Delaware law provisions which are not opted out of by Youbet.com's
Certificate of Incorporation and Bylaws could make it more difficult for a third
party to acquire Youbet.com, even if doing so would be beneficial to
Youbet.com's stockholders. Additionally, Youbet.com's Certificate of
Incorporation authorizes the board of directors to issue up to 1,000,000 shares
of preferred stock, in one or more series and permits the board of directors to
fix the rights, preferences, powers and designations of such series without a
stockholders vote. Depending on the terms of any such series, such preferred
stock may discourage attempts to acquire Youbet.com. See "Description of Capital
Stock--Anti-Takeover Provision."
The holders of the 11% Senior Convertible Discount Notes may call the notes
due and payable upon a "change in control" of Youbet.com. "Change in control"
includes a sale of substantially all of Youbet.com's assets, an acquisition of
20% or more of the voting power of Youbet.com by a "group" of affiliated persons
within the meaning of Section 13(d) of the Securities and Exchange Act of 1934,
as amended, the acquisition by Youbet.com of more than 30% of its capital stock
outstanding immediately prior to such acquisition, the payment of a dividend or
other distribution to Youbet.com's stockholders in an amount that is 30% or more
of the fair market value of Youbet.com's outstanding capital stock immediately
prior to such distribution or dividend, or the acquisition by a person or
affiliated group of the power to elect or appoint the majority of Youbet.com's
board of directors.
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USE OF PROCEEDS
The net proceeds to Youbet.com from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by Youbet.com, are estimated to be approximately $48 million at an assumed
offering price of $17.9375 per share. Additionally, since the shares sold by the
selling stockholders will be purchased from Youbet.com on the exercise of
warrants, Youbet.com anticipates receiving approximately $2.2 million of
proceeds from the exercise of such warrants (assuming the selling stockholders
offer 675,000 shares of common stock and the over-allotment option is not
exercised). Youbet.com intends to use up to approximately $30 million of such
proceeds for its marketing and brand development expenditures and for
development of Youbet.com's international expansion. The balance of the proceeds
will be used for general corporate purposes, including working capital.
DIVIDEND POLICY
Youbet.com has never declared or paid any dividends on its common stock.
Youbet.com intends to retain any future earnings for use in the operation and
expansion of its business. Consequently, Youbet.com does not anticipate paying
any cash dividends on its common stock to its stockholders for the foreseeable
future. Furthermore, under the terms of the 11% Senior Convertible Discount
Notes Youbet.com may not declare or pay dividends and the ability to do so in
the future may be further limited by the terms of any then-existing credit
facilities which may contain covenants restricting the payment of cash
dividends.
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CAPITALIZATION
The following table sets forth, as of March 31, 1999, the capitalization of
Youbet.com on an actual basis, a pro forma basis and a pro forma as adjusted
basis. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Youbet.com's financial statements and the related notes appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
Long-Term Debt:
11% Senior Convertible Discount Notes.......................... $ -- $ 36,728,510 $ 36,728,510
Other long-term debt........................................... 47,678 47,678 47,678
-------------- -------------- --------------
Total long-term debt....................................... 47,678 36,776,188 36,776,188
Stockholders' equity:
Series A Convertible Preferred Stock, $.001 par value
(aggregate liquidation preference of $2,627,750;
authorized--1,000,000 shares; 105,110 issued and outstanding
on an actual basis and a pro forma basis..................... 105 105 --
Common stock, $.001 par value; authorized--50,000,000
shares--14,314,731 shares issued and outstanding on an actual
basis and a pro forma basis, and 18,842,331 shares on a pro
forma as adjusted basis...................................... 14,315 14,315 18,842
Additional paid-in capital..................................... 43,224,232 43,576,232 91,487,399
Accumulated deficit during development stage................... (39,972,999) (39,972,999) (39,972,999)
Deferred compensation.......................................... (859,477) (859,477) (859,477)
Stock notes receivable......................................... (560,000) (560,000) (560,000)
-------------- -------------- --------------
Total stockholders' equity................................. 1,846,176 2,198,176 50,113,765
-------------- -------------- --------------
Total Capitalization..................................... $ 1,893,854 $ 38,974,364 $ 86,889,953
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The pro forma amounts reflect the issuance on April 5, 1999 of 11% Senior
Convertible Discount Notes payable with a principal amount of $45,500,000 for
cash proceeds of $36,728,510 generating net proceeds of approximately
$35,119,000.
The pro forma as adjusted amounts include (1) 1,041,100 shares (10,000
shares were issued on conversion during April 1999) issuable upon conversion,
immediately after the offering, of the outstanding Series A Convertible
Preferred Stock, (2) the sale of the 11% Senior Convertible Discount Notes, (3)
the sale of 2,811,500 shares of common stock in this offering at an assumed
public offering price of $17.9375 per share, after deducting the underwriting
discounts and estimated offering expenses payable by Youbet.com, and the
application of the net proceeds from this offering, and (4) the exercise of
approximately 675,000 warrants with an average exercise price of approximately
$3.30 per share.
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<PAGE>
DILUTION
The net tangible book value of Youbet.com as of March 31, 1999, was
$1,717,964, or $0.12 per share of common stock. Net tangible book value per
share is equal to the amount of Youbet.com's net tangible assets (total tangible
assets less total liabilities), divided by the number of shares of common stock
outstanding as of March 31, 1999. Assuming (1) the sale by Youbet.com of
2,811,500 shares of common stock offered in this offering at an assumed public
offering price of $17.9375 per share, and the application of the estimated net
proceeds from this offering, (2) the exercise of approximately 675,000 warrants
with an average exercise price of $3.30 per share, and (3) the conversion of
105,110 shares of Series A Convertible Preferred Stock into 1,051,100 shares of
common stock, Youbet.com's pro forma net tangible book value as of March 31,
1999 would have been $47,800,890, or $2.53 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $2.41
per share to existing investors and immediate dilution of $15.41 per share for
new investors. The pro forma transaction reflecting the issuance on April 5,
1999 of 11% Senior Convertible Discount Notes payable is assumed to have no
significant effect on dilution.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................................... $ 17.94
Net tangible book value per share as of March 31, 1999..................... $ 0.12
Pro forma increase attributable to new investors........................... 2.41
Pro forma net tangible book value per share after the offering............... 2.53
---------
Dilution per share to new investors.......................................... $ 15.41
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the total number of shares of common stock purchased from Youbet.com, the total
consideration paid to Youbet.com and the average price per share paid by
existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. 16,040,831 85% $ 22,448,675 31% $ 1.40
New investors...................................... 2,811,500 15 50,431,250 69 $ 17.94
------------ --- ------------- ---
Total........................................ 18,852,331 100% $ 72,879,925 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by existing stockholders will be increased to
16,547,081 or 88% of the total number of shares of common stock to be
outstanding after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Youbet.com's financial statements and the related notes included
elsewhere in this prospectus. The selected statement of operations data for the
years ended December 31, 1996, 1997 and 1998 and the selected balance sheet data
as of December 31, 1997 and 1998 are derived from Youbet.com's audited financial
statements included elsewhere in this prospectus. The selected statement of
operations data for the years ended December 31, 1994 and 1995 and the selected
balance sheet data as of December 31, 1995 are derived from Youbet.com's audited
financial statements not included in this prospectus. The selected balance sheet
data as of March 31, 1999 and the selected statement of operations data for the
three months ended March 31, 1998 and 1999 and 1995 through March 31, 1999 are
derived from Youbet.com's unaudited financial statements. The unaudited
financial statements have been prepared on substantially the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, that are considered necessary for a fair
presentation of the financial position and results of operations for the
respective periods. Results for the three months ended March 31, 1999 are not
necessarily indicative of results for the year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ -- $ -- $ -- $ -- $ 264 $ -- $ 461
Operating Expenses:
Network operations............................. -- -- 221 665 1,287 149 412
Research and development....................... 2 318 1,390 1,254 1,267 230 359
Sales and marketing............................ -- -- 664 711 1,405 156 476
General and administrative..................... 107 193 1,441 1,804 2,741 443 616
Depreciation and amortization.................. -- 3 123 308 397 76 96
Non-cash compensation.......................... -- 38 102 2,176 4,263 1,223 657
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses....................... 109 552 3,941 6,918 11,360 2,277 2,616
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................. (109) (552) (3,941) (6,918) (11,096) (2,277) (2,155)
Net interest income (expense).................... (24) (20) 63 (389) (261) (69) 18
Other income (expense)........................... 184 170 13 (12,110) (2,505) (484) (10)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ 51 $ (402) $ (3,865) $ (19,417) $ (13,862) $ (2,830) $ (2,147)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share--basic and diluted... $ 0.15 $ (0.59) $ (0.67) $ (3.06) $ (1.32) $ (0.29) $ (0.15)
Weighted average shares outstanding.............. 343 678 5,730 6,355 10,535 9,604 14,059
OPERATING DATA:
Pari-mutuel handle............................... $ -- $ -- $ -- $ -- $ 4,505 $ -- $ 8,209
Commission on pari-mutuel handle................. $ -- $ -- $ -- $ -- $ 264 $ -- $ 435
<CAPTION>
1995
THROUGH
MARCH 31,
1999
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 725
Operating Expenses:
Network operations............................. 2,585
Research and development....................... 4,588
Sales and marketing............................ 3,256
General and administrative..................... 6,795
Depreciation and amortization.................. 927
Non-cash compensation.......................... 7,236
-----------
Total Operating Expenses....................... 25,387
-----------
Loss from operations............................. (24,662)
Net interest income (expense).................... (589)
Other income (expense)........................... (14,442)
-----------
Net income (loss)................................ $ (39,693)
-----------
-----------
Net income (loss) per share--basic and diluted...
Weighted average shares outstanding..............
OPERATING DATA:
Pari-mutuel handle............................... $ 12,714
Commission on pari-mutuel handle................. $ 699
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1999
------------------------------------------ ----------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................................... $ 3,298 $ 87 $ 53 $ 1,541 $ 2,543 $ 37,662
Working capital (deficit)..................... $ 3,027 $ (1,375) $ (2,739) $ 1,925 $ 792 $ 35,910
Total assets.................................. $ 3,417 $ 1,311 $ 1,004 $ 4,653 $ 3,790 $ 40,870
Long-term debt................................ $ -- $ 98 $ -- $ 60 $ 48 $ 36,776
Total stockholders' equity (deficit).......... $ 3,105 $ (405) $ (1,848) $ 2,793 $ 1,846 $ 2,198
</TABLE>
The statement of operations data and balance sheet data for the years ended
December 31, 1994 and 1995 are not relevant to Youbet.com's present operating
history because Youbet.com has been engaged in its current business only since
mid-1995.
The cumulative amounts for 1995 through 1999 represent the period Youbet.com
was in the development stage.
The pro forma amounts reflect the issuance on April 5, 1999 of 11% Senior
Convertible Discount Notes payable with a principal amount of $45,500,000 for
cash proceeds of $36,728,510 generating net proceeds of approximately
$35,119,000.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF YOUBET.COM, SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. YOUBET.COM'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Youbet.com has initially focused its efforts
primarily on the United States horse track racing industry and believes that its
principal product, the You Bet Network, is currently the only legal system
available for online wagering in the United States. Youbet.com believes that
online communication is an ideal medium for live event wagering. First, online
communication allows bettors instant access to vast amounts of historical
performance data used in assessing potential wagers. Second, online
communication offers the ability to sort and analyze such data in ways and at
speeds that are unachievable manually. Third, online communication technology
allows wagers to be placed from virtually any location within a jurisdiction
where wagering is legal, thus freeing bettors from traditional site-specific
wagering locations. In addition, the speed of electronic communication allows
wagers to be placed and acknowledged in seconds.
Youbet.com's initial product, the You Bet Network, is a PC-based system
which utilizes the infrastructure of the Internet and a closed-loop private
network with Internet access to provide up-to-the minute detailed information on
races taking place at horse tracks nationwide. Youbet.com also delivers a live
simulcast of most of these races directly to the subscriber's computer. In
addition, subscribers can use the You Bet Network to transmit information and
thereby facilitate wagers, using the system's icon-driven menus to fill out an
electronic betting ticket with a brief series of mouse-clicks. The information
is then transmitted electronically to a licensed account wagering entity,
currently Ladbroke. Ladbroke accepts and processes the wager from its hub in
Pennsylvania. After processing the wager, Ladbroke sends an electronic
confirmation to the bettor through the You Bet Network. The round-trip time from
information submission to acknowledgment is usually less than three seconds.
Youbet.com currently derives revenue from the You Bet Network in three ways.
First, it charges a monthly subscription fee, currently $5.95 per month. Second,
it receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wages placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Since mid-1995, Youbet.com has been engaged in developing the You Bet
Network, its first service being offered to subscribers. Youbet.com has incurred
substantial software development costs since inception, which have been charged
to operations as research and development costs. Management believes that the
technological feasibility of Youbet.com's proprietary software technology was
established during the year ended December 31, 1998.
As of March 31, 1999 Youbet.com was considered to be a development stage
entity as it had not realized a significant amount of revenues from planned
principal operations. During 1995, Youbet.com shifted its business strategy by
de-emphasizing consulting services and software licensing, as a result of which
Youbet.com became a development stage company.
Youbet.com has expanded its operations in recent years and has grown from 38
employees at December 31, 1996 and 1997 to 51 employees at December 31, 1998 and
57 employees at March 31, 1999. Youbet.com expects to add additional personnel
in the United States and plans to commence
22
<PAGE>
operations and add personnel internationally as operations expand. Youbet.com
currently expects to significantly increase its operating expenses in order to
grow its sales and marketing operations, expand in international markets and
upgrade and enhance its service and technologies. As a result of these and other
factors, Youbet.com expects to incur significant losses at least through 1999.
Youbet.com has incurred significant losses since inception, and as of March
31, 1999 had an accumulated net loss of $39,973,000. Included in this
accumulated deficit is $21,598,000 in non-cash expenses related to the recording
of the fair value of warrants and stock options charged to operations over the
period of benefit, discount on conversion of bridge loans, accounts payable and
employee deferred salaries into common stock and warrants, and the release of
forfeiture provisions on certain shares of common stock. The recognition of
these expenses did not affect working capital, net stockholders' equity
(deficiency) or cash flows. The remaining deferred compensation at March 31,
1999 of $859,000 is expected to be amortized as compensation during 1999 and
subsequent years. Youbet.com does not expect that these types of costs will
continue at the previous levels.
On January 22, 1999 Youbet.com became the successor to You Bet
International, Inc. through a merger transaction. The subsidiaries of You Bet
International, Inc. (You Bet!, Inc., a Delaware corporation, and Middleware
Telecom Corporation, a California corporation) were also merged into Youbet.com.
On December 6, 1995, Continental Embassy Acquisition, Inc. ("CEA"), which
was organized in the State of Utah in 1987 for the purpose of raising capital
and acquiring a suitable business opportunity through a merger with, or
acquisition of, a private business enterprise, acquired 100% of the outstanding
capital stock of You Bet!, Inc., a Delaware corporation (formerly know as PC
Totes, Inc.), in exchange for the issuance of 5,800,000 shares of common stock,
including 5,710,000 shares of common stock to David M. Marshall and Russell M.
Fine (who were the founders of Youbet.com's predecessor entity), their nominees
and a stockholder related to one of the officers. Concurrent with this
transaction, CEA reincorporated in the State of Delaware and changed its name to
You Bet International, Inc., and the management of You Bet!, Inc. became the
management of You Bet International, Inc. For accounting purposes, the
acquisition of You Bet!, Inc. by You Bet International, Inc. has been treated as
a reverse acquisition of You Bet!, Inc. with You Bet!, Inc. considered the
acquirer. Concurrent with this transaction, 100% of the capital stock of
Middleware Telecom Corporation was contributed by its stockholders, who were
substantially the same as the stockholders of You Bet!, Inc. to You Bet!, Inc.
for no additional consideration. Youbet.com also effected a 1 for 1.5 reverse
stock split of its common stock in December 1995.
At the time of the reverse merger in December 1995, PC Totes, Inc. had over
eight years of experience developing computer-based wagering systems. In 1987,
PC Totes, Inc. developed a 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
REVENUES
Revenues for the three months ended March 31, 1999 were $461,000, $435,000
represented Youbet.com's commission on the gross amount of each wager placed by
its subscribers. The remaining $26,000 represented subscription fee revenue as
Youbet.com commenced charging a monthly subscription fee to its subscribers in
February 1999.
23
<PAGE>
In June 1997, Youbet.com and Ladbroke entered into a Telecommunication
Facilitation Agreement which expires in November 2002. Under the agreement,
Youbet.com provides Ladbroke with an interactive graphics interface to the You
Bet Network whereby Youbet.com's subscribers who have established accounts with
Ladbroke's Call-A-Bet System in Pennsylvania are able to communicate
interactively with Ladbroke using their PCs to transmit wagering information to
Ladbroke. The agreement provides for Youbet.com to receive a fee from Ladbroke
equal to fifty percent (50%) of the net commissions to Ladbroke derived from
wages placed by Youbet.com subscribers who use the Call-A-Bet System either
through the computer graphics interface provided by Youbet.com or more
traditional telephone communication. The Ladbroke agreement contains provisions
allowing the termination of the agreement by either party upon one hundred
twenty (120) days written notice of termination to the other party, in the event
that net commissions are, or are projected in good faith by either party to the
agreement, to be less than $1,000,000 for either the first eighteen months
subsequent to the date upon which the first transmission of live wagering
information occurs, or for any full twelve month period during the term of the
agreement subsequent to the initial eighteen month period.
During the three months ended March 31, 1999, 94.4% of Youbet.com's revenues
were generated from the Ladbroke agreement, and Youbet.com expects that
approximately 80% of its revenues during the year ending December 31, 1999 will
also be generated from the Ladbroke agreement. Youbet.com currently estimates
that net commissions will exceed $1,000,000 during the initial eighteen month
period beginning January 1998 and ending June 1999. However, should net
commissions be less than $1,000,000 during such eighteen month period, Ladbroke
could elect to terminate the agreement, which could have a material adverse
effect on Youbet.com.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs consist primarily of salaries
and costs to support the private network. Network operations costs increased by
$263,000 or 176.3% to $412,000 for the three months ended March 31, 1999 from
$149,000 for the three months ended March 31, 1998 reflecting the continued
development and expansion of the You Bet Network. Youbet.com expects network
operations costs to increase significantly as the You Bet Network expands to
support the growth in subscribers.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily
of salaries. Research and development costs increased $129,000 or 56.0% to
$359,000 for the three months ended March 31, 1999 from $230,000 for the three
months ended March 31, 1998 reflecting the hiring of developers and the
continued development of the You Bet Network. Youbet.com will continue to invest
in the development of the You Bet Network, which Youbet.com believes is critical
to achieving its strategic objectives and, as a result, expects research and
development costs to increase significantly in future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing program expense and salaries. Sales and marketing expenses increased
by $319,000 or 203.9% to $476,000 for the three months ended March 31, 1999 from
$157,000 for the three months ended March 31, 1998. The increase in sales and
marketing reflects the expansion of Youbet.com's marketing activities as the
Youbet Network did not launch until the third quarter of 1998. Youbet.com
expects sales and marketing expenses to increase significantly to brand the You
Bet Network, grow its subscriber base, hire additional sales and marketing
personnel and expand internationally.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. General and administrative expenses increased by $173,000 or 39.1% to
$616,000 for the three months ended March 31, 1999 from $443,000 for the three
months ended March 31, 1998. The increases reflect a general increase in
personnel related costs, legal and accounting fees, and general operating
activity. Youbet.com expects that general
24
<PAGE>
and administrative expenses will increase in future periods as it hires
additional personnel to provide for the growth of the business.
NON-CASH COMPENSATION. Non-cash compensation relates to the recording of
the fair value of warrants and stock options charged to the period of benefit.
Non-cash compensation decreased $566,000 or 46.3% to $657,000 for the three
months ended March 31, 1999 from $1,223,000 for the three months ended March 31,
1998. The decrease is due to Youbet.com reducing the number of warrants and
stock options issued, offset by a $300,000 charge resulting from a cashless
exercise of stock options. Youbet.com expects that these costs will continue as
it issues warrants and stock options.
LOSS FROM OPERATIONS
As described above, Youbet.com has made a significant investment in
developing the You Bet Network to maintain its technological advantage and to
begin to brand and market the service. The loss from operations for the three
months ended March 31, 1999 decreased $122,000 or 5.4% to $2,155,000 from
$2,277,000 for the three months ended March 31, 1998. Youbet.com expects to
incur significant losses at least through 1999.
OTHER INCOME (EXPENSE)
NET INTEREST INCOME (EXPENSE). Net interest income of $18,000 for the three
months ended March 31, 1999 compares to $69,000 of net interest expense for the
three months ended March 31, 1998. The net interest expense for the three months
ended March 31, 1998 is the result of advances and bridge loans being
outstanding during the period that were subsequently converted to common stock
during the third quarter ended September 30, 1998. Youbet.com expects interest
expense to increase significantly in 1999 as a result of the issuance in April
1999 of its 11% Senior Convertible Discount Notes. However, Youbet.com will not
pay cash interest thereon until October 2001.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Youbet.com commenced recognizing revenues from operations during the year
ended December 31, 1998. Revenues during 1998 were $264,000, representing
Youbet.com's commission on the gross amount of each wager placed by its
subscribers. Youbet.com did not charge monthly subscription fees for its service
in 1998.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs increased by $622,000 or 93.5%
to $1,287,000 in 1998 from $665,000 in 1997 and increased by $444,000 or 200.9%
in 1997 from $221,000 in 1996 reflecting the continued development and expansion
of the You Bet Network.
RESEARCH AND DEVELOPMENT. Research and development costs increased slightly
to $1,267,000 in 1998 from $1,254,000 in 1997 and decreased by $136,000 or 9.8%
from $1,390,000 in 1996 reflecting the continued development of the You Bet
Network.
SALES AND MARKETING. Sales and marketing expenses increased by $694,000 or
97.6% to $1,405,000 in 1998 from $711,000 in 1997 and increased 7.1% from
$664,000 in 1996. The increase in sales and marketing reflects the expansion of
Youbet.com's marketing activities and the launch of the You Bet Network in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $937,000 or 51.9% to $2,741,000 in 1998 from $1,804,000 in 1997 an increase
of $363,000 or 25.2% from $1,441,000 in 1996. The increases reflect a general
increase in personnel related costs, legal and accounting fees,
25
<PAGE>
general operating activity, and the expansion of the investor relations program
in 1998. During 1998, Youbet.com entered into an agreement with a financial and
marketing consulting firm to develop and manage an expanded investor relations
program aimed at Youbet.com's stockholders, investors, brokerage firms and
industry professionals during 1998. During the year ended December 31, 1998,
Youbet.com incurred $489,000 in costs related to this program. Youbet.com does
not expect this program to continue.
NON-CASH COMPENSATION. Non-cash compensation increased $2,087,000 or 95.9%
to $4,263,000 from $2,176,000 in 1997 and increased by $2,074,000 from $102,000
in 1996. The increases are due to Youbet.com issuing a greater number of
warrants and stock options in each subsequent year.
LOSS FROM OPERATIONS
As described above, the loss from operations for the year ended December 31,
1998 increased $4,178,000 or 60.4% to $11,096,000 from $6,918,000 in 1997 and
increased by $2,977,000 or 75.5% from $3,941,000 in 1996.
OTHER INCOME (EXPENSE)
NET INTEREST INCOME (EXPENSE). Net interest expense of $261,000 in 1998
decreased by $128,000 or 32.9% from $389,000 in 1997 an increase of $452,000
from net interest income of $63,000 in 1996. Net interest expense in 1998 and
1997 are the result of advances and bridge loans being outstanding during both
years.
NON-CASH EQUITY TRANSACTIONS. Non-cash equity transactions relate to the
recording of the discount on conversion of bridge loans, accounts payable and
employee deferred salaries into common stock and warrants, and the release of
forfeiture provisions on certain shares of common stock. These transactions
decreased $9,849,000 or 81.4% to $2,256,000 in 1998 from $12,105,000 in 1997.
Youbet.com did not incur this cost in 1996. During the year ended December 31,
1998, these costs consisted of $1,406,000 for financing costs and $850,000 to
reflect a discount on conversion of bridge loans, accounts payable and employee
deferred salaries into common stock and warrants. During the year ended December
31, 1997, Youbet.com incurred $3,656,000 for financing costs, $573,000 to
reflect a discount on conversion of bridge loans, accounts payable and employee
deferred salaries into common stock and warrants, and $7,875,000 to reflect the
accounting for the release of forfeiture provisions on certain shares of common
stock owned by Russell M. Fine and David M. Marshall and a shareholder related
to one of the officers. In conjunction with the 1995 private placement offering,
2,500,000 shares of common stock were subject to forfeiture under certain
conditions if Youbet.com did not achieve certain subscriber levels by December
5, 1999. However, as a result of a change in the marketing strategy in 1997 to
focus on building a brand and becoming the market leader to maximize long-term
profitability, the forfeiture restrictions on the 2,500,000 shares of common
stock were released in exchange for the return to Youbet.com and cancellation of
750,000 of such shares.
INCOME TAXES
At March 31, 1999, Youbet.com has available federal and state net operating
loss carryforwards of $18,386,000 and $17,404,000, respectively, for income tax
purposes, which expire in varying amounts through 2019 for federal and 2005 for
state purposes.
The net operating loss carryforward generated a deferred tax asset of
approximately $7,790,000 as of March 31, 1999. The deferred tax asset has not
been recognized since management is unable to determine whether it is more
likely than not that it will be realized. Accordingly, a 100% valuation
allowance has been provided.
26
<PAGE>
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of operations
data for each of the nine quarters ended March 31, 1999. In the opinion of
management, the unaudited financial results include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of
Youbet.com's results of operations for those periods. The quarterly data should
be read in conjunction with the audited Financial Statements and the notes
thereto appearing elsewhere in this prospectus. The results of operations for
any quarter are not necessarily indicative of the results of operations for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ -- $ -- $ -- $ -- $ -- $ 20 $ 76 $ 168
Operating expenses:
Network operations.. 118 197 168 182 149 182 405 551
Research and
development....... 335 330 296 293 230 348 349 340
Sales and
marketing......... 171 151 143 246 156 535 500 214
General and
administrative.... 364 412 513 515 443 783 819 696
Depreciation and
amortization...... 74 76 80 78 76 82 86 153
Non-cash
compensation...... 25 25 1,169 957 1,223 1,522 707 811
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Total operating
expenses.......... 1,087 1,191 2,369 2,271 2,277 3,452 2,866 2,765
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Loss from
operations.......... (1,087) (1,191) (2,369) (2,271) (2,277) (3,432) (2,790) (2,597)
Net interest income
(expense)........... (34) (92) (198) (65) (69) (174) (30) 12
Other income
(expense)........... 1 2 (2,800) (9,313) (484) (1,759) (235) (27)
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Net loss.............. $ (1,120) $ (1,281) $ (5,367) $ (11,649) $ (2,830) $ (5,365) $ (3,055) $ (2,612)
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
<CAPTION>
MAR. 31,
1999
-----------
<S> <C>
Revenues.............. $ 461
Operating expenses:
Network operations.. 412
Research and
development....... 359
Sales and
marketing......... 476
General and
administrative.... 616
Depreciation and
amortization...... 96
Non-cash
compensation...... 657
-----------
Total operating
expenses.......... 2,616
-----------
Loss from
operations.......... (2,155)
Net interest income
(expense)........... 18
Other income
(expense)........... (10)
-----------
Net loss.............. $ (2,147)
-----------
-----------
</TABLE>
Revenues commenced, with the testing of the You Bet Network, during the
second quarter of 1998 and increased steadily in all subsequent quarters with
the launch of the service in the third quarter. Operating expenses in the
second, third and fourth quarters of 1998 and the first quarter of 1999 have
increased significantly over the corresponding quarters of the prior year due to
the launch of the You Bet Network. Correspondingly, network operations costs
increased significantly in the first quarter of 1999 and in the third and fourth
quarters of 1998 due to an increase in personnel and costs to support the
closed-loop private network. Sales and marketing expenses increased in the first
quarter of 1999 and in the second and third quarters of 1998 due to the launch
of the service and the commencement of the marketing programs to acquire
subscribers. The fourth quarter decrease in sales and marketing expense is due
to a reduction is marketing programs during this period. General and
administrative expenses increased during the first quarter of 1999 and the
second, third and fourth quarters of 1998 due to increases in personnel, legal
and accounting fees, and expansion of the investor relations program.
Youbet.com's quarterly revenues, operating costs and expenses and results of
operations have fluctuated significantly in the past and are expected to
continue to fluctuate significantly in the future. Causes of these fluctuations
have included and may include, among other factors, Youbet.com's ability to
retain and attract new subscribers to the You Bet Network; maintaining good
relations with the horse tracks and other content and information providers;
introduction of competing wagering services; success of brand-building and
marketing campaigns; price competition from competing services; the
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level of use of online and Internet interactive services; increasing consumer
confidence in and acceptance of the online and interactive services for leisure
and wagering; volume, size, timing and completion rates for wagers transmitted
through the You Bet Network; technical difficulties or interruptions in the You
Bet Network; Youbet.com's ability to update and upgrade the You Bet Network with
technological innovations and infrastructure to accommodate growth; Federal or
local governmental controls and regulation; and general economic conditions and
economic conditions specific to online and Internet interactive activity. Any
one or more of these factors could have a material and adverse effect on
Youbet.com's business, results of operations and financial condition, and makes
the prediction of results of operations on a quarterly basis unreliable.
LIQUIDITY AND CAPITAL RESOURCES
Youbet.com has financed its operations primarily through the sale of its
securities and short-term debt as Youbet.com has generated only negative cash
flow from operations since inception. Between December 5, 1995 and March 31,
1999, Youbet.com has received an aggregate of $18,795,000 in net proceeds from
the sale of common stock, Series A Convertible Preferred Stock and the exercise
of stock options, warrants and short term debt. At March 31, 1999 Youbet.com had
$2,543,000 in cash. Youbet.com's principal commitments consists of obligations
under capital leases.
Net cash used in operating activities was $1,275,000, $6,538,000, $3,862,000
and $2,832,000 for the three months ended March 31, 1999 and the years ended
December 31, 1998, 1997 and 1996, respectively. The principal use of cash for
all periods was to fund losses from operations. The increases in the net cash
used in operating activities reflected a general increase in all levels of
activity as Youbet.com developed the You Bet Network and commenced marketing
activities during 1998.
Net cash used in investing activities was $174,000, $360,000, $132,000 and
$790,000 for the three months ended March 31, 1999 and the years ended December
31, 1998, 1997 and 1996, respectively, for purchases of property and equipment.
During 1998 Youbet.com, in conjunction with the restructuring of a capital lease
obligation, increased the outstanding lease obligation by $80,000 to reflect the
acquisition of office and computer equipment. During 1997 the purchases of
property and equipment were funded by the proceeds of a capital lease
aggregating $150,000.
Net cash provided by financing activities was $2,452,000, $8,385,000,
$3,960,000 and $412,000 for the three months ended March 31, 1999 and the years
ended December 31, 1998, 1997 and 1996, respectively. Net cash provided by and
used by financing activities consisted principally of proceeds from short-term
loans, primarily from related parties, bridge loans from both related and
unrelated parties, the exercise of stock options and warrants, and the private
placement of common stock, Series A Convertible Preferred Stock and stock
purchase warrants offset by the repayment of a portion of the short term debt.
During the three months ended March 31, 1999, Youbet.com received $2,100,000
from stock subscription receivables, $381,000 from the exercise of stock options
and warrants and $250,000 from the sale of common stock. Offsetting these
receipts was $280,000 of deferred financing costs, payments of lease
obligations, deferred offering costs and costs related to stock financing.
During 1998, Youbet.com received net advances of $560,000 and bridge financing
of $1,465,000, as well as the net proceeds from preferred and common stock
financings of $5,501,000 and $1,069,000 from the exercise of stock options and
warrants to fund its cash requirements. In addition, during December 1998
Youbet.com completed the sale of common stock and Series A Convertible Preferred
Stock generating net proceeds of $1,980,000, which were received in January and
February 1999.
During November 1997, Youbet.com completed a private placement offering of
securities to investors. Youbet.com sold 89.78 units at $25,000 per unit,
resulting in net proceeds of $1,953,380. Each unit consisted of 10,000 shares of
common stock and 5,000 Series D common stock purchase warrants exercisable at
$5.25. As a result of the sale of 89.78 units under this private placement in
1997,
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Youbet.com issued a total of 897,760 shares of common stock and 448,880 Series D
common stock purchase warrants.
In conjunction with the closing of the private placement offering in
November 1997, bridge loans payable aggregating $1,679,000, representing a
principal balance of $1,460,000 and accrued interest of $219,000, were exchanged
for 89.55 units of common stock and Series D common stock purchase warrants.
Included in the $1,679,000 was $632,500, representing a principal balance of
$550,000 and accrued interest of $82,500, from related parties. As a result of
the issuance of 89.55 units in 1997, Youbet.com issued 895,468 shares of common
stock and 447,734 Series D common stock purchase warrants, including 337,335
shares of common stock and 168,667 Series D common stock purchase warrants to
related parties. During the year ended December 31, 1997, $209,000 of advances,
including $104,000 to related parties, were repaid. As of December 31, 1997,
bridge loans payable aggregating $300,000 to unrelated parties remained
outstanding.
The holders of the 1997 bridge loans had the option of converting such
loans, including accrued interest, into the lesser of units, consisting of
10,000 shares of common stock and 5,000 Series D warrants, at the rate of
$18,750 per unit, or 75% of the next private placement offering price of an
offering over $5,000,000. During the year ended December 31, 1998, as a result
of the completion of the Series A Convertible Preferred Stock financing, the
holders of the bridge loans converted such loans, plus accrued interest of
$94,188, at the rate of $1.875 per unit, into common stock and Series D common
stock purchase warrants. Accordingly, during the year ended December 31, 1998,
Youbet.com issued 210,232 shares of common stock and 105,117 Series D common
stock purchase warrants.
In January 1998, Youbet.com commenced a new bridge financing, consisting of
a secured note with interest at 12% per annum due December 1998, secured by a
junior lien on substantially all the assets of Youbet.com. Youbet.com issued a
total of $2,415,000 of bridge notes (including $950,000 converted from
advances), of which $1,247,000 were issued to related parties. At the option of
the holder, each note was convertible into the securities of a subsequent
private placement (or the equivalent amount of common stock, if such financing
was not a common stock financing) at the lower of $2.75 or 80% of the private
placement price. During the year ended December 31, 1998, as a result of the
completion of the Series A Convertible Preferred Stock financing, the holders of
the $2,415,000 principal amount of bridge notes converted such notes, plus
accrued interest of $191,682, at the rate of $2.00 per share, into 1,303,319
shares of common stock, including 683,176 shares attributable to related
parties. During the year ended December 31, 1998, as a result of the conversion
of the 1998 bridge financing into common stock, Youbet.com issued 79,312 Series
E common stock purchase warrants, which had an aggregate fair value of $210,915,
to certain finders with respect to such bridge financing. These warrants are
exercisable at $3.125 per share for a period of three years. Finders fees paid
in cash with respect to such bridge notes aggregating $96,000 were recorded as
deferred financing costs and were being amortized through the earlier of
December 31, 1998 or the conversion of the bridge notes into common stock.
Accordingly, the unamortized portion of such deferred financing costs of $56,391
was charged to operations as financing costs during the year ended December 31,
1998.
Advances payable, all to related parties, were $390,000 at December 31,
1997. During the year ended December 31, 1998, Youbet.com received additional
advances of $613,875, including $508,875 from related parties, of which $53,875
was repaid in 1998. The holders of the advances had the right to convert such
amounts into the 1998 bridge financing until such time as the bridge notes were
either called or repaid. During the year ended December 31, 1998, all of the
advances aggregating $950,000 converted into the 1998 bridge financing.
During the year ended December 31, 1998, Youbet.com issued 355,000 shares of
common stock to four individuals in conjunction with the exercise of warrants
and stock options with exercise prices ranging from $2.50 to $3.125 per share,
generating gross proceeds to Youbet.com of $1,069,000.
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On June 29, 1998, Youbet.com entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, Youbet.com sold 220,000 shares of Series A Convertible Preferred
Stock for a cash purchase price of $25.00 per share, resulting in gross proceeds
to Youbet.com of $5,010,000. Officers and directors purchased 35,890 shares of
Series A Convertible Preferred Stock.
During July 1998 and December 1998, Youbet.com sold an additional 20,000
shares and 22,500 shares, respectively, of Series A Convertible Preferred Stock
under the same terms for aggregate gross proceeds of $1,062,500, $100,000 of
which was received in January 1999. During December 1998, 155,390 shares of
Series A Convertible Preferred Stock were converted into 1,553,900 shares of
common stock.
The Series A Convertible Preferred Stock has a liquidation preference of
$25.00 per share and will rank senior to all other series of preferred stock
that may be issued in the future. Each share of Series A Convertible Preferred
Stock is convertible into ten shares of common stock of Youbet.com, and will be
automatically converted into common stock at then prevailing conversion rate at
such time as Youbet.com has completed a secondary public offering which raises
not less than $15,000,000 in gross proceeds and has its common stock listed on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market. Accordingly, the Series A Preferred Stock will be converted into common
stock upon completion of the Offering.The holders of the Series A Convertible
Preferred Stock are not entitled to dividends, except that if dividends are paid
on Youbet.com's common stock, holders of Series A Convertible Preferred Stock
will be entitled to dividends on the basis of the number of shares of common
stock into which the Series A Convertible Preferred Stock is then convertible.
The Series A Convertible Preferred Stock will vote together with the holders of
common stock on all matters presented to stockholders for a vote on the basis of
the number of shares of common stock into which the Series A Convertible
Preferred Stock is then convertible. The holders of the Series A Convertible
Preferred Stock have unlimited piggyback registration rights and certain demand
registration rights. Based on a valuation report prepared by an investment and
merchant banking firm dated July 31, 1998, Youbet.com has determined that the
Series A Convertible Preferred Stock was sold at fair market value.
In conjunction with the Series A Convertible Preferred Stock financing,
Youbet.com incurred direct costs related to such financing of $360,909, which
were charged to additional paid-in capital. Of such amount, $217,493 was paid to
a firm for investment advisory services. In addition, this firm purchased
warrants for $.0625 per warrant to acquire 72,498 shares of common stock,
consisting of 24,166 warrants exercisable at $.01 per share and 48,332 warrants
exercisable at $2.50 per share. The warrants are exercisable through June 2003,
and have certain piggyback registration rights. The aggregate fair value of such
warrants was $401,639. As final settlement, additional fees of $122,500 are owed
to this firm which was accrued at March 31, 1999. In addition, 13,000 warrants
with an exercise price of $.01 and 26,000 warrants with an exercise price of
$2.50 are to be issued to this firm or its designee. Youbet.com also paid cash
finder's fees to other parties aggregating $28,500.
During December 1998, Youbet.com entered into stock subscription agreements
for the sale of 800,000 shares of common stock for net proceeds of $1,880,000
which were received during January and February 1999.
During January 1999, Youbet.com sold 100,000 shares of common stock to a
private investor for a cash purchase price of $2.50 per share, resulting in
proceeds to Youbet.com of $250,000.
During the quarter ended March 31, 1999, Youbet.com issued 136,125 shares of
common stock in conjunction with the exercise of warrants and stock options with
exercise prices ranging from $2.50 to $5.25, generating gross proceeds to
Youbet.com of $381,000.
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As a result of the sale of Series A Convertible Preferred Stock, common
stock and the conversion of advances and bridge loans into common stock during
1998, Youbet.com had net working capital of $792,000 at March 31, 1999 and
$1,925,000 at December 31, 1998, as compared to a working capital deficit of
$3,905,000 at March 31, 1998 and $2,739,000 at December 31, 1997.
In April 1999, Youbet.com issued $45,500,000 principal amount of 11% Senior
Convertible Discount Notes for cash proceeds of $36,728,510 (generating proceeds
of approximately $35,119,000),
which represents a discount of 11% per year, compounded semi-annually to April
2001. The notes begin accruing interest in April 2001 at 11% per year, payable
semi-annually. Principal and unpaid interest are due and payable on April 5,
2004. The notes plus accrued, unpaid interest are convertible at any time at the
rate of $10 per common share, subject to reset provisions as defined in the
notes. The conversion price resets one time at the earlier of (1) a placement,
after April 1999, of common stock and any securities convertible into common
stock which raises at least $15 million gross proceeds to Youbet.com or (2)
April 5, 2000. In the event that a placement of common stock or convertible
securities occurs first, the conversion price will be reset to the lesser of $10
per share or the lowest price per share at which Youbet.com sells common stock
after the date of the placement of common stock or convertible securities
(excluding options, warrants and other convertible securities existing prior to
April 1999). In the event that the reset occurs on April 5, 2000, the conversion
price will be reset to the lower of $10 per share or the average daily closing
price for the ten-day period ending on April 5, 2000, but in no event less than
$5 per share.
Youbet.com does not currently have any material commitments for capital
expenditures. However, Youbet.com anticipates that it will experience a
substantial increase in capital expenditures and lease commitments consistent
with Youbet.com's anticipated growth in operations and infrastructure, including
various capital expenditures associated with the expansion of operations into
foreign markets. Youbet.com anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
these expenses will be a material use of cash resources. Youbet.com believes
that its existing cash and the proceeds from the sale of the 11% Senior
Convertible Discount Notes, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures at least for the next twelve
months. Additionally, upon completion of the offering, Youbet.com intends to use
such proceeds to pursue the opportunities described in this prospectus.
IMPACT OF THE YEAR 2000
The year 2000 risk is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS
Based on an internal assessment, Youbet.com believes that its software
programs, both those developed internally and purchased from material outside
vendors, are year 2000 compliant or will be by December 31, 1999. Youbet.com
began assessing its state of year 2000 readiness during October 1998. This
included reviewing the year 2000 compliance of the following:
- Youbet.com's internally developed proprietary software incorporated in the
You Bet Network;
- Ladbroke's pool wagering and other software;
- Third party handicapping information suppliers;
- Third-party software vendors;
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Youbet.com will continue to require its vendors of material hardware and
software to provide assurances of their year 2000 compliance.
COSTS
To date, Youbet.com has incurred approximately $25,000 of costs in
identifying and evaluating year 2000 compliance issues. Most of Youbet.com's
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation year
2000 compliance matters. At this time, Youbet.com does not possess the
information necessary to estimate the potential costs of future revisions to
software relating to the You Bet Network should revisions be required or the
replacement of third-party software, hardware or services, if any, that are
determined to not be year 2000 compliant. Although Youbet.com believes that its
software programs, both developed internally and purchased from outside vendors
are either already year 2000 compliant or will be by December 31, 1999, failure
to identify non year 2000 compliant software could have a material and adverse
effect on Youbet.com's business, results of operations and financial condition.
RISKS
Youbet.com is not currently aware of any significant year 2000 compliance
problems relating to the You Bet Network or other software systems that would
have a material and adverse effect on business, results of operations and
financial condition. However, there can be no assurance that Youbet.com will not
discover year 2000 compliance problems in its proprietary software or other
third party software that will require a substantial investment to correct.
Youbet.com's inability to fix such hardware or software on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on
Youbet.com's business, results of operations and financial condition.
Failure to adequately address year 2000 compliance issues in Youbet.com's
proprietary software or third party software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that utility companies, Internet network companies, Internet access
companies, third-party service providers and others outside Youbet.com's control
will be year 2000 compliant. The failure by these entities to be year 2000
compliant could result in a systemic failure beyond Youbet.com's control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent Youbet.com from providing subscribers access
to the You Bet Network or other value added handicapping services any of which
would have a material and adverse effect on Youbet.com's business, results of
operations and financial condition.
CONTINGENCY PLAN
Although Youbet.com continues to evaluate its software for possible year
2000 compliance issues, Youbet.com believes that its software programs, both
those developed internally and purchased from material outside vendors, are
already year 2000 compliant or will be by December 31, 1999. Therefore,
Youbet.com does not have a formal contingency plan for a major year 2000
problem. Youbet.com's inability to locate or correct a significant year 2000
problem, if one exists, could result in an interruption in, or a failure of,
certain normal business activities or operations. In addition, year 2000
problems may affect sub-systems of the You Bet Network, such as the ability to
provide value added handicapping information. Any such failure could cause
Youbet.com's subscribers to seek alternate providers for online wagering. This
could require Youbet.com to incur significant unanticipated expenses to remedy
and could divert Youbet.com's management's time and attention, either of which
could have a material and adverse effect on business, results of operation and
financial condition.
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RECENT ACCOUNTING PRONOUNCEMENTS
Youbet.com adopted the Financial Accounting Standards Board statement No.
130, "Reporting Comprehensive Income" (SFAS No. 130), during the year ended
December 31, 1998. This Statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income but are excluded from net income. Adoption
of this statement did not have an impact on Youbet.com's current disclosures and
presentation.
Youbet.com adopted the Financial Accounting Standards Board statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
No. 131), during the year ended December 31, 1998. This Statement requires that
public companies report certain information about their major customers,
operating segments, products and services, and the geographic areas in which
they operate. Because Youbet.com operates within a single operating segment,
adoption of this statement did not have an impact on Youbet.com's current
disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (SFAS No. 132), which is effective for financial statements issued for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
requires comparative information for earlier years to be restated. Youbet.com
adopted SFAS No. 132 for its fiscal year beginning January 1, 1998. Adoption of
SFAS No. 132 did not have an effect on Youbet.com's financial statement
presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No.
133) which is effective for financial statements issued for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (2) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Historically, Youbet.com has not entered into derivative contracts to hedge
existing risks or for speculative purposes. Accordingly, Youbet.com does not
expect adoption of the new standard on January 1, 2000 to have any effect on its
financial statements.
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BUSINESS
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Wagering on live events, such as horse track racing,
car racing, soccer, football, etc, is a large industry. Youbet.com has initially
focused its efforts primarily on the United States horse track racing industry
and believes that its principal product, the You Bet Network, is currently the
only legal system available for online wagering in the United States.
Youbet.com believes that online communication is an ideal medium for live
event wagering. First, online communication allows bettors instant access to
vast amounts of historical performance data used in assessing potential wagers.
Second, online communication offers the ability to sort and analyze such data in
ways and at speeds that are unachievable manually. Third, online communications
technology allows wagers to be placed from virtually any location within a
jurisdiction where wagering is legal, thus freeing bettors from traditional
site-specific wagering locations. In addition, the speed of electronic
communication allows wagers to be placed and acknowledged in seconds.
Youbet.com's initial product, the You Bet Network, is a PC-based system
which allows a subscriber to transmit information and thereby facilitate wagers.
YOUBET.COM DOES NOT ACTUALLY ACCEPT OR PLACE ANY WAGERS. Wagers are placed only
by a state licensed wagering facility, currently Ladbroke, through pari-mutuel
wagering pools at the respective horse tracks.
INDUSTRY BACKGROUND
WORLDWIDE WAGERING
Youbet.com believes that wagering on most forms of live sporting events is
legal in most parts of Europe, Asia, Australia and Latin America. Youbet.com
believes there is substantial wagering worldwide of which in 1997, $639 billion
was wagered in the United States. The amount wagered on horse track racing,
which is Youbet.com's initial target market is also substantially larger
overseas, with Japan and Hong Kong bettors in particular wagering per capita
amounts significantly greater than in the United States. In 1997, of an
estimated $100 billion wagered on horse track racing worldwide approximately
$15.4 billion was wagered in the United States.
Sports wagering includes not only horse track wagering, but sporting events
such as football, basketball, baseball, hockey, soccer, boxing, golf, car
racing, dog track racing and jai alai to name a few. Aside from horse track
racing, dog track racing and jai alai, in the United States other sports
wagering is currently legal only in the State of Nevada. Legal wagering on
sporting events in the United States is estimated in 1997 to have exceeded $20.4
billion and illegal domestic sports event wagering is estimated to have exceeded
$100 billion. Overseas legal and illegal sports event wagering is estimated to
be significantly greater than wagering in the United States.
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Sports wagering worldwide consists of a mixture of fixed-odds wagering and
pari-mutuel wagering (see box below). Pari-mutuel wagering is the dominant form
of legal sports wagering in the United States and most other countries. In
certain countries such as the United Kingdom, fixed-odds wagering is offered by
licensed book-makers and is the dominant form of wagering.
<TABLE>
<S> <C>
PARI-MUTUEL WAGERING FIXED-ODDS WAGERING
No risk of loss to the house--Pari-mutuel Possible loss to the house--Fixed odds
wagering allows bettors to wager against one wagering allows bettors to wager against the
another, with a single entity or "house" entity holding the pool of wagers or "house".
holding the pool of wagers and distributing The house sets ratios of possible winnings on
it back to the winners. There is no risk of various wagers based on an educated guess as
loss to the house because the house retains a to the likely outcome of the event. The
percentage fee from the total amount wagered amount paid into the pool in excess of the
in the pool prior to paying out the remaining amount paid out is the house fee. There is a
amount of the pool to the winners. risk of loss to the house if winnings paid
out are greater than the total amount paid
into the pool.
</TABLE>
HORSE TRACK RACING OVERVIEW
Worldwide horse track wagering in 1997 exceeded $100 billion, 85% of which
came from Japan, Australia, Hong Kong, France, Great Britain and the United
States. In the United States, handicappers (horse track racing fans) wagered
approximately $15.4 billion on horse races in 1997.
UNITED STATES HORSE TRACK RACING MARKET
While many people associate horse track racing with horse track betting, in
1997 more than 77% of United States horse track wagering came from off-track
betting. This movement to off-track betting began after off-track betting was
introduced in the 1970s. During the past 15 years, off-track betting has grown
by more than 600% in the United States and wagering on domestic horse track
racing owes its current growth principally to off-track sources. As the graph
below demonstrates, the revenue mix of the industry is driven by off-track
betting. Off-track wagering currently includes inter-track simulcasts, off-track
betting facilities, telephone account wagering and with the introduction of the
You Bet Network, online wagering.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BILLIONS OF $
<S> <C> <C>
OFF-TRACK & INTER-TRACK ON TRACK
1982 $1,707.30 $9,990.60
1997 $11,045.80 $3,838.10
</TABLE>
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This dramatic shift from on-track to off-track betting was driven by the
public's desire to have convenient access to racing, the racing industry's
ability to provide a service that met this need and the legalization of a system
called "account wagering".
Account wagering is accomplished by establishing an account with a state
licensed account wagering entity and depositing funds into that account for
purposes of wagering. Once these funds have cleared, the bettor is free to use
the funds and any resulting winnings for wagering. Many entities in the United
States and worldwide are in the business of establishing such accounts and
placing wagers at the request of bettors.
In the United States, 42 states have pari-mutuel wagering of some kind.
Eight of these 42 states have statutes which specifically provide for account
wagering, and five of these eight states allow out-of-state bettors with
accounts at licensed wagering facilities within any of these five states to
wager on any track carried by the account wagering facility.
It is under this current structure that interstate account wagering has
operated in the United States for more than two decades by many large licensed
account wagering entities such as Ladbroke. For example, account wagering allows
a customer physically located in Virginia (where pari-mutuel wagering on horse
racing is legal) to place a wager at Ladbroke in Pennsylvania (which permits
interstate account wagering on pari-mutuel horse track racing) on a race run in
Maryland (where horse track racing and pari-mutuel wagering also are legal).
THE INTERNET AS A NEW ENTERTAINMENT AND COMMERCE MEDIUM
The Internet has become an important medium for communication, news,
entertainment and commerce. As a result, it is experiencing rapidly increasing
public awareness, substantial growth and acceptance on a global scale. A 1998
report issued by the United States Department of Commerce estimated that the
number of Internet users worldwide is expected to increase from approximately
100 million at year end 1997 to over 320 million by the year 2002. The same
report projects even higher growth rates for traffic and electronic commerce,
estimating that traffic is doubling approximately every 100 days. Electronic
commerce is expected to increase from an estimated $8.6 billion in 1998 to
approximately $23.3 billion in 2001. This growth is being enabled by rapid
technological advances such as the installation of more secure networks, the
introduction of better and higher performance Internet access options and the
improvement of PCs, as well as the increased penetration of PCs in both the home
and the workplace.
One of the fundamental growth drivers of the Internet is its ability to
deliver information in ways that are not possible using traditional media
sources such as broadcast or print media. Unlike these traditional sources, the
Internet is capable of combining textual, graphical, streamed audio and video
formats in a dynamic, interactive and real-time environment. This has created
new programming and content delivery opportunities that are not only capturing
the interest of the general public but also shifting user preferences away from
traditional news and entertainment sources.
A second fundamental growth driver of the Internet is the fact that it is
rapidly becoming a powerful and credible new commerce channel. To this end the
Internet has already significantly impacted consumers and businesses
transactions in a broad range of industries including financial services,
particularly online securities trading and numerous consumer product sectors.
Individuals are showing increasingly strong preferences to consummate
transactions online rather than via traditional means such as over the phone or
in person. Drivers of this trend include the perception that online purchasing
systems are simple, fast, secure, convenient, often able to offer goods at lower
prices and an unmatched source for information which can be used to make complex
purchasing or transaction decisions.
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THE ONLINE WAGERING OPPORTUNITY
Youbet.com believes that horse track racing fans enjoy the sport not only
because it is entertaining to watch but also because wagering adds significant
excitement to the experience. Online communication provides convenience and has
the opportunity to seamlessly integrate the viewing and transaction processing
aspects of wagering in one medium. Youbet.com believes this will significantly
enhance the entertainment value of online based horse track racing systems as
compared to the traditional on-track and off-track systems that are in use
today. Youbet.com also believes that online solutions are likely to appeal to
both new fans and the most serious handicappers for a number of reasons
including the following:
- HANDICAPPERS ARE ALREADY HEAVY PC USERS. According to a study commissioned
by Youbet.com in 1996 by Yankelovich Partners, a leading consumer and
market research firm, 69% of the core group of 4.8 million highly active
handicappers in the United States had access to a computer, 37% used an
online service and 14% used a computer to access handicapping information.
These findings are significant because they indicate that PC and online
service usage among handicappers was significantly greater than the
general United States population even as early as 1996. Moreover,
Youbet.com believes the fact that 14% of handicappers were already using
their computers to access horse track racing information is an indicator
of the high likelihood that handicappers will be interested in utilizing
advanced online wagering and information systems.
- OFF TRACK WAGERING IS THE NORM. Since the introduction of simulcasting in
1978 and the passage of the Interstate Horse Wagering Act, horse track
wagering has migrated away from the horse track. In 1997, for example, 77%
of all horse track racing wagers originated from off-track wagering
facilities. Handicappers prefer to place wagers at either remote sites or
by phone because it is more convenient. This trend is expected to continue
for the foreseeable future.
- HANDICAPPERS VALUE EFFICIENT EXECUTION. Fast execution of wagers as close
to race start times as possible is imperative because it allows
handicappers to place wagers based on the most up-to-date information.
Consequently, systems that facilitate fast execution are of significant
value to handicappers.
- HANDICAPPERS WANT ENTERTAINMENT AND VARIETY. The widespread popularity of
closed circuit television coverage of horse tracks at both on-track and
off-track wagering facilities is a strong indicator of the high
entertainment value that handicappers associate with watching horse track
racing. It is also important to note that one of the main benefits of
multiple television coverage is the ability to watch and wager on races
from a wide variety of horse tracks from a single location.
- HANDICAPPERS NEED DATA. The ability to interpret a wide range of both
historical and current data about jockeys, horses, weather, the condition
of the horse tracks and many other factors improves the handicapper's
chance of winning. Consequently, handicappers, especially those with
experience, will go to great lengths to acquire the most up-to-date data
and will routinely draw from a wide variety of sources.
- WORLDWIDE ONLINE WAGERING LAWS. Youbet.com believes many countries have or
are in the process of enacting laws and procedures for operating online
wagering systems. Youbet.com believes that many horse track racing fans
would be interested, particularly if these online systems are perceived as
reliable and legal, to view and wager on international horse track racing
and sporting events.
Due to these primary factors, Youbet.com believes that online communication is
an ideal medium for live event wagering offering significant enhancements
relative to traditional choices. Current off-track options available to
handicappers, while significantly more convenient than physically going to a
particular horse track, are still very inefficient and not well integrated. For
example, handicappers spend a significant amount of time collecting and
organizing handicapping information from a broad range of
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sources. Once this step is accomplished they must either travel to a horse track
or off-track wagering facility to watch races. Handicappers have the option of
placing wagers at the horse track, at off-track facilities or via phone but must
often wait in lines or on the telephone to actually place wagers. Youbet.com
believes an online system able to integrate the features of gathering
handicapping information, providing live event audio and video feeds and
automating the wagering process will be of great value to handicappers and could
significantly enhance their enjoyment and ultimately draw new fans to the sport
as well. Youbet.com also believes that the fans of many other live event
wagering events will be attracted to online systems with the same basic
features, but customized in terms of content and performance.
THE YOUBET.COM SOLUTION
Youbet.com believes that the You Bet Network is the nation's first
interactive online horse track racing and wagering service. It enables
handicappers who have installed Youbet.com's proprietary software to use their
PC and a standard online connection, to view horse track racing events, access a
comprehensive database of handicapping information and place wagers directly
through a state licensed wagering facility. The You Bet Network is completely
interactive and provides a real-time environment.
Horse track wagering, as an industry, has evolved from predominantly
on-track based to off-track betting and telephone wagering. Youbet.com believes
that its service is not only unique but also has the potential to revolutionize
how handicappers and enthusiasts wager and watch horse track racing events by
offering significant advantages over traditional on-track and off-track options.
Moreover, the underlying technology of the You Bet Network has been designed to
be highly flexible and able to fully leverage the broad access and information
distribution capabilities of an online environment. Youbet.com's technology
enables it to continue to add features to its network, to rapidly expand from
its current coverage of United States based horse track racing to the much
larger international markets and into other live event wagering markets such as
the United Kingdom and Japan. Key benefits of the Youbet.com solution include:
- CONVENIENCE, EASE OF USE. The You Bet Network is the only single source
provider of online live coverage of horse track racing events and
comprehensive handicapping information. Youbet.com provides this service
through an intuitive, easy-to-use PC based system in which users can
access the You Bet Network using a standard modem connection from home,
the office or virtually any location where a computer has online access
and it is legal to wager.
- EFFICIENT EXECUTION. The You Bet Network is able to be electronically tied
to licensed gaming agencies and is substantially faster and more efficient
than traditional on-track or off-track systems. Using the You Bet Network,
handicappers can place wagers and receive confirmation in as little as
three seconds, thus completely eliminating the hassle of waiting in lines
to place wagers or the frequent and frustrating delays associated with
phone-based systems. This faster and more efficient execution feature not
only gives handicappers the option to make more wagers but is also
critically important because it allows one to wait until the last possible
moment and to make use of the most recently available information before
making a wager. The You Bet Network also offers an important back-end
benefit because it automatically updates the user's account balances
immediately after final race results are posted. The handicappers receive
two important benefits from this feature. First, the handicappers always
know their account balance. And second, they always have access to their
full account balance when making future wagers.
- THE INFORMATION EDGE. Youbet.com believes that its system provides
handicappers with comprehensive and easy to use handicapping information
for the United States horse track racing industry. Youbet.com provides
real time information such as horse track conditions and jockey changes
and up to the minute odds on all wagers including exotic wagers such as
exactas,
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trifectas and quinellas. Youbet.com has also established relationships
with a broad range of information providers such as Equibase and the Daily
Racing Form. Youbet.com uses proprietary software to package this
information so that it is always available and easy for the handicapper to
use right on his or her PC.
- ENTERTAINMENT VALUE. Youbet.com believes that it provides a broad range of
users, from the most sophisticated handicapper to beginners, with a fun,
entertaining and feature rich wagering experience. Youbet.com believes its
ability to seamlessly combine broadcast-quality graphics, live audio and
video feeds, a broad range of tools to view handicapping information and
analyze wagering odds as well as extensive handicapping information in an
easy and flexible browser based interface is the key to providing this
high degree of entertainment value. Youbet.com currently provides this
information on a real time basis for 28 horse tracks, and is actively
expanding its relationship with new horse tracks.
- BENEFITS TO HORSE TRACKS AND WAGERING FACILITIES. Youbet.com believes that
the You Bet Network will increase the number of handicappers involved in
wagering on horse track races and therefore prove beneficial to and grow
the horse track racing industry as a whole. When a subscriber places a
wager which is facilitated by the You Bet Network, that wager is
aggregated into the total pari-mutuel pool of wagers at each respective
horse track. The horse track receives a percentage of this wager and the
licensed account wagering facility also receives a percentage of this
wager as a commission. Youbet.com receives a fee from the licensed account
wagering facility expressed as a percentage of the licensed wagering
facility's commissions. Therefore, as Youbet.com grows the number of
subscribers, the industry as a whole should benefit.
YOUBET.COM'S STRATEGY
Youbet.com's strategy is to make Youbet.com the leading global brand name
for online live event wagering. It intends to do this by accomplishing the
following goals:
- MAKE WAGERING CONVENIENT. Youbet.com believes that wagering on live events
is an exciting activity which appeals to bettors of widely varying
sophistication. By making wagering more convenient for all types of
bettors, Youbet.com hopes to increase the number of off-track bettors
using the You Bet Network and also increase the overall number of bettors.
For example, Youbet.com intends to make wagering easier for sophisticated
bettors by providing, in one easy-to-access and highly flexible format,
all the data and analytical tools that existing bettors routinely assemble
manually from a variety of sources. Newcomers to the sport are assisted by
tutorials and introductory tools, together with a friendly and dedicated
customer support staff. And, for all bettors, convenience and immediacy is
greatly enhanced by allowing these activities to take place in familiar
locations such as the home or office as opposed to the horse track, off-
track betting locations or other simulcast venues.
- INCREASE WAGERING OPPORTUNITIES. Live event wagering, like other forms of
gaming, is most enjoyable when there is a wide variety of wagering options
available, and when the stream of wagering decisions and wagering outcomes
is as full as possible. Online communications technology allows players to
make more wagers on more events in a given time period than is possible
through any other live event wagering alternative. For example, patrons at
a horse track are limited to the races offered at that horse track only
(or to the limited simulcast selection offered in addition). This provides
fewer wagering opportunities. The You Bet Network, which offers racing
content from 26 horse tracks (and growing), provides as many as 32 races
per hour, thus affording subscribers more opportunities than are available
via any other method. Online technology also allows the execution of
wagers to happen much faster than in person or over the phone (a very
important advantage), and wins are instantly credited to the bettors
account and available to be wagered again. Finally, in addition to the
numbers of races, online technology allows for a
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greater ease of wagering (including exotic wagers such as exactas,
trifectas and quinellas) than can be accomplished by other means.
- MAKE WAGERING ACCESSIBLE TO A BROADER AUDIENCE. Youbet.com expects that
the convenience of in-home wagering will encourage the new bettor to
become more active. In addition, Youbet.com believes that its marketing
activities will attract consumers who have rarely or never wagered and
that its easy-to-use product will allow them to realize the fun of
wagering with a minimum of difficulty or intimidation. In this way,
Youbet.com hopes to expand the total wagering activity in the events it
presents by lowering the challenges to participation by newcomers.
- SIGNIFICANTLY INCREASE EXPENDITURES ON MARKETING TO MAKE THE YOUBET.COM
BRAND NAME AND THE YOU BET NETWORK UBIQUITOUS. Although Youbet.com's
competitors, domestic and overseas, may have greater financial resources,
Youbet.com believes that it has a lead time advantage. Youbet.com intends
to capitalize on that lead time by significantly increasing expenditures
on domestic and international marketing to add as many subscribers as
possible as rapidly as possible. Youbet.com believes that a large base of
satisfied subscribers should present a significant challenge for new
entrants to overcome. Youbet.com's ultimate goal is for the name
"Youbet.com" to become the household name for live event online wagering,
so that a consumer's first instinct when deciding to wager online is to do
so through Youbet.com.
- PURSUE INTERNATIONAL MARKETS AGGRESSIVELY. While Youbet.com intends to
fully exploit the opportunities available to it in the United States,
foreign markets represent a much more significant opportunity due to, the
relative size of wagering in these markets, cultural or other factors
resulting in a higher propensity to wager in some foreign markets, and
regulatory structures in certain foreign countries which facilitate online
wagering. Youbet.com will devote a significant portion of its resources in
the near term to establishing a presence in key international markets by
entering into arrangements with joint venture partners in countries with a
significant sports wagering market.
- BUILD STRATEGIC RELATIONSHIPS. Youbet.com believes that it can enter into
mutually beneficial agreements with other companies and organizations, and
it will pursue relationships selectively. Youbet.com will most likely
pursue those relationships in areas outside its core technical, regulatory
or geographic competencies. In particular, Youbet.com expects to develop
such relationships in international wagering markets.
- EXPLOIT DEVELOPMENTS IN TECHNOLOGY. Youbet.com's strategy is based upon
being the first to bring a new technology in online communications to the
horse track racing market. Youbet.com will continue to enhance and improve
its existing products and technologies, and will carefully monitor
developments in technology and will adopt any new technologies which will
make online live event wagering easier, faster and more entertaining.
THE YOU BET NETWORK
In July 1998, the You Bet Network became fully operational. The You Bet
Network had undergone an extensive six month system-wide test ending in December
1997, and was launched in limited release in January 1998. The limited release,
with more than 400 subscribers, consisted mainly of computer-literate
handicappers, along with a small section of non-racing participants and was
intended to further research system features and functionality, as well as to
study marketing issues, such as pricing and packaging.
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AVAILABILITY OF THE YOU BET NETWORK
The You Bet Network is normally available to subscribers 24 hours a day,
seven days a week and offers subscribers support 14 hours a day, seven days a
week. Live horse track racing is available on the You Bet Network approximately
10-14 hours per day, depending on which horse tracks are running on a particular
day. Access to handicapping information such as past performances, is available
24 hours a day and the availability to place wagers is subject to the actual
horse tracks' time schedule of accepting wagers. If for any reason the You Bet
Network is unavailable for a particular race or for any other reason whatsoever,
Youbet.com subscribers can place wagers over the telephone by calling Ladbroke
directly via a toll free number. As the graphs below illustrate, the number of
subscribers and the pari-mutuel handle have increased substantially since the
You Bet Network became operational.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SUBSCRIBERS
<S> <C>
Jun-98 750.00
Jul-98 900.00
Aug-98 1,169.00
Sep-98 1,442.00
Oct-98 1,697.00
Nov-98 2,022.00
Dec-98 2,237.00
Jan-99 1,848.00
Feb-99 2,735.00
Mar-99 3,234.00
Apr-99 3,806.00
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THOUSANDS OF $
<S> <C>
Pari-Mutuel Handle
Jun-98 $92,356.00
Jul-98 $264,938.00
Aug-98 $518,954.00
Sep-98 $634,372.00
Oct-98 $796,835.00
Nov-98 $746,098.00
Dec-98 $1,225,373.00
Jan-99 $2,139,270.00
Feb-99 $2,841,973.00
Mar-99 $3,229,000.00
Apr-99 $3,484,000.00
</TABLE>
SETTING UP A YOU BET NETWORK ACCOUNT
To subscribe to the You Bet Network, a potential subscriber contacts
Youbet.com, either on its web site or its toll free number, opens an account and
chooses a payment method for charges to the account. This account is used for
the monthly subscription fee and for the purchasing of handicapping information.
In order to access the You Bet Network, a subscriber must install CD-ROM
software which Youbet.com provides at no additional charge. (Youbet.com
anticipates providing this software from its web site in the near future.) Once
the subscriber installs the software and activates the service, the subscriber
has access to simulcasts from the horse tracks and handicapping information.
Since YOUBET.COM DOES NOT ACTUALLY TAKE OR PLACE ANY WAGERS, wagering through
the You Bet Network requires that a subscriber open a separate wagering account
with a licensed wagering entity, currently Ladbroke.
SETTING UP A WAGERING ACCOUNT
In order to set up a wagering account, Ladbroke requires that new
subscribers provide a drivers license number, social security number, proof of
age and state of residence. Once this information is verified by Ladbroke, funds
can be transferred by the subscriber into his or her wagering account.
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Several fund transfer methods are available to fund a subscriber's account. From
this wagering account the subscriber can have wagers facilitated by the You Bet
Network, the telephone or an off-track betting facility owned by Ladbroke.
FEATURES OF THE YOU BET NETWORK
The You Bet Network is provided through a secure, proprietary, closed-loop
private online network which a subscriber can access via his or her Internet
service provider. The high performance level of the You Bet Network in terms of
audio, video, transaction processing and information delivery, improved
reliability, and higher levels of security are made possible by the installation
of Youbet.com's proprietary software. Specific features of the You Bet Network
include:
- Wagering directly into horse track pools;
- Immediate access to wager results, payouts and account status;
- 28 horse tracks to chose from, many running simultaneously;
- Ability to play multiple horse tracks simultaneously;
- Up-to-the-minute odds, probable payouts and late changes on the horse
track;
- Access to a vast database of handicapping and past performance
information;
- Live audio and video feed from the horse tracks or any other programming;
- Official programs and data on past performances including races, tracks,
jockeys and horses;
- Simple graphical user interfaces which simulate wagering at the horse
track;
- Summary of previous wagers placed by the subscriber and previous wagering
results; and
- Sophisticated encryption technology.
Youbet.com, with Ladbroke, continue to negotiate contracts with numerous horse
tracks and content and information providers to allow additional features and
content to be added to the You Bet Network.
HOW A WAGER IS FACILITATED BY THE YOU BET NETWORK
Subscribers can use the You Bet Network to facilitate wagers, using the
system's icon-driven menus to fill out an electronic wagering information ticket
similar to a wagering ticket at a horse track. The wager is then transmitted
electronically to Ladbroke, Youbet.com's licensed account wagering provider.
Ladbroke debits the subscriber's account, places the wager at the host horse
track and sends an electronic confirmation to the subscriber through the You Bet
Network. This entire process usually takes less than three seconds. The
subsequent adjustment to the subscriber's account for winnings and losses also
usually takes less than three seconds after official winnings are posted at the
horse track.
CUSTOMER SERVICE FOR THE YOU BET NETWORK
Youbet.com maintains and provides a high level of customer service and
support for its subscribers. Customer service representatives are available from
7:00 a.m. to 9:00 p.m. Pacific Standard Time, seven days a week, to provide
assistance via email or toll free number. Customer service representatives can
handle all questions relating to the You Bet Network, including how to install
Youbet.com's software, how to place a wager and how to find desired features or
information on the You Bet Network. Customer service will also process a
subscriber's credit card information over the telephone to initially set up an
account. Customer service hours have been set by Youbet.com according to the
hours when it is likely that online activity will take place. To date,
Youbet.com has had no significant customer service
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issues and intends to continue to devote the resources necessary to maintain
this high level of customer service.
PRICING FOR THE YOU BET NETWORK
Beginning in February 1999, Youbet.com implemented a monthly subscription
fee for access to the You Bet Network which is currently $5.95. This fee does
not include the extra charges applicable for value added features and additional
handicapping information such as past performances, tip sheets and horse track
racing analysis which are billed separately on a monthly basis. New subscribers
may currently access the You Bet Network for an initial one month free trial
period.
REVENUE SOURCES FROM THE YOU BET NETWORK
Pari-mutuel operators typically take a percentage as a commission prior to
distributing payoffs to the winners. Pari-mutuel operators such as Ladbroke also
bring additional wagers into a horse track pool from off-track sources.
Youbet.com receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers who
have wagers placed through Ladbroke. This fee includes not only a percentage of
net commissions for wagers facilitated by the You Bet Network, but also each
wager by a Youbet.com subscriber which is placed by phone with Ladbroke. These
commissions comprise Youbet.com's primary revenue stream. Additional revenues
are generated from monthly subscription fees, the sale of information products
and other value added services such as past performances of various tracks,
jockeys or horses.
Youbet.com expects to continue to derive a majority of its future revenues
through commissions from amounts wagered with licensed wagering facilities
through the You Bet Network. However, Youbet.com anticipates that additional
revenue will be generated from sources such as, advertising on the You Bet
Network, including web banners, and advertising on the live simulcasts as well
as sales of other sports information and sports and logo merchandise. Youbet.com
intends, as part of its marketing plan, to extensively expand advertising on the
You Bet Network once its subscriber base reaches a certain threshold.
YOUBET.COM INTERNATIONAL INITIATIVES
Youbet.com is currently engaged in discussions with several large, overseas
companies with the objective of expanding the You Bet Network to include foreign
handicappers and enabling Youbet.com's subscribers to place wagers on world
class racing from foreign racing centers. Youbet.com's overseas strategy
envisions providing Youbet.com's technology and experience in developing the You
Bet Network to overseas partners who will develop the physical network
facilities under joint venture agreements. These joint ventures will develop
local networks as turn-key operations that can easily be replicated throughout
the world in countries with significant sports wagering markets. As in its
operation in the United States, Youbet.com does not plan to actually accept
wagers or take the risks associated therewith. Instead, the overseas networks
will enter into agreements with licensed wagering entities, for the actual
processing of each wager. Additionally, while wagering on horse track racing is
the only service currently offered by the You Bet Network, Youbet.com's overseas
networks may also include other types of sports wagering.
WAGERING SYSTEMS DEVELOPMENT EXPERIENCE
Youbet.com's predecessor, PC Totes, Inc. had more than eight years of
experience developing computer-based wagering systems, including development of
a PC-based "totalisator" system to operate and process all wagering at horse and
dog tracks at the time of its merger into Youbet.com. To Youbet.com's knowledge,
this was the first PC-based totalisator system to be operated by horse and dog
tracks.
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MARKETING AND PROMOTION
In December 1998, the National Thoroughbred Racing Association, or NTRA,
published horse track racing customer market research. The NTRA identified a
U.S. thoroughbred racing wagering population of 10 million, who wagered $15.5
billion legally in 1998.
TARGET MARKETS
Youbet.com has stratified the market into two distinct betting groups, as
follows:
- EXISTING BETTOR This type represents the "expert", "above average" and
"average" handicapper. The existing player is a regular bettor, who
currently uses remote betting facilities, often plays casino games and
follows sports.
- NEW BETTOR This type of bettor represents the mainstream online service
users who are sports fans, players of online "fantasy sports," and day
traders, but who do not presently wager on horse track racing. Youbet.com
will target on-line financial, business, sports, and gaming communities in
order to reach this player. Youbet.com believes that the new bettor
represents an extremely large market.
MARKETING STRATEGY
Existing bettors require less time to learn to use the You Bet Network and
provide a very profitable segment of players. The existing bettor is likely to
be targeted by competitors. New bettors will need more education regarding horse
track racing, but represent a larger market and possibly even greater revenues.
Youbet.com intends to attract the existing bettor with superior information
and technology as well as value-added promotions such as complementary monthly
service charges. Youbet.com also believes that significant wagering activity can
be produced by existing and new bettors who may be significant gamblers or have
strong interest in the sports field, but who have not traditionally been large
players due to a perceived lack of time and convenience regarding horse track
wagering. The convenience and ease of use of the You Bet Network, as well as the
immediate excitement of online wagering and wagering results will be heavily
marketed to attract these new players. The Youbet.com brand will also be heavily
marketed to these two market segments to distinguish Youbet.com from its future
competitors and to create brand awareness, sampling of the You Bet Network and
loyalty.
DISTRIBUTION
Sales strategies are concentrated on direct mail campaigns, online marketing
(banners ads, co-marketing ventures, etc.), print advertising, on-track
promotion and bundling with software products and print media.
Youbet.com's website is a primary marketing vehicle and sales driver. In
addition, Youbet.com has entered into strategic relationships with mainstream
and niche online services to enhance its marketing and distribution efforts.
INTERNATIONAL MARKETING
As Youbet.com expands and develops wagering networks overseas, additional
marketing strategies will be implemented to target the players wagering on horse
track racing in their respected countries as well as bettors who may be
interested in wagering on Youbet.com's other live sports wagering products which
will be developed by country, as appropriate.
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STRATEGIC RELATIONSHIPS
Youbet.com has domestic agreements with Ladbroke, one of the world's largest
licensed account wagering entities, Equibase, the industry's leading source of
racing information, Thoroughbred Sports Network, a leading Internet-based
publisher of horse track racing information, The United States Trotting
Association, the industry's leading source of standardbred racing information
and Netixs Communications, one of the leading Internet providers of networking
services.
LADBROKE
In June 1997, Youbet.com entered into a Telecommunication Facilitation
Agreement with Mountain Laurel Racing, Inc. and Washington Trotting Association,
Inc., both of which are subsidiaries of Ladbroke USA (collectively, "Ladbroke"),
which expires in November 2002. Under the agreement, Youbet.com provides
Ladbroke with an interactive graphics interface to the You Bet Network through
which Youbet.com's subscribers who have established accounts with Ladbroke's
Call-A-Bet System in Pennsylvania are able to communicate interactively with
Ladbroke using their PCs to transmit wagering information to Ladbroke.
Ladbroke provides simulcast signals and pari-mutuel wagering from 32 horse
track racing venues throughout the United States, including most major horse
tracks. Since 1983, Ladbroke has offered telephone wagering through Ladbroke's
Call-A-Bet System, one of the nation's largest account wagering systems.
Youbet.com's agreement with Ladbroke enables Youbet.com's subscribers to place
wagers through Ladbroke's Call-A-Bet System. The agreement also provides for
Youbet.com to receive a fee from Ladbroke equal to fifty percent (50%) of the
net commissions to Ladbroke derived from wagers placed by Youbet.com subscribers
who use the Call-A-Bet System either through the computer graphics interface
provided by Youbet.com or more traditional telephone communication.
Ladbroke is a subsidiary of Ladbroke USA, a subsidiary of the worldwide
gaming and hospitality leader Ladbroke Group PLC. Ladbroke consists of the
Meadows horse track in Pennsylvania and six offtrack wagering facilities, all in
the state of Pennsylvania. Ladbroke USA owns and operates Golden Gate Fields in
California. Ladbroke Group PLC is a multi-national publicly traded corporation
headquartered in the United Kingdom, that owns and operates more than 2,000
wagering shops in the United Kingdom, and is the world's largest operator of
horse track racing and sports wagering properties. In addition, Ladbroke Group
PLC owns Hilton International, which controls more than 160 hotels and casinos
in 50 countries and Ladbroke is the second largest hotel operator in the United
Kingdom and recently acquired the Stakis Hotel and Casino Group.
Youbet.com's agreement with Ladbroke expires in November 2002, and provides
that through June, 1999, subject to certain exceptions, Ladbroke will be the
exclusive horse track wagering facility used by Youbet.com and Youbet.com will
be the exclusive interactive computer-based audio/video telecommunications
facilitator used by Ladbroke. This relationship becomes non-exclusive in June
1999. However, if Youbet.com enters into an arrangement with another account
wagering facility which is more favorable to such account wagering facility than
Youbet.com's agreement with Ladbroke on an overall basis, Ladbroke is entitled
to receive the benefit of such arrangement.
STATION CASINOS
On June 9, 1999, Youbet.com, Inc. announced that it had entered into a
letter of intent with Station Casinos, Inc., to create a new venture which will
jointly offer in-home interactive and sports wagering to Nevada residents. The
new venture will be owned on a 50/50 basis by Youbet.com and Station Casinos.
Youbet.com will adapt its proprietary software and technology and license it on
a non-exclusive basis to the new venture. Station Casinos will fund a portion of
Youbet.com's software development cost and contribute to funding the new
venture's advertising and other costs. The new venture
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is subject to execution of definitive agreements, and its service will be
offered only after obtaining all required regulatory approvals, including the
approval of the Nevada gaming authorities.
The service, which will be available exclusively to Nevada residents, is
targeted for release on personal computers during the second quarter of 2000. It
is anticipated that the service will allow subscribers to place wagers on
sporting events at Station Casinos using their personal computers and the You
Bet Network.
Youbet.com also agreed to grant Station Casinos a 5-year warrant to purchase
100,000 shares of Youbet.com common stock at an exercise price of $19.50 per
share. Additionally, Station Casinos has agreed to purchase shares in this
offering at an aggregate cost of $2,000,000.
Station Casinos is a multi-jurisdictional gaming company that owns and
operates the Palace Station Hotel & Casino, the Boulder Station Hotel & Casino,
the Texas Station Gambling Hall & Hotel, and the Wild Wild West Gambling Hall &
Hotel in Las Vegas, Nevada, Sunset Station Hotel & Casino in Henderson, Nevada,
as well as slot machine route management services in Clark County, Nevada.
Station Casinos also owns and operates Station Casino St. Charles, a gaming and
entertainment facility in St. Charles, Missouri, and Station Casino Kansas City,
a gaming and entertainment facility in Kansas City, Missouri.
OTHER STRATEGIC RELATIONSHIPS
In March 1996, Equibase Company signed a five-year license agreement,
terminable upon 30 days written notice, with Youbet.com which allows Youbet.com
to produce products and services from Equibase's data and sell programs, past
performances and a wide variety of horse track racing information products to
Youbet.com's subscribers. Equibase is the official "thoroughbred industry owned"
database of racing information. Established in 1990, Equibase is a general
partnership between The Jockey Club and the Thoroughbred Racing Associations of
North America. The agreement provides that Youbet.com will pay Equibase fees for
individual product sales subject to a minimum monthly fee.
In September 1997, Thoroughbred Sports Network, Inc., or TSN, entered into a
five-year, marketing and distribution agreement, terminable upon 90 days written
notice, with Youbet.com, which allows Youbet.com to provide its subscribers with
access to a wide variety of handicapping past performance and sports information
products. The agreement provides that Youbet.com will pay TSN a percentage of
the set price per download for each information product sold. TSN is the leading
Internet-based publisher of horse track racing information products,
specializing in value-added handicapping services and daily reports, designed
especially for the avid handicapper.
In March 1998, the United States Trotting Association, or USTA, entered into
an agreement with Youbet.com, terminable upon 30 days written notice, to provide
past performance information related to horse track racing. Youbet.com agrees to
pay a monthly minimum fee as well as a separate fee for each downloaded horse
track program. The USTA is now in its sixtieth year of operations promoting the
standardbred breed of horses.
In March 1999, Netixs Communications entered into a two-year agreement with
Youbet.com to provide online network services that will deliver video, audio and
data to subscribers of the You Bet Network. The agreement provides that
Youbet.com will pay per an agreed fee on a monthly basis for use of Netixs'
network services. Netixs provides a high-speed fully redundant, nationwide loop
with DS-3 to OC-48 architecture and dedicated MAN rings (metropolitan area
network). Netixs functions as the primary network provider for Youbet.com.
COMPETITION
The online and interactive wagering market is new and rapidly changing.
Youbet.com anticipates that competition will become more intense and that new
companies will enter the market. Worldwide,
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several Internet and interactive ventures of various kinds have been announced.
Youbet.com expects to compete with these entities, as well as other established
gaming companies, which may enter the interactive pari-mutuel gaming market.
Presently, Youbet.com has focused its efforts primarily on the United States
horse track racing industry and believes that its principal product, the You Bet
Network, is currently the only legal system available for online wagering in the
United States.
Youbet.com believes that its principal domestic competitor in the
interactive pari-mutuel gaming market is the Television Games Network, which is
owned by TV Guide, Inc. The Television Games Network, yet to be nationally
launched, is a 24 hour national racing channel for distribution over cable and
DirecTV, along with an in-home pari-mutuel wagering system that requires a
dedicated television set-top box. The system has undergone limited testing in
Kentucky and has been available to the public in limited release since November
1998. The Television Games Network has announced that it has formed exclusive
relationships with a number of major United States horse tracks. Further
expansion of the Television Games Network's exclusive relationships may make it
difficult for Youbet.com to obtain racing audio and video content to supply the
You Bet Network. If such exclusive relationships account for a significant
number of horse tracks, the Television Games Network may be able to secure
additional horse tracks on more favorable terms than Youbet.com.
Youbet.com believes that potential new competitors, include large
interactive and online software companies, media companies and gaming companies,
which may increase their focus on the interactive wagering market. Competition
for the You Bet Network is influenced by the timing of competitive product
releases and the similarity of such products to those of Youbet.com, which may
result in significant price competition or reduced profit margins.
Youbet.com also anticipates that significant overseas competition will
emerge. This may eventually result in additional competition as these overseas
competitors expand into the United States or as Youbet.com expands
internationally. Specifically, several well-capitalized Australian media
companies and gaming companies are already developing Internet wagering systems.
GOVERNMENT REGULATION AND LEGISLATION
Gaming activities are subject to extensive statutory and regulatory control
by both state and federal authorities, and are likely to be significantly
affected by any changes in the political climate and economic and regulatory
policies. These changes may impact the operations of Youbet.com in a materially
adverse way. To the extent that Youbet.com's facilities are used by subscribers
to place intrastate or interstate wagers or Youbet.com receives commissions from
such wagers, various 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 You Bet Network.
All 50 states currently have statutes or regulations restricting gaming
activities, and three states have no gaming at all. In most states it is illegal
for anyone either to accept or make a wager, with specific state-by-state
statutory exceptions. The Federal Interstate Wire Act contains provisions which
make it a crime for anyone in the business of gaming to use an interstate or
international telephone line to transmit information assisting in the placing of
wagers, unless the wagering is legal in the jurisdictions from which and into
which the transmission is made. Other federal laws impacting wagering activities
include the Interstate Horse Racing Act, the Interstate Wagering Paraphernalia
Act, the Travel Act and the Organized Crime Control Act. Certain legislation is
currently being considered in Congress and individual states in this regard. In
addition, the United States Justice Department is in the process of taking
action against selected companies that it deems to be operating without proper
licensing and regulatory approval.
Youbet.com believes that its activities are in compliance with all
applicable gaming laws and regulations as currently applied. Youbet.com has been
advised by counsel that a reasonable conclusion can be drawn that Youbet.com's
activities do not violate the gaming laws of the United States or the 40
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states (plus the District of Columbia) in which it operates. However, because
there is little clear statutory and case law authority, this conclusion is not
free from doubt. Youbet.com faces the risk of either civil or criminal
proceedings brought by governmental or private litigants who disagree with
Youbet.com's interpretation of the applicable laws. Because there is little
guiding authority, there is a risk that Youbet.com could lose such lawsuits or
actions and be subject to significant damages or civil or criminal penalties.
In 1998, a bill sponsored by U.S. Senator Jon Kyl of Arizona and adopted by
a wide margin in the Senate (but ultimately not enacted) would have prohibited
online and Internet gaming with specified exceptions, including exceptions for
certain horse race wagering and certain "closed-loop" online systems. However,
the latter exceptions were narrow and this 1998 bill, had it been enacted, would
have had a material adverse effect on Youbet.com's business. Other online and
Internet gaming bills have been considered in recent years in both the Senate
and the House of Representatives. Senator Kyl has reintroduced a new version of
his online and Internet Gambling Prohibition Act of 1999. This 1999 Kyl bill (S.
692) contains more broadly drafted exceptions than the 1998 Kyl bill and, if it
were enacted in the form in which it was introduced on March 23, 1999,
Youbet.com does not believe that the bill would have a material adverse effect
on Youbet.com's business. However, a proposal such as the 1998 Kyl bill could
emerge again in Congress; many states are considering Internet gaming
legislation and regulations which may or may not be worded so as to permit
Youbet.com's business to continue in such states; and the National Gambling
Impact Study Commission or other legislative or regulatory bodies may reach
influential anti-gaming conclusions which could form the basis for new laws,
regulations, or enforcement policies that could have a material adverse effect
on Youbet.com's business.
Youbet.com intends to comply with all applicable laws and regulations
including the proposed Kyl bill, if enacted. Youbet.com has designated executive
officers to oversee its legal compliance efforts in the United States and
abroad. Such officers, where appropriate, will consult with Youbet.com's counsel
and others regarding Youbet.com's activities and will monitor proposed
regulations and legislation that would affect Youbet.com's business.
International expansion of the You Bet Network may be subject to regulation
in those countries in which it is made available. Youbet.com believes that it
can operate, or license technology, in numerous jurisdictions that allow
telephone and account wagering, such as Canada, Mexico, the United Kingdom,
Australia, and Hong Kong. However, Youbet.com may not be able to obtain the
approvals necessary to market its services in such jurisdictions.
INTELLECTUAL PROPERTY
In developing the You Bet Network, Youbet.com has acquired and developed
software technologies which it believes give it a technological advantage over
potential competitors. Although Youbet.com's software and technology is not
currently protected by patents or copyrights, Youbet.com believes that its
proprietary software could take time for a competitor to replicate. Youbet.com
also draws from an experienced team of software professionals with years in the
pari-mutuel wagering business. Among the technology which Youbet.com believes
potential competitors will find difficult to replicate or acquire, are the
following:
- A proprietary network design capable of handling the extreme peak loads of
interactive wagering;
- A national multicast network allowing for reliable and economical delivery
of audio, video, and information updates to a virtually unlimited
audience;
- Open architecture design capable of handling multi-currency and
multi-lingual games, including horse track racing and other high-level
participation games; and
- Proprietary encryption and security technologies and techniques.
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EMPLOYEES
As of April 30, 1999, Youbet.com had 58 employees. Youbet.com has never had
a work stoppage, and no employees are represented by a union. Youbet.com
considers its relations with its employees to be good. Youbet.com believes that
its future success will depend in part on its continued ability to attract,
integrate, retain and motivate highly qualified technical and managerial
personnel, and upon the continued service of its senior management and key
technical personnel. Competition for qualified personnel in Youbet.com's
industry is intense, particularly for software development and other technical
staff and there can be no assurance that Youbet.com will be successful in
retaining a sufficient numbers of qualified personnel to conduct its business in
the future.
FACILITIES
Youbet.com's principal administrative, data and marketing facilities total
approximately 9,600 square feet, and are located in Los Angeles, California
under a lease which will expire in October 1999. Youbet.com is exploring
alternatives to expand its current space or to secure a larger location.
Youbet.com expects that suitable additional space will be available on
commercially reasonable terms. Youbet.com does not own any real estate.
LEGAL PROCEEDINGS
Youbet.com has been advised that on June 4, 1999, a complaint was filed
against Youbet.com in the Court of Chancery of the State of Delaware in and for
New Castle County entitled Georg Von Opel v. Youbet.com, Inc. (C.A. No. 17200
NC). In the complaint Mr. Von Opel alleges that Youbet.com breached its
obligation to register the shares of common stock underlying 400,000 warrants
issued by Youbet.com to an affiliate of Mr. Von Opel. The complaint seeks
specific performance of the alleged obligation to register such shares and
damages for alleged breach of contract in the amount of $8.7 million. Youbet.com
intends to defend itself vigorously in the action. Among other things, Mr. Von
Opel executed a letter on February 24, 1998 which Youbet.com contends effected a
waiver of such registration rights. As the litigation is in an initial stage,
Youbet.com cannot predict its outcome, although if the claim is determined
adversely to Youbet.com, it could have a material adverse effect on Youbet.com.
In addition, holders of 37,667 warrants have demanded that Youbet.com
register the shares of common stock underlying such warrants. Youbet.com,
believes that such holders have registration rights only with respect to a
portion of such warrants. While Youbet.com anticipates having discussions with
such holders seeking to resolve such claims, such discussions may not result in
a successful resolution of these issues. It is possible that these claims, as
well as the potential claims of other warrantholders who did not accept
Youbet.com's March 1999 proposal, may, if determined adversely to Youbet.com,
have a material adverse effect on Youbet.com. See "Description of Capital
Stock--Registration Rights."
Youbet.com may from time to time become a party to other legal proceedings
arising in the ordinary course of business. Youbet.com is not currently subject
to any additional material legal proceedings. However, there can be no assurance
that Youbet.com will not be a party to any additional legal proceedings at some
future date.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the directors,
executive officers and certain key employees of Youbet.com:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Robert M. Fell(1)............... 56 Chairman of the Board and Chief Executive Officer
David M. Marshall(1)............ 36 Vice Chairman of the Board and President
Russell M. Fine(1).............. 35 Director, Executive Vice President and Chief Technology Officer
Ron W. Luniewski................ 35 Executive Vice President and Chief Operating Officer
Phillip C. Hermann.............. 49 Executive Vice President and Chief Financial Officer
Jean M. Prewitt................. 50 Executive Vice President, International
Steve A. Molnar................. 55 Executive Vice President, Racing
Nancy A. Lamb................... 41 Vice President, Marketing
Gary N. Jacobs.................. 53 Secretary
Caesar P. Kimmel(2)............. 73 Director
Alan Landsburg(2)............... 66 Director
Jess Rifkind(3)................. 68 Director
William H. Roedy(3)............. 51 Director
</TABLE>
- ---------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
ROBERT M. FELL
Mr. Fell has served as Chairman of the Board and Chief Executive Officer of
Youbet.com since June 1998. From 1995 to 1998 prior to joining Youbet.com, Mr.
Fell was chairman of the board and chief executive officer of Archon
Communications, Inc. ("ACI"). ACI acquired control of Premiere Radio Networks,
Inc., which it later sold to Jacor Communications, Inc. Mr. Fell was also the
founder of Silicon Gaming, Inc. and served as its initial President in 1993. Mr.
Fell resigned from the board of Silicon Gaming in early 1998. From 1978 to 1995,
as a consultant in the entertainment and communications industry, Mr. Fell,
through Fell & Company, Inc., played a major role in restructuring and
augmenting the management of Columbia Pictures Industries, Twentieth Century Fox
and other major media companies.
DAVID M. MARSHALL
Mr. Marshall has served as Vice Chairman of the Board and President since June
1998. Mr. Marshall has been a senior executive and director of Youbet.com or its
predecessors since its founding in 1987 and served as chairman of the board and
chief executive officer of Youbet.com or its predecessors from 1989 to June
1998. Mr. Marshall was also the co-founder of MiddleWare Telecom Corporation and
PC-Totes, Inc. Both entities have since been merged into Youbet.com.
RUSSELL M. FINE
Mr. Fine has served as Executive Vice President and Chief Technology Officer
since June 1998. Mr. Fine has been a senior executive and director of Youbet.com
or its predecessors since its founding
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in 1987. Mr. Fine was also the chief technology officer and co-founder of
MiddleWare Telecom Corporation and vice-president of research and development of
PC-Totes. Both entities have since been merged into Youbet.com.
RON W. LUNIEWSKI
Mr. Luniewski has served as Executive Vice President and Chief Operating Officer
of Youbet.com since February 1999, and was President of You Bet!, Inc. a
subsidiary of Youbet.com or its predecessor since March 1996. For more than five
years prior to joining Youbet.com, or its predecessor, Mr. Luniewski was with
Electronic Data Systems as a system engineer and held a variety of positions in
software development, project management and business development.
PHILLIP C. HERMANN
Mr. Hermann has served as Executive Vice President and Chief Financial Officer
of Youbet.com since May 1998. From August 1997 to April 1998, Mr. Hermann was
chief operating officer and chief financial officer of Cloud 9 Interactive, a
diversified entertainment company. Previously, from 1992 to August, 1997 Mr.
Hermann was executive vice president and chief financial officer of Strawberry
Industries, a consumer products company. From 1982 to 1986 Mr. Hermann was vice
president and chief financial officer of the Walt Disney Telecommunications
Group.
JEAN M. PREWITT
Ms. Prewitt has served as Executive Vice President, International of Youbet.com
since April 1999. From July 1994 to January 1999 Ms. Prewitt was with
podesta.com, a governmental affairs/public relations firm specializing in media
and technology clients. Previously, Ms. Prewitt was with the National
Telecommunications and Information Administration from 1989 to 1994 where she
advised and represented the United States in communications and information
policies. She also served as senior vice president and general counsel of United
International Pictures from 1982 to 1989.
STEVE A. MOLNAR
Mr. Molnar has served as Executive Vice President, Racing of Youbet.com since
February 1999 and was chief executive officer of You Bet!, Inc. a subsidiary of
Youbet.com or its predecessor from April 1997 to April 1998. From May 1994
through December 1995 Mr. Molnar was a consultant to the horse racing industry
including Youbet.com. Mr. Molnar's involvement in the horse racing industry
spans 12 years prior to joining Youbet.com. From November 1988 to April 1994 he
held the position of president and chief operating officer of McKinnie Systems.
NANCY A. LAMB
Ms. Lamb has served as Vice President, Marketing of Youbet.com since April 1999.
From September 1998 to April 1999 and from November 1997 to December 1997, Ms.
Lamb was self-employed as a marketing consultant. Previously, from January 1997
to September 1998, Ms. Lamb was a vice president of worldwide marketing at
Mattel, Inc. From October 1996 to October 1997, Ms. Lamb was director of
marketing at ABC Interactive. From December 1995 to June 1996, Ms. Lamb was vice
president of marketing and creative services at GT Interactive Software. From
June 1992 to December 1995, Ms. Lamb was a director of worldwide marketing at
Mattel.
GARY N. JACOBS
Mr. Jacobs has served as Secretary of Youbet.com since July 1998. He has been a
senior partner at Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro,
LLP, or its predecessors since May 1988. Mr. Jacobs is counsel for Youbet.com,
and a director of The InterGroup Corporation, which owns and operates rental
properties and invests in other companies.
CAESAR P. KIMMEL
Mr. Kimmel has served as a Director of Youbet.com since June 1998. Mr. Kimmel
has been a private investor for more than the past five years. Mr. Kimmel is one
of the original founders of Warner Communications, Inc. the predecessor to Time
Warner Inc. and served as Executive Vice President for twenty five years. Mr
Kimmel is also currently a director of the National Museum of Racing.
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ALAN LANDSBURG
Mr. Landsburg has served as a Director of Youbet.com since June 1998. Mr.
Landsburg is the founder and has been the chief executive officer of The
Landsburg Company and Alan Landsburg Productions since 1970. As an executive
producer, director and writer he is responsible for more than 2,000 hours of
television production which include seven hit series and more than 50 movies. He
is a founding board member of the Thoroughbred Owners of California. Mr.
Landsburg also serves on Advisory Committees for the California Horse Racing
Board.
JESS RIFKIND
Mr. Rifkind has served as a Director of Youbet.com since December 1995. Mr.
Rifkind is an independent management consultant providing counsel to clients in
the areas of management, finance, and high technology. Prior to establishing his
current practice in 1982, Mr. Rifkind held operating and research executive
positions with Xerox Corporation from May 1968 to December 1981; including vice
president, Field Engineering, and founder and manager of the Advanced
Development Labs of the Xerox Palo Alto Research Center. Mr. Rifkind is also
currently a director of Gemstone Systems Inc, a computer software company that
produces application server and object database software.
WILLIAM H. ROEDY
Mr. Roedy has served as a Director of Youbet.com since June 1998. Mr. Roedy has
been employed by MTV Networks since 1989 and is president of MTV Networks
International and chairman of MTV Networks Europe. Prior to joining MTV, Mr.
Roedy was at Home Box Office from 1979 to 1989, as manager for national accounts
and affiliate operations and vice president.
DIRECTOR COMPENSATION
Non-employee directors receive no annual retainer or meeting fees, but are
reimbursed for travel costs and other out-of-pocket expenses incurred in
attending board of directors and committee meetings. Jess Rifkind, a
non-employee member of the board of directors, was also paid a consulting fee of
$2,400 per month from January through June 1998. As additional compensation for
the non-employee members of the board of directors, Youbet.com issued the
following stock options:
- In April 1998, Youbet.com issued a stock option to Jess Rifkind, the only
non-employee director of Youbet.com at that time under the 1995 Stock
Plans to purchase 5,000 shares of common stock at an exercise price of
$5.50 per share. The stock option was fully vested upon issuance, and is
exercisable for a period of ten years.
- In July 1998, Youbet.com granted to each of its non-employee directors
options to acquire 40,000 shares of common stock, pursuant to the 1998
Stock Plan at an exercise price of $2.50 per share. These options vest
monthly over the one year period beginning July 1998 and are exercisable
for a period of ten years after vesting.
As of the date of this prospectus, options to acquire 180,300 shares of common
stock held in the aggregate by such directors are outstanding and are vested or
will be vested within the next 60 days.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Youbet.com's Bylaws provide that the number of members of Youbet.com's board
of directors shall be determined by the board of directors. This number is
currently seven. All of the officers identified above serve at the discretion of
the board of directors of Youbet.com. Youbet.com's Bylaws also provide for the
creation of committees of the board of directors. Youbet.com, currently has
three committees: the Executive Committee, the Compensation Committee and the
Audit Committee.
Messrs. Fell, Marshall and Fine are the members of the Executive Committee.
The Executive Committee has full authority to exercise all the powers of the
board of directors to the fullest extent permitted by Delaware law. Actions of
the Executive Committee are taken by a majority vote.
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Messrs. Kimmel and Landsburg are the members of the Compensation Committee.
The Compensation Committee administers, reviews and approves, subject to the
board of directors, Youbet.com's stock option plans, and make recommendations to
the board of directors regarding compensation, including payment of salaries,
bonuses and incentive compensation and other benefit programs, including those
relating to Youbet.com's senior management.
Messrs. Rifkind and Roedy are the members of the Audit Committee. The Audit
Committee interacts with Youbet.com's Chief Financial Officer and outside
auditors concerning Youbet.com's independent public accountants and the
establishment and oversight of such systems of internal accounting and auditing
control as it deems appropriate.
The board of directors does not have a nominating committee. However, the
board of directors will consider nomination recommendations from stockholders,
which should be addressed to Youbet.com's secretary at its principal executive
offices.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by Youbet.com for the
years ended December 31, 1998, 1997 and 1996 to the Chief Executive Officer, the
executive officers of Youbet.com whose total salary and bonus for 1998 exceeded
$100,000 and certain other key employees.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
<S> <C> <C> <C> <C>
OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- ---------------------------------------------------------------- --------- ---------- ----------- -------------
Robert M. Fell(1)............................................... 1998 $ 81,136(4) $ 363(5) $ 4,500(6)
Chairman of the Board and Chief Executive Officer 1997 -- -- --
1996 -- -- --
David M. Marshall(2)............................................ 1998 140,000 363(5) 52,279(7)
Vice Chairman of the Board and President 1997 130,000 -- 17,185(8)
1996 130,000 -- --
Russell M. Fine................................................. 1998 138,333 363(5) 39,898(9)
Executive Vice President and Chief Technology Officer 1997 120,000 -- 14,825(10)
1996 120,000 -- --
Ron W. Luniewski................................................ 1998 138,333 363(5) 2,991(11)
Executive Vice President and Chief Operating Officer 1997 120,000 -- 10,306(12)
1996 101,385 -- --
Phillip C. Hermann(3)........................................... 1998 96,667 363(5) 75,456(5)
Executive Vice President and Chief Financial Officer 1997 -- -- --
1996 -- -- --
Steve A. Molnar................................................. 1998 119,375 363(5) 3,158(11)
Executive Vice President, Racing 1997 121,460 -- 10,812(13)
1996 78,750 -- --
</TABLE>
- ---------
(1) Joined Youbet.com's management in June 1998.
(2) Served as chief executive officer of Youbet.com until June 1998.
(3) Joined Youbet.com's management in May 1998.
(4) Represents compensation paid to Fell & Company, Inc. for the services of
Robert M. Fell (see "Employment and Service Agreements" below).
(5) See "Option Grants in 1998" below.
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<PAGE>
(6) Represents automobile allowance.
(7) Represents interest on deferred compensation of $9,854, an automobile
allowance of $7,500, and a discount of $34,925 on the conversion of
deferred compensation into 55,879 shares of common stock.
(8) Represents an automobile allowance of $6,000, and interest on deferred
compensation of $11,185.
(9) Represents interest on deferred compensation in of $7,185, automobile
allowance of $7,500 and a discount of $25,213 on the conversion of deferred
compensation into 40,342 shares of common stock.
(10) Represents an automobile allowance of $6,000 and interest on deferred
compensation of $8,825.
(11) Represents interest on deferred compensation.
(12) Represents interest on deferred compensation of $3,743 and a 25% bonus on
deferred compensation of $6,563.
(13) Represents interest on deferred compensation of $3,921 and a 25% bonus on
deferred compensation of $6,891.
EMPLOYMENT AND SERVICE AGREEMENTS
In June 1998 Youbet.com and Fell & Company, Inc. entered into a services
agreement which was amended in March 1999 pursuant to which Mr. Fell serves as
Chairman of the Board and as the Chief Executive Officer. For making Mr. Fell's
services available, Fell & Company, Inc. receives a base fee of $225,000 per
year, subject to cost of living increases, plus the amount of payroll taxes
Youbet.com would pay if Mr. Fell were an employee of Youbet.com and other
miscellaneous benefits. While Mr. Fell is serving as Chief Executive Officer he
will devote 100% of his business time to the affairs of Youbet.com. At such time
as Mr. Fell is no longer serving as Chief Executive Officer, he will be required
to devote 70% of his business time to the affairs of Youbet.com and the base fee
will be reduced to $150,000 per year. The services agreement expires in June
2001. If Fell & Company, Inc. is willing to renew the agreement and Youbet.com
does not do so, Fell & Company, Inc. will receive a termination fee equal to the
amount paid to Fell & Company, Inc. by Youbet.com during the 12 months preceding
the expiration of the agreement.
In January 1999 David Marshall, Inc. and Youbet.com entered into a services
agreement pursuant to which Mr. Marshall serves as Vice-Chairman of the Board
and President of Youbet.com. For making Mr. Marshall's services available, David
Marshall, Inc. receives a base fee of $150,000 per year, subject to cost of
living increases, plus the amount of payroll taxes Youbet.com would pay if Mr.
Marshall were an employee of Youbet.com and other miscellaneous benefits. David
Marshall, Inc. is also entitled to receive an annual bonus determined by the
board of directors in its discretion. The services agreement also provides that
the compensation and benefits paid by Youbet.com for Mr. Marshall's services
will be no less favorable than the compensation and benefits received by any
employee of Youbet.com, other than the Chief Executive Officer (if other than
Mr. Fell). The services agreement expires in June 2003. The services agreement
permits David Marshall, Inc. to terminate the agreement at anytime after
December 31, 1999 and receive the compensation and benefits provided under the
agreement for the lesser of two years or the remaining portion of the term, but
at least one year. The services agreement replaced an employment agreement
between Mr. Marshall and Youbet.com which had substantially the same terms.
In June 1998 Russell Fine and Youbet.com entered into an employment
agreement pursuant to which Mr. Fine will serve as Chief Technology Officer. Mr.
Fine will receive a base salary of $150,000, subject to cost of living
increases, and other miscellaneous benefits. Mr. Fine is also entitled to
receive an annual bonus determined by the board of directors. The employment
agreement also provides that the compensation and benefits paid to Mr. Fine will
be no less favorable than the compensation and
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<PAGE>
benefits provided to any employee of Youbet.com, other than the Chief Executive
Officer (if other than Mr. Fell). The employment agreement expires in June 2003.
The employment agreement permits Mr. Fine to terminate the agreement at anytime
after December 29, 1999 and receive the compensation and benefits provided under
the agreement for the lesser of two years or the remaining portion of the term,
but at least one year.
In May 1999, the Compensation Committee recommended to the board of
directors that certain modifications be made to the existing service agreement
with David Marshall, Inc. and the employment agreement with Mr. Fine to reflect
the fact that Mr. Fell has agreed to serve on a full time basis as Youbet.com's
Chief Executive Officer instead of on an interim, part time basis as originally
contemplated. The Compensation Committee recommended the elimination of the
provision in the existing agreements providing that if Mr. Fell is Youbet.com's
Chief Executive Officer, the compensation and benefits paid by Youbet.com for
the services of Mr. Marshall and Mr. Fine will be no less favorable than the
compensation and benefits paid for the services of Mr. Fell. David Marshall,
Inc., Mr. Marshall and Mr. Fine have advised the Compensation Committee that in
light of Mr. Fell's significantly expanded role in Youbet.com, they are in
agreement with such modifications.
Additionally, the Compensation Committee has recommended the payment of
certain performance-based bonuses to Fell & Company, Inc., David Marshall, Inc.
and Mr. Fine. Fell & Company, Inc. would be paid an aggregate bonus equal to the
amounts payable to Youbet.com by the Robert M. Fell Living Trust (the "Fell
Trust") in connection with its purchase in 1998 of Series A Convertible
Preferred Stock and stock purchase warrants. The amount of such indebtedness is
$560,000, plus accrued interest. 50% of such bonus would be credited upon
approval of the board of directors in recognition of the completion of the
placement of 11% Senior Convertible Discount Notes; 25% would be credited upon
the completion of this offering; 12 1/2% would be credited upon Youbet.com
achieving 15,000 subscribers and 12 1/2% would be credited upon Youbet.com
achieving 25,000 subscribers. Any bonuses paid under the proposal to Fell &
Company, Inc. would be applied to reduce amounts owed to Youbet.com by the Fell
Trust. David Marshall, Inc. and Mr. Fine would each be granted a bonus of
$300,000, payable as follows: 10% upon approval of the board of directors in
recognition of the completion of the placement of the 11% Senior Convertible
Discount Notes; 40% upon completion of this offering; 25% upon Youbet.com
achieving 15,000 subscribers and 25% upon Youbet.com achieving 25,000
subscribers. The board of directors has not yet acted on these proposals.
In February 1999 Ron Luniewski and Youbet.com entered into an employment
agreement pursuant to which Mr. Luniewski serves as Executive Vice President and
Chief Operating Officer of Youbet.com through April 2000. This employment
agreement replaced an agreement which was to expire in April 1999 and provides
for Mr. Luniewski to receive an annual salary of $150,000, options to purchase
100,000 shares of common stock and other miscellaneous benefits. The options
have a 10 year term, vest in four equal annual installments beginning in May
2000 and are exercisable for $10.50 per share. All options will vest upon a
change of control of Youbet.com. Mr. Luniewski is also entitled to receive an
annual bonus determined by the board of directors in its discretion. The
agreement also permits Mr. Luniewski to terminate his employment with Youbet.com
under certain circumstances and receive two months salary and benefits.
In February 1999 Phillip Hermann and Youbet.com entered into an employment
agreement pursuant to which Mr. Hermann serves as Executive Vice President and
Chief Financial Officer of Youbet.com through April 2000. This employment
agreement replaced an agreement which was to expire in April 1999 and provides
for Mr. Hermann to receive an annual salary of $150,000, options to purchase
50,000 shares of common stock and other miscellaneous benefits. The options have
a 10 year term, vest in four equal annual installments beginning in May 2000 and
are exercisable for $10.50 per share. All options will vest upon a change of
control of Youbet.com. Mr. Hermann is also entitled to receive an annual bonus
determined by the board of directors in its discretion.
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<PAGE>
OPTION GRANTS IN 1998
The following table sets forth certain information regarding option grants
to each of Youbet.com's named executive officers during the year ended December
31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE EXPIRATION
NAME GRANTED (1) EMPLOYEES IN 1998 PER SHARE DATE
- -------------------------------------------------------- ----------- ------------------- ----------- ------------
Ron W. Luniewski........................................ 100,000 12.0% $ 2.50 02/05/2003
100 * 2.50 12/11/2003
Phillip C. Hermann...................................... 75,000 9.0 2.50 04/30/2008
5,000 * 2.50 04/30/2003
100 * 2.50 12/11/2003
Steve A. Molnar......................................... 50,000 6.0 2.50 02/05/2003
100 * 2.50 12/11/2003
David M. Marshall....................................... 100 * 2.50 12/11/2003
Russell M. Fine......................................... 100 * 2.50 12/11/2003
Robert M. Fell.......................................... 100 * 2.50 12/11/2003
</TABLE>
- ---------
* less than one percent
(1) Options were granted under the 1995 and 1998 Stock Option Plans and are
exercisable for common stock of Youbet.com.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the number of shares acquired upon the
exercise of stock options during the year ended December 31, 1998 and the number
of shares covered by both exercisable and unexercisable stock options held by
each of the named executive officers at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END(1) AT YEAR-END(2)
ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ron W. Luniewski.................. -- -- 175,100 25,000 $ 679,388 $ 97,000
Phillip C. Hermann................ -- -- 5,100 75,000 19,788 291,000
Steve A. Molnar................... -- -- 130,100 20,000 504,788 67,600
David M. Marshall................. -- -- 100 -- 388 --
Russell M. Fine................... -- -- 100 -- 388 --
Robert M. Fell.................... -- -- 100 -- 388 --
----- ----- ----------- ------------- ------------ -------------
TOTAL........................... -- -- 310,600 120,000 $ 1,205,128 $ 455,600
----- ----- ----------- ------------- ------------ -------------
----- ----- ----------- ------------- ------------ -------------
</TABLE>
- ---------
(1) Options shown were granted under the 1995 and 1998 Stock Option Plans and
are exercisable for common stock. See "1995 Stock Option Plans" and "1998
Stock Option Plan" for a description of the material terms of these options.
(2) The dollar values are calculated by determining the difference between the
weighted average exercise price of the options and the market price for the
common stock of $6.38 on December 31, 1998.
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<PAGE>
1995 STOCK OPTION PLANS
In November 1995, Youbet.com's board of directors approved the 1995 Stock
Option Plan and the 1995 Stock Option Plan for Non-Employee Directors
(collectively, the "1995 Stock Plans"). The 1995 Stock Plans provide for the
granting of awards of incentive stock options, non-qualified stock options, and
stock appreciation rights. The aggregate number of shares of common stock
available for issuance under the 1995 Stock Plans, as amended, are 15% of the
total number of shares of common stock outstanding, allocated 13.5% to the 1995
Stock Option Plan and 1.5% to the 1995 Stock Option Plan for Non-Employee
Directors. The options generally vest in four equal annual installments, and
have a term of ten years. The 1995 Stock Plans provide for the granting of
incentive stock options within the meaning of Section 422A of the Internal
Revenue Code of 1986 and non-qualified stock options. Non-qualified stock
options may be granted to employees, directors and consultants of Youbet.com,
while incentive stock options may be granted only to employees. The 1995 Stock
Plans are currently administered by the compensation committee of the board of
directors, which determines the terms and conditions of the options granted
under the 1995 Stock Plans, including the exercise price, number of shares
subject to options and the exercisability thereof. The exercise price of all
Incentive Stock Options granted under the 1995 Stock Plans must be at least
equal to the fair market value of the common stock of Youbet.com on the date of
grant, and must be 110% of fair market value when granted to a 10% or more
stockholder. The exercise price of all non-qualified stock options granted under
the 1995 Stock Plans shall be not less than the par value per share of the
common stock. The term of all options granted under the 1995 Stock Plans may not
exceed ten years, except for incentive options granted to a 10% or more
shareholder which may not exceed five years. The 1995 Stock Plans may be amended
or terminated by the board of directors or the compensation committee, but no
such action may be taken which would materially increase the aggregate number of
shares as to which options may be granted, materially increase the benefits
accruing to the optionees, or materially modify the requirements as to
eligibility for participation under the 1995 Stock Plans. The 1995 Stock Plans
provide the board of directors or the compensation committee with the discretion
to determine when options granted thereunder shall become exercisable and the
vesting period of such options. Upon termination of a participant's employment
or consulting relationship with Youbet.com, all unvested options terminate and
are no longer exercisable. Vested non-qualified options remain exercisable for a
period not to exceed three months following the termination date. However,
because the shares underlying these options have not been registered, the
Compensation Committee has extended the exercise period for these options until
three months after employment is terminated or the underlying shares are
registered, whichever is later (but no later than the expiration of the
options).
1998 STOCK OPTION PLAN
In February 1998, Youbet.com's board of directors approved the 1998 Stock
Option Plan and reserved 1,000,000 shares of common stock for options granted
thereunder. In April 1999, Youbet.com board of directors approved an amendment
of the 1998 Stock Option Plan, subject to stockholder approval, to reserve
500,000 additional shares of common stock for options thereunder. The 1998 Stock
Plan provides for the granting of incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986 and non-qualified stock
options. Non-qualified stock options may be granted to employees, directors,
officers and consultants of Youbet.com, while incentive stock options may be
granted only to employees and its affiliates. The 1998 Stock Plan is currently
administered by the Compensation Committee of the board of directors, which
determines the terms and conditions of the options granted under the 1998 Stock
Plan, including the exercise price, number of shares subject to options and the
vesting and exercisability of options granted under the 1998 Plan. The exercise
price of the incentive stock options granted under the 1998 Stock Plan must be
at least equal to the fair market value of the common stock of Youbet.com on the
date of grant, and must be 110% of fair market value when granted to a 10% or
more stockholder. The exercise price of non-qualified stock options will be
determined by the Compensation Committee. The term of all options granted under
the 1998 Stock Plan may not exceed ten years, except the term of incentive
options granted to a 10% or
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<PAGE>
more shareholder may not exceed five years. The board of directors may suspend
or terminate and may amend the 1998 Plan from time to time, except that certain
types of amendments will require approval of the stockholders. Upon termination
of a participant's employment or consulting relationship with Youbet.com, all
unvested options terminate and are no longer exercisable. Vested qualified
options remain exercisable for a period not to exceed three months following the
termination date, unless the participant was terminated for cause or voluntarily
resigned in which all vested options will also terminate. However, because the
shares underlying these options have not been registered, the Compensation
Committee has extended the exercise period for these options until three months
after employment is terminated or the underlying shares are registered,
whichever is later (but no later than the expiration of the options). The 1998
Plan also permits Youbet.com to assist a participant to exercise options granted
under the 1998 Plan, including paying any tax obligations arising therefrom by
making a loan to the participant, permitting the participant to pay the exercise
price of the stock option over a term of years or guaranteeing a loan.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Youbet.com's Certificate of Incorporation limits the liability of directors
for any breach of the fiduciary duty of a director to the maximum extent
permitted by the Delaware general corporate law. The Delaware general corporate
law provides that a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors, except for
liability (1) for any breach of their duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) for unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided for in
Section 174 of the Delaware general corporate law or (4) for any transaction
from which the director derived an improper personal benefit.
Youbet.com's Bylaws provide that (1) Youbet.com is required to indemnify its
directors and officers to the maximum extent permitted by the Delaware general
corporate law, subject to certain very limited exceptions, (2) Youbet.com may
indemnify its other employees and agents to the maximum extent permitted by the
Delaware general corporate law, (3) Youbet.com is required to advance expenses,
as incurred, to its directors and officers in connection with a legal
proceeding, subject to certain very limited exceptions and (4) the rights
conferred in the Bylaws are not exclusive.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of Youbet.com where indemnification will be
required or permitted. Youbet.com is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
CERTAIN TRANSACTIONS
In November 1997 Sid Marshall, the Marshall Gift Trust, and Stuart Fine
exchanged promissory notes having a principal amount of $550,000, plus accrued
interest, for 337,335 shares of common stock, 168,665 Series D Common Stock
purchase warrants and 220,000 Series C Common Stock Warrants issued in
connection with a private placement by Youbet.com. Sid Marshall and Stuart Fine
are the fathers of David M. Marshall and Russell M. Fine, respectively. The
promissory notes were exchanged on the same terms as all other holders of bridge
notes.
In December 1997 Youbet.com released forfeiture conditions on 2,500,000
shares of common stock held by David M. Marshall, Russell M. Fine and Sid
Marshall, in exchange for the return to Youbet.com of 750,000 shares of common
stock. The forfeiture conditions were imposed in connection with Youbet.com's
merger with Continental Embassy Acquisition, Inc. in 1995. However, as a result
of a change in its marketing strategy in 1997 to focus on building a brand and
becoming the market leader to maximize long-term profitability, Youbet.com did
not believe that it was appropriate to retain the forfeiture conditions.
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<PAGE>
In June 1998 David M. Marshall converted $104,773 of his employee deferred
compensation into 55,879 shares of common stock (and 27,939 Series C and 27,939
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998 Russell M. Fine converted $75,640 of his employee deferred
compensation into 40,341 shares of common stock (and 20,171 Series C and 20,171
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998 Youbet.com issued 177,000 Series C common stock purchase
warrants as additional consideration for short-term advances of $440,000, of
which 90,000 warrants were issued to Sid Marshall and 44,000 warrants were
issued to a company associated with Youbet.com's financial and marketing
consulting firm.
In January 1998 Youbet.com commenced a bridge financing, consisting of a
secured note with interest at 12% due December 1998, secured by a junior lien on
substantially all the assets of Youbet.com and an option to convert into
securities offered in any subsequent private placement (or the equivalent amount
of common stock, if such financing did not consist of common stock), at 75% to
80% of the private placement offering price. Youbet.com issued a total of
$2,415,000 of bridge notes of which $1,247,000 were issued to related parties.
In July 1998, as a result of the sale of Series A Convertible Preferred Stock,
the holders of the bridge notes payable converted such notes into 1,303,319
shares of common stock, including 683,176 shares to related parties, of which
232,821 shares were issued to Sid Marshall and 450,355 shares were issued to
companies associated with Youbet.com's financial and marketing consulting firm.
In June 1998 Youbet.com entered into a Stock Purchase Agreement with certain
investors. Pursuant to this agreement Youbet.com sold 200,000 shares of Series A
Convertible Preferred Stock for $25.00 per share. Robert M. Fell, David M.
Marshall, Jess Rifkind, Caesar Kimmel, Alan Landsburg, William Roedy, Gary N.
Jacobs or trusts of which they are beneficiaries purchased 445, 445, 400, 1,600,
1,000, 10,000 and 2,000 shares, respectively.
In June 1998 Youbet.com entered into a Securities Purchase Agreement with
the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant to the Securities
Purchase Agreement, the Fell Trust acquired 20,000 shares of Series A
Convertible Preferred Stock and a warrant to purchase 1,200,000 shares of
Youbet.com's common stock (the "Fell Warrant"). The purchase price for the
Series A Convertible Preferred Stock acquired by the Fell Trust was $25.00 per
share, of which $10,000 was paid in cash and $490,000 was paid in the form of a
promissory note (the "$490,000 Note"). The purchase price for the Fell Warrant
was $75,000, of which $5,000 was paid in cash and $70,000 was paid in the form
of a promissory note (the "$70,000 Note"). The Fell Warrant expires on June 29,
2008, and entitles the Fell Trust to purchase 1,200,000 shares of common stock
at $2.50 per share. The Fell Warrant is exercisable one-sixth commencing on June
29, 1998, and one-sixth thereafter on each six month anniversary date. The Fell
Warrant also provides that, with certain exceptions, the common stock received
upon the exercise of the Fell Warrant may not be sold until one year following
the date the shares were first able to be purchased. The $490,000 Note bears
interest at the rate of 8% per annum, which may, at the option of the Fell
Trust, be paid currently or added to the principal amount of the note. The
$490,000 Note is due June 29, 2002, provided that the Fell Trust is required to
prepay the note, without penalty, as soon as possible consistent with its other
cash requirements. The $70,000 Note bears interest at the rate of 6% per annum,
which may, at the option of the Fell Trust, be paid currently or added to the
principal amount of the note. The $70,000 Note is due on June 29, 2008. The Fell
Trust pledged the Fell Warrant and the Series A Convertible Preferred Stock
acquired pursuant to the Securities Purchase Agreement to secure its obligations
under the $490,000 Note and the $70,000 Note. In December 1998 the Fell Trust
converted the Series A Preferred Stock into common stock which remains subject
to such pledge. If the board of directors approves the recommendation of the
Compensation Committee to grant Fell & Company, Inc. a performance-based bonus
as a result of the services of Mr. Fell, $280,000 (plus accrued interest) would
be credited against the notes on such approval, $140,000 (plus
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<PAGE>
accrued interest) would be credited upon completion of this offering, and
$70,000 (plus accrued interest) would be credited at such time as Youbet.com
achieves 15,000 subscribers and at such time as it achieves 25,000 subscribers.
In June 1998 the purchasers of the Series A Convertible Preferred Stock,
Russell M. Fine and Youbet.com, entered into a stockholders agreement, under
which the parties agreed to vote all shares of Series A Convertible Preferred
Stock and common stock beneficially owned by them (determined in accordance with
Rule 13d-3 of the Securities Exchange Act of 1934, as amended) and any stock
acquired in the future, for the election to the board of directors of four
persons designated by Robert Fell and three persons designated by David Marshall
and Russell Fine. The Stockholders Agreement terminates on June 29, 2000. As of
April 30, 1999 the stockholders agreement covers shares of common stock and
Series A Convertible Preferred Stock representing approximately 27.1% of the
outstanding voting power of Youbet.com's stock (not including shares of common
stock beneficially owned as a result of stock options and warrants).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 30, 1999, certain information
regarding the beneficial ownership of Youbet.com's common stock, adjusted to
reflect the sale of the common stock offered hereby, by (1) each person or
entity who is known by Youbet.com to own beneficially 5% or more of Youbet.com's
outstanding common stock; (2) each Director of Youbet.com; (3) each of the named
Executive Officers; and (4) all Directors and Executive Officers of Youbet.com
as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER(1)(2) BENEFICIAL OWNER PERCENT OF CLASS
- -------------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Robert M. Fell............................................................ 804,550(3) 5.4
David M. Marshall......................................................... 2,099,015(4) 14.5
Sid Marshall.............................................................. 878,222(5) 6.0
1170-M Pacific Coast Highway
Malibu, CA 90265
Marshall Gift Trust....................................................... 532,250(6) 3.7
1700 Bank of America Plaza
300 South Fourth Street
Las Vegas, NV 80101
Russell M. Fine........................................................... 1,976,491(7) 13.7
Ceasar P. Kimmel.......................................................... 56,000(8) *
Alan Landsburg............................................................ 50,000(9) *
Jess Rifkind.............................................................. 74,000(10) *
William H. Roedy.......................................................... 140,000(11) 1.0
Ron W. Luniewski.......................................................... 120,100(12) *
Phillip C. Hermann........................................................ 23,850(13) *
Jean M. Prewitt........................................................... -- --
Steve A. Molnar........................................................... 115,850(14) *
Nancy A. Lamb............................................................. 43,750(15) *
All executive officers and directors as a group (13 persons).............. 5,545,373(16) 35.6
</TABLE>
- ---------
* less than one percent
(1) The address of the above beneficial owners is Youbet.com, Inc., 1950
Sawtelle Boulevard, Suite 180, Los Angeles, California, 90025, unless
otherwise noted.
(2) Beneficial ownership is determined according to the rules of the Securities
and Exchange Commission, and generally includes all voting or investment
power with respect to securities. Except as noted, and subject to community
property laws, the persons named in the table above have sole voting power
of their Youbet.com common stock.
(3) Includes 100 shares of common stock represented by a fully vested stock
option and 600,000 shares of common stock represented by the currently
exercisable portion of the Fell Warrant, but does not include the 600,000
shares of common stock represented by the portion of the Fell Warrant which
is fully vested but not exercisable within 60 days.
(4) Includes 100 shares of common stock represented by a fully vested stock
option and 55,878 shares of common stock represented by currently
exercisable common stock purchase warrants as follows: Series C--27,939;
Series D--27,939. Excludes shares of common stock and common stock
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<PAGE>
purchase warrants owned by Sid Marshall and the Marshall Gift Trust. David
M. Marshall is the son of Sid Marshall.
(5) Includes 457,000 shares of common stock represented by currently
exercisable common stock purchase warrants as follows: Series A--20,000;
Series C--345,000; Series D--92,000. Does not include shares of common
stock and common stock purchase warrants owned by the Marshall Gift Trust,
of which Sid Marshall is the trustee. Sid Marshall is the father of David
M. Marshall.
(6) Includes 141,333 shares of common stock subject to currently exercisable
common stock purchase warrants as follows: Series C--80,000; Series
D--61,333.
(7) Includes 100 shares of common stock represented by a fully vested stock
option and 40,342 shares of common stock subject to currently exercisable
common stock purchase warrants as follows: Series C--20,171; Series
D--20,171.
(8) Includes 40,000 shares of common stock represented by a stock option
exercisable within 60 days of April 30, 1999.
(9) Includes 40,000 shares of common stock represented by a stock option
exercisable within 60 days of April 30, 1999.
(10) Includes 60,000 shares of common stock represented by a stock option
exercisable within 60 days of April 30, 1999.
(11) Includes 40,000 shares of common stock represented by a stock option
exercisable within 60 days of April 30, 1999.
(12) Consists solely of 120,100 shares of common stock represented by stock
options exercisable within 60 days of April 30, 1999.
(13) Consists solely of 23,850 shares of common stock represented by stock
options exercisable within 60 days of April 30, 1999.
(14) Consists solely of 115,100 shares of common stock represented by stock
options exercisable within 60 days of April 30, 1999.
(15) Consists solely of 43,750 of common stock represented by stock options
exercisable within 60 days of April 30, 1999.
(16) Includes 504,867 shares of common stock represented by fully vested stock
options and stock options exercisable within 60 days of April 30, 1999,
96,220 shares of common stock represented by currently exercisable common
stock purchase warrants, 600,000 shares of common stock represented by the
currently exercisable portion of the Fell Warrant, but does not include
the 600,000 shares of common stock represented by the portion of the Fell
Warrant which is fully vested but not exercisable within 60 days.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Certificate of Incorporation authorizes 51,000,000 shares of capital
stock consisting of the following:
- 50,000,000 shares of common stock, par value $.001 per share of which
3,486,500 shares are being offered hereby; and
- 1,000,000 shares of preferred stock, par value $.001 per share.
As of April 30, 1999, there were outstanding 14,395,231 shares of common
stock held of record by 369 stockholders, 104,110 shares of Series A Convertible
Preferred Stock convertible into 1,041,100 of common stock immediately after the
offering, warrants to purchase 7,614,014 shares of common stock and options to
purchase 2,175,596 shares of common stock. In connection with this offering,
warrants to purchase 675,000 shares of common stock will be exercised.
COMMON STOCK
The common stock is entitled to one vote per share on all matters submitted
to a vote of the stockholders, including the election of directors. Cumulative
voting for the election of directors is not provided for in Youbet.com's
Certificate of Incorporation. Upon liquidation, dissolution or winding-up of
Youbet.com, and after the payment of the preferential rights of the Series A
Convertible Preferred Stock, the holders of shares of common stock will be
entitled to receive pro rata all assets of Youbet.com legally available for
distribution to such stockholders. Except for any preferential rights of the
Series A Convertible Preferred Stock, or any other series of preferred stock
created by the board from time to time, the stockholders of common stock will be
entitled to such cash dividends as may be declared from time to time by the
board from funds available therefor. See "Dividend Policy."
PREFERRED STOCK
Youbet.com has authorized the creation of a series of four hundred thousand
(400,000) shares of preferred stock designated "Series A Convertible Preferred
Stock" out of the one million (1,000,000) preferred shares authorized in
Youbet.com's Certificate of Incorporation. The remaining shares may be issued in
one or more series. The rights, preferences and privileges of any additional
series of preferred stock will be determined by the board of directors of
Youbet.com.
The holders of Series A Convertible Preferred Stock are not entitled to
dividends unless dividends are paid on the common stock, in which case the
Series A Convertible Preferred Stock will receive dividends at the same rate
payable on the common stock on the basis of the number of shares of common stock
into which the Series A Convertible Preferred Stock is convertible. The holders
of Series A Convertible Preferred Stock vote together with the holders of common
stock, on the basis of the number of shares of common stock into which the
Series A Convertible Preferred Stock is convertible, on all matters presented to
the stockholders of Youbet.com to vote. The Series A Convertible Preferred Stock
will vote separately as a class on matters which affect its rights and
preferences.
Each share of the Series A Convertible Preferred Stock is convertible into
ten shares of common stock and will be automatically converted into common stock
at such time as Youbet.com has completed a registered secondary public offering
which raises not less than $15,000,000 in gross proceeds and has its common
stock listed on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market. Accordingly, immediately upon completion of this
offering the Series A Preferred Stock will be converted into common stock.
Upon liquidation, dissolution or winding-up of Youbet.com, the holders of
shares of Series A Convertible Preferred Stock will be entitled to receive $25
per share, plus any unpaid dividends, prior
63
<PAGE>
to the distribution to any shares of stock ranking junior to the Series A
Convertible Preferred Stock. After the holders of shares of stock ranking junior
to the Series A Convertible Stock have received all liquidation preference
payments to which they are entitled and the holders of common stock have
received $2.50 per share plus any unpaid dividends, any remaining assets of
Youbet.com will be distributed ratably to the holders of the common stock and
the Series A Convertible Preferred Shares. Distributions to the holders of the
Series A Convertible Preferred Shares will be on the basis of the number of
shares of common stock into which the Series A Convertible Preferred Shares are
convertible.
REGISTRATION RIGHTS
Following this offering, under specified circumstances and subject to
customary conditions, the holders of Series A Convertible Preferred Stock and
common stock issuable upon conversion of such Series A Convertible Preferred
Stock and certain other holders of common stock will have certain registration
rights with respect to their shares of common stock (subject to the 210 day
lock-up arrangement entered into by directors and executive officers of
Youbet.com). These registration rights enable such holders to require Youbet.com
to register their shares of common stock under the Securities Act and permit
them to "piggyback" on any future registration of securities by Youbet.com.
Youbet.com is not required to effect more than two demand registrations on
behalf of these holders.
Certain warrants issued by Youbet.com have or may have various registration
rights with respect to the warrants or shares of common stock issuable on
exercise of such warrants. Youbet.com has not registered any of the warrants or
such shares of common stock. In March 1999, Youbet.com sent a proposal to
holders of approximately 5,955,000 warrants, certain of which warrants have or
may have certain registration rights. Among other things, the proposal requested
a release of claims, if any, which may arise from such warrants and shares of
common stock not having been registered in consideration of Youbet.com's
agreeing to allow such warrantholders to participate to a limited extent in this
offering and to register such remaining shares of common stock by no later than
the earlier of the first anniversary of this offering or June 30, 2000. As of
May 31, 1999, the holders of an aggregate of 5,361,882 warrants (90%) have
accepted such proposal and executed such releases. Certain of the remaining
warrantholders have or may have registration rights with respect to their
warrants and/or shares of common stock underlying such warrants and may assert
claims against Youbet.com in connection with such rights which may have a
material and adverse affect on Youbet.com.
The note purchase agreements also require Youbet.com to use its best efforts
to file, have declared effective by the Securities and Exchange Commission and
keep effective for a period of up to five years a registration statement with
respect to all of the shares of common stock into which the 11% Senior
Convertible Discount Notes may be converted (approximately 4,550,000 shares at
the present conversion rate, assuming conversion on April 5, 2001). If
Youbet.com fails to do so it shall pay to each holder for each 30-day period or
portion thereof that a registration statement is not effective, (1) a cash
payment equal to 3% of the principal amount of 11% Senior Convertible Discount
Notes held by such holder, and (2) for each share of common stock held by such
holder which was acquired upon conversion of the 11% Senior Convertible Discount
Notes, a cash payment equal to 3% of the principal amount of the 11% Senior
Convertible Discount Notes from which such common stock was converted, up to a
maximum penalty of 18% of the face principal amount of the 11% Senior
Convertible Discount Notes. The purchasers of the 11% Senior Convertible
Discount Notes are subject to lock-up periods of not more than 180 days
following the date of this prospectus or any subsequent prospectus.
ANTI-TAKEOVER PROVISIONS
Youbet.com is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations from
engaging, under certain circumstances, in a "business combination," which
64
<PAGE>
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder" i.e. a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such persons for three years following the date that such stockholder became
an "interested stockholder" unless (1) the transaction is approved by the board
of directors prior to the date the "interested stockholder" attained such
status, (2) upon consummation of the transaction that resulted in the
stockholder's becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding those shares owned by (a) persons who
are directors and also officers and (b) employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer), or (3)
on or subsequent to such date the "business combination" is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the "interested stockholder."
A Delaware corporation may "opt out" of the Anti-Takeover Law with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. Youbet.com has not "opted out" of the provisions of the
Anti-Takeover Law. The statute could prohibit or delay mergers or other takeover
or change-in-control attempts with respect to Youbet.com and, accordingly, may
discourage attempts to acquire Youbet.com.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for Youbet.com's common stock is American
Stock Transfer & Trust Company.
LISTING
Youbet.com's common stock is currently traded on the over-the-counter
bulletin board under the symbol "UBET". Youbet.com's common stock has been
approved for quotation on the Nasdaq National Market under the symbol "UBET,"
upon completion of this offering.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial amount of common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the common stock and could impair Youbet.com's ability in the future to raise
capital through the sale of equity securities. See "Risk Factors--Shares
Eligible for Future Sale May Negatively Affect Trading Prices."
Upon the completion of this offering, assuming conversion of the Series A
Convertible Preferred Stock and assuming the over-allotment option is not
exercised and that no options or warrants are exercised other than those sold by
selling stockholders in this offering, Youbet.com will have outstanding
18,922,831 shares of common stock. Of such common stock, 11,404,826 shares are
"restricted securities" as defined under Rule 144 and may not be sold publicly
unless they are registered under the Securities Act or are sold pursuant to Rule
144 or another exemption from registration.
The directors and executive officers, who will hold an aggregate of
4,344,286 shares of common stock upon completion of the offering have agreed
that they will not sell, directly or indirectly, any shares of common stock
without the prior written consent of the underwriters for a period of 210 days
after the date of this prospectus. Subject to these lock-up agreements, the
restricted shares of common stock outstanding upon the completion of this
offering and the common stock issuable upon conversion of the Series A
Convertible Preferred Stock will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES STATUS
- ------------------ ----------------------------------------------------------------------------------
<S> <C>
1,142,000 shares.. May be sold by the holders without volume limitations in accordance with Rule
144(k)
6,124,000 shares.. May be sold by the holders subject to volume limitations in accordance with Rule
144
2,696,000 shares.. May be sold by the holders, within six months of the date of this prospectus,
subject to volume limitations in accordance with Rule 144
1,443,000 shares.. May be sold by the holders subject to volume limitations in accordance with Rule
144 commencing no later than March 2000
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
1% of the then outstanding shares of common stock or (2) the average weekly
trading volume in the common stock during the four calendar weeks preceding the
date on which notice of such sale is filed with the Securities and Exchange
Commission, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold for at least two
years may sell such shares under Rule 144(k) without regard to the volume
limitations described above. To the extent that shares were purchased from an
affiliate such person's holding period for the purpose of effecting a sale under
Rule 144 commences on the date of transfer from the affiliate.
As of April 30, 1999, options to purchase 2,175,596 shares of common stock
were outstanding under Youbet.com's 1995 Stock Option Plan and 1998 Stock Option
Plan. After completion of this offering Youbet.com intends to file a
registration statement on Form S-8 to register for resale the 2,175,596 shares
issuable upon exercise of options granted under Youbet.com's 1995 Stock Option
Plans and 1998 Stock Option Plan. That registration statement will become
effective immediately upon filing. Accordingly, shares covered by that
registration statement will become eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreements with the underwriters.
Specifically the
66
<PAGE>
officers and directors of Youbet.com are holders of options to purchase an
aggregate of 924,034 shares of common stock and have entered into lock-up
agreements.
As of May 31, 1999, warrants to purchase 7,614,014 shares of common stock
were outstanding. As of April 30, 1999 Youbet.com has agreed with the holders of
5,361,882 warrants (which does not include the warrants to purchase 1,296,220
shares of common stock held by Youbet.com's executive officers and directors) to
file a registration statement to register for resale the common stock issuable
upon exercise of the warrants by no later than the earlier of the first
anniversary of this offering or June 30, 2000 and to use reasonable efforts to
cause such registration statement to become effective as promptly as possible.
The holders of the warrants have agreed that they will not sell any common stock
received upon exercise of warrants until such registration statement becomes
effective, and thereafter until the first anniversary of the date such
registration statement becomes effective, to limit their sales in any calendar
quarter to no more than 25% of the common stock received upon exercise of the
warrants. Certain of the remaining warrantholders have or may have registration
rights with respect to their warrants and/or shares of common stock underlying
such warrants and may assert claims against Youbet.com in connection with such
rights, which may have a material and adverse effect on Youbet.com.
Youbet.com has agreed not to sell or otherwise dispose of any shares of
common stock during the 180 day period following the date of this prospectus,
except that Youbet.com may grant options to purchase common stock under the 1998
Stock Option Plan and may issue common stock upon the exercise of options and
warrants and/or the conversion of Series A Convertible Preferred Stock. In
addition, Youbet.com may issue shares of common stock in connection with any
acquisition of another company.
Youbet.com has agreements with certain stockholders and holders of options
and warrants and with the holders of 11% Senior Convertible Discount Notes to
register their common stock for resale. See "Description of Capital
Stock--Registration Rights" for a description of these agreements.
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<PAGE>
SELLING STOCKHOLDERS
In connection with this offering, Youbet.com anticipates that certain
stockholders will sell an aggregate of 675,000 shares of common stock upon
exercise of the corresponding warrants. In the event that fewer shares are
offered by the selling stockholders, Youbet.com will increase the number of
shares of common stock offered by Youbet.com so that the total number of shares
of common stock in the offering will equal 3,486,500. Youbet.com will not
receive any of the proceeds from the sale of the common stock by the selling
stockholders. For information regarding the selling stockholders, please see
Appendix 1 hereto.
UNDERWRITING/PLAN OF DISTRIBUTION
The Underwriters named below, acting through their representatives,
BancBoston Robertson Stephens and ING Baring Furman Selz LLC (the
"underwriters"), have severally agreed with Youbet.com and the selling
stockholders, subject to the terms and conditions of the Underwriting Agreement,
to purchase the number of shares of common stock set forth below opposite their
respective names. The underwriters are committed to purchase and pay for all
shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ---------------------------------------------------------------------------- ----------------
<S> <C>
BancBoston Robertson Stephens...............................................
ING Baring Furman Selz LLC..................................................
----------------
Total.....................................................................
----------------
----------------
</TABLE>
The underwriters have advised Youbet.com that the underwriters propose to
offer the shares of common stock to the public at the offering price set forth
on the cover page of this prospectus and to certain dealers at such price less a
concession of not in excess of $[ ] per share, of which $[ ] may be re-allowed
to other dealers. After the offering, the offering price, concession and
relaunch to dealers may be reduced by the underwriters. No such reduction shall
change the amount of proceeds to be received by Youbet.com as set forth on the
cover page of this prospectus.
OVER-ALLOTMENT OPTION. The selling stockholders have granted to the
underwriters an option, exercisable during the 30-day period after the date of
this prospectus, to purchase up to 506,250 shares of common stock to cover
over-allotments. In the event that fewer than 506,250 shares of common stock are
offered by the selling stockholders to cover over-allotments, Youbet.com will
offer additional shares of common stock so that the total number of shares
offered to cover over-allotments equals 506,250.
The following table summarizes the compensation to be paid to the
underwriters by Youbet.com and the selling stockholders:
<TABLE>
<CAPTION>
TOTAL
------------------------------
<S> <C> <C> <C>
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
Underwriting Discounts and Commissions payable by
Youbet.com.......................................
Underwriting Discounts and Commissions payable by
the selling stockholders.........................
</TABLE>
68
<PAGE>
Youbet.com estimates that its expenses payable in connection with this
offering (other than the underwriting discounts and commissions referred to
above) will be approximately $1,150,000. The underwriters have agreed to
reimburse Youbet.com for certain expenses incurred in the offering.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters, Youbet.com and the selling stockholders against certain civil
liabilities, including liabilities under the Securities Act, and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
LOCK-UP AGREEMENTS. Each executive officer and director of Youbet.com has
agreed, during the period of 210 days after the effective date of this
prospectus ("the lock-up period"), subject to specified exceptions, not to offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock or any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by such holder or with respect to which such
holder has the power of disposition, without the prior written consent of the
underwriters. However, the underwriters may, in their sole discretion and at any
time or from time to time, without notice, release all or any portion of the
securities subject to lock-up agreements. There are no existing agreements
between the underwriters and any of Youbet.com's stockholders who have executed
a lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
Youbet.com has agreed that during the lock-up period Youbet.com will not,
without the prior written consent of the underwriters, subject to certain
exceptions, (1) consent to the disposition of any shares held by stockholders
subject to lock-up agreements prior to the expiration of the lock-up period or
(2) issue, sell, contract to sell, or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock other than Youbet.com's sale of shares in this offering, the
issuance of Youbet.com's common stock upon the exercise of outstanding options
or warrants, and the issuance of options under existing stock option and
incentive plans provided that those options do not vest prior to the expiration
of the lock-up period. See "Shares Eligible for Future Sale."
The underwriters have advised Youbet.com that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The holders of warrants to purchase 5,361,882 (including the 675,000 of such
shares which will be sold by the selling stockholders in the offering) shares of
common stock have agreed to a lock-up that provides they will not sell any
common stock received upon exercise of their warrants until a registration
statement covering such warrants becomes effective and thereafter, until the
first anniversary of the date such registration statement becomes effective, to
limit the sale, in any calendar quarter to no more than 25% of the common stock
received upon exercise of such warrants.
In addition, the holders of the 11% Senior Convertible Discount Notes are
subject to lock-up periods of not more than 180 days following the date of this
prospectus or any subsequent prospectuses.
Prior to this offering, there has only been a limited public market for the
common stock. Consequently, the offering price for the common stock offered
hereby will be determined through negotiations among Youbet.com and the
underwriters. Among the factors to be considered in such negotiations are the
prevailing market conditions, certain financial information of Youbet.com,
market valuations of other companies that Youbet.com and the underwriters
believe to be comparable to Youbet.com, estimates of the business potential of
Youbet.com, the present state of Youbet.com's development and other factors
deemed relevant.
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<PAGE>
LISTING. Youbet.com's common stock is currently traded on the
over-the-counter bulletin board under the symbol "UBET". Youbet.com's common
stock has been approved for quotation on the Nasdaq National Market under the
symbol "UBET," upon completion of this offering.
STABILIZATION. The underwriters have advised Youbet.com that, pursuant to
Regulation M under the Securities Exchange Act of 1934, some persons
participating in the offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the shares
of common stock at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or maintaining the
price of the common stock. A "syndicate covering transaction" is the bid for or
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the underwriters to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member purchased by the underwriters in a syndicate
covering transaction and have therefore not been effectively placed by such
underwriter or syndicate member. The underwriters have advised Youbet.com that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Youbet.com has issued an aggregate of 7,614,014 stock purchase warrants with
exercise prices ranging from $0.01 to $10.00 per share, at an average price of
approximately $3.30 per share. In connection with the issuance of certain of
these warrants, Youbet.com granted the holders certain registration rights.
Youbet.com and the holders of warrants with registration rights have agreed that
in satisfaction of such registration rights, an aggregate of 675,000 shares of
Youbet.com's common stock will be sold in this offering by holders of warrants
with registration rights on a pro rata basis by those holders who wish to sell
such shares. See "Description of Capital Stock--Registration Rights" and "Risk
Factors--Warrantholders May Assert Claims Regarding their Registration Rights."
To the extent the underwriters exercise their over allotment option, such
warrant holders will, on a pro rata basis, be permitted to sell up to 506,250
additional shares.
Additionally, Youbet.com has agreed, for the benefit of those warrant
holders with registration rights, to file a registration statement with respect
to all remaining shares subject to such warrants, by no later than the earlier
of the first anniversary of this offering or June 30, 2000, and to diligently
seek to have such registration statement declared effective by the Securities
and Exchange Commission. Pursuant to such registration statement, such warrant
holders will, on exercise of their warrants, be able to sell to the public each
quarter up to 25% of the number of shares of Youbet.com common stock acquired
upon exercise of the warrants.
Youbet.com will not receive any proceeds from the sale of such common stock,
although it will receive all proceeds from the exercise of such warrants.
70
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Youbet.com by Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Gibson Dunn & Crutcher LLP. As of the date of this
prospectus, Gary N. Jacobs, a senior partner of Christensen, Miller, Fink,
Jacobs, Glaser, Weil & Shapiro, LLP who serves as Youbet.com's Secretary,
beneficially owns 41,767 shares of common stock, including shares which may be
acquired pursuant to stock options exercisable within 60 days. Another attorney
having an "of counsel" relationship with Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP owns 2,000 shares of Series A Convertible Preferred
Stock.
EXPERTS
The financial statements of Youbet.com, Inc. as of December 31, 1998 and
1997 and for each of the years in the two year period ended December 31, 1998
appearing herein and in the Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The statements of operations, stockholders' (deficiency) and cash flows of
Youbet.com, Inc. for the year ended December 31, 1996 were audited by Weinbaum &
Yalamanchi, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows Youbet.com to "incorporate by
reference" the information Youbet.com files with it, which means that Youbet.com
can disclose important information to prospective investors by referring
prospective investors to those documents. The information incorporated by
reference is considered to be part of this prospectus, and later information
that Youbet.com files with the Securities and Exchange Commission will
automatically update and supersede this information. Youbet.com incorporates by
reference the Form 10-KSB for the year ended December 31, 1998, and any filings
made with the Securities and Exchange Commission under Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after December 31 1998. This
prospectus is part of the registration statement Youbet.com filed with the
Securities and Exchange Commission. Youbet.com's Securities and Exchange
Commission File Number is 33-13789LA.
Youbet.com will provide without charge to any person to whom this prospectus
is delivered, upon the written or oral request of such person, a copy of any or
all of the documents referred to above which have been incorporated by
reference, other than exhibits to such documents. Written requests for such
copies should be addressed to: Youbet.com, Inc., 1950 Sawtelle Boulevard., Suite
180, Los Angeles, CA 90025, Attention: Phillip Hermann. Youbet.com's telephone
number is (310) 444-3300.
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<PAGE>
AVAILABLE INFORMATION
Youbet.com has filed with the Securities and Exchange Commission a
registration statement (of which this prospectus is a part) on Form S-3 under
the Securities Act, with respect to the common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. Statements contained in this
prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto.
Youbet.com is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended and in accordance therewith files reports and
other information with the commission. The registration statement, including the
exhibits and schedules thereto, as well as any other information filed by
Youbet.com may be inspected and copied at the public reference rooms maintained
by the commission at its principal office located at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, the New York Regional Office located at
7 World Trade Center, New York, New York 10048, and the Chicago Regional Office
located at Northwest Atrium Center, 500 West Madison Street, Room 1204, Chicago,
Illinois 60661-2511. Please call the commission at 1-800-SEC-0330 for further
information on the public reference rooms.
Electronics filings made by Youbet.com through the commission's Electronic
Data Gathering, Analysis and Retrieval System are publicly available through the
commission's World Wide Web site (http://www.sec.gov), which contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the commission.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants--BDO Seidman, LLP....................................... F-2
Independent Accountants' Report--Weinbaum & Yalamanchi..................................................... F-3
Balance Sheets--December 31, 1997 and 1998 and March 31, 1999.............................................. F-4
Statements of Operations--Years Ended December 31, 1996, 1997, 1998 and 1995 through 1998 and Three Months
Ended March 31, 1998 and 1999............................................................................ F-5
Statements of Stockholders' Equity (Deficiency)--Years Ended December 31, 1995, 1996, 1997 and 1998 and
Three Months Ended March 31, 1999........................................................................ F-6
Statements of Cash Flows--Years Ended December 31, 1996, 1997, 1998 and 1995 through 1998 and Three Months
Ended March 31, 1998 and 1999............................................................................ F-9
Notes to Financial Statements--Years Ended December 31, 1996, 1997, 1998 and 1995 through 1998 and Three
Months Ended March 31, 1999.............................................................................. F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Youbet.com, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Youbet.com,
Inc. (formerly You Bet International, Inc.) and subsidiaries (a development
stage company) as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended. We have also audited the consolidated statements of
operations and cash flows for the period from inception of development stage
(January 1, 1995) through December 31, 1998 (Note 1), except that we did not
audit these financial statements for the period from inception of development
stage (January 1, 1995) to December 31, 1996 (Note 1); those statements were
audited by other auditors. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Youbet.com, Inc. (a development
stage company) and subsidiaries as of December 1998 and 1997, and the results of
their operations and their cash flows for the years then ended and the
cumulative period from January 1, 1997 to December 31, 1998, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 25, 1999, except for Note 11,
which is as of April 6, 1999
F-2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders of
Youbet.com, Inc. (formerly You Bet International, Inc.)
(a development stage company)
Los Angeles, California
We audited Youbet.com, Inc.'s (Youbet) accompanying consolidated statements
of operations, stockholders' (deficiency) and cash flows for the year ended
December 31, 1996. These financial statements are the responsibility of Youbet's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant management estimates,
as well as evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Youbet's results of operations and
cash flows for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
WEINBAUM & YALAMANCHI
Los Angeles, California
April 10, 1998
F-3
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
AND MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, AT MARCH 31,
1997 1998 1999 1999 (NOTE 11)
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS (Note 5)
Current assets:
Cash................................................... $ 52,895 $ 1,540,616 $ 2,543,084 $ 37,661,594
Stock subscriptions receivable (Note 6a and 6c)........ -- 2,100,000 -- --
Receivables............................................ 6,158 50,364 64,801 64,801
Prepaid expenses....................................... 49,315 22,344 63,483 63,483
Other current assets................................... 4,288 11,317 16,176 16,176
----------- ----------- ----------- --------------
Total current assets................................. 112,656 3,724,641 2,687,544 37,806,054
----------- ----------- ----------- --------------
Property and equipment (Notes 4 and 7)................... 1,260,411 1,700,211 1,871,523 1,871,523
Less: Accumulated depreciation and amortization.......... (423,177) (820,535) (914,534) (914,534)
----------- ----------- ----------- --------------
Property and equipment, net.............................. 837,234 879,676 956,989 956,989
----------- ----------- ----------- --------------
Deferred financing costs, net of amortization............ -- 31,395 78,817 2,040,817
Deferred public offering costs........................... -- -- 49,395 49,395
Deposits................................................. 53,963 17,537 17,037 17,037
----------- ----------- ----------- --------------
Total assets......................................... $ 1,003,853 $ 4,653,249 $ 3,789,782 $ 40,870,292
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 910,278 $ 984,258 $ 1,039,319 $ 1,039,319
Accrued compensation and related items................. 503,467 144,252 147,512 147,512
Accrued interest payable............................... 116,892 -- -- --
Other accrued expenses................................. 341,108 451,127 528,866 528,866
Advances and bridge loans payable (Note 5):
Related parties...................................... 390,000 -- -- --
Unrelated parties.................................... 300,000 -- -- --
State income taxes payable (Note 9).................... 6,400 -- -- --
Current portion of capitalized lease obligations (Note
7)................................................... 283,695 220,317 180,231 180,231
----------- ----------- ----------- --------------
Total current liabilities............................ 2,851,840 1,799,954 1,895,928 1,895,928
Notes payable............................................ -- -- -- 36,728,510
Capitalized lease obligations, less current portion (Note
7)..................................................... -- 60,134 47,678 47,678
----------- ----------- ----------- --------------
Total liabilities.................................... 2,851,840 1,860,088 1,943,606 38,672,116
----------- ----------- ----------- --------------
Commitments and contingencies (Notes 3, 7 and 8)
Stockholders' equity (deficiency) (Note 6):
Preferred stock, $.001 par value (liquidation
preference of $25 per share); authorized--1,000,000
shares; issued and outstanding--0 share and 107,110
shares at December 31, 1997 and 1998, respectively;
issued and outstanding 105,110 shares at March 31,
1999--unaudited; 105,110 shares outstanding pro
forma--unaudited..................................... -- 107 105 105
Common stock, $.001 par value; authorized--50,000,000
shares; issued and outstanding and
issuable--9,603,994 shares and 13,970,268 shares at
December 31, 1997 and 1998, respectively; issued and
outstanding 14,314,731 shares at March 31,
1999--unaudited; 14,314,731 shares outstanding pro
forma--unaudited..................................... 9,604 13,970 14,315 14,315
Additional paid-in capital............................. 23,413,989 42,326,397 43,224,232 43,576,232
Accumulated deficit during development stage........... (23,964,394) (37,825,941) (39,972,999) (39,972,999)
Deferred compensation (Note 6d)........................ (1,307,186) (1,161,372) (859,477) (859,477)
Stock notes receivable (Note 6c)....................... -- (560,000) (560,000) (560,000)
----------- ----------- ----------- --------------
Total stockholders' equity (deficiency).............. (1,847,987) 2,793,161 1,846,176 2,198,176
----------- ----------- ----------- --------------
Total liabilities and stockholders' equity
(deficiency)....................................... $ 1,003,853 $ 4,653,249 $ 3,789,782 $ 40,870,292
----------- ----------- ----------- --------------
----------- ----------- ----------- --------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED 1995 ENDED
DECEMBER 31, THROUGH -------------
--------------------------------------------- 1998 MARCH 31,
1996 1997 1998 (NOTE 1) 1998
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues........................................ $ -- $ -- $ 263,793 $ 263,793 $ --
Operating expenses:
Network operations............................ 220,721 665,399 1,287,295 2,173,415 149,212
Research and development...................... 1,389,883 1,253,663 1,267,153 4,228,766 230,304
Sales and marketing........................... 663,572 710,532 1,404,752 2,778,856 156,555
General and administrative.................... 1,441,439 1,804,176 2,740,603 6,179,563 442,599
Depreciation and amortization................. 122,673 307,935 397,357 830,821 75,795
Non-cash compensation (Note 6d)............... 102,263 2,176,182 4,262,963 6,579,883 1,223,232
------------- -------------- -------------- -------------- -------------
Total operating expenses...................... 3,940,551 6,917,887 11,360,123 22,771,304 2,277,697
------------- -------------- -------------- -------------- -------------
Loss from operations............................ (3,940,551) (6,917,887) (11,096,330) (22,507,511) (2,277,697)
Other income (expense):
Interest expense.............................. (15,154) (390,471) (331,763) (770,921) (69,176)
Amortization of deferred financing costs...... -- -- (119,546) (119,546) (12,164)
Discount on conversion of bridge loans,
accounts payable and employee deferred
salaries into common stock and warrants
(Note 6a)................................... -- (573,348) (849,963) (1,423,311) --
Fair value of warrants issued for financing
costs (Note 6d)............................. -- (3,656,202) (1,405,684) (5,061,886) (361,200)
Release of forfeiture restrictions on common
stock owned by officers/ major stockholders
(Note 6b)................................... -- (7,875,000) -- (7,875,000) --
Interest income............................... 78,000 1,145 70,627 163,974 37
Consulting revenues........................... 7,725 5,400 -- 164,602 --
Other......................................... 9,875 (831) (126,488) (97,444) (109,703)
------------- -------------- -------------- -------------- -------------
Total other income (expense).................. 80,446 (12,489,307) (2,762,817) (15,019,532) (552,206)
------------- -------------- -------------- -------------- -------------
Loss before provision for state income and
franchise taxes............................. (3,860,105) (19,407,194) (13,859,147) (37,527,043) (2,829,903)
Provision for state income and franchise taxes
(Note 9).................................... (4,629) (9,644) (2,400) (19,073) --
------------- -------------- -------------- -------------- -------------
Net loss........................................ $ (3,864,734) $ (19,416,838) $ (13,861,547) $ (37,546,116) $ (2,829,903)
------------- -------------- -------------- -------------- -------------
------------- -------------- -------------- -------------- -------------
Net loss per common share--basic and
diluted..................................... $ (0.67) $ (3.06) $ (1.32) $ (0.29)
------------- -------------- -------------- -------------
------------- -------------- -------------- -------------
Weighted average number of common shares
outstanding................................. 5,730,333 6,355,352 10,534,905 9,603,994
------------- -------------- -------------- -------------
------------- -------------- -------------- -------------
<CAPTION>
1995
MARCH 31, TO MARCH 31,
1999 1999 (NOTE 1)
------------- --------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues........................................ $ 460,606 $ 724,399
Operating expenses:
Network operations............................ 412,276 2,585,691
Research and development...................... 359,243 4,588,009
Sales and marketing........................... 475,788 3,254,644
General and administrative.................... 615,620 6,795,183
Depreciation and amortization................. 95,735 926,556
Non-cash compensation (Note 6d)............... 657,545 7,237,428
------------- --------------
Total operating expenses...................... 2,616,207 25,387,511
------------- --------------
Loss from operations............................ (2,155,601) (24,663,112)
Other income (expense):
Interest expense.............................. (7,444) (778,365)
Amortization of deferred financing costs...... (7,848) (127,394)
Discount on conversion of bridge loans,
accounts payable and employee deferred
salaries into common stock and warrants
(Note 6a)................................... -- (1,423,311)
Fair value of warrants issued for financing
costs (Note 6d)............................. -- (5,061,886)
Release of forfeiture restrictions on common
stock owned by officers/ major stockholders
(Note 6b)................................... -- (7,875,000)
Interest income............................... 25,249 189,223
Consulting revenues........................... -- 164,602
Other......................................... (1,414) (98,858)
------------- --------------
Total other income (expense).................. 8,543 (15,010,989)
------------- --------------
Loss before provision for state income and
franchise taxes............................. (2,147,058) (39,674,101)
Provision for state income and franchise taxes
(Note 9).................................... -- (19,073)
------------- --------------
Net loss........................................ $ (2,147,058) $ (39,693,174)
------------- --------------
------------- --------------
Net loss per common share--basic and
diluted..................................... $ (0.15)
-------------
-------------
Weighted average number of common shares
outstanding................................. 14,059,310
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995.................................. -- $ -- 343,333 $ 343 $ 21,657
Issuance of shares in reverse merger (Note 1)............. -- -- 5,800,000 5,800 (522,796)
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 1,490,000 1,490 3,723,510
Costs of private placement................................ -- -- -- -- (575,860)
Shares issued as underwriters compensation ($2.50 per
share) (Note 6a)........................................ -- -- 200,000 200 499,800
Shares issued in exchange for debt ($2.50 per share) (Note
6a)..................................................... -- -- 238,000 238 594,762
Stock options issued for services......................... -- -- -- -- 289,575
Amortization of deferred compensation..................... -- -- -- -- --
Net loss for the year..................................... -- -- -- -- --
--
--- --------- ----------- -----------
BALANCE, December 31, 1995................................ -- -- 8,071,333 8,071 4,030,648
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 212,000 212 529,788
Costs of private placement (Note 6a)...................... -- -- -- -- (278,025)
Stock options issued for services rendered (Note 6d)...... -- -- -- -- 128,250
Amortization of deferred compensation (Note 6d)........... -- -- -- -- --
Net loss for the year..................................... -- -- -- -- --
--
--- --------- ----------- -----------
BALANCE, December 31, 1996................................ -- -- 8,283,333 8,283 4,410,661
Shares issued as payment for amounts due to vendors and
employees ($2.50 per share for vendors and $1.88 per
share for employee services) (Note 6a).................. -- -- 27,433 28 61,410
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 897,760 898 2,243,502
Costs of private placement (Note 6a)...................... -- -- -- -- (291,020)
Shares issued to bridge loan investors for conversion into
common stock and warrants ($1.88 per share) (Note 6a)... -- -- 895,468 895 1,678,105
(continued)
<CAPTION>
STOCK
ACCUMULATED DEFERRED NOTES
DEFICIT COMPENSATION RECEIVABLE TOTAL
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995.................................. $ (279,825) $ -- $ -- $ (257,825)
Issuance of shares in reverse merger (Note 1)............. -- -- -- (516,996)
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 3,725,000
Costs of private placement................................ -- -- -- (575,860)
Shares issued as underwriters compensation ($2.50 per
share) (Note 6a)........................................ -- -- -- 500,000
Shares issued in exchange for debt ($2.50 per share) (Note
6a)..................................................... -- -- -- 595,000
Stock options issued for services......................... -- (289,575) -- --
Amortization of deferred compensation..................... -- 38,475 -- 38,475
Net loss for the year..................................... (402,997) -- -- (402,997)
------------ ------------- --- -----------
BALANCE, December 31, 1995................................ (682,822) (251,100) -- 3,104,797
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 530,000
Costs of private placement (Note 6a)...................... -- -- -- (278,025)
Stock options issued for services rendered (Note 6d)...... -- (128,250) -- --
Amortization of deferred compensation (Note 6d)........... -- 102,263 -- 102,263
Net loss for the year..................................... (3,864,734) -- -- (3,864,734)
------------ ------------- --- -----------
BALANCE, December 31, 1996................................ (4,547,556) (277,087) -- (405,699)
Shares issued as payment for amounts due to vendors and
employees ($2.50 per share for vendors and $1.88 per
share for employee services) (Note 6a).................. -- -- -- 61,438
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 2,244,400
Costs of private placement (Note 6a)...................... -- -- -- (291,020)
Shares issued to bridge loan investors for conversion into
common stock and warrants ($1.88 per share) (Note 6a)... -- -- -- 1,679,000
(co
</TABLE>
F-6
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Shares returned to Company for cancellation by
officers/major stockholders ($0.001 per share)
(Note 6b)........................................ -- -- (750,000) (750) 750 --
Release of forfeiture restrictions on common stock
owned by officers/major stockholders ($4.50 per
share) (Note 6b)................................. -- -- -- -- 7,875,000 --
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into
common stock and warrants (Note 5)............... -- -- -- -- 573,348 --
Shares issued as finders fees for capital raising
transactions (Note 6a)........................... -- -- 250,000 250 (250) --
Amortization of deferred compensation (Note 6d).... -- -- -- -- -- --
Fair value of stock options and warrants issued
(Note 6d)........................................ -- -- -- -- 6,862,483 --
Net loss for the year.............................. -- -- -- -- -- (19,416,838)
--------- ----- ----------- --------- ------------ -------------
BALANCE, December 31, 1997......................... -- -- 9,603,994 9,604 23,413,989 (23,964,394)
Warrants exercised and converted to stock (Note
6a).............................................. -- -- 355,000 355 1,068,645 --
Shares issued as payment for amounts due to vendors
and employees ($2.50 per share for vendors and
$1.88 per share for employee services) (Note
6a).............................................. -- -- 27,603 28 69,510 --
Shares issued as payment for amounts due to
officers and directors ($1.88 per share) (Note
6a).............................................. -- -- 96,220 96 180,317 --
Shares issued through financing activities ($3.94
per share) (Note 6a)............................. -- -- 20,000 20 78,730 --
Shares issued to bridge loan investors for
conversion into common stock and warrants ($1.88
per share for 1997 loans and $2.00 per share for
1998 loans) (Note 6a)............................ -- -- 1,513,551 1,513 2,999,217 --
Preferred shares issued in private placement
($25.00 per share) (Note 6c)..................... 262,500 262 -- -- 6,562,238 --
(continued)
<CAPTION>
STOCK
DEFERRED NOTES
COMPENSATION RECEIVABLE TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Shares returned to Company for cancellation by
officers/major stockholders ($0.001 per share)
(Note 6b)........................................ -- -- --
Release of forfeiture restrictions on common stock
owned by officers/major stockholders ($4.50 per
share) (Note 6b)................................. -- -- 7,875,000
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into
common stock and warrants (Note 5)............... -- -- 573,348
Shares issued as finders fees for capital raising
transactions (Note 6a)........................... -- -- --
Amortization of deferred compensation (Note 6d).... 167,965 -- 167,965
Fair value of stock options and warrants issued
(Note 6d)........................................ (1,198,064) -- 5,664,419
Net loss for the year.............................. -- -- (19,416,838)
------------- ---------- -------------
BALANCE, December 31, 1997......................... (1,307,186) -- (1,847,987)
Warrants exercised and converted to stock (Note
6a).............................................. -- -- 1,069,000
Shares issued as payment for amounts due to vendors
and employees ($2.50 per share for vendors and
$1.88 per share for employee services) (Note
6a).............................................. -- -- 69,538
Shares issued as payment for amounts due to
officers and directors ($1.88 per share) (Note
6a).............................................. -- -- 180,413
Shares issued through financing activities ($3.94
per share) (Note 6a)............................. -- -- 78,750
Shares issued to bridge loan investors for
conversion into common stock and warrants ($1.88
per share for 1997 loans and $2.00 per share for
1998 loans) (Note 6a)............................ -- -- 3,000,730
Preferred shares issued in private placement
($25.00 per share) (Note 6c)..................... -- (490,000) 6,072,500
</TABLE>
F-7
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Cost of private placement (Note 6c)....................... -- -- -- -- (360,909)
Proceeds from the sale of warrants (Note 6c).............. -- -- -- -- 4,531
Warrants purchased by officers (Note 6c).................. -- -- -- -- 75,000
Preferred stock converted to common shares (Note 6c)...... (155,390) (155) 1,553,900 1,554 (1,399)
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 800,000 800 1,999,200
Cost of private placement (Note 6a)....................... -- -- -- -- (120,000)
Discount on conversion of bridge loans, accounts payable
and employee deferred salaries into common stock and
warrants (Note 5)....................................... -- -- -- -- 849,963
Fair value of warrants issued for financing costs (Note
6d)..................................................... -- -- -- -- 1,405,684
Non-cash compensation (Note 6d)........................... -- -- -- -- 4,196,881
Cancellation of warrants (Note 6d)........................ -- -- -- -- (95,200)
Amortization of deferred compensation (Note 6d)........... -- -- -- -- --
Net loss for the year..................................... -- -- -- -- --
--------- ----- ---------- ----------- ----------
BALANCE, December 31, 1998................................ 107,110 107 13,970,268 13,970 42,326,397
--------- ----- ---------- ----------- ----------
Warrants exercized and converted to stock (Note 6a)
(unaudited)............................................. -- -- 136,125 136 381,129
Stock options exercised and converted to stock (Note 6a)
(unaudited)............................................. -- -- 74,833 75 299,925
Preferred stock converted to common shares (Note 6a)
(unaudited)............................................. (2,000) (2) 20,000 20 (18)
Shares issued in private placement ($2.50 per share) (Note
6a) (unaudited)......................................... -- -- 100,000 100 249,900
Shares issued as payment for amounts due to vendors (Note
6a) (unaudited)......................................... -- -- 13,505 14 33,749
Finder's fee settlement relating to the preferred
financing (Note 6a) (unaudited)......................... -- -- -- -- (122,500)
Non-cash compensation (Note 6d) (unaudited)............... -- -- -- -- 55,650
Amortization of deferred compensation (Note 6d)
(unaudited)............................................. -- -- -- -- --
Net loss for the quarter (unaudited)...................... -- -- -- -- --
--------- ----- ---------- ----------- ----------
BALANCE, March 31, 1999 (unaudited)....................... 105,100 $ 105 14,314,731 $ 14,315 $43,224,232
--------- ----- ---------- ----------- ----------
--------- ----- ---------- ----------- ----------
<CAPTION>
STOCK
ACCUMULATED DEFERRED NOTES
DEFICIT COMPENSATION RECEIVABLE TOTAL
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Cost of private placement (Note 6c)....................... -- -- -- (360,909)
Proceeds from the sale of warrants (Note 6c).............. -- -- -- 4,531
Warrants purchased by officers (Note 6c).................. -- -- (70,000) 5,000
Preferred stock converted to common shares (Note 6c)...... -- -- -- --
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 2,000,000
Cost of private placement (Note 6a)....................... -- -- -- (120,000)
Discount on conversion of bridge loans, accounts payable
and employee deferred salaries into common stock and
warrants (Note 5)....................................... -- -- -- 849,963
Fair value of warrants issued for financing costs (Note
6d)..................................................... -- -- -- 1,405,684
Non-cash compensation (Note 6d)........................... -- (1,434,988) -- 2,761,893
Cancellation of warrants (Note 6d)........................ -- -- -- (95,200)
Amortization of deferred compensation (Note 6d)........... -- 1,580,802 -- 1,580,802
Net loss for the year..................................... (13,861,547) -- -- (13,861,547)
------------ ------------- ----------- -----------
BALANCE, December 31, 1998................................ (37,825,941) (1,161,372) (560,000) 2,793,161
------------ ------------- ----------- -----------
Warrants exercized and converted to stock (Note 6a)
(unaudited)............................................. -- -- -- 381,265
Stock options exercised and converted to stock (Note 6a)
(unaudited)............................................. -- -- -- 300,000
Preferred stock converted to common shares (Note 6a)
(unaudited)............................................. -- -- -- --
Shares issued in private placement ($2.50 per share) (Note
6a) (unaudited)......................................... -- -- -- 250,000
Shares issued as payment for amounts due to vendors (Note
6a) (unaudited)......................................... -- -- -- 33,763
Finder's fee settlement relating to the preferred
financing (Note 6a) (unaudited)......................... -- -- -- (122,500)
Non-cash compensation (Note 6d) (unaudited)............... -- (55,650) -- --
Amortization of deferred compensation (Note 6d)
(unaudited)............................................. -- 357,545 -- 357,545
Net loss for the quarter (unaudited)...................... (2,147,058) -- -- (2,147,058)
------------ ------------- ----------- -----------
BALANCE, March 31, 1999 (unaudited)....................... ($39,972,999) $ (859,477) $(560,000) $ 1,846,176
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS
1995 ENDED
YEAR ENDED THROUGH MARCH 31,
------------------------------------------ 1998 ------------
1996 1997 1998 (NOTE 1) 1998
------------ ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net loss..................................... $ (3,864,734) $ (19,416,838) $ (13,861,547) $ (37,546,116) $(2,829,903)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............ 122,673 307,935 397,357 830,821 75,795
Amortization of deferred financing....... -- -- 119,546 119,546 12,164
Other losses............................. -- -- 70,640 70,640 64,750
Reduction of loan from settlement
agreement............................. -- -- -- (20,000) --
Non-cash compensation.................... 102,263 2,176,182 4,262,963 6,579,883 1,584,432
Discount on conversion of bridge loans,
accounts payable and employee deferred
salaries into common stock and
warrants.............................. -- 573,348 849,963 1,423,311 --
Fair value of warrants issued for
financing costs....................... -- 3,656,202 1,405,684 5,061,886 --
Release of forfeiture restrictions on
common stock owned by officers/ major
stockholders.......................... -- 7,875,000 -- 7,875,000 --
Changes in operating assets and
liabilities:
(Increase) decrease in:
Receivables........................... 28,100 1,350 (44,206) (20,364) 3,917
Prepaid expenses...................... (143,238) 93,923 10,296 (39,019) 12,512
Other current assets.................. (632) 1,708 16,532 12,244 (13,270)
Deposits.............................. (53,963) -- (17,537) (71,500) --
Increase (decrease) in:
Accounts payable...................... 568,385 122,679 101,980 1,052,258 15,326
Accrued compensation and related
items............................... 146,712 332,980 (167,583) 343,916 (100,539)
Accrued interest payable.............. 1,250 334,642 214,602 533,415 65,781
Other accrued expenses................ 258,901 76,797 110,019 451,128 808
State income taxes payable............ 2,020 1,980 (6,400) (800) (726)
------------ ------------- ------------- ------------- ------------
Net cash used in operating activities.......... (2,832,263) (3,862,112) (6,537,690) (13,343,751) (1,108,953)
------------ ------------- ------------- ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment.......... (790,152) (132,356) (359,800) (1,363,318) (56,656)
------------ ------------- ------------- ------------- ------------
Net cash used in investing activities.......... (790,152) (132,356) (359,800) (1,363,318) (56,656)
------------ ------------- ------------- ------------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants................................... -- -- 1,069,000 1,069,000 --
Increase in deferred financing costs......... -- -- (96,000) (96,000) (81,000)
Proceeds from lease financing................ -- 150,261 -- 150,261 --
Proceeds from sale of securities, net of
offering costs............................. 251,975 1,953,380 5,501,122 10,855,617 --
Proceeds from advances and bridge loans:
Related parties............................ 200,000 844,000 888,875 2,218,862 410,000
Unrelated parties.......................... -- 1,315,000 1,190,000 2,505,000 865,000
Repayments of advances:
Related parties............................ -- (104,000) (23,875) (127,875) --
Unrelated parties.......................... -- (105,000) (30,000) (135,000) --
Payments on capitalized lease obligations.... (40,150) (93,596) (113,911) (247,657) --
Proceeds from subscription receivable...... -- -- -- -- --
Increase in deferred offering costs........ -- -- -- -- --
Additional costs related to preferred stock
financing................................ -- -- -- -- --
Proceeds from notes payable................ -- -- -- -- --
------------ ------------- ------------- ------------- ------------
Net cash provided by financing activities...... 411,825 3,960,045 8,385,211 16,192,208 1,194,000
------------ ------------- ------------- ------------- ------------
<CAPTION>
PRO FORMA
1995 FOR THE THREE
TO MARCH 31, MONTHS ENDED
1999 MARCH 31,
1999 (NOTE 1) 1999 (NOTE 11)
------------ ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net loss..................................... $(2,147,058) $ (39,693,174) $ (2,147,058)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............ 95,735 926,556 95,735
Amortization of deferred financing....... 7,848 127,394 7,848
Other losses............................. 1,237 71,877 1,237
Reduction of loan from settlement
agreement............................. -- (20,000) --
Non-cash compensation.................... 657,545 7,237,428 657,545
Discount on conversion of bridge loans,
accounts payable and employee deferred
salaries into common stock and
warrants.............................. -- 1,423,311 --
Fair value of warrants issued for
financing costs....................... -- 5,061,886 --
Release of forfeiture restrictions on
common stock owned by officers/ major
stockholders.......................... -- 7,875,000 --
Changes in operating assets and
liabilities:
(Increase) decrease in:
Receivables........................... (14,437) (34,801) (14,437)
Prepaid expenses...................... (41,139) (80,158) (41,139)
Other current assets.................. (4,857) 7,387 (4,857)
Deposits.............................. 500 (71,000) 500
Increase (decrease) in:
Accounts payable...................... 55,061 1,107,319 55,061
Accrued compensation and related
items............................... 3,262 347,178 3,262
Accrued interest payable.............. -- 533,415 --
Other accrued expenses................ 111,500 562,628 111,500
State income taxes payable............ -- (800) --
------------ ------------- ---------------
Net cash used in operating activities.......... (1,274,803) (14,618,554) (1,274,803)
------------ ------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment.......... (174,287) (1,537,605) (174,287)
------------ ------------- ---------------
Net cash used in investing activities.......... (174,287) (1,537,605) (174,287)
------------ ------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants................................... 381,266 1,450,266 381,266
Increase in deferred financing costs......... (55,271) (151,271) (1,665,271)
Proceeds from lease financing................ -- 150,261 --
Proceeds from sale of securities, net of
offering costs............................. 250,000 11,105,617 250,000
Proceeds from advances and bridge loans:
Related parties............................ -- 2,218,862 --
Unrelated parties.......................... -- 2,505,000 --
Repayments of advances:
Related parties............................ -- (127,875) --
Unrelated parties.......................... -- (135,000) --
Payments on capitalized lease obligations.... (52,542) (300,199) (52,542)
Proceeds from subscription receivable...... 2,100,000 2,100,000 2,100,000
Increase in deferred offering costs........ (49,395) (49,395) (49,395)
Additional costs related to preferred stock
financing................................ (122,500) (122,500) (122,500)
Proceeds from notes payable................ -- -- 36,728,510
------------ ------------- ---------------
Net cash provided by financing activities...... 2,451,558 18,643,766 37,570,068
------------ ------------- ---------------
</TABLE>
(continued)
F-9
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS
1995 ENDED
YEAR ENDED THROUGH MARCH 31,
------------------------------------------ 1998 ------------
1996 1997 1998 (NOTE 1) 1998
------------ ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents................................ $ (3,210,590) $ (34,423) $ 1,487,721 $ 1,485,139 $ 28,391
Cash and cash equivalents at beginning of
period..................................... 3,297,908 87,318 52,895 55,477 52,895
------------ ------------- ------------- ------------- ------------
Cash and cash equivalents at end of period... $ 87,318 $ 52,895 $ 1,540,616 $ 1,540,616 $ 81,286
------------ ------------- ------------- ------------- ------------
------------ ------------- ------------- ------------- ------------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest................................... $ 12,627 $ 27,364 $ 26,780 $ 117,383 $ 7,554
State income taxes......................... 1,756 6,443 6,166 15,165 --
------------ ------------- ------------- ------------- ------------
------------ ------------- ------------- ------------- ------------
Non-cash investing and financing activities:
Equipment acquired under capital leases...... $ 267,180 $ -- $ 80,000 $ 347,180 $ --
Reduction of loan from settlement
agreement.................................. -- -- -- (20,000) --
Additions to deferred compensation........... 128,250 -- 1,434,988 1,852,813 --
Advances and bridge loans, including accrued
interest, converted into common stock and
warrants:
Related parties.......................... -- 632,500 1,366,365 1,998,865 --
Unrelated parties........................ -- 1,046,500 1,634,504 2,681,004 --
Conversion of accounts payable and accrued
compensation into common stock............. -- 61,438 249,951 311,389 --
Exercise of 74,833 stock options in cashless
exchange for 74,833 common stock (Note 6a)... -- -- -- -- --
Conversion of 2,000 shares of preferred stock
into common stock............................ -- -- -- -- --
------------ ------------- ------------- ------------- ------------
------------ ------------- ------------- ------------- ------------
<CAPTION>
PRO FORMA
1995 FOR THE THREE
TO MARCH 31, MONTHS ENDED
1999 MARCH 31,
1999 (NOTE 1) 1999 (NOTE 11)
------------ ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents................................ $1,002,468 $ 2,487,607 $ 36,120,978
Cash and cash equivalents at beginning of
period..................................... 1,540,616 55,477 1,540,616
------------ ------------- ---------------
Cash and cash equivalents at end of period... $2,543,084 $ 2,543,084 $ 37,661,594
------------ ------------- ---------------
------------ ------------- ---------------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest................................... $ 7,444 $ 124,827 $ 7,444
State income taxes......................... -- 15,165 --
------------ ------------- ---------------
------------ ------------- ---------------
Non-cash investing and financing activities:
Equipment acquired under capital leases...... $ -- $ 347,180 $ --
Reduction of loan from settlement
agreement.................................. -- (20,000) --
Additions to deferred compensation........... 55,650 1,908,463 55,650
Advances and bridge loans, including accrued
interest, converted into common stock and
warrants:
Related parties.......................... -- 1,998,865 --
Unrelated parties........................ -- 2,681,004 --
Conversion of accounts payable and accrued
compensation into common stock............. 33,763 345,152 33,763
Exercise of 74,833 stock options in cashless
exchange for 74,833 common stock (Note 6a)... 300,000 300,000 300,000
Conversion of 2,000 shares of preferred stock
into common stock............................ -- -- --
------------ ------------- ---------------
------------ ------------- ---------------
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
Youbet.com, Inc., a Delaware corporation (formerly known as You Bet
International, Inc.), You Bet!, Inc., a Delaware corporation and a wholly-owned
subsidiary of Youbet.com, Inc., and Middelware Telecom Corporation, a California
corporation and a wholly-owned subsidiary of You Bet!, Inc., are collectively
referred to herein as the "Company". Youbet.com, Inc. is the successor to You
Bet International, Inc. through a merger transaction effective January 22, 1999.
The subsidiaries of You Bet International, Inc. were also merged into
Youbet.com. Prior to January 1, 1999, the financial statements of Youbet.com are
consolidated. All intercompany accounts and transactions have been eliminated in
consolidation.
BUSINESS
Since mid-1995, the Company has been engaged in developing PC-based
proprietary communications software technology to be utilized by consumers for
online entertainment purposes. The Company's first service being offered to
subscribers is The You Bet Network, an interactive online horseracing network
that is broadcast over the Company's virtual private network.
DEVELOPMENT STAGE
As of March 31, 1999, the Company is considered to be a development stage
entity, as it has not realized a significant amount of revenues from planned
principal operations. Accordingly, the Company has provided cumulative
statements of operations, statements of stockholders' equity (deficiency) and
statements of cash flows for the period from inception of development stage
(January 1, 1995) through March 31, 1999.
ORGANIZATION
On December 6, 1995, Continental Embassy Acquisition, Inc. ("CEA"), a public
shell which was organized in Utah in 1987, acquired 100% of the outstanding
capital stock of You Bet!, Inc., a Delaware corporation, in exchange for the
issuance of 5,800,000 shares of common stock, including 5,710,000 shares of
common stock to two officers/major stockholders of the Company (who were the
founders of the Company's predecessor entity), their nominees and a stockholder
related to one of the officers. In conjunction with the contemporaneous 1995
private placement of the Company's securities as described at Note 6, 2,500,000
of the 5,710,000 shares were deemed subject to forfeiture by the holders under
certain conditions, also as described at Note 6b. Concurrent with this
transaction, CEA reincorporated in the State of Delaware and changed its name to
You Bet International, Inc., and the management of You Bet!, Inc. became the
management of You Bet International, Inc. For accounting purposes, the
acquisition of You Bet!, Inc. by You Bet International, Inc. has been treated as
a reverse acquisition of You Bet!, Inc. with You Bet!, Inc. considered the
acquiror. The operating results reflected in the accompanying financial
statements, where 1995 through March 31, 1999 amounts are presented, do not
include CEA's operating activities prior to the You Bet!, Inc. acquisition, as
the amounts are not significant.
F-11
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue as wagers are placed (see Note 3). The
Company also recognizes revenue from monthly subscription fees as earned and
from the sale of handicapping information as used by subscribers.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development costs in
compliance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." Capitalization of computer software
development costs begins upon the establishment of technological feasibility for
the product and continues until the product is available for sale or use. The
Company's software, which is marketed to customers, includes the You Bet Network
(YBN), an Internet site developed by the Company, and software which customers
install on their personal computers in order to access the YBN. Management
believes technological feasibility was achieved in early 1998, and the Company's
network became available for general release to customers shortly thereafter.
Capitalizable software costs incurred subsequent to establishing technological
feasibility have not been capitalized due to the uncertainty surrounding the
recoverability of these costs. The Company has determined that software
development costs to date should properly be charged to operations. Since the
Company's software has become available for use, the Company has expensed
maintenance costs as incurred.
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.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. The Company measures impairment loss
by comparing the fair value of the asset to its carrying amount. Fair value of
an asset is calculated as the present value of expected future cash flows.
Impairment losses, if any, are recorded currently.
INCOME TAXES
The Company accounts for income taxes utilizing the asset and liability
approach, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
basis of assets and liabilities for financial reporting purposes and tax
purposes. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided when management cannot determine whether or not it is more likely that
the net deferred tax asset will be realized.
F-12
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Basic earnings per share are calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are calculated by dividing net income (loss) by the basic
shares outstanding and all dilutive securities, including stock options,
warrants, convertible notes and preferred stock, but does not include the impact
of potential common shares which would be antidilutive. These dilutive
securities were anti-dilutive in 1996, 1997 and 1998 and the three month periods
ended March 31, 1998 and 1999.
For the year ended December 31, 1996, potential dilutive securities
representing 1,026,364 outstanding stock options, 1,387,188 outstanding common
stock purchase warrants, and $200,000 of convertible notes, are not included in
the earnings per share calculation since their effect would be antidilutive.
For the year ended December 31, 1997, potential dilutive securities
representing 1,121,433 outstanding stock options, 5,896,011 outstanding common
stock purchase warrants, and $345,000 of convertible notes, are not included in
the earnings per share calculation since their effect would be antidilutive.
As of December 31, 1998, potential dilutive securities representing
10,654,951 shares of common stock were not included in the earnings per share
calculation since their effect would be anti-dilutive. Potential dilutive
securities consisted of 1,914,212 outstanding stock options, 7,669,639
outstanding common stock purchase warrants, and 107,110 shares of preferred
stock convertible into 1,071,100 shares of common stock. Basic and diluted
earnings per share are the same for all periods presented.
As of March 31, 1999, potential dilutive securities representing 10,581,710
shares of common stock were not included in the earnings per share calculation
since their effect would be anti-dilutive. Potential dilutive securities
consisted of 1,956,596 outstanding stock options, 7,574,014 outstanding common
stock purchase warrants, and 105,110 shares of preferred stock convertible into
1,051,100 shares of common stock. Basic and diluted earnings per share are the
same for all periods presented.
During 1997, 2,500,000 shares of common stock issued and outstanding to two
officers/major stockholders and a stockholder related to one of the officers
were subject to forfeiture under certain specified conditions, and were excluded
from the calculation of net loss per share in 1997. The forfeiture provisions
were released effective December 31, 1997, in exchange for the return to the
Company and cancellation of 750,000 of such shares. See Note 6b for additional
information.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans. The provisions of this
Statement allow companies to either expense the estimated fair value of stock
options or to continue to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", but to
F-13
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
disclose the pro forma effect on net income (loss) and net income (loss) per
share had the fair value of the stock options been expensed. The Company has
elected to continue to account for stock-based compensation plans utilizing the
intrinsic value method. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant above the amount an employee must pay to acquire the stock.
In accordance with this Statement, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and is recognized over the vesting period. The value of the
stock-based award is determined using a pricing model whereby compensation cost
is the excess of the fair value of the award as determined by the pricing model
at grant date or other measurement date above the amount an employee must pay to
acquire the stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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 carrying value of the Company's financial instruments, consisting
primarily of stock subscriptions receivable, accounts payable, notes payable and
capitalized lease obligations, approximates fair value due to the maturity of
these financial instruments and the borrowing costs to the Company.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", during the year ended December 31, 1998.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income. Adoption of
this statement did not have an impact on the Company's current disclosures and
presentation.
F-14
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the year ended December 31, 1998.
This Statement requires that public companies report certain information about
their major customers, operating segments, products and services, and the
geographic areas in which they operate. Because the Company operates within a
single operating segment, adoption of this statement did not have an impact on
the Company's current disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (SFAS No. 132), which is effective for financial statements issued for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
requires comparative information for earlier years to be restated. The Company
adopted SFAS No. 132 for its fiscal year beginning January 1, 1998. Adoption of
SFAS No. 132 did not have an effect on the Company's financial statement
presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for financial statements issued for all fiscal quarters of fiscal
years beginning after June 15, 1999. This statement requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Historically, the Company has not entered into derivative contracts to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to have any effect on
its financial statements.
NOTE 3--AGREEMENT WITH LADBROKE
Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc.,
(collectively, "Ladbroke"), operate horseracing operations within the State of
Pennsylvania. Effective June 23, 1997, the Company and Ladbroke entered into a
Telecommunications Facilitation System Agreement (the "Ladbroke Agreement"),
which provides that the Company will facilitate interactive telecommunications
between subscribers to The You Bet Network and Ladbroke's horseracing
activities. The Ladbroke Agreement contains certain exclusivity provisions
during the first two years of the agreement, and also provides Ladbroke with the
right to receive the benefit of any more favorable terms should the Company
enter into a subsequent agreement with another horseracing facility. The
Ladbroke Agreement provides for a term of five years subsequent to the first
transmission of live wagering information over The You Bet Network to an end
user. The initial transmissions of live wagering information over The You Bet
Network commenced during January 1998. As a result, the term of the Ladbroke
Agreement is through January 2003.
F-15
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 3--AGREEMENT WITH LADBROKE (CONTINUED)
The Company is entitled to receive on a weekly basis one half of the net
commission to Ladbroke derived from wagers placed by Youbet.com subscribers. Net
commissions are calculated as gross commissions generated from wagers, less
state taxes and certain direct costs. The Ladbroke Agreement contains provisions
allowing the termination of the agreement by either party at any time prior to
January 2003, in the event that net commissions are, or are projected in good
faith by either party to the agreement, to be less than $1,000,000 for either
the initial eighteen month period ending June 1999, or for any full twelve month
period during the term of the agreement subsequent to the initial eighteen month
period.
During the year ended December 31, 1998 and the three months ended March 31,
1999, all and 94%, respectively, of the Company's revenues were generated from
the Ladbroke Agreement, and the Company expects that approximately 60% of its
revenues during the year ending December 31, 1999 will also be generated from
the Ladbroke Agreement. The Company currently estimates that net commissions
will exceed $1,000,000 during the initial eighteen month period ending June
1999. However, should net commissions be less than $1,000,000 during such
eighteen month period, Ladbroke could elect to terminate the agreement, which
could have a material adverse effect on the Company's business plans and capital
raising efforts.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Computer equipment................................. $ 602,449 $1,015,411 $ 1,168,435
Office furniture and equipment..................... 176,987 202,504 220,792
Leasehold improvements............................. 63,534 64,855 64,855
Assets under capital leases (Note 7)............... 417,441 417,441 417,441
------------ ------------ ------------
1,260,411 1,700,211 1,871,523
Less: Accumulated depreciation and amortization.... (423,177) (820,535) (914,534)
------------ ------------ ------------
$ 837,234 $ 879,676 $ 956,989
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
At December 31, 1997, 1998 and March 31, 1999, accumulated depreciation and
amortization included $131,352, $244,892 and $273,278, respectively, related to
assets under capital leases.
F-16
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 5--ADVANCES AND BRIDGE LOANS PAYABLE
Advances and bridge loans consisted of the following at December 31, 1997
and 1998:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES
------------- -------------
<S> <C> <C>
ADVANCES
Balance, January 1, 1997............................................................ $ -- $ --
Add: New loans...................................................................... 594,000 105,000
Less: Repayments.................................................................... (104,000) (105,000)
Converted into 1997 bridge financing........................................... (100,000) --
------------- -------------
Balance, December 31, 1997.......................................................... 390,000 --
Add: New loans...................................................................... 508,875 105,000
Less: Repayments.................................................................... (23,875) (30,000)
Converted into 1998 bridge financing........................................... (875,000) (75,000)
------------- -------------
Balance, December 31, 1998.......................................................... $ -- $ --
------------- -------------
------------- -------------
BRIDGE LOANS PAYABLE
Balance, January 1, 1997............................................................ $ 200,000 $ --
Add: New loans...................................................................... 250,000 1,210,000
Converted from advances........................................................ 100,000 --
Less: Converted into common stock and warrants...................................... (550,000) (910,000)
------------- -------------
Balance, December 31, 1997.......................................................... -- 300,000
Add: New loans...................................................................... 380,000 1,085,000
Converted from advances........................................................ 875,000 75,000
Less: Conversion of 1997 bridge loans into common stock and warrants................ -- (300,000)
Conversion of 1998 bridge loans into common stock.............................. (1,255,000) (1,160,000)
------------- -------------
Balance, December 31, 1998.......................................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Interest expense with respect to bridge loans payable aggregated $264,000
during 1997, including $82,500 to related parties. Additional financing cost was
also incurred during 1997 as a result of the issuance of an aggregate of 966,000
Series C common stock purchase warrants to the parties that provided unsecured
advances during 1997 and to the participants in the 1997 bridge financing,
including 456,000 warrants to related parties. As a result, the Company recorded
a charge to operations of $2,949,420 in 1997, including $1,504,580 allocable to
related parties, as more fully described at Note 6a.
Interest expense with respect to bridge loans and advances payable
aggregated $240,730 during 1998, including $111,365 to related parties.
Additional financing cost was also incurred during 1998 as a result of the
issuance of an aggregate of 177,000 Series C and 105,117 Series D common stock
purchase warrants to the parties that provided unsecured advances during 1998
and to the participants in the 1998 bridge financing, including 134,000 warrants
to related parties. As a result, the Company
F-17
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 5--ADVANCES AND BRIDGE LOANS PAYABLE (CONTINUED)
recorded a charge to operations of $910,099 in 1998, including $500,600
allocable to related parties, as more fully described at Note 6a.
CONVERSION DISCOUNT
As part of the consideration for making the 1997 bridge loans, the Company
agreed at the time the bridge loans were funded to give the bridge investors the
option to convert their bridge loans, including accrued interest, into the
subsequent private placement securities at the lesser of $25,000 per unit or 75%
of the private placement offering price. As a result, bridge investors exchanged
their bridge loans for units offered in the private placement at the rate of
$18,750 per unit, equivalent to a 25% discount from the $25,000 private
placement price. Accordingly, the Company recognized a charge to operations,
with a corresponding credit to additional paid-in capital, representing the
aggregate discount of $559,667, including $210,834 allocable to related parties.
As part of the consideration for making the 1998 bridge loans, the Company
granted the investors the option to convert their bridge loans, including
accrued interest, into the securities offered in any subsequent private
placement (or the equivalent amount of common stock, if such financing is not a
common stock financing), at 75% to 80% of the private placement offering price,
representing discounts of 20% to 25%. As a result of the sale of preferred stock
on June 29, 1998 as described in Note 6c, the difference between the fair value
of the Company's common stock of $2.50 per share on June 29, 1998 (as determined
by an investment and merchant banking firm) and the effective conversion rates
ranging from $1.875 to $2.00 per share, was recognized as a charge to
operations. Accordingly, the Company recognized a charge to operations, with a
corresponding credit to additional paid-in capital, representing the aggregate
discount of $849,963, including $341,588 allocable to related parties.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY)
A. ISSUANCE OF COMMON STOCK AND WARRANTS
Concurrent with the completion of the reverse merger discussed in Note 1,
the Company completed a private placement offering of securities to investors.
The Company sold 149 units at $25,000 per unit. Each unit consisted of 10,000
shares of common stock and 5,000 Series A common stock purchase warrants
exercisable at $5.25 per share and expiring two years from the date on which a
registration statement registering the warrants is declared effective. Total
offering costs of $575,860 were charged against the gross proceeds of
$3,725,000, resulting in net proceeds of $3,149,140. As a result of the sale of
149 units under this private placement offering in 1995, the Company issued a
total of 1,490,000 shares of common stock and 745,000 Series A common stock
purchase warrants.
In 1995, the Company issued 200,000 shares of common stock and Series B
common stock purchase warrants representing the right to purchase 417,188 shares
of common stock as commission to the placement agent of the private placement
offering, which were valued at $500,000. The Series B common stock purchase
warrants are exercisable at $3.12.
F-18
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
In conjunction with the closing of the reverse merger and private placement
offering in 1995, bridge loans payable aggregating $250,000 were exchanged for
10 units of common stock and Series A common stock purchase warrants, and
advances aggregating $345,000, including $100,000 from a related party, were
exchanged for 13.8 units of common stock and Series A common stock purchase
warrants. As a result of the issuance of 23.8 units, the Company issued an
aggregate of 238,000 shares of common stock and 119,000 Series A common stock
purchase warrants, including 40,000 shares and 20,000 Series A common stock
purchase warrants to a related party.
During 1996, the Company sold an additional 21.2 units as part of the
private placement offering commenced during 1995. Total offering costs of
$278,025 were charged against the gross proceeds of $530,000, resulting in net
proceeds of $251,975. As a result of the sale of 21.2 units under this private
placement offering in 1996, the Company issued a total of 212,000 shares of
common stock and 106,000 Series A common stock purchase warrants.
During November 1997, the Company reduced the exercise price of the Series A
common stock purchase warrants from $5.25 to $2.50 per share.
During November 1997, the Company completed a private placement offering of
securities to investors. The Company sold 89.78 units at $25,000 per unit. Each
unit consisted of 10,000 shares of common stock and 5,000 Series D common stock
purchase warrants exercisable at $5.25 and expiring November 1999. Total
offering costs of $291,020 were charged against the gross proceeds of
$2,244,400, resulting in net proceeds of $1,953,380. As a result of the sale of
89.78 units under this private placement in 1997, the Company issued a total of
897,760 shares of common stock and 448,880 Series D common stock purchase
warrants.
In conjunction with the closing of the private placement offering, bridge
loans payable aggregating $1,679,000, representing a principal balance of
$1,460,000 and accrued interest of $219,000, were exchanged for 89.55 units of
common stock and Series D common stock purchase warrants. Included in the
$1,679,000 was $632,500, representing a principal balance of $550,000 and
accrued interest of $82,500, from related parties. As a result of the issuance
of 89.55 units in 1997, the Company issued 895,468 shares of common stock and
447,734 Series D common stock purchase warrants, including 337,335 shares of
common stock and 168,667 Series D common stock purchase warrants to related
parties.
In conjunction with the 1997 private placement offering, the Company issued
690,275 Series E common stock purchase warrants to finders exercisable at $3.125
per share through November 2000. The Series E common stock purchase warrants had
an aggregate fair value of $1,891,354. The Company also issued 250,000 common
stock shares to finders.
During 1997, amounts due to vendors aggregating $40,000 and deferred
employee compensation aggregating $21,438 were exchanged for 2.74 units of
common stock and Series D common stock purchase warrants. As a result of the
issuance of 2.74 units, the Company issued 27,433 shares of
F-19
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
common stock and 13,717 Series D common stock purchase warrants. The employees
exchanged their deferred compensation for common stock and warrants at the same
rate as did the bridge investors, and the vendors received a premium to exchange
their debt for common stock and warrants. As a result, the Company also
recognized a charge to operations, with a corresponding credit to additional
paid-in capital, for $13,681.
During 1998, in conjunction with the restructuring of a capital lease
obligation, the Company issued 20,000 shares of common stock to the lessor with
an approximate fair market value of $79,000 (Note 7).
During 1998, the Company issued 2,500 shares of common stock to a former
employee for services rendered which were valued at $15,469 and charged to
operations.
During 1998, the Company issued 1,513,551 shares of common stock (and
105,117 Series D common stock purchase warrants) in conjunction with the
conversion of bridge financing notes with a principal balance of $2,715,000 and
accrued interest of $285,730.
During 1998, the Company issued 355,000 shares of common stock to four
individuals, including two former officers, in conjunction with the exercise of
warrants and stock options with exercise prices ranging from $2.50 to $3.125 per
share, generating gross proceeds to the Company of $1,069,000.
During 1998, the Company issued 11,200 shares of common stock (and 5,600
Series D common stock purchase warrants) in conjunction with the conversion of
vendor debt of $28,000 into common stock.
During 1998, the Company issued 110,123 shares of common stock (and 55,063
Series C and 55,063 Series D common stock purchase warrants), including 96,220
shares to two officers/major stockholders, in conjunction with the conversion of
employee deferred compensation of $206,483 into common stock.
During December 1998, the Company entered into a stock subscription
agreement for the sale of 800,000 shares of common stock and 40,000 Series E
common stock purchase warrants for gross proceeds of $2,000,000. The Company
incurred direct costs related to such financing of $120,000. The Company
received the proceeds during January and February 1999.
During the three months ended March 31, 1999, the Company issued 136,125
shares of common stock, in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $2.50 to $5.25 per share, generating
gross proceeds to the Company of $381,266.
During the three months ended March 31, 1999, the Company issued 74,833
shares of common stock in conjunction with the exercise of stock options by four
employees and one former employee. In order to effect a cashless transaction, an
additional 37,417 stock options were forfeited. This cashless exercise resulted
in a charge to noncash compensation of $300,000.
F-20
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
During the three months ended March 31, 1999, 2,000 shares of convertible
preferred stock were converted into 20,000 shares of common stock.
During the three months ended March 31, 1999, the Company issued 100,000
shares of common stock at a price of $2.50 per share, generating gross proceeds
to the Company of $250,000.
During the three months ended March 31, 1999, the Company issued 13,505
shares of common stock in conjunction with the conversion of vendor debt of
$33,763.
B. DIVESTMENT SHARES
In conjunction with the December 1995 reverse merger discussed in Note 1 and
the contemporaneous 1995 private placement offering, 2,500,000 of the 5,710,000
shares issued to related parties were subject to forfeiture under certain
conditions if the Company did not achieve certain customer subscription levels
within a specified timeframe through December 5, 1999 (the "Divestment Shares").
The Company's original short-term goal, established in 1995, was to maximize
customer subscription levels. However, as a result of a change in the Company's
marketing strategy during 1997, the Company has decided to de-emphasize its
original short-term goal in order to focus on certain long-term goals. The
Company's revised marketing strategy is focused on building a brand name and
becoming a market leader, acquiring and retaining a large and loyal customer
base, and maximizing long-term profitability. Accordingly, effective December
31, 1997, the Board of Directors authorized the release of the forfeiture
restrictions on the 2,500,000 shares of common stock in exchange for the return
of 750,000 shares to the Company.
The release from the possibility of forfeiture with respect to the
Divestment Shares is recorded for accounting purposes as the payment of
compensation to the recipients when the possibility of forfeiture terminates,
and results in a charge to operations in an amount equal to the fair market
value of the Divestment Shares retained at the time such forfeiture possibility
terminates. Accordingly, the Company recognized a charge to operations, with a
corresponding credit to additional paid-in capital, of $7,875,000 at December
31, 1997, reflecting the release of the 1,750,000 shares.
C. PREFERRED STOCK FINANCING
On June 29, 1998, the Company entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, the Company sold 200,000 shares of Series A Convertible Preferred
Stock (the "Preferred Stock") for a cash purchase price of $25.00 per share,
resulting in gross proceeds to the Company of $5,000,000. Officers and directors
purchased 15,890 shares of Preferred Stock.
On July 31, 1998 and during December 1998, the Company sold an additional
20,000 shares and 22,500 shares, respectively, of Preferred Stock under the same
terms for aggregate gross proceeds of
F-21
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
$1,062,500 of which $100,000 was received in January 1999. During December 1998,
155,390 shares of Preferred Stock were converted into 1,553,900 shares of common
stock.
The Preferred Stock has a liquidation preference of $25.00 per share and
will rank senior to all other series of preferred stock that may be issued in
the future. Each share of Preferred Stock is convertible into ten shares of
common stock of the Company, and will be automatically converted into common
stock at the then prevailing conversion rate at such time as the Company has
completed a public offering which raises not less than $15,000,000 in gross
proceeds and has its common stock listed on a major exchange or the NASDAQ
National Market System. The holders of the Preferred Stock are not entitled to
dividends, except that if dividends are paid on the Company's common stock,
holders of Preferred Stock will be entitled to dividends on the basis of the
number of shares of common stock into which the Preferred Stock is then
convertible. The Preferred Stock will vote together with the holders of common
stock on all matters presented to stockholders for a vote on the basis of the
number of shares of common stock into which the Preferred Stock is then
convertible. The holders of the Preferred Stock have unlimited piggyback
registration rights and certain demand registration rights.
Based on a valuation report prepared by an investment and merchant banking
firm dated July 31, 1998, the Company has determined that the Preferred Stock
was sold at fair market value.
Robert M. Fell assisted the Company in its Preferred Stock financing during
1998 prior to his appointment as an officer and director of the Company. As a
result of the completion of such financing on June 29, 1998, Mr. Fell acquired
the right to designate four directors of the Company and may therefore be deemed
to have acquired control of the Company. In conjunction therewith, on June 29,
1998, the Company entered into a Securities Purchase Agreement with the Robert
M. Fell Living Trust (the "Fell Trust"). Pursuant to the Securities Purchase
Agreement, the Fell Trust acquired 20,000 shares of Preferred Stock and a
warrant to purchase 1,200,000 shares of the Company's common stock (the "Fell
Warrant"). The purchase price of the Preferred Stock acquired by the Fell Trust
was $25.00 per share, or an aggregate of $500,000, of which $10,000 was paid in
cash and $490,000 was paid in the form of a promissory note (the "$490,000
Note"). The purchase price of the Fell Warrant was $75,000, of which $5,000 was
paid in cash and $70,000 was paid in the form of a promissory note (the "$70,000
Note"). The $490,000 Note and the $70,000 Note are sometimes collectively
referred to as the "Notes". The Fell Warrant expires on June 29, 2008, and
entitles the Fell Trust to purchase 1,200,000 shares of common stock at $2.50
per share. The Fell Warrant is exercisable one-sixth on June 29, 1998, and
one-sixth thereafter on each six month anniversary date. The $490,000 Note bears
interest at the rate of 8% per annum, which may, at the option of the Fell
Trust, be paid currently or added to the principal amount of the note. The
$490,000 Note is due June 29, 2002, provided that the Fell Trust is required to
prepay the note, without penalty, as soon as possible consistent with its other
cash requirements. The $70,000 Note bears interest at the rate of 6% per annum,
which may, at the option of the Fell Trust, be paid currently or added to the
principal amount of the note. The $70,000 Note is due on June 29, 2008.
F-22
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired
pursuant to the Securities Purchase Agreement to secure its obligations under
the $490,000 Note and the $70,000 Note. In December 1998, the Preferred Stock
held by the Fell Trust was converted into common stock, which remained subject
to the pledge to secure the Notes.
The $490,000 Note and the $70,000 Note were recorded as reductions to
stockholders' equity at December 31, 1998. Based on a valuation report prepared
by an investment and merchant banking firm dated July 31, 1998, the Company has
determined that the exercise price of the Fell Warrant was at not less than fair
market value. The Fell Warrant had an aggregate fair value of $2,112,000.
Effective June 29, 1998, in connection with the Preferred Stock financing,
the Company entered into a Services Agreement with Fell & Company, Inc.,
pursuant to which Mr. Fell will serve as Chairman of the Board of Directors for
a period of three years. The Services Agreement also provided that Mr. Fell
would serve as interim Chief Executive Officer until a new Chief Executive
Officer is appointed, provided that if an employment agreement is not entered
into with a new Chief Executive Officer within six months from June 29, 1998, or
such person does not commence employment within eight months of June 29, 1998,
the position of Chief Executive Officer will become the Office of the Chief
Executive and will consist of Mr. Fell, Mr. Marshall and Mr. Fine. For making
Mr. Fell's services available to the Company, Fell & Company, Inc. would receive
$150,000 per annum, subject to cost of living increases, plus the amount of
payroll taxes the Company would pay if Mr. Fell were an employee of the Company,
and standard benefits. Effective February 23, 1999, the Board of Directors
approved the appointment of Mr. Fell as full-time Chief Executive Officer, and
Mr. Marshall and Mr. Fine agreed to waive the requirement for formation of the
Office of the Chief Executive. The Board of Directors also approved an increase
in the amount payable to Fell & Company, Inc. for making Mr. Fell's services
available to the Company, to $225,000 per annum effective March 1, 1999,
reflecting the increase in Mr. Fell's involvement with the Company from 70% to
100% of his available time.
Effective June 29, 1998, in connection with the Preferred Stock financing,
the Company entered into new employment agreements with Mr. Marshall and Mr.
Fine pursuant to which they will serve as Vice Chairman and Chief Technology
Officer, respectively. Both employment agreements provide for terms of five
years and compensation of $150,000 per annum, subject to cost of living
increases, and standard benefits.
In conjunction with the Preferred Stock financing, the Company incurred
direct costs related to such financing of $360,909. In addition, this firm
purchased warrants for $.0625 per warrant to acquire 72,498 shares of common
stock, consisting of 24,166 warrants exercisable at $.01 per share and 48,332
warrants exercisable at $2.50 per share. The warrants are exercisable through
June 2003. The aggregate fair value of such warrants was $401,639. The Company
also paid cash finder's fees to other parties aggregating $28,500.
F-23
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
As final settlement for the finder's fee related to the preferred stock
financing in June 1998, additional fees of $122,500 are owed to the finder. The
fees are charged to additional paid-in capital and accrued at March 31, 1999. In
addition, 13,000 warrants with an exercise price of $.01 and 26,000 warrants
with an exercise price of $2.50 were issued to the finder. These warrants are
exercisable through March 2004.
D. STOCK OPTIONS AND WARRANTS
The Company issued various stock options and warrants during 1997 in
non-capital raising transactions for services rendered and to be rendered, and
as financing costs. The Company accounts for stock options and warrants granted
to non-employees in accordance with Statement of Financial Accounting Standards
No. 123, which requires non-cash compensation expense be recognized over the
expected period of benefit. The Company has calculated the fair value of such
warrants and stock options according to the Black-Scholes pricing model. The
resulting amount has been recorded as a charge to deferred compensation, with a
corresponding credit to additional paid-in capital. Deferred compensation is
being amortized on the straight-line basis over the period in which the Company
expects to receive benefit.
The Company issued a warrant to an officer of a subsidiary in 1997 to
purchase 100,000 shares of common stock at an exercise price of $3.00,
exercisable through October 31, 1998, partially in exchange for an accrued but
unpaid bonus. Aggregate fair value of the warrant was $210,000, which was
charged to operations in 1997.
The Company issued various stock options and warrants to certain consultants
during 1997 to purchase an aggregate of 394,000 shares of common stock at
exercise prices ranging from $2.50 to $3.12 and exercisable for periods ranging
from one to five years. Aggregate fair value was $720,680, of which $359,421 was
charged to operations in 1997, and the remaining $361,259 is being charged to
operations in 1998 and 1999.
Pursuant to a letter of intent dated May 11, 1997 and a final agreement
entered into on December 19, 1997, the Company issued a financial and marketing
consulting firm warrants to purchase 1,000,000 shares of common stock
exercisable for a period of 5.5 years, 500,000 of which are exercisable at
$3.125 per share and 500,000 of which are exercisable at $5.25 per share, for
services rendered and to be rendered for the two year period commencing May 11,
1997. In addition, the Company issued a bonus to such firm during December 1997
in the form of 500,000 warrants exercisable for a period of 5 years, 250,000 of
which are exercisable at $3.125 per share and 250,000 of which are exercisable
at $5.25 per share. Aggregate fair value of the 1,000,000 warrants was
$1,218,000, of which $389,084 was charged to operations in 1997, and the
remaining $828,916 is being charged to operations through 1999. Aggregate fair
market value of the 500,000 warrants issued as a bonus was $1,037,750, all of
which was charged to operations in 1997.
F-24
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
During 1997, the Company issued an aggregate of 1,114,217 Series C common
stock purchase warrants to various parties as financing costs. The Series C
common stock purchase warrants are exercisable at $2.50 per share through
December 31, 2002. Employees deferring a portion of their compensation received
5,717 warrants, vendors deferring amounts due them received 142,500 warrants,
individuals providing short-term unsecured advances to the Company received
262,000 warrants (including 236,000 warrants to related parties), and bridge
investors received 704,000 warrants (including 220,000 warrants to related
parties). Aggregate fair market value of the warrants was $3,656,202 (including
$1,504,580 allocable to related parties), all of which was charged to operations
in 1997.
During March 1998, the Company entered into a supplemental agreement with a
financial and marketing consulting firm to develop and manage an expanded
investor relations program to publicize the Company to stockholders, investors,
brokerages, and industry professionals during 1998. During April 1998, the
Company issued warrants to the financial and marketing consulting firm to
purchase an aggregate of 300,000 shares of common stock, of which 200,000
warrants are exercisable at $3.125 per share and 100,000 warrants are
exercisable at $5.25 per share, for additional services rendered during January
through June 1998. The warrants are exercisable through March 2003. The
aggregate fair value of the 300,000 warrants of $1,444,000 was recorded as a
charge to operations in 1998.
During April 1998, the Company issued a warrant to purchase 25,000 shares of
common stock exercisable at $3.00 per share to the Company's Acting Chief
Financial Officer at that time for services rendered during 1998. The warrant is
exercisable through April 1999. The fair value of the warrant was approximately
$75,000, which was charged to operations in 1998. The warrant has been
exercised.
During 1998, the Company issued Series C common stock purchase warrants for
254,593 shares of common stock to various parties. The Series C common stock
purchase warrants are exercisable at $2.50 per share through June 2003. The
Company issued 5,000 warrants to a vendor which deferred an amount due it,
55,063 warrants (including 48,110 warrants to two officers/major stockholders)
in conjunction with the conversion into common stock of employee deferred
compensation of $206,483, and 177,000 warrants (including 134,000 warrants to
related parties) as additional consideration for short-term advances of
$440,000, all of which were considered financing costs. Aggregate fair value of
the warrants issued for financing costs was $1,019,444, which was charged to
operations as financing costs in 1998.
During 1998, a Series C common stock purchase warrant for 20,000 shares of
common stock, originally issued in 1997, was returned to the Company due to lack
of performance and was cancelled. The fair value of such warrant at the time of
issuance was $95,200, which amount was recognized as a credit to operations in
1998. The Company also issued 17,530 warrants for legal fees. The warrant issued
for legal fees had an aggregate fair value of $100,447, which was charged to
operations in 1998.
During 1998, the Company issued Series D common stock purchase warrants for
165,780 shares of common stock to various parties. The Series D common stock
purchase warrants are exercisable at
F-25
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
$5.25 per share through September 2000. The Company issued 105,117 warrants in
conjunction with the conversion into common stock of 1997 bridge financing notes
with a principal balance of $300,000, 5,600 warrants in conjunction with the
conversion into common stock of vendor debt of $28,000, and 55,063 warrants
(including 48,110 warrants to two officers/major stockholders) in conjunction
with the conversion into common stock of employee deferred compensation of
$206,483, all of which were considered financing costs. The aggregate fair value
of such warrants of $386,240 was charged to operations as financing costs in
1998.
During 1998, the Company issued Series E common stock purchase warrants to
various parties. The Series E common stock purchase warrants are exercisable at
$3.125. During April 1998, the Company issued a Series E common stock purchase
warrant for 50,000 shares of common stock to a consulting firm exercisable
through April 2001. The fair value of the warrant of $251,000 was charged to
operations in 1998.
During 1998, in conjunction with the 1997 private placement and the
conversion of the 1998 bridge financing into common stock, the Company issued
87,844 Series E common stock purchase warrants exercisable through 2001, which
had an aggregate fair value of $243,251 and was charged to operations in 1998.
During 1998, in conjunction with the sale of 800,000 shares of common stock,
the Company issued 40,000 Series E common stock purchase warrants exercisable
through February 2004, which had an aggregate fair value of $212,400.
F-26
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Information with respect to common stock purchase warrants and stock options
issued, excluding stock options issued under the Stock Option Plans as described
below, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE
WARRANTS PRICE
---------- -----------
<S> <C> <C>
Balance, January 1, 1996............................................... 1,281,188 $ 2.70
Warrants/stock options issued.......................................... 106,000 $ 2.50
----------
Balance, December 31, 1996............................................. 1,387,188 $ 2.69
Warrants/stock options issued.......................................... 4,508,823 $ 3.70
----------
Balance, December 31, 1997............................................. 5,896,011 $ 3.48
Warrants/stock options issued.......................................... 2,148,628 $ 2.90
Exercised.............................................................. (375,000) $ 3.07
----------
Balance, December 31, 1998............................................. 7,669,639 $ 3.33
Warrants/stock options issued.......................................... 39,000 $ 5.54
Exercised.............................................................. (134,625) $ 2.80
---------- -----
Balance, March 31, 1999................................................ 7,574,014 $ 3.36
---------- -----
---------- -----
Warrants/stock options exercisable (vested) at December 31, 1998....... 7,669,639 $ 3.33
---------- -----
---------- -----
Warrants/stock options exercisable (vested) on March 31, 1999.......... 7,574,014 $ 3.36
---------- -----
---------- -----
</TABLE>
Additional information about outstanding warrants/stock options to purchase
the Company's common stock at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WARRANTS/STOCK OPTIONS OUTSTANDING AND
EXERCISABLE
-------------------------------------------------
WEIGHTED AVG.
REMAINING
NUMBER CONTRACTUAL LIFE WEIGHTED AVG.
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE
- -------------------------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
$.01........................................ 24,166 Not determinable $ .01
$2.50....................................... 52,000 2.68 $ 2.50
$2.50....................................... 3,567,143 Not determinable $ 2.50
$3.00....................................... 112,000 2.12 $ 3.00
$3.13....................................... 1,948,221 Not determinable $ 3.13
$5.25....................................... 1,966,109 Not determinable $ 5.25
---------- -----
Total....................................... 7,669,639 $ 3.33
---------- -----
---------- -----
</TABLE>
F-27
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
STOCK OPTION PLANS
The Company has Employee Stock Option Plans and a Stock Option Plan for
Non-Employee Directors. These Plans provide for the granting of awards of
incentive stock options, non-qualified stock options, and stock appreciation
rights. The aggregate number of shares of common stock available for issuance
under these Plans is 15% of the total number of shares of common stock
outstanding. The options generally vest in four equal annual installments, and
have a term of five to ten years.
On February 6, 1998, the Company's Board of Directors adopted a new employee
stock option plan. This plan provides for the granting of options to both
employees and non-employees. The Company issued options to purchase 500,000
shares of common stock at $2.50 per share of such amount, 205,000 options were
issued to officers. Such options were fully vested upon issuance, but are not
exercisable until February 1999, and expire on February 6, 2003. The Company has
recorded the aggregate difference between the fair market value of the Company's
common stock on the issuance date and the $2.50 exercise price of $828,151 as
compensation cost in 1998.
During 1996, deferred compensation of $128,250 was recorded as a result of
the issuance of stock options being granted with exercise prices less than the
current market price, and is being amortized on the straight-line basis over the
vesting period of the stock options. Deferred compensation charged to operations
from the above transaction as well as a transaction occurring in 1995 was
$102,263 in 1996, $167,965 in 1997, $63,561 in 1998 and $11,391 for the three
months ended March 31, 1999.
During 1997, the Company issued a stock option to the non-employee director
under the 1995 Plan to purchase 5,000 shares of common stock at an exercise
price of $2.75 per share, exercisable for a period of ten years. Aggregate fair
value was $9,083, of which $1,811 was charged to operations in 1997, and the
remaining $7,272 was charged to operations in 1998.
During 1997, the Company issued stock options to certain consultants under
the 1995 Plans to purchase an aggregate of 3,773 shares of common stock at
exercise prices ranging from $3.00 to $3.88 and exercisable for a period of ten
years. Aggregate fair value was $10,151, all of which was charged to operations
in 1997.
During the quarter ended March 31, 1999, deferred compensation of $55,650
was recorded as a result of the issuance of stock options being granted in
exchange for future services. Deferred compensation charged to operations for
the quarter ended March 31, 1999 was $657,545.
During 1998, the Company granted various stock options, as follows:
(1) On May 1, 1998, the Company issued a stock option to its newly-appointed
Executive Vice President and Chief Financial Officer under the 1995 Stock
Option Plan to purchase 75,000 shares of common stock at an exercise
price of $2.50 per share. The stock option vests in four equal annual
installments commencing one year after the grant date, and is exercisable
for a period of ten years. The Company has recorded a charge to deferred
compensation of
F-28
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
$323,438 to reflect the aggregate difference between the fair market
value of the Company's common stock on the grant date of $6.81 per share
and the exercise price of $2.50 per share, and is charging this amount to
operations over the four year period beginning May 1, 1998. On May 1,
1998, the Company also issued a stock option to its newly-appointed
Executive Vice President and Chief Financial Officer under the 1998 Stock
Option Plan to purchase 5,000 shares of common stock at an exercise price
of $2.50 per share. The stock option vested immediately and is
exercisable for a period of five years. The aggregate difference between
the fair market value of the Company's common stock on the grant date of
$6.81 per share and the exercise price of $2.50 per share was $21,550,
and was charged to operations.
(2) Stock options were granted to employees to purchase 13,000 shares of
common stock at $5.50 per share, the fair value on the date of grant.
These options vest over four years and are exercisable for a period of
ten years.
(3) Stock options were granted to non-employees to purchase 224,000 shares
of common stock (165,000 to directors), 204,000 shares at $2.50 per
share, and 20,000 shares averaging $5.46 per share, the fair value at the
date of grant. The director options generally vest over one year and the
other options generally vest over one to two years. The fair value of
these stock options of $1,148,860 ($888,150 allocated to the director
options) is being charged to operations over the respective vesting
periods.
(4) During July 1998, the Company issued a stock option to the Company's
legal counsel, who acts as Secretary of the Company, to purchase 40,000
shares of common stock at an exercise price of $2.50 per share. The stock
option vests monthly over the two year period beginning July 1998, and is
exercisable for a period of ten years. The fair value of the stock option
of $179,600 is being charged to operations over the two year period
beginning July 1998. During December 1998, the Company also issued a
stock option to its legal counsel to purchase 100 shares of common stock
at an exercise price of $2.50 per share. The stock option vested
immediately and is exercisable for a period of five years. The fair value
of the stock option of $508 was charged to operations.
(5) During December 1998, the Company issued a stock option to each
executive officer of the Company, consisting of six persons, to purchase
100 shares of common stock at an exercise price of $2.50 per share. The
stock options vested immediately and are exercisable for a period of five
years. The aggregate difference between the fair market value of the
Company's common stock on the grant date of $6.13 per share and exercise
price of $2.50 per share was $2,178, and was charged to operations.
During the quarter ended March 31, 1999, the Company granted various stock
options, as follows:
(1) The Company issued a stock option to its Executive Vice President and
Chief Financial Officer under the 1998 Stock Option Plan to purchase
50,000 shares of common stock at an
F-29
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
exercise price of $10.50 per share, the fair market price at the date of
grant. The stock option vests in four equal annual installments
commencing one year after the grant date, and is exercisable for a period
of ten years.
(2) The Company issued a stock option to its Executive Vice President and
Chief Operating Officer under the 1998 Stock Option Plan to purchase
100,000 shares of common stock at an exercise price of $10.50 per share,
the fair market price at the date of grant. The stock option vests in
four equal annual installments commencing one year after the grant date,
and is exercisable for a period of ten years.
(3) Stock options were granted to employees to purchase 8,200 shares of
common stock at an average price of $10.50 per share, which was the fair
value on the date of grant. These options vest over four years and are
exercisable for a period of five years.
(4) Stock options were granted to a consultant to purchase 5,000 shares of
common stock at the fair value on the date of grant. These options vest
50% after the first year of service and the remainder vest upon achieving
certain milestones. The options are exercisable for a period of five
years.
F-30
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Information with respect to activity under the Plans is summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
STOCK EXERCISE
OPTIONS PRICE
---------- -----------
<S> <C> <C>
Options granted........................................................ 755,000 $ 2.50
Options terminated..................................................... (111,500) $ 2.50
----------
Balance, January 1, 1996............................................... 643,500 $ 2.50
Options granted........................................................ 469,914 $ 2.60
Options terminated..................................................... (87,050) $ 2.50
----------
Balance, December 31, 1996............................................. 1,026,364 $ 2.55
Options granted........................................................ 246,735 $ 3.06
Options terminated..................................................... (151,666) $ 2.70
----------
Balance, December 31, 1997............................................. 1,121,433 $ 2.64
Options granted........................................................ 837,469 $ 2.65
Options terminated..................................................... (44,690) $ 2.93
----------
Balance December 31, 1998.............................................. 1,914,212 $ 2.64
Options granted........................................................ 163,200 $ 10.82
Options exercised...................................................... (113,750) $ 2.50
Options terminated..................................................... (7,066) $ 3.03
---------- -----------
Balance March 31, 1999................................................. 1,956,596 $ 3.33
---------- -----------
---------- -----------
Options exercisable (vested) at December 31, 1998...................... 1,408,154 $ 2.60
---------- -----------
---------- -----------
Options exercisable (vested) at March 31, 1999......................... 1,429,648 $ 2.61
---------- -----------
---------- -----------
</TABLE>
F-31
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Additional information about outstanding options to purchase the Company's
common stock at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING ---------------------------
NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
RANGE OF EXERCISE PRICES OF SHARES LIFE (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
- ------------------------- ---------- ----------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$2.50.................... 1,622,186 6.54 2.50 1,240,505 2.50
$2.51-$2.99.............. 30,500 8.25 2.75 11,500 2.75
$3.00.................... 179,706 8.30 3.00 112,429 3.00
$3.01-$5.50.............. 81,820 6.97 4.44 43,720 4.51
---------- --- ----- ---------- -----
Total.................... 1,914,212 6.75 $ 2.64 1,408,154 $ 2.60
---------- --- ----- ---------- -----
---------- --- ----- ---------- -----
</TABLE>
The Company accounts for stock options issued to officers and employees
under Accounting Principles Board Opinion No. 25, under which no compensation
cost is recognized. Options granted to outside directors are accounted for in
accordance with Statement of Financial Accounting Standards No. 123. If
compensation expense for stock options issued to officers and employees had been
determined based upon the fair value at the grant date consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, the net loss and basic loss per share would have been as shown below. The
fair value of stock options granted under the Company's Plans was estimated on
the date of grant using the Black-Scholes option pricing model using the
following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life in years.......................................... 5 5 5
Risk free interest rate......................................... 5.7% 6.75% 6.75%
Dividend yield.................................................. 0% 0% 0%
Expected volatility............................................. 100% 83.4% 83.4%
</TABLE>
F-32
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The weighted average fair value at the date of grant for stock options and
warrants granted during 1996, 1997 and 1998 was $2.61 per option in 1996, $2.12
per option and $2.31 per warrant in 1997, and $3.88 per option and $2.84 per
warrant in 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net loss
As reported................................. $ (3,864,734) $ (19,416,838) $ (13,861,547)
Pro forma................................... $ (4,138,734) $ (20,015,044) $ (15,389,025)
Net loss per share
As reported................................. $ (0.67) $ (3.06) $ (1.32)
Pro forma................................... $ (0.72) $ (3.15) $ (1.46)
</TABLE>
NOTE 7--CAPITAL AND OPERATING LEASES
During the year ended December 31, 1996, the Company acquired $267,180 of
equipment under capital leases. During the year ended December 31, 1997, the
Company financed $150,261 of equipment through a capital lease transaction. The
Company's capitalized lease obligations of $283,695 at December 31, 1997
(excluding the interest portion of $45,556) has been classified as a current
liability in the accompanying financial statements.
Effective March 31, 1998, the Company restructured a capital lease
obligation aggregating $170,516 into a new capital lease bearing interest at
approximately 14% per annum. In conjunction with this transaction, the Company
increased the outstanding lease obligation by $80,000 to reflect the acquisition
of office and computer equipment from the lessor. The Company agreed to pay the
lessor eighteen monthly payments of $15,500 commencing July 1, 1998 under the
restructured lease agreement. The Company also issued 20,000 shares of common
stock to the lessor with an approximate fair market value of $79,000. The
Company recorded deferred financing costs of $54,941 as a result of the issuance
of the 20,000 shares of common stock to the lessor, which are being amortized to
operations through December 31, 1999.
Effective September 1, 1998, the Company restructured a capital lease
obligation aggregating $120,286 into a new capital lease bearing interest at
approximately 7% per annum. The Company
F-33
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 7--CAPITAL AND OPERATING LEASES (CONTINUED)
agreed to pay the lessor $21,000, and thirty monthly payments of $4,495
commencing September 15, 1998 under the restructured lease agreement.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 239,940
2000.............................................................................. 53,940
2001.............................................................................. 8,990
----------
Total payments.................................................................... 302,870
Less: amount representing interest................................................ 22,419
----------
Present value of minimum payments................................................. $ 280,451
----------
----------
Current portion................................................................... $ 220,317
Long-term portion................................................................. 60,134
----------
$ 280,451
----------
----------
</TABLE>
The Company leases its executive and operating offices under an operating
lease which expires on October 31, 1999. Rent expense under this lease was
$89,928, $106,269, $228,578 for the years ended December 31, 1996, 1997 and
1998, respectively. Rent expense under this lease was $37,446 and $59,267 for
the three months ended March 31, 1998 and 1999, respectively. Under this
non-cancellable lease, the Company is committed to future minimum payments of
$190,370 through October 31, 1999.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment agreement with Robert M. Fell,
which expires on June 30, 2001. This agreement calls for Mr. Fell to devote
approximately 70% of his business time to the affairs of the Company. This
agreement was amended subsequent December 31, 1998. The new employment agreement
provides for compensation of $225,000 per annum. Additional details are
described at Note 6c.
The Company also entered into new employment agreements with David M.
Marshall and Russell M. Fine. Both employment agreements provide for terms of
five years and compensation of $150,000 per annum, subject to cost of living
increases.
Subsequent to December 31, 1998, the Company renewed employment agreements
with Ronald W. Luniewski and Phillip C. Hermann. Both employment agreements
expire on April 30, 2000 and provide for compensation of $150,000 per annum.
The Company entered into license agreements with service providers which
require the payment of certain license fees based on usage levels and product
sales. The Company is required to make minimum payments of $247,590 in 1999,
$60,000 in 2000, $60,000 in 2001, and $50,000 in 2002.
F-34
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time, the Company is involved in litigation arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 9--INCOME TAXES
The Company has recorded a provision for current minimum state income taxes
in the accompanying financial statements. At December 31, 1998, the Company has
available federal and state net operating loss carryforwards of approximately
$16,896,000 and $16,659,000, respectively, for income tax purposes, which expire
in varying amounts through 2018 for federal and 2005 for state purposes. At
March 31, 1999, the Company has available federal and state net operating loss
carryforwards of approximately $18,386,000 and $17,404,000, respectively, for
income tax purposes, which expire in varying amounts through 2019 for federal
and 2005 for state purposes.
The net operating loss carryforward generated a deferred tax asset of
approximately $7,200,000 and $7,790,000 as of December 31, 1998 and March 31,
1999, respectively. The deferred tax asset has not been recognized since
management is unable to determine whether it is more likely than not that it
will be realized. Accordingly, a 100% valuation allowance has been provided.
NOTE 10--RELATED PARTY TRANSACTIONS
The non-employee member of the Board of Directors was paid a consulting fee
of $2,400 per month from January through June 1998.
Additional related party transactions are described at Notes 5 and 6.
NOTE 11--SUBSEQUENT EVENTS
On April 5, 1999, the Company issued $45,500,000 principal amount of 11%
Senior Convertible Discount Notes for cash proceeds of $36,738,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001. The Company incurred approximately $1,610,000 of costs related to this
offering and issued 50,000 warrants exercisable at $10.00 per share as a
finder's fee. These warrants had an aggregate fair value of $352,000. The Notes
begin accruing interest on April 5, 2001 at 11% per year, payable semi-annually.
Principal and unpaid interest are due and payable on April 5, 2004. The Notes
plus accrued, unpaid interest are convertible at any time at the rate of $10 per
common share, subject to reset provisions as defined in the Notes. Based on a
valuation report prepared by an investment and merchant banking firm dated April
28, 1999, the Company has determined that the Notes conversion price at $10.00
per share was at fair market value. Accordingly, the Company will recognize a
charge to operations of $352,000 over the five year maturity period. The
conversion price resets one time at the earlier of (1) a placement, after April
5, 1999, of common stock and any securities convertible into common stock which
raises at least $15 million gross proceeds to the
F-35
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 11--SUBSEQUENT EVENTS (CONTINUED)
Company or (2) April 5, 2000. In the event that a placement of common stock or
convertible securities occurs first, the conversion price will be reset to the
lesser of $10 per share or the lowest price per share at which the Company sells
common stock after the date of the placement of common stock or convertible
securities (excluding options, warrants and other convertible securities
existing prior to April 5, 1999). In the event that the reset occurs on April 5,
2000, the conversion price will be reset to the lower of $10 per share or the
average daily closing price for the ten-day period ending on April 5, 2000, but
in no event less than $5 per share. The notes also contain customary financial
covenants and restrictions limiting the ability of the Company to engage in
certain financings, other transactions and dividend distributions.
On April 9, 1999, the Company filed a registration statement with the
Securities and Exchange Commission to permit the Company to sell 2,700,000
shares of its common stock to the public and to permit certain warrant holders
to exercise 675,000 of their warrants and sell the underlying common stock to
the public.
In May 1999, Youbet.com's Compensation Committee recommended to the Board of
Directors the payment of certain performance-based bonuses to Fell & Company,
Inc., David Marshall, Inc., and Mr. Fine. Fell & Company, Inc. would be paid an
aggregate bonus equal to the amounts payable to Youbet.com by the Robert M. Fell
Living Trust (the "Fell Trust") in connection with its purchase in 1998 of
Series A Convertible Preferred Stock and stock purchase warrants. The amount of
such indebtedness is $560,000, plus accrued interest. 50% of such bonus would be
credited upon approval of the Board of Directors in recognition of the
completion of the placement of 11% Senior Convertible Discount Notes, 25% would
be credited upon the completion of this offering, 12 1/2% would be credited upon
Youbet.com achieving 15,000 subscribers and 12 1/2% would be credited upon
Youbet.com achieving 25,000 subscribers. Any bonuses paid under the proposal to
Fell & Company, Inc. would be applied to reduce amounts owed to Youbet.com by
the Fell Trust. David Marshall, Inc. and Mr Fine would each be granted a bonus
of $300,000, payable as follows: 10% upon approval of the Board of Directors in
recognition of the completion of the placement of the 11% Senior Convertible
Discount Notes; 40% upon completion of this offering; 25% upon Youbet.com
achieving 15,000 subscribers and 25% upon Youbet.com achieving 25,000
subscribers. The Board of Directors has not yet acted on these proposals.
UNAUDITED
Youbet.com has been advised that on June 4, 1999, a complaint was filed
against the Company. In the complaint Mr. Von Opel, a warrant holder, alleges
that the Company breached its obligation to register the shares of common stock
underlying 400,000 warrants issued by the Company to an affiliate of Mr. Von
Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. The Company intends to defend itself vigorously in the action.
Among other things, Mr. Von Opel executed a letter on February 24, 1998 which
the Company contends effected a waiver of such registration rights. As the
F-36
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
AND THREE MONTHS ENDED MARCH 31, 1999
INFORMATION WITH RESPECT TO THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED.
NOTE 11--SUBSEQUENT EVENTS (CONTINUED)
litigation is in an initial stage, the Company cannot predict its outcome,
although if the claim is determined adversely to Youbet.com, it could have a
material adverse effect on the Company.
In addition, holders of 37,667 warrants have demanded that the Company
register the shares of common stock underlying such warrants. The Company,
believes that such holders have registration rights only with respect to a
portion of such warrants. While the Company anticipates having discussions with
such holders seeking to resolve such claims, such discussions may not result in
a successful resolution of these issues. It is possible that these claims, as
well as the potential claims of other warrantholders who did not accept the
Company's March 1999 proposal, may, if determined adversely to Youbet.com, have
a material adverse effect on the Company.
The Company may from time to time become a party to other legal proceedings
arising in the ordinary course of business. The Company is not currently subject
to any additional material legal proceedings. However, there can be no assurance
that the Company will not be a party to any additional legal proceedings at some
future date.
On June 9, 1999, the Company announced that it had entered into a letter of
intent with Station Casinos, Inc., to create a joint venture which will offer
in-home interactive and sports wagering to Nevada residents. The joint venture
will be owned on a 50/50 basis by the Company and Station Casinos. The Company
will adapt its proprietary software and technology and license it on a non-
exclusive basis to the joint venture. Station Casinos will fund a portion of the
Company's software development cost and contribute to funding the joint
venture's advertising and other costs. The joint venture is subject to execution
of definitive agreements, and its service will be offered only after obtaining
all required regulatory approvals, including the approval of the Nevada gaming
authorities.
The Company also agreed to grant Station Casinos a 5-year warrant to
purchase 100,000 shares of the Company's common stock at an exercise price of
$19.50 per share. Additionally, Station Casinos has agreed to purchase shares in
the Company's offering at an aggregate cost of $2,000,000.
F-37
<PAGE>
APPENDIX 1
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
OWNERSHIP
OF COMMON STOCK OWNERSHIP
PRIOR TO THE OF COMMON STOCK
OFFERING(1) NUMBER AFTER THE OFFERING(1)
----------------------- OF SHARES ---------------------------
NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
NAME OF SELLING STOCKHOLDER OF SHARES OWNERSHIP HEREBY(2)(3) OF SHARES OF OWNERSHIP
- ------------------------------------------------- ---------- ----------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Ted Abele........................................ 7,500 * 429 7,071 *
James Acheson.................................... 93,200 * 1,714 91,486 *
Christopher Bauer................................ 3,533 * 686 2,847 *
Blairwood Financial Advisors..................... 10,062 * 4,338 5,724 *
Joe Bodgan....................................... 22,530 * 2,896 19,634 *
Matt Bright...................................... 5,000 * 857 4,143 *
Crowell Weedon FBO Capen 40,334 * 21,712 18,622 *
Phillip Centanni................................. 2,500 * 1,071 1,429 *
John J. Demer.................................... 29,000 * 12,855 16,145 *
Nancy Driski..................................... 10,000 * 857 9,143 *
J. Paul Consulting............................... 75,000 * 21,426 53,574 *
J.K.S.B.M. Family Ltd., Parthership.............. 8,000 * 4,285 3,715 *
Fred Kellerman................................... 5,000 * 4,285 715 *
Marshall Gift Trust.............................. 264,000 1.4 42,851 221,149 1.2
Sid Marshall..................................... 1,158,739 6.1 148,836 1,009,903 5.3
Owen & Associates IBG, LLC....................... 52,150 * 7,285 44,865 *
Owen & Associates Inc. Profit Sharing Plan....... 8,000 * 1,286 6,714 *
Owen Enterprises, LLC............................ 55,200 * 9,427 45,773 *
James W. Toot.................................... 96,000 * 16,283 79,717 *
Winsford Corp.................................... 161,000 * 15,855 145,145 *
Arnold Living Trust.............................. 122,500 * 12,112 110,388 *
Bay Holdings..................................... 37,500 * 32,138 5,362 *
Barbara Fry Birt Trust........................... 15,000 * 1,286 13,714 *
John Keith Bright................................ 15,000 * 4,285 10,715 *
Henry Dickenson.................................. 5,000 * 686 4,314 *
Tim Eastman...................................... 7,707 * 825 6,882 *
Fahnestock & Co., Inc............................ 10,000 * 8,570 1,430 *
First Portland Corp.............................. 30,000 * 8,570 21,430 *
Hersma Trust..................................... 15,000 * 429 14,571 *
Jeffries Technologies, Inc....................... 10,000 * 8,570 1,430 *
Andrew J. Kessler................................ 12,000 * 10,284 1,716 *
Roy Kim.......................................... 20,667 * 15,141 5,526 *
Stan Kramer...................................... 2,500 * 429 2,071 *
Tim Longeway..................................... 5,000 * 4,285 715 *
Jose Lopez....................................... 352 * 151 201 *
Lawrence Lucas................................... 124,505 * 21,426 103,079 *
Dianne M. Lyles.................................. 15,000 * 1,286 13,714 *
Steve Maniaci.................................... 18,134 * 3,108 15,026 *
Elaine Matthews.................................. 1,608 * 1,378 230 *
Chris McCarron................................... 15,000 * 4,285 10,715 *
Mark McCutcheon.................................. 2,768 * 2,372 396 *
George Moudry.................................... 7,877 * 3,375 4,502 *
Robert Muh....................................... 12,000 * 10,284 1,716 *
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
OWNERSHIP
OF COMMON STOCK OWNERSHIP
PRIOR TO THE OF COMMON STOCK
OFFERING(1) NUMBER AFTER THE OFFERING(1)
----------------------- OF SHARES ---------------------------
NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
NAME OF SELLING STOCKHOLDER OF SHARES OWNERSHIP HEREBY(2)(3) OF SHARES OF OWNERSHIP
- ------------------------------------------------- ---------- ----------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Leon Myers....................................... 5,000 * 4,285 715 *
Pacesesetter Travel, Ltd......................... 20,000 * 3,428 16,572 *
Peterson & Sons Holding Co....................... 8,000 * 857 7,143 *
Norman L. Peterson............................... 10,000 * 857 9,143 *
Gordon M. Reisinger.............................. 34,700 * 14,569 20,131 *
Gregg Reisinger.................................. 10,000 * 2,143 7,857 *
Todd Reisinger................................... 4,900 * 2,143 2,757 *
Brett Rhodes..................................... 2,671 * 1,145 1,526 *
Andrew Kent Robertson............................ 250,823 1.3 34,308 216,515 1.1
Len H. Rothstein................................. 2,032 * 456 1,576 *
SFM Marketing.................................... 75,000 * 12,855 62,145 *
Monique Smith.................................... 440 * 377 63 *
Jane Snowden..................................... 9,000 * 514 8,486 *
John P. Stacy.................................... 2,500 * 429 2,071 *
Sutter Securities................................ 8,000 * 6,856 1,144 *
Cornell & Ann Timney............................. 10,000 * 4,285 5,715 *
Josh Touber...................................... 28,261 * 8,570 19,691 *
Steve & Charlene Ustin........................... 141,000 * 9,427 131,573 *
US Sachem........................................ 72,503 * 39,852 32,651 *
Donald W. White Money
Purchase Plan.................................. 5,000 * 1,714 3,286 *
Joseph Yaghosbian................................ 60,000 * 51,421 8,579 *
---------- ----- ------------ ---------- -----
Total.......................................... 3,371,696 * 675,000 2,696,696 *
---------- ----- ------------ ---------- -----
---------- ----- ------------ ---------- -----
</TABLE>
- ---------
* less than one percent
(1) Includes shares which may be acquired on the exercise of warrants.
(2) Youbet.com expects that the number of shares of common stock offered by the
selling stockholders will be 675,000. In the event that fewer shares are
offered by the selling stockholders, Youbet.com will increase the number of
shares of common stock offered by Youbet.com so that the total number of
shares offered equals 3,486,500.
(3) The selling stockholders have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 506,250 shares of common stock to cover over-allotments. If
the over-allotment option is exercised, the selling stockholders listed
herein will each sell a pro rata amount of the shares of common stock to be
sold to the underwriters. In the event that fewer than 506,250 shares of
common stock are offered by the selling stockholders to cover
over-allotments, Youbet.com will offer additional shares of common stock so
that the total number of shares offered to cover over-allotments may equal
506,250.
A-2
<PAGE>
YOUBET.COM MISSION STATEMENT:
>Build the leading global brand for online live event
wagering. >Continue to be the leading edge interactive
company that facilitates live sports event wagering via the
computer.
<TABLE>
<S><C>
YOUBET.COM'S STRATEGY FOR THE FUTURE.
GLOBAL OPPORTUNITIES
[Picture of a globe with arrows Youbet.com's growth strategy:
leading to various continents - Expand the current (U.S.) horseracing business.
and regions] - Expand the domestic horseracing strategy to
the international market.
- Expand into other live sporting events in the
global marketplace.
HOW IT WORKS...
[Picture of Youbet.com's logo First, members install the free You Bet Network
with lines leading to software onto their computer. After opening a
Youbet.com's content providers secure account with Ladbroke, You Bet's wagering
and the customer] account partner, they log in to You Bet's private
closed loop network via their local access provider.
Within minutes members can handicap, watch and
wager on live horseracing. The You Bet Network
acts as a facilitator of information between the
customer and the track, tote, wagering account
partner and racing information suppliers.
Youbet.com's revenue is derived from:
- a percentage of handle
- subscriptions
- racing information products
</TABLE>
<PAGE>
YOU BET NETWORK PARTNER TRACKS
Delta Downs (LA)
Dover Downs (DE)
Evangeline Downs (LA)
Fair Grounds (LA)
Freehold (NJ)
Garden State Park (NJ)
Golden Gate Fields (CA)
Hawthorne Race Course (IL)
Hollywood Park (CA)
Laurel Park (MD)
Louisiana Downs (LA)
The Meadowlands (NJ)
The Meadows (PA)
Monmouth Park (NJ)
[Youbet.com's LOGO] Oaklawn Park (AR)
Philadelphia Park (PA)
Pimlico (MD)
Pompano Park Racing (FL)
Remington Park (OK)
Rockingham Park (NH)
Santa Anita Park (CA)
Sportsman's Park (IL)
Youbet.com, Inc. Suffolk Downs (MA)
1950 Sawtell Blvd. Ste 180 Tampa Bay Downs (FL)
Los Angeles, CA 90025 Woodbine (CAN)
www.youbet.com Yonkers (NY)
email: [email protected]
phone: 310.444.3300
fax: 310.444.3390
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission filing Fee................... $ 16,826
National Association of Securities Dealers, Inc. filing fee..... $ 6,298
Printing and engraving fees and expenses........................ $ 200,000
Legal fees and expenses......................................... $ 750,000
Accounting fees and expenses.................................... $ 175,000
Other........................................................... $ 50,000
---------
Total....................................................... $1,198,124
---------
---------
</TABLE>
The Company will bear all the foregoing expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides
that a corporation shall have the power, and in some cases is required, to
indemnify an agent, including an officer or director, who was or is a party or
is threatened to be made a party to any proceedings, against certain expenses,
judgments, fines, settlements and other amounts under certain circumstances.
Article of the Registrant's Bylaws requires indemnification of the
Registrant's officers and directors to the maximum extent permitted by the
Delaware General Corporation Law, and the Registrant maintains insurance
covering certain liabilities of the directors and officers of the Registrant and
its subsidiaries.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
2.1 Acquisition Agreement between PC Totes, Inc. and Embassy Acquisition, Inc.
dated as of December 6, 1995 (Incorporated herein by reference to
Youbet.com's Form 10-K for the year ended December 31, 1995.)
2.2 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation (Incorporated herein by reference to
Youbet.com's Form 10-K for the year ended December 31, 1995.)
3.2 By-Laws of Youbet.com (Incorporated herein by reference to Youbet.com's
Form 10-K for the year ended December 31, 1995.)
3.3 Certificate of Designation for Series A Convertible Preferred dated June
18, 1998 (Incorporated herein by reference to Youbet.com's Form 10-KSB
for the year ended December 31, 1998.)
*5.1 Opinion of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
10.1 1995 Stock Option Plan (Incorporated herein by reference to Youbet.com's
Form 10-K for the year ended December 31, 1996.)
10.2 1995 Stock Option Plan for Non-Employee Directors (Incorporated herein by
reference to Youbet.com's Form 10-K for the year ended December 31,
1996.)
10.3 Stock Purchase Agreement dated June 29, 1998 (Incorporated herein by
reference to Youbet.com's Form 8-K for the year ended June 29, 1998.)
10.4 Securities Purchase Agreement dated June 29, 1998 (Incorporated herein by
reference to Youbet.com's Form 8-K dated June 29, 1998.)
10.5 Stockholders Agreement dated June 29, 1998 (Incorporated herein by
reference to Youbet.com's Form 8-K dated June 29, 1998.)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.6 Registration Rights Agreement dated June 29, 1998 (Incorporated herein by
reference to Youbet.com's Form 8-K dated June 29, 1998.)
10.7 Warrant to Purchase Common Stock dated June 29, 1998 (Incorporated herein
by reference to Youbet.com's Form 8-K dated June 29, 1998.)
10.8 Employment Agreement between Youbet.com and David M. Marshall dated June
29, 1998 (Incorporated herein by reference to Youbet.com's Form 8-K
dated June 29, 1998.)
10.9 Employment Agreement between Youbet.com and Russell M. Fine dated June 29,
1998 (Incorporated herein by reference to Youbet.com's Form 8-K dated
June 29, 1998.)
10.10 1998 Stock Option Plan (Incorporated herein by reference to Youbet.com's
Form 10-KSB for the year ended December 31, 1998.)
10.11 Services Agreement between Youbet.com and David Marshall, Inc. dated
January 1, 1999 (Incorporated herein by reference to Youbet.com's Form
10-KSB for the year ended December 31, 1998.)
10.12 Services Agreement between Youbet.com and Fell & Company, Inc. dated June
29, 1998, amended and restated as of March 1, 1999 (Incorporated herein
by reference to Youbet.com's Form 10-KSB for the year ended December 31,
1998.)
10.13 Employment Agreement between Youbet.com and Ronald W. Luniewski dated May
1, 1998, superceded by an Employment Agreement dated March 1, 1999
(Incorporated herein by reference to Youbet.com's Form 10-KSB for the
year ended December 31, 1998.)
10.14 Employment Agreement between Youbet.com and Phillip C. Hermann dated May
1, 1998, superceded by an Employment Agreement dated March 1, 1999
(Incorporated herein by reference to Youbet.com's Form 10-KSB for the
year ended December 31, 1998.)
10.15 Telecommunications Facilitation System Agreement between Youbet.com and
Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc.
dated June 23, 1997 (Incorporated herein by reference to Youbet.com's
Form 10-KSB for the year ended December 31, 1998.)
**10.16 License Agreement between Youbet.com and Equibase Company dated March 25,
1996
**10.17 Marketing and Distribution Agreement between Youbet.com and Thoroughbred
Sports Network, Inc. dated September 26, 1997
**10.18 Agreement between Youbet.com and the United States Trotting Association
dated March 18, 1998
10.19 Agreement between Youbet.com and Netixs Communications dated March 3, 1999
(Incorporated herein by reference to Youbet.com's Form 10-KSB for the
year ended December 31, 1998.)
10.20 Form of Note Purchase Agreement dated April 5, 1999 relating to the 11%
Senior Convertible Discount Notes. (Incorporated herein by reference to
Youbet.com's Form 10-KSB for the year ended December 31, 1998)
10.21 Form of 11% Senior Convertible Discount Note. (Incorporated herein by
reference to Youbet.com's Form 10-KSB for the year ended December 31,
1998)
*23.1 Consent of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
(included in Exhibit 5.1)
23.2 Consent of BDO Seidman, LLP
23.3 Consent of Weinbaum & Yalamanchi
27 Financial Data Schedule
</TABLE>
- ---------
* To be filed by amendment.
** Portions of these documents containing confidential information have been
redacted in accordance with the rules of the Securities and Exchange
Commission.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned registrant undertakes to supplement the prospectus, after
the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriter during the
subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If
any public offering by the underwriters is to be made on terms different
from those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on June 11, 1999.
<TABLE>
<S> <C> <C>
YOUBET.COM, INC.
By: /s/ ROBERT M. FELL
-----------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
/s/ ROBERT M. FELL Directors and Chief
- ------------------------------ Executive Officer; June 11, 1999
Robert M. Fell Director
* /s/ DAVID M.
MARSHALL Vice Chairman of the Board
- ------------------------------ of Directors and June 11, 1999
David M. Marshall President
* /s/ RUSSELL M.
FINE Executive Vice President
- ------------------------------ Chief Technology Officer June 11, 1999
Russell M. Fine and Director
/s/ PHILLIP C. HERMANN Executive Vice President
- ------------------------------ and Chief Financial June 11, 1999
Phillip C. Hermann Officer
* /s/ CAESAR P.
KIMMEL
- ------------------------------ Director June 11, 1999
Caesar P. Kimmel
* /s/ ALAN W.
LANDSBURG
- ------------------------------ Director June 11, 1999
Alan W. Landsburg
* /s/ JESS
RIFKIND
- ------------------------------ Director June 11, 1999
Jess Rifkind
* /s/ WILLIAM H.
ROEDY
- ------------------------------ Director June 11, 1999
William H. Roedy
</TABLE>
<TABLE>
<S> <C> <C> <C>
* By /s/ PHILLIP C. HERMANN
----------------------------------------
Phillip C. Hermann
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
Exhibit 2.2
FORM OF UNDERWRITING AGREEMENT
_____ __, 1999
BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
As Representative of the several Underwriters
Ladies and Gentlemen:
INTRODUCTORY. Youbet.com, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of [___] shares of its Common
Stock, par value $0.001 per share (the "Common Shares"); and the stockholders
of the Company named in SCHEDULE B (collectively, the "Selling Stockholders")
severally propose to sell to the Underwriters an aggregate of [___] Common
Shares. The [___] Common Shares to be sold by the Company and the [___]
shares of Common Shares to be sold by the Selling Stockholders are
collectively called the "Firm Shares". [____] of the Firm Shares to be sold
by the Company are to be sold to Station Casinos, Inc. and are collectively
called the "Station Casinos Shares". In addition, the Selling Stockholders
have severally granted to the Underwriters an option to purchase up to an
additional [___] Common Shares (the "Option Shares"), as provided in Section 2,
each Selling Stockholder selling up to the amount set forth opposite such
Selling Stockholder's name in SCHEDULE B. The Firm Shares and, if and to the
extent such option is exercised, the Option Shares are collectively called
the "Shares". BancBoston Robertson Stephens Inc. has agreed to act as
representative of the several Underwriters (in such capacity, the
"Representative") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (File
No. 333-76029), which contains a form of prospectus to be used in connection
with the public offering and sale of the Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including all
documents incorporated or deemed to be incorporated by reference therein and
any information deemed to be a part thereof at the time of effectiveness
pursuant to Rule 430A or Rule 434 under the Securities Act or the Securities
Exchange Act of 1934 and the rules and regulations promulgated thereunder
(collectively, the "Exchange Act"), is called the "Registration Statement".
Any registration statement filed by the Company
<PAGE>
pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b)
Registration Statement", and from and after the date and time of filing of
the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in
the form first used by the Underwriters to confirm sales of the Shares, is
called the "Prospectus"; provided, however, if the Company has, with the
consent of the Representative, elected to rely upon Rule 434 under the
Securities Act, the term "Prospectus" shall mean the Company's prospectus
subject to completion (each, a "preliminary prospectus") dated [___] (such
preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed
by the Company with the Commission under Rules 434 and 424(b) under the
Securities Act and all references in this Agreement to the date of the
Prospectus shall mean the date of the Term Sheet. All references in this
Agreement to [(i)] the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"). All references in this Agreement to
financial statements and schedules and other information which is
"contained," "included" or "stated" in the Registration Statement or the
Prospectus (and all other references of like import) shall be deemed to mean
and include all such financial statements and schedules and other information
which is or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement or the
Prospectus shall be deemed to mean and include the filing of any document
under the Exchange Act which is or is deemed to be incorporated by reference
in the Registration Statement or the Prospectus, as the case may be.
The Company and each of the Selling Stockholders hereby confirm
their respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been
instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares.
Each of the Registration Statement, any
2
<PAGE>
Rule 462(b) Registration Statement and any post-effective amendment thereto,
at the time it became effective and at all subsequent times, complied and
will comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating to
any Underwriter or Selling Stockholder furnished to the Company in writing by
the Representative or the Selling Stockholder, respectively, expressly for
use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representative one complete conformed copy of the
Registration Statement and of each consent and certificate of experts filed
as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representative has reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE COMPANY. The Shares
to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE SELLING STOCKHOLDERS.
The Common Shares to be purchased by the Underwriters from the Selling
Stockholders, when issued, were validly issued, fully paid and nonassessable.
3
<PAGE>
(g) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. Except as
disclosed in the Prospectus, there are no persons with registration or other
similar rights to have any equity or debt securities registered for sale
under the Registration Statement or included in the offering contemplated by
this Agreement, other than the Selling Stockholders with respect to the
Shares included in the Registration Statement, except for such rights as have
been duly waived.
(h) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no
material adverse change, or any development that could reasonably be expected
to result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether or
not arising from transactions in the ordinary course of business, of the
Company (any such change or effect, where the context so requires, is called
a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company
has not incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid
or made by the Company or, except for dividends paid to the Company on any
class of capital stock or repurchase or redemption by the Company of any
class of capital stock.
(i) INDEPENDENT ACCOUNTANTS. BDO Seidman, LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) [and supporting schedules]
filed with the Commission as a part of the Registration Statement and
included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act and the Exchange Act.
(j) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial position
of the Company as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. [The supporting schedules
included in the Registration Statement present fairly the information
required to be stated therein.] Such financial statements [and supporting
schedules] have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be
included in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Selected Financial
Data", "Selected Financial Data" and "Capitalization" fairly present the
information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(k) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
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general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(l) SUBSIDIARIES OF THE COMPANY. The Company has no subsidiaries.
(m) INCORPORATION AND GOOD STANDING OF THE COMPANY. The Company has
been duly organized and is validly existing as a corporation, in good
standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the prospectus, and is duly qualified to do business
as a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the failure to
be so qualified would not result in a Material Adverse Change.
(n) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in
the Prospectus). The Common Shares (including the Shares) conform in all
material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding Common Shares have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
Common Shares were issued in violation of any preemptive rights, rights of
first refusal or other similar rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options, warrants,
preemptive rights, rights of first refusal or other rights to purchase, or
equity or debt securities convertible into or exchangeable or exercisable
for, any capital stock of the Company other than those accurately described
in the Prospectus. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(o) STOCK EXCHANGE LISTING. The Shares are registered pursuant to 12(g)
of the Securities Exchange Act of 1934 (the "Exchange Act") and have been
approved on the Nasdaq National Market effective concurrently with the
completion of the offering and sale of the Shares, and the Company has taken
no action designed to, or likely to have the effect of, terminating the
registration of the Common Shares under the Exchange Act or delisting the
Common Shares for trading on the Nasdaq National Market, nor has the Company
received any notification that the Commission or the National Association of
Securities Dealers, LLC (the "NASD") is contemplating terminating such
registration or listing.
(p) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares
by the Underwriters in the manner contemplated here and
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in the Prospectus, (ii) by the National Association of Securities Dealers, LLC
and (iii) by the federal and provincial laws of Canada.
(q) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AGREEMENTS. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company pursuant to,
(i) the charter or by-laws of the Company, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument to which the
Company is a party or bound or to which its property is subject or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable to the
Company of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the Company or
any of its properties.
(r) NO DEFAULTS OR VIOLATIONS. The Company is not in violation or
default of (i) any provision of its charter or by-laws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument
to which it is a party or bound or to which its property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator
or other authority having jurisdiction over the Company or any of its
properties, as applicable, except any such violation or default which would
not, singly or in the aggregate, result in a Material Adverse Change except
as otherwise disclosed in the Prospectus.
(s) NO ACTIONS, SUITS OR PROCEEDINGS. Except as disclosed in the
Prospectus, no action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or its property is pending or, to the best knowledge of the Company,
threatened that (i) could reasonably be expected to have a Material Adverse
Effect on the performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
result in a Material Adverse Effect.
(t) ALL NECESSARY PERMITS, ETC. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to conduct
its business, and the Company has not received any notice of proceedings
relating to the revocation or modification of, or non-compliance with, any
such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(u) TITLE TO PROPERTIES. The Company has good and marketable title to
all the properties and assets reflected as owned in the financial statements
referred to in Section 1(A) (i) above (or elsewhere in the Prospectus), in
each case free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such
property by the Company. The real property, improvements, equipment and
personal property held under lease by the Company are held under valid and
enforceable leases,
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with such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company.
(v) TAX LAW COMPLIANCE. The Company has filed all necessary federal,
state and foreign income and franchise tax returns or has properly requested
extensions thereof and has paid all taxes required to be paid by it and, if
due and payable, any related or similar assessment, fine or penalty levied
against it. The Company has made adequate charges, accruals and reserves in
the applicable financial statements referred to in Section 1(A) (i) above in
respect of all federal, state and foreign income and franchise taxes for all
periods as to which the tax liability of the Company has not been finally
determined. The Company is not aware of any tax deficiency that has been or
might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(w) INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses
adequate rights to use all patents, patent rights or licenses, inventions,
collaborative research agreements, trade secrets, know-how, trademarks,
service marks, trade names and copyrights which are necessary to conduct its
business as described in the Registration Statement and Prospectus and any
Incorporated Document, except for such rights, the non-possession of which
would not result in a Material Adverse Change; the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not result in a Material Adverse Change that is not
otherwise disclosed in the Prospectus; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has
no knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly
or in the aggregate, might result in a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, is the subject of an adverse decision, finding or ruling, might
have a Material Adverse Change. The Company does not in the conduct of its
business as now or proposed to be conducted as described in the Prospectus
infringe or conflict with any right or patent of any third party, or any
discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company, which such
infringement or conflict is reasonably likely to result in a Material Adverse
Change.
(x) YEAR 2000 PREPAREDNESS. There are no issues related to the Company's
preparedness for the Year 2000 that (i) are of a character required to be
described or referred to in the Registration Statement or Prospectus or any
Incorporated Document by the Securities Act or by the Exchange Act or the
rules and regulations of the Commission thereunder which have not been
accurately described in the Registration Statement or Prospectus or any
Incorporated Document or (ii) might reasonably be expected to result in any
Material Adverse Change or that might materially affect the Company's
properties, assets or rights. All internal computer systems and each
Constituent Component (as
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defined below) of those systems and all computer-related products and each
Constituent Component (as defined below) of those products of the Company
fully comply with Year 2000 Qualification Requirements. "Year 2000
Qualifications Requirements" means that the internal computer systems and
each Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below)
of those products of the Company (i) have been reviewed to confirm that they
store, process (including sorting and performing mathematical operations,
calculations and computations), input and output data containing date and
information correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designated to ensure date
and time entry recognition and calculations, and date data interface values
that reflect the century, (iii) accurately manage and manipulate data
involving dates and times, including single century formulas and multi-century
formulas, and will not cause an abnormal ending scenario within the
application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond
to two-digit year date input in a manner that resolves any ambiguities as to
the century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The
Company has inquired of material vendors as to their preparedness for the
Year 2000 and has disclosed in the Registration Statement or Prospectus any
issues that might reasonably be expected to result in any Material Adverse
Change.
(y) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or
any political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the
Company of the shares.
(z) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Shares will not be, an "investment company" or an
entity "controlled" by an "investment company" within the meaning of the
Investment Company Act and will conduct its business in a manner so that it
will not become subject to the Investment Company Act.
(aa) INSURANCE. The Company is insured by recognized, financially sound
and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for their businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and earthquakes, general
liability and Directors and Officers liability. The Company has no reason to
believe that it will not be able (i) to renew its existing insurance coverage
as and when such policies expire or (ii) to obtain comparable coverage from
similar institutions as may be necessary or appropriate to conduct its
business as now conducted and at a cost that would not result in a Material
Adverse Change. The Company has not been denied any insurance coverage which
it has sought or for which it has applied.
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(bb) LABOR MATTERS. To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subcontractors, original
equipment manufacturers, authorized dealers or international distributors
that might reasonably be expected to result in a Material Adverse Change.
(cc) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken
and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
(dd) LOCK-UP AGREEMENTS. Each officer and director of the company has
agreed to sign an agreement substantially in the form attached hereto as
EXHIBIT A (the "Director and Officer Lock-up Agreement"). Each Selling
Stockholder has agreed to sign an agreement substantially in the form
attached hereto as EXHIBIT B (the "Selling Stockholder Lock-up Agreement;"
together with the Director and Officer Lock-up Agreement, the "Lock-up
Agreements"). The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the
number and type of securities held by each securityholder. The Company has
provided to counsel for the Underwriters true, accurate and complete copies
of all of the Lock-up Agreements presently in effect or effected hereby.
Through the period commencing on the date hereof and expiring [ ____ ], the
Company hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent of
the Representative.
(ee) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any other person required
to be described in the Prospectus which have not been described as required.
(ff) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor to the best of the Company's knowledge, any employee or agent of the
Company, has made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of any law
or of the character required to be disclosed in the Prospectus.
(gg) ENVIRONMENTAL LAWS. (i) the Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, except where the
failure to comply would not result in a Material Adverse Change, (ii) the
Company has received no notice from any governmental authority or third party
of an asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus and any
Incorporated Document, (iii) the Company will not be required to make future
material capital expenditures to comply with Environmental Laws and (iv) no
property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended
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(42 U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated
site under applicable state or local law.
(hh) ERISA COMPLIANCE. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company or its
"ERISA Affiliates" (as defined below) are in compliance in all material
respects with ERISA. "ERISA Affiliate" means, with respect to the Company,
any member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the regulations
and published interpretations thereunder (the "Code") of which the Company is
a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company or any of its ERISA Affiliates. No
"employee benefit plan" established or maintained by the Company or any of
its ERISA Affiliates, if such "employee benefit plan" were terminated, would
have any "amount of unfounded benefit liabilities" (as defined under ERISA).
Neither the Company nor any of its ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(ii) EXCHANGE ACT COMPLIANCE. The documents incorporated or deemed to
be incorporated by reference in the Prospectus, at the time they were or
hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time the
Registration Statement and any amendments thereto become effective and at the
First Closing Date and the Second Closing Date, as the case may be, will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(jj) EXCHANGE ACT REPORTS FILED. The Company has filed all reports
required to be filed pursuant to the Securities Act and the Exchange Act.
(kk) CONDITIONS FOR USE OF FORM S-3. The Company has satisfied the
conditions for the use of Form S-3, as set forth in the general instructions
thereto, with respect to the Registration Statement.
(ll) GAMING LAW COMPLIANCE. The Company and its operations are in
compliance in all material respects with all applicable federal, state and
foreign gaming laws and regulations.
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(jj) FORM 8-A REGISTRATION STATEMENT. The Company has filed a
registration statement on Form 8-A (the "Form 8-A Registration Statement") as
required by the Securities Exchange Act of 1934 (the "Exchange Act") which has
become effective.
Any certificate signed by an officer of the Company and delivered to
the Representative or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents, warrants and covenants (as to each such Selling
Stockholder and no other Selling Stockholder) to each Underwriter as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the
(i) Custody Agreement signed by such Selling Stockholder and [___], as custodian
(the "Custodian"), relating to the deposit of the Shares to be sold by such
Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney
appointing certain individuals named therein as such Selling Stockholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein
relating to the transactions contemplated hereby and by the Prospectus (the
"Power of Attorney"), of such Selling Stockholder has been duly authorized,
executed and delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification thereunder may be limited by applicable law
and except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles. Each
Selling Stockholder agrees that the Shares to be sold by such Selling
Stockholder on deposit with the Custodian is subject to the interests of the
Underwriters, that the arrangements made for such custody are to that extent
irrevocable, and that the obligations of such Selling Stockholder hereunder
shall not be terminated, except as provided in this Agreement or in the Custody
Agreement, by any act of the Selling Stockholder, by operation of law, by death
or incapacity of such Selling Stockholder or by the occurrence of any other
event. If such Selling Stockholder should die or become incapacitated, or if
any other event should occur, before the delivery of the Shares to be sold by
such Selling Stockholder hereunder, the documents evidencing the Shares to be
sold by such Selling Stockholder then on deposit with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodian shall have received notice thereof.
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(c) TITLE TO SHARES TO BE SOLD. Such Selling Stockholder is the lawful
owner of the Shares to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Shares, as provided herein, such
Selling Stockholder will convey good and marketable title to such Shares, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(d) ALL AUTHORIZATIONS OBTAINED. Such Selling Stockholder has, and on
the First Closing Date and the Second Closing Date (as defined below) will have,
good and valid title to all of the Company Shares which may be sold by such
Selling Stockholder pursuant to this Agreement on such date and the legal right
and power, and all authorizations and approvals required by law and under its
charter or by-laws, or other organizational documents, if applicable, to enter
into this Agreement and its Custody Agreement and Power of Attorney, to sell,
transfer and deliver all of the Shares which may be sold by such Selling
Stockholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(e) NO FURTHER CONSENTS, AUTHORIZATION OR APPROVALS. No consent,
approval, authorization or order of any court or governmental agency or body is
required for the consummation by such Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the Securities
Act and such as may be required under the federal and provincial securities laws
of Canada or the blue sky laws or any jurisdiction in connection with the
purchase and distribution of the Shares by the Underwriters and such other
approvals as have been obtained.
(f) NON-CONTRAVENTION. Neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach or
violation of, or constitute a default under any law or the terms of any
indenture or other agreement or instrument to which such Selling Stockholder is
party or bound, any judgment, order or decree applicable to such Selling
Stockholder or any court or regulatory body, administrative agency, governmental
body or arbitrator having jurisdiction over such Selling Stockholder.
(g) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling Stockholder
does not have any registration or other similar rights to have any equity or
debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement, except for
such rights as are described in the Prospectus under "Shares Eligible for Future
Sale".
(h) NO PREEMPTIVE, CO-SALE OR OTHER RIGHTS. Such Selling Stockholder
does not have, or has waived prior to the date hereof, any preemptive right,
co-sale right or right of first refusal or other similar right to purchase
any of the Shares that are to be sold by the Company or any of the other
Selling Stockholders to the Underwriters pursuant to this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, right, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
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(i) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS. All
information furnished by or on behalf of such Selling Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on the
First Closing Date and the Second Closing Date (as defined below) will be, true,
correct, and complete in all material respects, and does not, and on the First
Closing Date and the Second Closing Date will not, contain any untrue statement
of a material fact or omit to state any material fact necessary to make such
information not misleading. Such Selling Stockholder confirms as accurate the
number of shares of Company Shares set forth opposite such Selling Stockholder's
name in the Prospectus under the caption "Selling Stockholders" and the Appendix
to the Prospectus (both prior to and after giving effect to the sale of the
Shares).
(j) NO PRICE STABILIZATION OR MANIPULATION. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(k) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the sale by the Selling Stockholders
of the Shares.
(l) DISTRIBUTION OF OFFERING MATERIALS BY THE SELLING STOCKHOLDERS. The
Selling Stockholders have not distributed and will not distribute, prior to the
later of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares by such Selling Stockholder other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(m) CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. Such
Selling Stockholder has no reason to believe that the representations and
warranties of the Company contained in Section 1(A) hereof are not true and
correct, is familiar with the Registration Statement and the Prospectus and has
no knowledge of any material fact, condition or information not disclosed in the
Registration Statement or the Prospectus which has had or may result in a
Material Adverse Change on the condition, financial or otherwise, or on the
earnings, business, operation or prospects, whether or not arising from
transactions in the ordinary course of business of the Company and is not
prompted to sell the Shares to be sold by such Selling Stockholder by any
information concerning the Company which is not set forth in the Registration
Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) THE FIRM SHARES. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of [___] Firm
Shares
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and (ii) the Selling Stockholders, severally and not jointly agree to sell to
the several Underwriters an aggregate of [___] Firm Shares, each Selling
Stockholder selling the number of Firm Shares set forth opposite such Selling
Stockholder's name on SCHEDULE B. On the basis of the representations,
warranties and agreements herein contained, and upon the terms but subject to
the conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Stockholders the
respective number of Firm Shares set forth opposite their names on SCHEDULE
A. The purchase price per Firm Share to be paid by the several Underwriters
to the Company and the Selling Stockholders shall be $[___] per share, except
that the purchase price per Station Casinos Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representative at 6:00 a.m. Los Angeles time, at the offices of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, 2121 Avenue of the Stars,
18th Floor, Los Angeles, California 90067-5010 (or at such other place as may
be agreed upon among the Representatives and the Company), (i) on the third
(3rd) full business day following the first day that Shares are traded, (ii) if
this Agreement is executed and delivered after 1:30 P.M., Los Angeles time, the
fourth (4th) full business day following the day that this Agreement is executed
and delivered or (iii) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representative and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representative may, in its sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representative.
(c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Selling
Stockholders, severally and not jointly, hereby grant an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of [___]
Option Shares from the Selling Stockholders at the purchase price per share to
be paid by the Underwriters for the Firm Shares. The option granted hereunder
is for use by the Underwriters solely in covering any over-allotments in
connection with the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time upon notice by the Representative
to the Selling Stockholders (with a copy to the Company), which notice may be
given at any time within 30 days from the date of this Agreement. The time and
date of delivery of the Option Shares, if subsequent to the First Closing Date,
is called the "Second Closing Date" and shall be determined by the
Representative and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Option Shares
are to be purchased, (i) each Underwriter agrees, severally and not jointly, to
purchase the number of Option Shares (subject to such adjustments to eliminate
fractional shares as the Representative may determine) that bears the same
proportion to the total number of Option Shares to be purchased as the number of
Firm Shares set forth on SCHEDULE A opposite the name of such Underwriter bears
to the total number of
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Firm Shares and (ii) each Selling Stockholder agrees, severally and not
jointly, to sell the number of Option Shares (subject to such adjustments to
eliminate fractional shares as the Representative may determine) that bears
the same proportion to the total number of Option Shares to be sold as the
number of Option Shares set forth in SCHEDULE B opposite the name of such
Selling Stockholder bears to the total number of Option Shares. The
Representative may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Selling Stockholders (with
a copy to the Company).
(d) PUBLIC OFFERING OF THE SHARES. The Representative hereby advises
the Company and the Selling Stockholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Shares as soon after this Agreement has been executed and the
Registration Statement has been declared effective as the Representative, in its
sole judgment, has determined is advisable and practicable.
(e) PAYMENT FOR THE SHARES. Payment for the Shares to be sold by the
Company shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Shares to be sold by the Selling
Stockholders shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Custodian.
It is understood that the Representative has been authorized, for
its own account and the accounts of the several Underwriters, to accept delivery
of and receipt for, and make payment of the purchase price for, the Firm Shares
and any Option Shares the Underwriters have agreed to purchase. BancBoston
Robertson Stephens Inc., individually and not as the Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Shares to
be purchased by any Underwriter whose funds shall not have been received by the
Representative by the First Closing Date or the Second Closing Date, as the case
may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable upon
the sale or delivery of the Shares to be sold by such Selling Stockholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder hereunder and to hold such amounts for the account of such Selling
Stockholder with the Custodian under the Custody Agreement.
(f) DELIVERY OF THE SHARES. The Company and the Selling Stockholders
shall deliver, or cause to be delivered a credit representing the Firm Shares to
an account or accounts at The Depository Trust Company as designated by the
Representative for the accounts of the Representative and the several
Underwriters at the First Closing Date, against the irrevocable release of a
wire transfer of immediately available funds for the amount of the purchase
price therefor. The Selling Stockholders shall also deliver, or
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cause to be delivered a credit representing the Option Shares to an account
or accounts at The Depository Trust Company as designated by the
Representative for the accounts of the Representative and the several
Underwriters, at the First Closing Date or the Second Closing Date, as the
case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
Time shall be of the essence, and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriters.
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representative shall request.
SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best
efforts to cause the Registration Statement to become effective or, if the
procedure in Rule 430A of the Securities Act is followed, to prepare and timely
file with the Commission under Rule 424(b) under the Securities Act a Prospectus
in a form approved by the Representative containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A of the Securities Act and (ii) not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representative shall not previously have been advised and furnished with a copy
or to which the Representative shall have reasonably objected in writing or
which is not in compliance with the Securities Act. If the Company elects to
rely on Rule 462(b) under the Securities Act, the Company shall file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(b) SECURITIES ACT COMPLIANCE. The Company will advise the
Representative promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt
of any comments from the Commission, (iii) of any request of the Commission
for amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use
of the Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) BLUE SKY COMPLIANCE. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representative may reasonably have designated in writing and
will make such applications, file such documents, and furnish such information
as may be reasonably
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required for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to
file such a consent. The Company will, from time to time, prepare and file
such statements, reports and other documents, as are or may be required to
continue such qualifications in effect for so long a period as the
Representative may reasonably request for distribution of the Shares.
(d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS. The Company will comply with the Securities Act and the Exchange
Act, and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Representative or counsel for the Underwriters, it becomes
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading, or, if it is necessary at any time
to amend or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission, and furnish at its own
expense to the Underwriters and to dealers, an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representative, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the Representative
may request.
(f) INSURANCE. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause the Representative to be
added as an additional insured to such policy in respect of the offering
contemplated hereby.
(g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
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(h) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) TRANSFER AGENT. The Company shall maintain, at its expense, a
registrar and transfer agent for the Company Shares.
(j) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending [___] that satisfies the provisions of Section 11(a) of the Securities
Act.
(k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company
will not, without the prior written consent of the Representative, for a period
of 180 days following the date of the Prospectus, offer, sell or contract to
sell, or otherwise dispose of or enter into any transaction which is designed
to, or could be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
during the period of 180 days from the date that the Registration Statement is
declared effective (the "Company Lock-Up Period") and the Company shall enter
stop transfer instructions with its transfer agent and registrar against the
transfer of any such Common Shares and (ii) the Company may issue Common Shares
issuable upon the conversion of securities or the exercise of warrants
outstanding at the date of the Prospectus and described in the Prospectus.
(m) FUTURE REPORTS TO THE REPRESENTATIVE. During the period of five
years hereafter the Company will furnish to the Representative (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
(n) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to
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Section 13, 14 or 15 of the Exchange Act in the manner and within the time
periods required by the Exchange Act.
(o) GAMING LAW COMPLIANCE. During the period beginning on the date
hereof and ending on the fifth anniversary of the date hereof, the Company will
use its best efforts to create, implement and maintain appropriate procedures to
insure that the Company operates at all times in compliance with all applicable
federal, state and foreign gaming laws, including, but not limited to, the
appointment by the board of directors of the Company of a senior executive
officer or officers of the Company who shall be charged with overseeing the
Company's legal compliance efforts in the United States and abroad. Such
officer or officers, where appropriate, will consult with the Company's counsel
and others regarding the Company's activities and will monitor proposed federal,
state and foreign proposed legislation that might affect the Company's business.
(p) AGREEMENT NOT TO REGISTER CERTAIN SECURITIES. As of the date of
this Agreement, there are outstanding warrants to purchase [______] shares of
Common Stock of the Company (the "Warrants"). The Company will not, without the
prior written consent of the Representative, take any action to register
pursuant to the Securities Act any of the shares of Common Stock of the Company
underlying the Warrants until the Second Registration Statement (which the
Company has agreed to file pursuant to certain letters dated March 11, 1999 sent
by the Company to holders of certain warrants) has been declared effective by
the Commission, other than pursuant to the offering contemplated by this
Agreement or pursuant to the Second Registration Statement.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. Such Selling
Stockholder will not make a disposition of Securities (as defined in Exhibit B
hereto) otherwise than pursuant to the Offering (as defined in Exhibit B hereto)
or to a person who agrees in writing to be bound by the terms of this
restriction, for a period commencing on the date of the Selling Stockholder
Lock-up Agreement and continuing to the time the Second Registration Statement
(as defined in Exhibit B hereto) is declared effective by the Securities and
Exchange Commission (the "Selling Stockholder Lock-Up Period"). Thereafter,
such Selling Stockholder agrees to limit dispositions of Securities during any
three month period to 25% of the shares of Common Stock (as defined in Exhibit B
hereto) underlying the Warrants (as defined in Exhibit B hereto) remaining after
the Offering, other than to persons who agree in writing to be bound by the
terms of this restriction. The foregoing restriction has been expressly agreed
to preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a disposition of Securities during the Selling Stockholder Lock-Up Period, even
if such Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer
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instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(b) DELIVERY OF FORMS W-8 AND W-9. To deliver to the Representative
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States Person).
(c) NOTIFICATION OF UNTRUE STATEMENTS, ETC. If, at any time prior to
the date on which the distribution of the Common Shares as contemplated herein
and in the Prospectus has been completed, as determined by the Representative,
such Selling Stockholder has knowledge of the occurrence of any event as a
result of which the Prospectus or the Registration Statement, in each case as
then amended or supplemented, would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, such Selling Stockholder will promptly notify the Company and the
Representative.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof
and as of the First Closing Date as though then made and, with respect to the
Option Shares, as of the Second Closing Date as though then made, to the timely
performance by the Company and the Selling Stockholders of their respective
covenants and other obligations hereunder, and to each of the following
additional conditions:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling Shareholder or any Underwriter, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or any
Incorporated Document or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel; and the National Association of
Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
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(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. Subsequent to
the execution and delivery of this Agreement and prior to the First Closing
Date, or the Second Closing Date, as the case may be,
(i) there shall not have been any Material Adverse Change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and
adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus; and
(ii) there shall not have occurred any downgrading, nor shall any notice
have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Act.
(d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, counsel for
the Company, substantially in the form of EXHIBIT C attached hereto, dated the
First Closing Date, or the Second Closing Date, addressed to the Underwriters
and with reproduced copies or signed counterparts thereof for each of the
Underwriters.
Counsel rendering the opinion contained in EXHIBIT C may rely as to
questions of law not involving the laws of the United States or the State of
California and Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) OPINION OF REGULATORY COUNSEL FOR THE COMPANY. You shall have
received on the First Closing Date, or the Second Closing Date, as the case may
be, an opinion of Hopkins & Sutter, regulatory counsel for the Company,
substantially in the form of EXHIBIT D attached hereto.
(f) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Gibson, Dunn & Crutcher LLP, substantially in the form of EXHIBIT E
hereto. The Company shall have furnished to such counsel such documents as they
may have requested for the purpose of enabling them to pass upon such matters.
(g) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
BDO Seidman,
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LLP addressed to the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the meaning
of the Act and the applicable published Rules and Regulations and based upon
the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the First Closing Date or the Second
Closing Date, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability
of more recent financial statements, data or information. The letter shall
not disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth
in the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus. The Original Letter from BDO Seidman, LLP
shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of
December 31, ____ and related consolidated statements of operations,
shareholders' equity, and cash flows for the twelve (12) months ended
[December 31], ____, and address other matters agreed upon by BDO Seidman,
LLP and you. In addition, you shall have received from BDO Seidman, LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements
as of December 31, ____, did not disclose any weaknesses in internal controls
that they considered to be material weaknesses.
(h) OFFICERS' CERTIFICATE. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or to their knowledge threatened under the Act;
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(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto and
the Incorporated Documents, when such Incorporated Documents became
effective or were filed with the Commission, contained all material
information required to be included therein by the Securities Act or the
Exchange Act and the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects conformed to
the requirements of the Securities Act or the Exchange Act and the
applicable rules and regulations of the Commission thereunder, as the case
may be, the Registration Statement and the Prospectus, and any amendments
or supplements thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and,
since the effective date of the Registration Statement, there has occurred
no event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company,
(b) any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (c) any obligation, direct
or contingent, that is material to the Company, incurred by the Company,
except obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the Company that
is material to the Company, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or (f) any loss
or damage (whether or not insured) to the property of the Company which has
been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(i) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The
Company shall have obtained and delivered to you an agreement (i) substantially
in the form of EXHIBIT A attached hereto from each officer and director of the
Company and (ii) substantially in the form of EXHIBIT B attached hereto from
each Selling Shareholder.
(j) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. You shall have
received on the First Closing Date and the Second Closing Date, as the case may
be, an opinion of counsel of each Selling Stockholder who proposes to sell
75,000 or more share of Common Stock pursuant to this Agreement substantially in
the form of EXHIBIT F attached hereto, dated as of such Closing Date, addressed
to the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters.
In rendering such opinion, such counsel may rely as to questions of law not
involving the laws of the United States or State of [SELLING STOCKHOLDER'S
STATE] and Delaware upon opinions of local counsel and as to questions of fact
upon representations or certificates of the Selling Stockholders or officers of
the Selling Stockholders (when the Selling Stockholder is not a natural person),
and of governmental officials, in which case their opinion is to state that they
are so relying and
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that they have no knowledge of any material misstatement or inaccuracy of any
material misstatement or inaccuracy in any such opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of
the Underwriters, and to Underwriters' Counsel.]
(k) SELLING STOCKHOLDERS' CERTIFICATE. On each of the First Closing
Date and the Second Closing Date, as the case may be, the Representative shall
received a written certificate executed by the Attorney-in-Fact of each Selling
Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(l) SELLING STOCKHOLDERS' DOCUMENTS. At least three business days prior
to the date hereof, the Company and the Selling Stockholders shall have
furnished for review by the Representative copies of the Powers of Attorney and
Custody Agreements executed by each of the Selling Stockholders and such further
information, certificates and documents as the Representative may reasonably
request.
(m) STOCK EXCHANGE LISTING. The Shares shall have been approved for
listing on the Nasdaq National Market.
(n) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(o) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representative and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the Representative
by notice to the Company and the Selling Stockholders at any time on or prior to
the First Closing Date and, with respect to the Option Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 5 (Payment of
Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7
(Indemnification and Contribution) and Section 10 (Representations and
Indemnities to Survive Delivery) shall at all times be effective and shall
survive such termination.
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SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representative,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
listing the Common Stock on the Nasdaq National Market, (ix) all costs and
expenses incident to the preparation and undertaking of "road show" preparations
to be made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 14 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel, including the actual costs and expenses of the "roadshow".
The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholders, (ii) fees and expenses
of the Custodian and (iii) expenses and taxes incident to the sale and delivery
of the Common Shares to be sold by such Selling Stockholders to the Underwriters
hereunder (which taxes, if any, may be deducted by the Custodian under the
provisions of Section 2 of this Agreement).
This Section 5 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Stockholders, on the other hand.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representative pursuant to Section 4, Section 7, Section 8,
Section 9 or Section 15, or if the sale to the Underwriters of the Shares on the
First Closing Date is
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not consummated because of any refusal, inability or failure on the part of
the Company or the Selling Stockholders to perform any agreement herein or to
comply with any provision hereof, the Company agrees to reimburse the
Representative and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by
the Representative and the Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including but not limited
to fees and disbursements of counsel, printing expenses, travel expenses,
postage, facsimile and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION OF THE UNDERWRITERS.
(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in
respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; or (iii) in whole or in part upon any
inaccuracy in the representations and warranties of the Company contained
herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any act or failure to
act or any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered
by clause (i), (ii), (iii) or (iv) above, provided that the Company shall not
be liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures
to act undertaken or omitted to be taken by such Underwriter through its bad
faith or willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by The Representative) as such expenses are
reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying
any such loss, claim,
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damage, liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by the Representative expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure
to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Shares, or any person
controlling such Undewriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or
on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage,
liability or expense. The indemnity agreement set forth in this Section 7(a)
shall be in addition to any liabilities that the Company may otherwise have.
(2) Each of the Selling Stockholders, jointly and severally,
agrees to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company, which consent shall not be
unreasonably withheld), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (i) and (ii) of this Section
7(a)(2) to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or such
Underwriter by such Other Selling Stockholder, directly or through such Other
Selling Stockholder's representatives, specifically for use in the preparation
thereof; or (iii) in whole or in part upon any inaccuracy in the representations
and warranties of the Other Selling Stockholders contained herein; or (iv) in
whole or in part upon any failure of the Other Selling Stockholders to perform
their respective obligations hereunder or under law; or (v) any act or failure
to act or any alleged act or failure to act by any Underwriter in connection
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with, or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered by
clause (i), (ii), (iii) or (iv) above, provided that the Other Selling
Stockholders shall not be liable under this clause (v) to the extent that a
court of competent jurisdiction shall have determined by a final judgment that
such loss, claim, damage, liability or action resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its bad faith or willful misconduct; and to reimburse each Underwriter
and each such controlling person for any and all expenses (including the fees
and disbursements of counsel chosen by The Representative) as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Other Selling Stockholders by the Representative
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liablity or expense purchased Shares, or any
person controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The indemnity
agreement set forth in this Section 7(a) shall be in addition to any liabilities
that the Other Selling Stockholders may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS AND THE
SELLING STOCKHOLDER. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Stockholders and
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer, Selling Stockholder or controlling person may become subject,
under the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue
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statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company and the Selling
Stockholders by the Representative expressly for use therein; and to
reimburse the Company, or any such director, officer, Selling Stockholder or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer, Selling Stockholder or controlling
person in connection with investigating, defending, settling, compromising or
paying ny such loss, claim, damage, liability, expense or action. The
indemnity agreement set forth in this Section 7(b) shall be in addition to
any liabilities that each Underwriter may otherwise have.
(c) INFORMATION PROVIDED BY THE UNDERWRITERS. Each of the Company and
each of the Selling Stockholders, hereby acknowledges that the only information
that the Underwriters have furnished to the Company and the Selling Stockholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth in the table in the first paragraph and the second paragraph under the
caption "Underwriting/Plan of Distribution" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso
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to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and
Section 8), representing the indemnified parties who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action, or (iii)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) CONTRIBUTION. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriter on the other shall be deemed to
be in
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the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders
bears to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 7(f)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7(f). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 7(f) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this Section 7(f) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(g) SURVIVAL. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(h) ACKNOWLEDGMENTS OF PARTIES. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said
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provisions. They further acknowledge that the provisions of this Section 7
fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required
by the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on SCHEDULE A bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representative with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representative or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date, this Agreement may be terminated by the Representative by notice given to
the Company and the Selling Stockholders if at any time (i) trading or quotation
in any of the Company's securities shall have been suspended or limited by the
Commission or by the Nasdaq Stock Market, or trading in securities generally on
either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the National
Association of Securities Dealers, LLC; (ii) a general banking moratorium shall
have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any change
in
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the United States or international financial markets, or any substantial
change or development involving a prospective change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representative is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representative there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representative may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this Section 9 shall be
without liability on the part of (a) the Company or the Selling Stockholders to
any Underwriter, except that the Company and the Selling Stockholders shall be
obligated to reimburse the expenses of the Representative and the Underwriters
pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company or the
Selling Stockholders, or (c) of any party hereto to any other party except that
the provisions of Section 7 shall at all times be effective and shall survive
such termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Shares sold
hereunder and any termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
YOUBET.COM, INC.
1950 Sawtelle Boulevard
Suite 180
Los Angeles, California 90025
Facsimile: [___]
Attention: Phillip Hermann
33
<PAGE>
If to the Selling Stockholders:
[Custodian]
[address]
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not
34
<PAGE>
located in the United States irrevocably appoints CT Corporation System,
which currently maintains a San Francisco office at 49 Stevenson Street, San
Francisco, California 94105, United States of America, as its agent to
receive service of process or other legal summons for purposes of any such
suit, action or proceeding that may be instituted in any state or federal
court in the City and County of San Francisco.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 15. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND
DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail to
sell and deliver to the Underwriters the Shares to be sold and delivered by such
Selling Stockholders at the First Closing Date pursuant to this Agreement, then
the Underwriters may at their option, by written notice from the Representative
to the Company and the Selling Stockholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 5, 6, and 7 hereof, the Company or the Selling Stockholders, or
(ii) purchase the shares which the Company and other Selling Stockholders have
agreed to sell and deliver in accordance with the terms hereof. If one or more
of the Selling Stockholders shall fail to sell and deliver to the Underwriters
the Shares to be sold and delivered by such Selling Stockholders pursuant to
this Agreement at the First Closing Date or the Second Closing Date, then the
Company and the non-defaulting Selling Stockholders shall have the right, within
24 hours thereafter, to make arrangements for one or more of the Company and the
non-defaulting Selling Stockholders to sell upon the terms set forth in this
Agreement all but not less than all, of such defaulted shares in such amounts as
may be agreed upon and to which the Underwriters do not reasonably object, if
however, such arrangements have not been completed within such 24-hour period
the Underwriters shall have the right, by written notice from the Representative
to the Company and the Selling Stockholders, to postpone the First Closing Date
or the Second Closing Date, as the case may be, but in no event for longer than
seven days in order that the required changes, if any, to the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected.
SECTION 16. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition
35
<PAGE>
herein (express or implied) may be waived unless waived in writing by each
party whom the condition is meant to benefit. The Section headings herein are
for the convenience of the parties only and shall not affect the construction
or interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
36
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Custodian the enclosed copies
hereof, whereupon this instrument, along with all counterparts hereof, shall
become a binding agreement in accordance with its terms.
Very truly yours,
YOUBET.COM, INC.
By:__________________________
[Name]
[Title]
SELLING SHAREHOLDERS
By:__________________________
Attorney-in-fact for the Selling Stockholders
named in SCHEDULE B hereto
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
ING BARING FURMAN SELZ LLC
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
37
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Underwriters Firm Common Shares
To be Purchased
<S> <C>
BANCBOSTON ROBERTSON STEPHENS INC.......... [___]
ING BARING FURMAN SELZ..................... [___]
[Additional Underwriters].................. [___]
Total................................. [___]
</TABLE>
S-A
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Maximum Number
Selling Stockholder Firm Shares of Option Shares to
to be Sold be Sold
<S> <C> <C>
Selling Stockholder #1
[address]
Attention: [___] ..................... [___] [___]
[Additional Selling Stockholders]
[address]
Attention: [___] ..................... [___] [___]
Total:........................... [___] [___]
----------- -------------------
----------- -------------------
</TABLE>
S-B
<PAGE>
EXHIBIT A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: Youbet.com, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives (the "Representative[s]") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market, and (iv) with the prior written consent of
BancBoston Robertson Stephens Inc., for a period commencing on the date hereof
and continuing to a date 180 days after the Registration Statement is declared
effective by the Securities and Exchange Commission (the "Lock-up Period"). The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a
A-1
<PAGE>
Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited
hedging or other transactions would include, without limitation, any short
sale (whether or not against the box) or any purchase, sale or grant of any
right (including, without limitation, any put or call option) with respect to
any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents
to the entry of stop transfer instructions with the Company's transfer agent
and registrar against the transfer of shares of Common Stock or Securities
held by the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
In the event the Offering is not completed by November 30, 1999, this
agreement shall terminate and be of no further force or effect.
Dated:
-------------------------------------
-------------------------------------------
Printed Name of Holder
By:
----------------------------------------
Signature
-------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
A-2
<PAGE>
EXHIBIT B
SELLING STOCKHOLDER LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: Youbet.com, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain warrants
(the "Warrants") exercisable for shares of Common Stock of the Company ("Common
Stock"). The Company proposes to carry out a public offering of Common Stock
(the "Offering") for which you will act as the representatives (the
"Representatives") of the underwriters. The undersigned will sell shares of
Common Stock received upon exercise of certain of the Warrants in such Offering,
if such Offering is consummated. The undersigned recognizes that the Offering
will be of benefit to the undersigned and will benefit the Company by, among
other things, raising additional capital for its operations. The undersigned
acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any Warrants or the shares of Common Stock underlying any such
Warrants (collectively, "Securities"), otherwise than pursuant to the Offering
or to a person who agrees in writing to be bound by the terms of this
restriction, for a period commencing on the date hereof and continuing to the
time the Second Registration Statement (as defined below) is declared effective
by the Securities and Exchange Commission (the "Lock-up Period"). Thereafter,
the undersigned agrees to limit Dispositions of Securities during any three
month period to 25% of the shares of Common Stock underlying the Warrants
remaining after the Offering, other than to persons who agree in writing to be
bound by the terms of this restriction. The foregoing restriction has been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up Period,
otherwise than as permitted above, even if such Securities would be disposed of
by someone other than such holder. Such prohibited hedging or
B-1
<PAGE>
other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that included, relates to or derives any significant part of
its value from Securities. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held
by the undersigned except in compliance with the foregoing restrictions.
In a letter to the undersigned from the Company dated March 11, 1999 and an
accompanying Acknowledgment and Release signed by the undersigned (together, the
"March Letter"), the Company agreed, in return for certain promises from the
undersigned, to file, by not later than the earlier of the first anniversary of
the closing of the Offering or June 30, 2000 (or earlier in certain
circumstances), a registration statement (the "Second Registration Statement")
which, on effectiveness, would enable certain holders of warrants of the Company
to exercise their remaining warrants and sell the shares of Common Stock
received on exercise of such warrants, subject to certain restrictions.
This agreement is not intended to supersede the March Letter.
Nothing contained herein is intended to limit the undersigned's ability to
sell Common Stock obtained by the undersigned other than by reason of the
exercise of Warrants, whether the Common Stock is now owned or hereafter
acquired.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
The Company shall be a third party beneficiary of this agreement.
B-2
<PAGE>
In the event the Offering is not completed by November 30, 1999, this
agreement shall terminate and be of no further force or effect.
Dated:
-------------------------------------
-------------------------------------------
Printed Name of Holder
By:
----------------------------------------
Signature
-------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
B-3
<PAGE>
EXHIBIT C
MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation;
(ii) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or
be in good standing would not have a Material Adverse Effect. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of
the dates stated therein, the issued and outstanding shares of capital
stock of the Company (including the Selling Stockholder Shares) have been
duly and validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, will not have been issued in violation of or subject
to any preemptive right, co-sale right, registration right, right of first
refusal or other similar right;
(v) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right.
(vi) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
you and the Selling Stockholder, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
C-1
<PAGE>
(viii) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and to such counsel's knowledge
no proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(ix) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(x) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations; and
each of the Incorporated Documents (other than the financial statements
(including supporting schedules) and the financial data derived therefrom
as to which such counsel need express no opinion) complied when filed
pursuant to the Exchange Act as to form in all material respects with the
requirements of the Act and the Rules and Regulations of the Exchange Act
and the applicable rules and regulations of the Commission thereunder;]
(xi) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply
with Delaware law;
(xii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiii) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are not described
or referred to therein or filed as required;
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, (i) result in a material breach
or violation of any of the terms and
C-2
<PAGE>
provisions of, or constitute a default under, any bond, debenture, note
or other evidence of indebtedness, or any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument known to such counsel to which the Company is a
party or by which its properties are bound where such a breach would
cause a Material Adverse Change, or (ii) any applicable statute, rule or
regulation known to such counsel or, (iii) any order, writ or decree of
any court, government or governmental agency or body having jurisdiction
over the Company or over any of its properties or operations;
(xv) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or over any of its properties or operations
is necessary in connection with the consummation by the Company of the
transactions herein contemplated, except (i) such as have been obtained
under the Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters, (iii) such as may be
required by the National Association of Securities Dealers, LLC and (iv)
such as may be required under the federal or provincial laws of Canada;
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company of a character
required to be disclosed in the Registration Statement or the Prospectus or
any Incorporated Document by the Securities Act or by the Exchange Act or
the applicable rules and regulations of the Commission thereunder, other
than those described therein;
(xvii) To such counsel's knowledge, the Company is not presently (a) in
material violation of its respective charter or bylaws, or (b) in material
breach of any applicable statute, rule or regulation known to such counsel
or, to such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or over
any of its properties or operations; and
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus and any Incorporated Document, no
holders of Company Shares or other securities of the Company have
registration rights with respect to securities of the Company and, except
as set forth in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to
registration of such shares of Company Shares or other securities, because
of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such
rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of and in
full satisfaction of such rights.
(xix) The Company is not and, after giving effect to the offering and the
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus,
C-3
<PAGE>
will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(xx) To such counsel's knowledge, the expected expiration of trademarks,
trade names, patent rights, copyrights, licenses, approvals, trade secrets
and other similar rights (collectively, "Intellectual Property Rights")
owned or possessed by the Company would not result in a Material Adverse
Effect. The Company has not received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Effect. To such counsel's knowledge, the
Company's discoveries, inventions, products, or processes referred to in
the Registration Statement or Prospectus do not infringe or conflict with
any right or patent which is the subject of a patent application known to
the Company.
(xxi) Each document filed pursuant to the Exchange Act (other than the
financial statements and supporting schedules included therein, as to which
no opinion need be rendered) and incorporated or deemed to be incorporated
by reference in the Prospectus complied when so filed as to form in all
material respects with the Exchange Act and such counsel has no reason to
believe that any of such documents, when they were so filed, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were filed,
not misleading.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto and any
Incorporated Document, when such documents became effective or were filed with
the Commission (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
First Closing Date or the Second Closing Date, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
and any Incorporated Document (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. Such counsel
C-4
<PAGE>
shall also state that the conditions for the use of Form S-3 set forth in the
General Instructions thereto have been satisfied.
C-5
<PAGE>
EXHIBIT D
MATTERS TO BE COVERED IN THE OPINION OF
REGULATORY COUNSEL FOR THE COMPANY
(i) The Company and its operations are not in violation of any
applicable laws and regulations relating to gaming, gambling, horse racing
and wagering ("Gaming Laws") of the United States and of the states from
which the Company accepts subscribers.
(ii) The Company has the governmental consents, approvals, and other
authorizations needed for its operations not to be in violation of the
Gaming Laws of the United States and of the states from which the Company
accepts subscribers.
(iii) All statements in the Registration Statement describing or
summarizing Gaming Law, the Company's compliance therewith and related
matters are complete and correct in all material respects. With regard to
the foregoing, at the time the Registration Statement became effective and
at all times subsequent thereto up to and on the First Closing Date or
Second Closing Date, as the case may be, neither the Registration Statement
nor any amendment or supplement thereto nor any Incorporated Document, when
such documents became effective or were filed with the Commission,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
D-1
<PAGE>
EXHIBIT E
MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL
(i) The [Firm Shares] [Shares to be issued by the Company] [Option
Shares] have been duly authorized and, upon issuance and delivery and
payment therefor in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto have been instituted or threatened
or are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder.
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
(v) The Underwriting Agreement has been duly authorized, executed and
delivered by the Selling Stockholders.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from [list each set of counsel that has
provided an opinion], each dated the date hereof, and furnished to you in
accordance with the provisions of the Underwriting Agreement. Such opinions
appear on their face to be appropriately responsive to the requirements of the
Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto and any
Incorporated Document, when such documents became effective or were filed with
the Commission (other than the financial statements including supporting
schedules and other financial and
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statistical information derived therefrom, as to which such counsel need
express no comment) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or at the First Closing Date
or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto and any Incorporated
Document (except as aforesaid) contained any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Such counsel shall also state that the conditions for the use of
Form S-3 set forth in the General Instructions thereto have been satisfied.
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EXHIBIT F
MATTERS TO BE COVERED IN THE OPINION OF SELLING STOCKHOLDER COUNSEL
(i) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of, such
Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, the
Underwriting Agreement and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute
a default under, the charter or by-laws, partnership agreement, trust
agreement or other organization documents, as the case may be, of such
Selling Stockholder, or, to the best of such counsel's knowledge, violate,
result in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Stockholder is a party or by
which it is bound, or any judgment, order or decree applicable to such
Selling Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.
(iii) Such Selling Stockholder has good and valid title to all of the
Common Shares which may be sold by such Selling Stockholder under the
Underwriting Agreement and has the legal right and power, and all
authorization and approvals required [under its charter and by-laws,]
[partnership agreement,] [trust agreement] [or other organizational
documents, as the case may be,] to enter into the Underwriting Agreement
and its Custody Agreement and its Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may be sold by such Selling
Stockholder under the Underwriting Agreement and to comply with its other
obligations under the Underwriting Agreement, its Custody Agreement and its
Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such Selling
Stockholder has been duly authorized, executed and delivered by such
Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
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(v) Assuming that the Underwriters purchase the Shares which are sold
by such Selling Stockholder pursuant to the Underwriting Agreement for
value, in good faith and without notice of any adverse claims, the delivery
of such Shares pursuant to the Underwriting Agreement will pass good and
valid title to such Shares, free and clear of any security interest,
mortgage, pledge, lieu encumbrance or other claim.
(vi) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the National
Association of Securities Dealers, LLC.]
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EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Youbet.com, Inc.
Los Angeles, California
We hereby consent to the inclusion in the prospectus constituting a part of
this Registration Statement of our report dated March 25, 1999, except for Note
11, which is as of April 6, 1999, relating to the consolidated financial
statements of Youbet.com, Inc. for the years ended December 31, 1997 and 1998
appearing in the prospectus.
We also consent to the incorporation by reference in the prospectus
constituting a part of this Registration Statement of our report dated March 25,
1999, except for Note 11, which is as of April 6, 1999, relating to the
consolidated financial statements of Youbet.com, Inc. for the years ended
December 31, 1997 and 1998 appearing in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998.
We also consent to the reference to us under the caption "Experts" in the
prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
June 11, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Youbet.com, Inc.
Los Angeles, California
We hereby consent to the inclusion in the prospectus constituting a part of
this Registration Statement of our report dated April 10, 1998, relating to the
consolidated statements of operations, stockholders' (deficiency) and cash flows
of Youbet.com, Inc. for the year ended December 31, 1996 appearing in the
prospectus.
We also consent to incorporating by reference in the prospectus which is
part of this Registration Statement our April 10, 1998 report, related to
Youbet.com's consolidated statements of operations, stockholders' deficiency and
cash flows for the year ended December 31, 1996 appearing in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
We also consent to the reference to us under the caption "Experts" in the
prospectus.
WEINBAUM & YALAMANCHI
Los Angeles, California
June 11, 1999
