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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 33-13789LA
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YOUBET.COM, INC.
(Name of small business issuer in its charter)
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DELAWARE 95-4627253
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
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1950 SAWTELLE BOULEVARD, SUITE 180, LOS ANGELES, CALIFORNIA 90025
(Address of principal executive offices, including zip code)
(310) 444-3300
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock, par value, $.001 per share
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended December 31, 1999 were
$3,773,577.
As of February 29, 2000 the issuer had 19,414,809 shares of common stock
issued and outstanding. The aggregate market value of the issuer's common stock
held by non-affiliates (assuming that the Registrant's only affiliates are its
officers, directors and 10% or greater stockholders) of the issuer as of
February 29, 2000 was approximately $78,309,690, based upon the closing market
price of $5.19 on that date of a share of common stock as reported on the Nasdaq
National Market.
Transitional Small Business Disclosure Format: Yes / / No /X/
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YOUBET.COM, INC.
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PART I.
Item 1. Description of Business..................................... 3
Item 2. Description of Property..................................... 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.... 15
Item 6. Management's Discussion and Analysis........................ 17
Item 7. Financial Statements........................................ 24
Item 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure.................................. 24
PART III.
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16 (a) of Exchange....... 25
Item 10. Executive Compensation...................................... 28
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 12. Certain Relationships and Related Transactions.............. 35
PART IV.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 38
(a) 1. Index to Financial Statements
2. Financial Statement Schedule
3. Exhibits
(b) Reports on Form 8-K......................................... 39
Signatures.......................................................................... 41
Financial Statements and Financial Statement Schedule............................... F-1
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Youbet.com, Inc. (the "Company") intends to establish itself as the leading
global brand name for online live event sports entertainment and wagering and
other forms of online gaming. Wagering on live events, such as horse racing, car
racing, soccer, football, etc, is a very large global industry which adapts well
to the internet space. The Company has initially focused on the United States
horse wagering market and believes that its principal product, the You Bet
Network, a PC-based system which allows a subscriber to transmit information and
thereby facilitate wagers, is currently the only legal system available for
online wagering in the United States. Concurrently, the Company is working to
expand the Youbet.com brand, product and services in the United States and
overseas market. The Company currently provides its United States network
members the ability to watch, access a comprehensive database of handicapping
information and, in most states, the ability to wager on a wide selection of
coast-to-coast thoroughbred and harness horse racing, via its exclusive
closed-loop network. The You Bet Network is completely interactive and provides
a real-time environment. The Company does not actually accept or place any
wagers. Wagers are accepted and placed only by a state licensed wagering entity,
currently the Ladbroke Pennsylvania facility (see "Strategic
Relationships--Ladbroke").
The Company believes it is an innovator in the online live event wagering
industry and intends to fully exploit the opportunities available to it in the
United States and to pursue international markets aggressively. Future
developments include enhancement and improvement of its existing products and
technologies, development of new products and international expansion. To
enhance and improve the You Bet Network, Youbet.com intends to replace the CD
download currently used with a web-based product. Additionally, it is looking
into improving its web content management and exploring other revenue streams
such as advertising.
The Company believes that wagering on most forms of live sporting events is
legal in many parts of Europe, Asia, Australia and Latin America. The amount
wagered on horse racing, which is the Company's initial target market is
substantially larger overseas. For example, the Company believes that in Japan
and Hong Kong, per capita wagering levels are significantly higher than in the
United States.
Sports wagering includes not only horse wagering, but sporting events such
as football, basketball, baseball, hockey, soccer, boxing, golf, car racing, dog
racing and jai alai. Aside from horse racing, dog racing and jai alai
("pari-mutuel wagering") in the United States, other sports wagering is
currently legal only in the State of Nevada. Overseas sports event wagering is
estimated to be significantly greater than in the United States.
While many people associate horse racing with horse track betting, in 1998
more than 77% of United States horse 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 racing owes its current
growth principally to off-track sources. 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. 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 development 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.
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GROWTH STRATEGY
Youbet.com's strategy is to establish itself as the leading global brand
name for online live event sports entertainment and wagering and other forms of
online gaming. The principal elements of the Company's strategy are as follows:
MAKE LEGAL WAGERING CONVENIENT
The Company believes that legal 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, the Company 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. Additionally, the
Company intends to enrich the experience by having creative contests and games
for prizes and points.
INCREASE LEGAL 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 robust 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 than the You Bet
Network, which offers racing content from 40 horse tracks (and growing). The You
Bet Network provides as many as 32 races per hour, thus affording subscribers
more opportunities than are available via other methods. 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
bettor's account and available to be wagered again. Finally, in addition to the
numbers of races, online technology allows for a greater ease of wagering
(including exotic wagers such as exactas, trifectas and quinellas) than can be
accomplished by other means. The Company is developing products which will allow
sports gambling enthusiasts to bet online on other live sporting events where
legal (both in Nevada and overseas). Youbet.com intends to transport the
technological and participatory innovations that are developed to other legal
gaming venues.
MAKE LEGAL WAGERING OPPORTUNITIES ACCESSIBLE TO A BROADER AUDIENCE
The Company expects that the convenience of in-home wagering will encourage
the new bettor to become more active. In addition, the Company 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, the Company hopes to
expand the total wagering activity in the events it presents by lowering the
challenges to participation by newcomers.
PURSUE INTERNATIONAL MARKETS AGGRESSIVELY
The Company intends to create a global brand name for Youbet.com, operating
worldwide in live event sports wagering and other forms of online gaming. The
Company intends to leverage its position as a leading online live event sports
entertainment and wagering company in the United States to expand
internationally. Youbet.com's overseas strategy envisions utilizing Youbet.com's
technology and experience to form business relationships with partners in Latin
America, Europe, Australia and Asia with the goal of
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creating robust sports information and other types of legal gaming websites for
gaming aficionados. The sports websites will provide information, statistics and
live event coverage of popular sports throughout the targeted region. The
initial international activities will serve to develop a template for
international operations which can be replicated in other countries with
significant sports wagering markets. As in its operation in the United States,
the Company 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 racing is the only service currently
offered by the You Bet Network, Youbet.com's overseas networks will include
other types of sports wagering and online gaming. Currently, the Company has
entered into a letter of intent to purchase off-track betting and bingo
operations located in Argentina. Youbet.com's first venture (other than
operating the off-track betting and bingo operations to be acquired) will
consist of putting bingo, horse racing and selective sports products online in
South America.
BUILD STRATEGIC RELATIONSHIPS
The Company 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. The Company
also intends to develop relationships in international wagering markets as part
of its international expansion.
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 racing market and other live
event markets. The Company 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. To enhance and improve its principal
product, Youbet.com intends to replace the CD download presently used with a
web-based product to simplify the process in addition to improving its web
content management. In addition, the Company will improve the quality and
quantity of content provided to its subscribers as bandwidth to individual
internet users increases.
HORSE RACING
INDUSTRY TRENDS
The Company believes that horse 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 racing systems as compared
to the traditional on-track and off-track systems that are in use today. The
Company also believes that online solutions are likely to appeal to both new
fans and the more serious handicappers for a number of reasons including the
following:
THE INTERNET IS 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. The two fundamental growth drivers are the Internet's ability to
deliver information in ways that are not possible using traditional media
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sources such as broadcast or print media and the Internet is rapidly becoming a
powerful and credible new commerce channel.
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, the Company believes that 14% of handicappers
were already using their computers to access horse 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 wagering has
migrated away from the horse track. 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 racing at both on-track and
off-track wagering facilities is a strong indicator of the high entertainment
value that handicappers associate with watching horse 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--The Company 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 racing fans would be interested,
particularly if these online systems are perceived as reliable and legal, to
view and wager on international horse racing and sporting events using an
interactive online system.
Due to these primary factors, the Company 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 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. The Company believes an
online system that integrates 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 wagering events will
be attracted to online systems with the same basic features, but customized in
terms of content and performance.
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THE YOUBET.COM SOLUTION
Horse race wagering, as an industry, has evolved from predominantly on-track
based to off-track betting and telephone wagering. The Company believes that its
service is not only unique but also has the potential to revolutionize how
handicappers and enthusiasts wager and watch horse 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. The Company's technology
enables it to continue to add features to its network, to rapidly expand from
its current coverage of United States based horse racing to the much larger
international markets and into other live event wagering markets such as Europe,
Asia, Australia and Latin America. Key benefits of the You Bet Network include:
- CONVENIENCE, EASE OF USE--Members 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--Handicappers can use the You Bet Network to transmit
wagering instructions and receive confirmation in as little as three
seconds and will always know their account balance in addition to having
full access to their account balance when making future wagers.
- THE INFORMATION EDGE--The You Bet Network provides real time information
from several leading companies and up to the minute odds on all wagers
(See "Strategic Relationships").
- ENTERTAINMENT VALUE--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. The Company currently provides this information on a real time
basis for 40 horse tracks, and is actively expanding its relationship with
additional horse tracks.
- BENEFITS TO HORSE TRACKS AND WAGERING FACILITIES--The Company believes
that the You Bet Network will increase the number of handicappers involved
in wagering on horse races and therefore prove beneficial to and grow the
horse racing industry as a whole.
Since mid-1995, Youbet.com has been engaged in developing the You Bet
Network, its first service being offered to subscribers. The Company has
incurred substantial software development costs since inception, which have been
charged to operations as research and development costs. During June 1999, the
Company became operational upon generating revenues of over $1,000,000. As of
December 31, 1999, Youbet.com had approximately 14,500 subscribers. (In
connection with a settlement with the Los Angeles County District Attorney and
Los Angeles Police Department on January 14, 2000, the Company agreed that until
California law is clarified, California subscribers will not be allowed to
utilize the You Bet Network to transmit wagering instructions. As of
December 31, 1999, approximately 16% of Youbet.com's subscribers were from
California.)
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. In February 1999, the
Company began charging subscribers a monthly subscription fee of $5.95 and in
April 1999 began charging subscribers for information purchases.
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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 15 hours a day, seven days a
week. Live horse racing is available on the You Bet Network approximately
12-13 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.
SETTING UP A YOU BET NETWORK ACCOUNT
To subscribe to the You Bet Network, a potential subscriber contacts
Youbet.com, either on its website or its toll free number and opens an 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 intends to provide this software from its website 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.
Youbet.com facilitates the opening of this account through a simple web
interface. 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 the 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;
- 40 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;
- Real time streaming handicapping information from track correspondents;
- Live audio and video feed from the horse tracks;
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- 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. All wagering information is stored outside of
California in a jurisdiction where such information may be utilized. 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 10:00 p.m. Pacific Standard Time, seven days a week, to provide
assistance via email or toll free number. Customer service representatives
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 the Company according to the
hours when it is likely that online activity will take place. The Company
intends to continue to devote the resources necessary to maintain this high
level of customer service.
PRICING FOR THE YOU BET NETWORK
Youbet.com charges a monthly service subscription fee of $5.95 for access to
the You Bet Network. 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 racing analysis which are billed separately
on a monthly basis. New subscribers currently may access the You Bet Network for
an initial 30-day 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 the Company 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.
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The Company 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, the Company 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.
MARKETING
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
racing, but represent a larger market and possibly greater revenues.
The Company intends to attract the existing bettor with superior information
and technology as well as value-added promotions such as complimentary monthly
service charges. The Company also believes that significant wagering activity
can be produced by existing and new bettors who may be significant sports
enthusiasts, but who have not traditionally been large players due to a
perceived lack of time and convenience regarding horse 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 marketed to attract these new
players. Additionally, the Company intends to attract the sports betting
enthusiasts to its site by having creative contests and games for prizes and
points and then identifying new potential customers for live horse wagering in
the United States. The Youbet.com brand will also be marketed to these two
market segments to distinguish the Company from its competitors and to create
brand awareness, sampling of the You Bet Network and loyalty.
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 also a key marketing vehicle and sales driver.
STRATEGIC RELATIONSHIPS
The Company 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 racing information), The United States
Trotting Association (the industry's leading source of standardbred racing
information), LMKI, Inc. (formerly, Netixs Communications, one of the leading
Internet providers of networking services) and Axcis Information Network, Inc.
(the industry's leading provider of harness racing handicapping information).
LADBROKE
In June 1997, the Company 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, the Company
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 40 horse
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 the Company's subscribers to place
wagers through Ladbroke's Call-A-Bet System. The agreement also provides for the
Company to receive a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by
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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 Hilton Group plc. Ladbroke consists of the Meadows
horse track in Pennsylvania and six off-track wagering facilities, all in the
state of Pennsylvania. Hilton 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 off-track horse racing and sports wagering properties. In addition,
Hilton Group plc controls more than 160 hotels and casinos in 50 countries and
is the second largest hotel operator in the United Kingdom. The Company's
non-exclusive agreement with Ladbroke expires in November 2002. This
relationship became non-exclusive in June 1999, however, Ladbroke is entitled to
receive the benefit of such arrangement if the Company enters into an
arrangement with another account wagering facility which is more favorable to
such account wagering facility than the Company's agreement with Ladbroke on an
overall basis.
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 the Company
to produce products and services from Equibase's data and sell programs, past
performances and a wide variety of horse 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 the Company will pay Equibase fees
for individual product sales subject to a minimum monthly fee.
In September 1997, Thoroughbred Sports Network, Inc., TSN, entered into a
five-year, marketing and distribution agreement, terminable upon 90 days written
notice, with Youbet.com, which allows the Company to provide its subscribers
with access to a wide variety of handicapping past performance and sports
information products. The agreement provides that the Company 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 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, USTA, entered into an
agreement with the Company, terminable upon 30 days written notice, to provide
past performance information related to horse racing. Youbet.com pays a monthly
minimum fee as well as a separate fee for each downloaded horse track program.
The USTA is now in its sixty first year of operations promoting the standardbred
breed of horses.
In March 1999, LMKI, Inc., formerly 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 the Company will pay per an agreed fee on a monthly
basis for use of LMKI' s network services. LMKI provides a high-speed fully
redundant, nationwide loop with DS-3 to OC-48 architecture and dedicated MAN
rings (metropolitan area network). LMKI functions as the primary network
provider for the Company.
In September 1999, Axcis Information Network, Inc. ("Axcis") entered into a
three-year agreement with the Company, terminable upon 90 days written notice.
The agreement allows the Company to provide its subscribers with racing
handicapping information. The agreement provides that the Company will pay Axcis
fees for individual product sales subject to a minimum monthly fee.
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COMPETITION
The online and interactive wagering market is new and rapidly changing. The
Company anticipates that competition will become more intense as new companies
will enter the market. Worldwide, many Internet and interactive ventures of
various kinds have been announced. The Company expects to compete with these
entities, as well as other established gaming companies, which may enter the
interactive pari-mutuel gaming market. Initially, the Company has focused its
efforts primarily on the United States horse 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.
The Company 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 testing in Kentucky
and has been available to the public in limited release since November 1998 and
is currently available in Kentucky, Maryland and Oregon. The Television Games
Network has announced that it has formed exclusive relationships with a number
of major United States horse tracks. TrackPower.com is another domestic
competitor which offers live video and wagering services to U.S. residents.
TrackPower.com has formed non-exclusive relationships with many of the same
tracks which Youbet.com offers on the You Bet Network, allows wagering via the
telephone, and plans to offer wagering capability on both PC and WebTV.
TrackPower.com offers video coverage of horse racing seven days per week through
its relationship with the DISH Network.
The Company 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.
The Company 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.
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 the Company in a materially
adverse way. To the extent that Youbet.com's facilities are used by subscribers
to place intrastate or interstate wagers or the Company receives commissions
derived 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 gaming 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.
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The Company believes that its activities conform to those gaming laws and
regulations as currently applied which are applicable to its activities.
However, because there is very little clear statutory and case law authority,
this conclusion is not free from doubt. The Company 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 the Company 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
on-line and Internet gaming with specified exceptions, including exceptions for
certain horse race wagering and certain "closed-loop" on-line systems. However,
the latter exceptions were narrow. Senator Kyl reintroduced a new version of his
on-line and Internet Gambling Prohibition Act of 1999. This 1999 Kyl bill (S.
692) contains more broadly drafted exceptions than the 1998 Kyl bill. If it were
enacted in the form in which it was approved by the Senate on November 11, 1999,
the Company does not believe that the bill would have a material adverse effect
on Youbet.com's business. Specifically, the bill provides for federal
prohibition on Internet gambling but permits interstate wagering on horse racing
in a closed-loop, subscriber-based system. The bet or wager must be
(1) regulated by the state where the wager is received, (2) placed in a
closed-loop, subscriber based system, (3) initiated from a state allowing
pari-mutual wagers, (4) received in a state where such betting is lawful,
(5) in accordance with the Interstate Horse Racing Act, and (6) in accordance
with other regulations in the state where originated. On October 21, 1999,
Representative Goodlatte introduced a bill in the House of Representatives (H.R.
3125) with similar language as the Kyl bill. This bill has not been voted on by
the House of Representatives. The federal legislation, if approved in its
currently proposed form, would not preclude the states from seeking to impose
their own restrictions on gaming through the Internet.
On October 13, 1999, a search warrant was served on the Company by the Los
Angeles Police Department in connection with an investigation by the Los Angeles
Police Department and the Los Angeles District Attorney's Office. In cooperation
with the investigation, effective November 10, 1999, the Company voluntarily
suspended reception and transmission of wagering information from California
residents and accelerated its implementation of a new data center outside the
state of California. On January 14, 2000 the Company reached a civil resolution
with the Los Angeles County District Attorney and the Los Angeles Police
Department. The Company entered into a stipulation with the District Attorney
resulting in the entry of a civil judgment and injunction in which the Company
admitted no wrongdoing and no factual or legal findings were made. In connection
with the settlement, the Company disbursed a total of $1,308,250 consisting of
$208,250 in cost reimbursements, $600,000 in civil payments, $300,000 in
contributions to the Los Angles County Education Foundation in support of
computer education and $200,000 to the California Council on Problem Gambling.
As part of the settlement, the Company agreed that until California law is
clarified, California subscribers will not be allowed to place wagers on the You
Bet Network.
International expansion of the You Bet Network may be subject to regulation
in those countries in which it is made available. The Company believes that it
can operate, or license technology, in numerous jurisdictions that allow
telephone and account wagering, such as South America, Australia/Asia and
Europe. However, the Company may not be able to obtain the approvals necessary
to market its services in such jurisdictions.
EMPLOYEES
As of February 29, 2000, the Company had 88 employees. The Company 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. The Company 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.
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ITEM 2. DESCRIPTION OF PROPERTY
Youbet.com's executive and operating offices occupy approximately 11,000
square feet and are located at 1950 Sawtelle Boulevard, Suite 180, Los Angeles,
California, under a lease that expires February 28, 2001. The base lease payment
is $22,600 per month. The Company also occupies 2,522 square feet of office
space, located at 1849 Sawtelle Boulevard, Suite 600, Los Angeles, California.
The lease payment is $5,044 per month and expires on June 30, 2000. On
March 11, 2000, the Company entered into a lease agreement on an approximately
30,000 square foot facility in Woodland Hills, California. The base term of the
lease is ten years with an option to extend an additional five years. Base rent
payments are $60,078 per month with annual increases as specified in the lease
agreement. Lease payments will commence approximately 120 days from the date of
the lease agreement. The Company does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
On June 4, 1999, George von Opel filed a complaint against the Company in
the Court of Chancery of the State of Delaware, alleging that the Company
breached its obligation to register 400,000 stock purchase warrants and shares
of common stock underlying such warrants issued by the Company to an affiliate
of Mr. von Opel. Mr. von Opel is seeking specific performance of the alleged
registration obligation and money damages of $8.7 million. The Company has
answered the complaint and intends to defend itself vigorously in the action.
Mr. von Opel has moved for summary judgment on the issue of liability, to which
the Company has responded. No hearing has been scheduled to date. No discovery
has been taken by either side at that time. As the litigation is at an initial
stage, an outcome cannot be predicted at this time.
For a description of the investigation by and settlement with the Los
Angeles County District Attorney and the Los Angeles Police Department see
"Government Regulation and Legislation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Youbet.com's stockholders during the
fourth quarter of the fiscal year ended December 31, 1999.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing June 18, 1999, the common stock of Youbet.com, Inc. began trading
on the Nasdaq National Market under the symbol "UBET". Prior to June 18, 1999,
the common stock was traded on the over-the-counter bulletin board under the
symbol "UBET". For the period of June 18, 1999 through December 31, 1999, the
sales prices were quoted on the Nasdaq National Market. The high and low bid
prices of Youbet.com's common stock during fiscal 1998 through June 17, 1999
were obtained from America Online and reflect prices between dealers in
securities and do not include any retail markup, markdown or commission and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
YEAR ENDED DECEMBER 31, 1999: -------- --------
<S> <C> <C>
Three months ended--
March 31, 1999.............................................. $22.25 $6.00
June 30, 1999............................................... 24.25 10.50
September 30, 1999.......................................... 13.25 5.75
December 31, 1999........................................... 7.75 3.31
YEAR ENDED DECEMBER 31, 1998:
Three months ended--
March 31, 1998.............................................. $ 5.25 $3.87
June 30, 1998............................................... 7.37 5.25
September 30, 1998.......................................... 6.50 3.12
December 31, 1998........................................... 6.50 3.06
</TABLE>
As of February 29, 2000, the Company had 375 stockholders of record,
excluding shares held in street name by brokerage firms and other nominees who
hold shares for multiple investors.
Holders of common stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefore,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and outstanding. The Company has never declared or paid any dividends
on its common stock. The Company intends to retain any future earnings for use
in the operation and expansion of its business. Consequently, the Company 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, the Company 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.
In June 1999, the Company completed a public offering and issued 2,863,582
common stock shares at a price of $14.00 per share, generating gross proceeds of
$37,283,838. The Company also issued 654,275 shares of common stock, in
conjunction with the exercise of warrants, generating proceeds to the Company of
$2,163,553. The Company incurred $1,660,142 of fees and expenses in conjunction
with the above transactions.
RECENT SALES OF UNREGISTERED SECURITIES.
In January 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.
In January 1999, the Company issued 13,505 shares of common stock in
conjunction with the conversion of vendor debt of $33,763.
In April 1999, the Company consummated a private placement of $45,500,000
principal amount of its 11% Senior Convertible Discount Notes due 2004 to a
group of institutional investors. The 11% Senior
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Convertible Discount Notes were issued and sold pursuant to note purchase
agreements which provided for an aggregate purchase price of $36,728,510. The
11% Senior Convertible Discount Notes bear interest on the purchase price at the
rate of 11% per annum, which for the first two years is added to principal to
yield the face principal amount of $45,500,000. Thereafter, interest is paid in
cash semi-annually in April and October of each year, until April 2004, when all
principal and accrued interest is due and payable. The principal amount of the
11% Senior Convertible Discount Notes together with any accrued and unpaid
interest, is convertible into Youbet.com common stock at a price of $10.00 per
share. The Company has filed a registration statement with the Securities and
Exchange Commission (the "SEC") with an effective date of September 30, 1999 for
the underlying 4,550,000 common shares, however, each selling stock holder
agreed not to sell any common stock covered by the registration statement until
December 11, 1999.
In February 2000, all of the holders of the 11% Senior Convertible Discount
Notes agreed to a First Amendment to the various note purchase agreements. The
modifications to the original amendment increased the amount of borrowed money
the Company can incur, broadened the definition of permitted business for
acquisition purposes, required the Company to repurchase $4,000,000 aggregate
principal amount of notes and requires a reset of conversion price on June 30,
2001 if the Company acquires the stock or assets of any additional business on
or prior to September 30, 2000. The Company repurchased the $4,000,000 of notes
for $2,977,600 which represented approximately 83% of the accreted value,
therefore, a gain will be realized on the difference between the amount paid and
the accreted value of the notes on the date of repurchase. The amount of the
gain, net of the proportionate write-off of unamortized financing costs, is
approximately $430,000.
In April 1999, the Company issued 50,000 warrants to various finders in
connection with the issuance of the 11% Senior Convertible Discount Notes. The
warrants are exercisable at $10.00 per share and expire on April 5, 2004. The
fair value of the warrants was $352,000.
In April 1999, Youbet.com issued 50,000 warrants to a horse racing track for
services rendered. The warrants are exercisable at $11.50 per share and expire
on March 25, 2004. The fair value of the warrants was $405,000.
In May 1999, Youbet.com issued warrants as final settlement to a finder in
connection with the issuance of Series A Convertible Preferred Stock in
June 1998. The Company issued 13,000 warrants with an exercise price of $.01 and
26,000 warrants with an exercise price of $2.50. The warrants are exercisable
through March 2004. The fair value of the warrants was $216,060.
In June 1999, Youbet.com issued 100,000 warrants to a joint venture partner.
The warrants are exercisable at $19.50 per share and expire on June 8, 2004. The
fair value of the warrants was $907,000.
In August 1999, Youbet.com issued 25,000 warrants to a horse racing track
for services rendered. The warrants are exercisable at $7.93 per share and
expire on August 3, 2002. The fair value of the warrants was $141,861.
In March 1999, Youbet.com sent a proposal to holders of approximately
6,100,000 warrants, certain of which warrants had or may had certain
registration rights. Among other things, the proposal requested a release of
claims, if any, which may have arisen from such warrants and underlying shares
of common stock not having been registered in consideration of Youbet.com's
agreeing to register such shares of common stock in 1999 and 2000. An aggregate
of 5,173,415 warrants (85%) accepted such proposal and executed such releases.
Of these, 654,275 warrants were exercised in the June, 1999 secondary offering.
In a registration statement dated September 29, 1999, the Company registered
3,542,096 shares of common stock issuable upon the exercise of options issued
under the 1995 Stock Option Plan, 1995 Stock Option Plan for Non-Employee
Directors and 1998 Stock Option Plan.
In a registration statement declared effective on September 30, 1999, the
Company registered the resale of 7,834,179 shares of common stock. Included in
this registration statement were 4,550,000 shares
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issuable upon conversion of the 11% Senior Convertible Discount Notes, 1,600,000
shares of common stock issued during the 1998 private placement of which 20,000
are owned by the Secretary of Youbet.com, 279,729 shares of common stock
issuable upon the exercise of warrants, and securities owned by an affiliate of
the Chairman and Chief Executive Officer of the Company, including 204,450
shares of common stock and 1,200,000 warrants. The registration statement became
effective on September 30, 1999, however, each selling stockholder agreed not to
sell any common stock covered by the registration statement until December 11,
1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING PRESENTATION OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF
YOUBET.COM, INC. SHOULD BE READ IN CONJUNCTION WITH YOUBET.COM'S CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED HEREIN.
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event sports entertainment wagering and other forms of online
gaming. The Company has initially focused its efforts primarily on the United
States horse racing industry. 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. The Company 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 (see "Strategic Relationships--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 wagers placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Since mid-1995, the Company has been engaged in developing the You Bet
Network, its first service being offered to subscribers. The Company 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.
During June 1999, Youbet.com determined it had successfully completed the
development stage by generating revenues of over $1,000,000 since the beginning
of the year. Accordingly, the Company is no longer in the development stage and
is now in the operating stage.
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The Company has expanded its operations in recent years and has grown from
38 employees at December 31, 1997 to 90 employees at December 31, 1999.
Youbet.com expects to add additional personnel in the United States and plans to
commence operations and add personnel internationally as operations expand. The
Company currently expects to continue to 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, the Company expects to incur significant losses at
least through 2000.
Youbet.com has incurred significant losses since inception, and as of
December 31, 1999 had an accumulated net loss of $62,312,000. Included in this
accumulated deficit is $23,639,000 in non-cash expenses related to the recording
of the fair value of warrants and stock options charged to operations, 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 December 31, 1999 of $1,203,000 is expected
to be amortized as compensation over the next four years. The Company 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.
CONSOLIDATED RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Youbet.com commenced recognizing revenues from operations during the year
ended December 31, 1998. Revenues for the year ended December 31, 1999 were
$3,774,000, an increase of 1,330% from $264,000 during the same period in 1998.
The 1999 revenue included $3,239,000 in commission income, which represents the
Company's share of the commission on the gross amount of each wager placed by
its subscribers.
In June 1997, the Company 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 the Company 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 the Company or more
traditional telephone communication.
OPERATING EXPENSES
NETWORKS OPERATIONS--Network operations costs consist primarily of salaries
and costs to support the closed-loop private network. Network operations costs
increased by $611,000 or 40.9% to $2,105,000 in 1999 from $1,494,000 in 1998 and
increased by $816,000 or 120.4% in 1998 from $678,000 in 1997 reflecting the
continued development and expansion of the You Bet Network. Network operations
costs include non-cash compensation of $173,000, $207,000 and $12,000 in 1999,
1998 and 1997, respectively, the result of issuance of warrants and options to
third-party consultants or the issuance of below market options and warrants to
employees. The Company 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 by $794,000 or 50.3% to
$2,373,000 in 1999 from $1,579,000 in 1998 and
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<PAGE>
increased by $247,000 or 18.6% in 1998 from $1,331,000 in 1997. This increase
resulted from the hiring of developers and the continued development of the You
Bet Network. Research and development costs include non-cash compensation of
$67,000, $312,000 and $78,000 in 1999, 1998 and 1997, respectively, the result
of issuance of warrants and options to third-party consultants or the issuance
of below market options and warrants to employees. The Company will continue to
invest in the development of the You Bet Network and other projects, which it
believes are of value and critical to achieving its strategic objectives and, as
a result, expects research and development costs to continue to increase
significantly in future periods.
SALES AND MARKETING--Sales and marketing expenses consist primarily of
marketing program expenses and salaries. Sales and marketing expenses increased
by $12,643,000 or 695.3% to $14,462,000 in 1999 from $1,818,000 in 1998, and
increased by $870,000 or 91.7% from $948,000 in 1997. 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. Marketing activities during 1999 included
the rollout of direct marketing, television and radio advertising campaigns.
Sales and marketing expenses include non-cash compensation of $401,000, $414,000
and $238,000 in 1999, 1998 and 1997, respectively, the result of issuance of
warrants and options to third-party consultants or the issuance of below market
options and warrants to employees. The Company expects increases in sales and
marketing expense to continue increasing 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 $1,310,000 or 21.6%
to $7,381,000 in 1999 from $6,071,000 in 1998, and increased $2,419,000 or 66.2%
from $3,652,000 in 1997. The increase from 1997 to 1998 reflects a general
increase in personnel related costs, legal fees, and operating activity. The
$1,310,000 increase in 1999 from 1998 primarily relates to a $1,308,250
settlement payment in connection with civil resolution with the Los Angeles
County District Attorney and the Los Angeles Police Department. The remaining
variance was attributable to an increase in labor costs, legislative affairs
cost, legal fees and other overhead expenses offset by lower non-cash
compensation cost. General and administrative expenses include non-cash
compensation of $1,567,000, $3,331,000 and $1,848,000 in 1999, 1998 and 1997,
respectively, the result of issuance of warrants and options to third-party
consultants or the issuance of below market options and warrants to employees.
The Company expects that general and administrative expenses will increase in
future periods as it hires additional personnel to provide for the growth of the
business.
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 year
ended December 31, 1999 increased by $11,933,000 or 107.5% to $23,027,000 from
$11,096,000 in 1998, and increased $4,178,000 or 60.4% from $6,918,000 in 1997.
The Company expects to incur significant losses at least through 2000.
OTHER INCOME (EXPENSE)
NET INTEREST INCOME (EXPENSE)--Net interest expense increased by $425,000 or
162.8% to $686,000 in 1999 from $261,000 in 1998, and decreased by $128,000 or
32.9% from $389,000 in 1997. The increase in 1999 is the result of the issuance
in April 1999 of its 11% Senior Convertible Discount Notes. The Company will not
pay cash interest on these notes until October 2001, but is accreting interest
since the notes are outstanding. Net interest expense in 1998 and 1997 is the
result of advances and bridge loans being outstanding during both years.
Youbet.com expects net interest expense to increase during 2000 as the notes
will be outstanding for the entire fiscal year and interest income will decline
as cash balances decrease to fund ongoing operations.
19
<PAGE>
NON-CASH EQUITY TRANSACTIONS--Non-cash equity transactions consist of the
recording of the discount on conversion of bridge loans, accounts payable and
employee deferred salaries into common stock and warrants, and release of
forfeiture provisions on common stock. Non-cash equity transactions decreased
$1,765,000 or 78.2% to $491,000 in 1999 from $2,256,000 in 1998, and decreased
$9,849,000 or 81.4% from $12,105,000 in 1997. During the year ended
December 31, 1999, these costs consisted solely of $491,000 for financing costs.
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, the Company 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. The
Company does not expect that these types of costs will continue at the previous
levels.
INCOME TAXES
At December 31, 1999, Youbet.com has available federal and state net
operating loss carryforwards of $37,900,000 and $27,000,000, respectively, for
income tax purposes, which expire in varying amounts through 2019 for federal
and 2004 for state purposes. The net operating loss carryforwards generated a
deferred tax asset of approximately $15,300,000 as of December 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.
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED,
-------------------------------------------------------------------------------------
1998 1999
----------------------------------------- -----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 0 $ 20 $ 76 $ 168 $ 461 $ 733 $ 1,132 $ 1,448
Operating expenses:
Network operations...... 204 234 455 601 574 490 496 545
Research and
development........... 313 423 427 416 415 603 537 818
Sales and marketing..... 276 650 615 277 567 1,066 5,648 7,181
General and
administrative........ 1,409 2,063 1,282 1,317 965 1,712 1,436 3,268
Depreciation and
amortization.......... 76 82 86 153 96 105 114 165
------- ------- ------- ------- ------- ------- ------- --------
Total operating
expenses................ 2,277 3,452 2,866 2,765 2,617 3,976 8,231 11,977
------- ------- ------- ------- ------- ------- ------- --------
Loss from operations...... (2,277) (3,432) (2,790) (2,597) (2,156) (3,243) (7,099) (10,529)
Net interest income
(expense)............... (69) (174) (30) 12 18 (522) (45) (137)
Other income (expense).... (484) (1,759) (235) (27) (9) (555) (100) (109)
------- ------- ------- ------- ------- ------- ------- --------
Net loss.................. $(2,830) $(5,365) $(3,055) $(2,612) $(2,147) $(4,320) $(7,244) $(10,775)
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
20
<PAGE>
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 of 1998. Operating expenses
during 1999 increased both when compared to the prior sequential quarter and
when compared to the same quarter in the prior year. Sales and marketing expense
increased significantly in both the second and third quarters due to the
roll-out of direct mail campaigns, and increased further in the fourth quarter
due to the roll-out of radio and television advertising campaigns. General and
administrative expense during the fourth quarter of 1999 includes the
$1.3 million civil settlement with the Los Angeles County District Attorney.
Operating expenses in the second, third and fourth quarters of 1998 increased
significantly both when compared to the prior sequential quarter and when
compared to the prior year due to the launch of the You Bet Network.
Correspondingly, network operations costs increased significantly 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
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 in
marketing programs during this period. General and administrative expenses
increased during the second, third and fourth quarters due to increases in
personnel, legal and accounting fees, and expansion of the investor relations
program.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of its
securities and convertible debt as Youbet.com has generated only negative cash
flow from operations since inception. During the year ended December 31, 1999,
Youbet.com has received an aggregate of $77,007,000 in net proceeds from the
sale of common stock, Series A Convertible Preferred Stock and the exercise of
stock options and warrants. At December 31, 1999 the Company had $62,274,000 in
cash and cash equivalents. Youbet.com's principal commitments consist of the 11%
Senior Convertible Notes and obligations under capital leases.
Net cash used in operating activities was $14,077,000, $6,538,000 and
$3,862,000 for the years ended December 31, 1999, 1998 and 1997, 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 $1,978,000, $360,000, and $132,000
for the years ended December 31, 1999, 1998 and 1997, respectively, for
purchases of property and equipment.
Net cash provided by financing activities was $76,789,000, $8,385,000, and
$3,960,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Net cash provided by financing activities consisted principally of proceeds from
the June, 1999 secondary offering, the 11% Senior Convertible notes, advances
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. During
1999, Youbet.com received net proceeds from the issuance of 11% Senior
Convertible notes of $35,104,000, net proceeds from the June, 1999 secondary
offering of $35,624,000, proceeds from exercises of options and warrants of
$3,641,000 and $2,100,000 from a stock subscription receivable. During 1998,
Youbet.com received net proceeds of $2,025,000 from advances and bridge loans,
as well as the net proceeds from preferred and common stock issuances of
$5,501,000 and $1,069,000 from the exercise of stock options and warrants to
fund its cash requirements. During 1997, Youbet.com received net proceeds from
security issuances of $1,953,000 and $1,950,000 net proceeds from advances and
bridge loans.
In January 1999, the Company issued 100,000 shares of common stock at $2.50
per share, generating gross proceeds of $250,000.
21
<PAGE>
In April 1999, Youbet.com issued $45,500,000 principal amount of 11% Senior
Convertible Discount Notes for cash proceeds of $36,728,510, 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 is 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.
In February 2000, all of the holders of the 11% Senior Convertible Discount
Notes agreed to a First Amendment to Note Purchase Agreement. The modifications
to the original amendment increased the amount of borrowed money the Company can
incur, broadened the definition of permitted business for acquisition purposes,
required the Company to repurchase $4,000,000 of notes at face value and
requires a reset of conversion price on June 30, 2001 if the Company acquires
the stock or assets of any additional business on or prior to September 30,
2000. The Company repurchased the $4,000,000 of notes for $2,977,600 which
represented approximately 83% of the accreted value, therefore, a gain will be
realized on the difference between the amount paid and the accreted value of the
notes on the date of repurchase. The amount of the gain, net of the
proportionate write-off of unamortized financing costs, is approximately
$430,000.
In June 1999, the Company sold 2,863,582 shares of common stock in a
secondary public offering at an offering price of $14 per share, for cash
proceeds of $37,283,838 (generating net proceeds of approximately $35,624,000).
In addition, warrant holders sold 654,275 shares upon the exercise of warrants,
generating additional net proceeds to the Company of $2,153,553.
During the year ended December 31, 1999, the Company issued 688,000 shares
of common stock to individuals 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 Youbet.com of $1,505,000.
At December 31, 1999, the Company had net working capital of $56,848,000
compared to net working capital of $1,925,000 at December 31, 1998, the result
of the placement of the 11% Senior Convertible Notes and the June, 1999
secondary offering. Net working capital at December 31, 1998 compared to a
working capital deficit of $2,739,184 at December 31, 1997, the 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.
The Company 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. The Company 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. The Company believes
that its existing cash will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures at least for the next twelve months.
RECENT EVENTS
On January 14, 2000, the Company reached a civil resolution of an
investigation by the Los Angeles County District Attorney and the Los Angeles
Police Department. The Company entered into a stipulation with the District
Attorney resulting in the entry of a civil judgment and injunction in which the
Company admitted no wrongdoing and no factual or legal findings were made. In
connection with the settlement, Youbet.com disbursed a total of $1,308,250
consisting of $208,250 in cost reimbursements, $600,000 in civil payments,
$300,000 in contributions to the Los Angeles County Education Foundation in
support of computer education and $200,000 to the California Council on Problem
Gambling. As part of the settlement, the Company agreed that until California
law is clarified, California subscribers will not be allowed to place wagers on
the You Bet Network.
22
<PAGE>
On March 24, 2000 the Company announced that it is restructuring its
relationship with Station Casinos. Youbet.com intends to continue to develop an
interactive website to provide a broad spectrum of information on live sporting
events, including handicapping information and live odds and spreads. Youbet.com
plans to invite a major Las Vegas strip and local casinos to participate. This
website is expected to be made available to Youbet.com subscribers for
entertainment and prizes, and subject to obtaining applicable approvals by the
Nevada gaming authorities, to facilitate sports wagering in Nevada limited to
Nevada residents. Youbet.com intends to offer this service in cooperation with
licensed Nevada sports books. Station Casinos has expressed interest in
participating in this service along with other Nevada casinos on terms to be
negotiated.
On March 14, 2000, the Company signed a letter of intent to acquire from
Ladbrokes, the betting and gaming division of Hilton Group plc, its subsidiaries
which own and operate six off-track betting and two bingo operations based in
Argentina. The purchase price is estimated to be approximately $26 million,
payable in cash and notes. This acquisition is expected to be completed in the
second quarter of fiscal 2000 subject to negotiation, execution and closing of a
definitive purchase agreement, completion of the Company's due diligence,
receipt of applicable regulatory approvals and absence of adverse changes in the
financial condition of the business.
YEAR 2000 UPDATE
To address the year 2000 issue, in October 1998, Youbet.com established an
in-house project team and initiated a comprehensive plan to assess, remediate
and test Youbet.com's software programs, both those developed internally and
purchased form material outside vendors, hardware and processes, including key
operational, manufacturing and financial systems. The plan also included steps
to verify that all key third-party suppliers and customers were taking measures
to ensure their own readiness and timely implementation. All phases of the year
2000 readiness plan were completed as scheduled. To date, the Company has not
experienced any year 2000 issues with its internal operating systems or with its
third party customers and suppliers. In addition, Youbet.com did not experience
any loss in revenues due to the year 2000 issue.
All software programs currently under development are year 2000 compliant.
As of December 31, 1999, Youbet.com spent a total of approximately $100,000
in connection with addressing the year 2000 issue. Any additional charges are
expected to be minimal. These costs were largely due to the use of internal
resources dedicated to achieving year 2000 compliance, and were charged to
expense as incurred.
Although unlikely given that the Company has not experienced any year 2000
issues to date, there can be no assurance that any future unforeseen year 2000
issues or year 2000 issues relating to possibly non-compliant software products
will not materially adversely affect Youbet.com's results of operations,
liquidity and financial position or adversely affect Youbet.com's relationships
with customers, vendors or others.
RECENT ACCOUNTING PRONOUNCEMENTS:
The Company adopted the Financial Accounting Standards Board Issued
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.
23
<PAGE>
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this report contain forward looking
statements that are based on the current beliefs and expectations of the
Company's management, as well as assumptions made by, and information currently
available to, the Company's management. Such statements include those regarding
general economic and e-gaming industry trends. Because such statements involve
risks and uncertainties, actual actions and strategies and the timing and
expected results thereof may differ materially from those expressed or implied
by such forward-looking statements, and the Company's future results,
performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements.
This Annual Report on Form 10-KSB for the year ended December 31, 1999
contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements involve a number of risks and
uncertainties, including the timely development and market acceptance of
products and technologies, successful integration of acquisitions, the ability
to secure additional sources of financing, the ability to reduce operating
expense and other factors described in the Company's filing with the Securities
and Exchange Commission. The actual results that the Company achieves may differ
materially from any forward-looking statements due to such risks and
uncertainties. The forward-looking statements in this Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999 are subject to risks and
uncertainties that could cause actual results to differ materially from those
results expressed in or implied by the statements contained herein.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements are listed at the "Index to Financial
Statements" elsewhere in this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Board of Directors is comprised of only one class. All of the directors
will serve until the next annual meeting of stockholders and until their
successors are elected and qualified, or until their earlier death, retirement,
resignation or removal. There are no family relationships among directors and
executive officers.
Effective June 29, 1998, in conjunction with the Series A Convertible
Preferred Stock financing, Mr. Fell acquired the right to nominate four
directors pursuant to the Stockholders Agreement, which expires in June, 2000.
The remaining three directors are to be nominated by David Marshall and Russell
Fine. Robert M. Fell, Alan W. Landsburg, William H. Roedy and Caesar P. Kimmel
were nominated by Mr. Fell. Russell M. Fine, Charles D. Peebler Jr. and Terrence
Lanni were nominated by Messrs. Marshall and Fine.
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set 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.................... 57 Chairman of the Board and Chief
Executive Officer
A.L. Frank........................ 56 President
Russell M. Fine................... 36 Director, Executive Vice President
and Chief Technology Officer
Ron W. Luniewski.................. 36 Executive Vice President
Phillip C. Hermann................ 50 Executive Vice President and Chief
Financial Officer
Nour-Dean Anakar.................. 42 Managing Director, International
Steve A. Molnar................... 56 Executive Vice President, Racing
Gary N. Jacobs.................... 54 Secretary
Caesar P. Kimmel.................. 73 Director
Alan W. Landsburg................. 66 Director
J. Terrence Lanni................. 57 Director
Charles D. Peebler Jr............. 63 Director
William H. Roedy.................. 51 Director
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS:
ROBERT M. FELL
Mr. Fell has served as Chairman of the Board and Chief Executive Officer of
Youbet.com since June 1998. From 1994 to 1997 prior to joining the Company,
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
1977 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.
25
<PAGE>
A.L. FRANK
Mr. Frank has served as President of Youbet.com since February 2000. Prior
to joining the Company, Mr. Frank served as President and Founder of Onyx
Software, Inc., a software and venture capital consulting firm, since 1990.
Through Onyx he served as President and CEO of Thinque Systems Corporation prior
to which he founded and grew several software firms. From 1987 to 1990
Mr. Frank served as president and CEO of Indysy Software, which was sold to
Novell, Inc. From 1980 to 1986 he served as Founder, President and CEO of
California Software which was sold to Computer Associates.
RUSSELL M. FINE
Mr. Fine has served as Executive Vice President and Chief Technology Officer
of the Company since June 1998. Mr. Fine has been a senior executive and
director of Youbet.com or its predecessors since its founding 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 the Company.
RON W. LUNIEWSKI
Mr. Luniewski has served as Executive Vice President of Youbet.com since
February 1999, and from February 1999 through March 2000 was Chief Operating
Officer. Mr. Luniewski was President of You Bet!, Inc. a subsidiary of the
Company or its predecessor since March 1997. For more than the 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.
NOUR-DEAN ANAKAR
Mr. Anakar has served as Managing Director, International since
January 2000. Prior to joining Youbet.com, Mr. Anakar was Senior Vice President
Virtgame.com International and Managing Director of Virtual Gaming Argentina
since June 1999. From May 1997 to April 1999, Mr. Anakar was a Senior Vice
President with Ladbrokes USA. From November 1992 to May 1997, Mr. Anakar held
the position of Senior Vice President and General manager for Ladbrokes
Argentina, a wholly owned subsidiary of the Hilton Group PLC.
STEVE A. MOLNAR
Mr. Molnar has served as Executive Vice President, Racing of the Company
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.
26
<PAGE>
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 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.
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.
J. TERRENCE LANNI
Mr. Lanni has served as a Director of Youbet.com since January 2000.
Mr. Lanni is currently Chairman of the Board of MGM Grand, Inc. and served as
Chief Executive Officer of MGM Grand from May 1995 to December 1999. Prior to
May 1995, Mr. Lanni served for approximately 18 years in various roles at
Caesars World, Inc., most notably as president, chief operating officer and
chief financial officer. Additionally, Mr. Lanni was a member of the Caesars
World Board of Directors. Mr. Lanni currently serves as a Director for Purchase
Pro.com, Inc. and Magna Entertainment Corporation.
CHARLES D. PEEBLER JR.
Mr. Peebler has served as a Director of Youbet.com since September 1999.
Mr. Peebler has served as Chairman Emeritus of True North Communications, Inc.,
the world's sixth largest advertising agency holding company and Chairman of the
Board and Chief Executive Officer of True North's Diversified Companies Group
since April 1999. From December 1997 to April 1999, Mr. Peebler was employed as
President of True North Communications, Inc. Prior to December 1997,
Mr. Peebler served for approximately 32 years as Chief Executive Officer of
Bozell, Jacobs, Kenyon & Eckhardt or its predecessor companies. Mr. Peebler is
also a Director for Valmont Industries, Inc. and GHS, Inc.
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership (Forms 3,4 and
5) of
27
<PAGE>
Common Stock with the Securities and Exchange Commission and the National
Association of Securities Dealers. Officers, directors and greater-than-ten
percent holders are required to furnish the Company with copies of all such
forms which they file.
To the Company's knowledge, based solely on the Company's review of copies
of such reports or written representations from certain reporting persons that
no Forms 5 were required to be filed by those persons, the Company believes that
for fiscal 1999 all filing requirements applicable to its officers, directors,
greater-than-ten-percent beneficial owners and other persons subject to
Section 16 of the Exchange Act were compiled with, except that Charles D.
Peebler Jr. filed one report late covering one transaction in which he purchased
shares of common stock.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by Youbet.com for the
years ended December 31, 1999, 1998 and 1997 to the Chief Executive Officer and
the executive officers of Youbet.com whose total salary and bonus for 1999
exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- - ---------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Robert M. Fell..................................... 1999 $217,033(1) $420,000(2) $ 9,738(4)
Chairman of the Board and Chief Executive Officer 1998 81,136(1) 363(3) 4,500(5)
1997 -- -- --
Russell M. Fine.................................... 1999 153,125 150,000 7,200(5)
Executive Vice President and Chief Technology
Officer 1998 138,333 363(3) 39,989(7)
1997 120,000 -- 14,825(8)
Ron W. Luniewski................................... 1999 153,125 12,500 281,600(6)
Executive Vice President and Chief Operating
Officer(20) 1998 138,333 363(3) 168,621(9)
1997 120,000 -- 10,306(10)
Phillip C. Hermann................................. 1999 153,125 12,500 87,247(13)
Executive Vice President and Chief Financial
Officer 1998 96,667 363(3) 75,456(14)
1997 -- -- --
Steve A. Molnar.................................... 1999 110,000 -- 75,000(12)
Executive Vice President, Racing 1998 119,375 363(3) 85,973(15)
1997 121,460 -- 10,812(11)
David M. Marshall(16).............................. 1999 156,775(17) 150,000 9,000(5)
Vice Chairman of the Board 1998 140,000 363(3) 52,279(18)
1997 130,000 -- 17,185(19)
</TABLE>
- - ------------------------
(1) Represents compensation paid to Fell & Company, Inc. for the services of
Robert M. Fell (see "Employment and Service Agreements" below).
(2) Represents a bonus which was applied against promissory notes totaling
$560,000 (see "Certain Relationships and Related Transactions" below).
(3) Represents income from fully vested stock options awarded as bonuses in
1998.
(4) Represents automobile allowance of $1,575 and non-business expense
reimbursements of $8,163.
(5) Represents automobile allowance.
28
<PAGE>
(6) Represents automobile allowance of $6,600 and income of $275,000 resulting
from the exercise of options (see "Option Exercises and Fiscal Year-End
Values" below).
(7) Represents interest on deferred compensation 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.
(8) Represents an automobile allowance of $6,000 and interest on deferred
compensation of $8,825.
(9) Represents $2,991 interest on deferred compensation and $165,630 relating to
1998 vesting of stock options (see "Option Exercises and Fiscal Year-End
Values" below)..
(10) Represents interest on deferred compensation of $3,743 and a 25% bonus on
deferred compensation of $6,563.
(11) Represents interest on deferred compensation of $3,921 and a 25% bonus on
deferred compensation of $6,891.
(12) Represents income of $75,000 resulting from the exercise of options (see
"Option Exercises and Fiscal Year-End Values" below).
(13) Represents automobile allowance of $6,435 and income of $80,812 relating to
a stock option awarded in 1998 (see "Option Exercises and Fiscal Year-End
Values" below).
(14) Represents income relating to 1998 vesting of stock options awarded in 1998
(see "Option Exercises and Fiscal Year-End Values" below).
(15) Represents $3,158 interest on deferred compensation and $82,815 relating to
1998 vesting of stock options (see "Option Exercises and Fiscal Year-End
Values" below).
(16) Resigned as Vice Chairman of the Board effective December 31, 1999.
(17) Represents compensation paid to David Marshall, Inc. for the services of
David M. Marshall (see "Employment and Services Agreements "below).
(18) 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.
(19) Represents an automobile allowance of $6,000 and interest on deferred
compensation of $11,185.
(20) During March 2000 Ron Luniewski's title was changed to Executive Vice
President.
BOARD OF DIRECTORS
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. As additional compensation
for the non-employee members of the board of directors, Youbet.com issued the
following stock options:
- In September 1999, Youbet.com granted to Charles Peebler options to
acquire 40,000 shares of common stock, pursuant to the 1998 Stock Plan at
an exercise price of $7.00 per share. The shares vest monthly over a one
year period and are exercisable for a period of ten years.
- In January 2000, Youbet.com granted to J. Terrence Lanni options to
acquire 100,000 shares of common stock, pursuant to the 1998 Stock Plan at
an exercise price of $4.94 per share. The shares vest monthly over a
twenty-five month period and are exercisable for a period of ten years.
- In March 2000, Youbet.com granted to Caesar Kimmel, Alan Landsburg,
Charles Peebler, and William Roedy options to acquire 25,000 shares of
common stock each, pursuant to the 1998 Stock Plan at an exercise price of
$4.875. The shares vest monthly over one year and are exercisable for a
period of ten years.
29
<PAGE>
As of March 24, 2000 options to acquire 365,000 shares of common stock held
in the aggregate by the directors are outstanding, and 196,000 of such options
are vested or will be vested within the next 60 days.
EMPLOYMENT AND SERVICES 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 the
Company 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. On March 8, 2000
Youbet.com, subject to the the closing of the acquisition of the off-track
betting and bingo operations in Argentina, increased the base fee of Fell &
Company, Inc. to $375,000 per year, retroactive to March 8, 2000. In addition,
Robert M. Fell was granted an option to purchase 300,000 shares of common stock,
pursuant to the 1998 Stock Plan at an exercise price of $4.875. The options have
a ten year term and vest in four equal annual installments beginning March,
2001.
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. Effective December 1999 Mr. Fine's
base salary was increased to $165,000. Mr. Fine is also entitled to receive an
annual bonus determined by the board of directors. 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 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 provides for Mr. Luniewski to receive an annual salary of $150,000 per
year subject to cost of living increases, 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. In November 1999, the options were repriced to an exercise
price of $5.31 per share, the current market price on the date of repricing. 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. Effective December 1999, Mr. Luniewski's base salary was increased
to $165,000. The agreement also permits Mr. Luniewski to terminate his
employment with Youbet.com under certain circumstances and receive two months
salary and benefits. This employment agreement replaced an employment agreement
entered into between Mr. Luniewski and Youbet.com in May 1998, expiring on
April 1999 which had substantially the same terms.
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 provides for Mr. Hermann to receive an annual salary of $150,000
subject to cost of living increases, 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. In November 1999, the options were repriced to an exercise
price of $5.31 per share, the current market price on the date of repricing. All
options will vest
30
<PAGE>
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.
Effective December 1999, Mr. Hermann's base salary was increased to $165,000.
This employment agreement replaced an employment agreement entered into between
Mr. Hermann and Youbet.com in May 1998 expiring on April 1999 which had
substantially the same terms.
In January 1999, David Marshall, Inc. and Youbet.com entered into a services
agreement pursuant to which Mr. Marshall served as Vice Chairman of the Board of
Youbet.com until December 31, 1999. For making Mr. Marshall's services
available, David Marshall, Inc. received a base fee of $150,000 per year plus
the amount of payroll taxes Youbet.com would have paid if Mr. Marshall were an
employee of Youbet.com and other miscellaneous benefits. David Marshall, Inc.
was also entitled to receive an annual bonus determined by the board of
directors in its discretion. David Marshall, Inc. terminated the agreement
pursuant to a provision which permitted David Marshall Inc. to terminate the
agreement at anytime after December 31, 1999 and receive the compensation and
benefits provided under the agreement for two years. The services agreement
replaced an employment agreement entered into between Mr. Marshall and
Youbet.com in June 1998, which had substantially the same terms. Mr. Marshall
resigned his position as Vice Chairman effective December 31, 1999.
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
stockholder 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 shares underlying these options were not registered until September 29,
1999, the Executive Committee has extended the exercise period for some of these
options held by terminated employees until June 29, 2000. The Plans are closed
and no additional options will be granted under these Plans.
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<PAGE>
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. Effective September 23, 1999, shareholders approved an increase of
1,500,000 shares to a total of 2,500,000 shares. 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 more stockholder 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. 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. However, because shares underlying these options were not registered until
September 29, 1999, the Executive Committee had extended the exercise period for
some of these options held by terminated employees until June 29, 2000.
In a registration statement filed with the SEC effective September 29, 1999,
the underlying shares of common stock the 1995 and 1998 stock option plans were
registered.
OPTION GRANTS IN 1999
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, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION
NAME GRANTED(1) IN 1998 PER SHARE DATE
- - ---- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Ron W. Luniewski................................ 100,000 10.6% $5.31(2) 02/22/2009
Phillip C. Hermann.............................. 50,000 5.3% $5.31(2) 02/22/2009
</TABLE>
- - ------------------------
(1) Options were granted under the 1998 Stock Option Plans and are exercisable
for common stock of Youbet.com.
(2) Options were originally issued at an exercise price of $10.50 and
subsequently repriced to $5.31, the current market price on the date of
repricing.
32
<PAGE>
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, 1999 and the number
of shares covered by both exercisable and unexercisable stock options held by
each of the named executive officers at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR-END(1) OPTIONS AT YEAR-END(2)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ron W. Luniewski................ 36,667(3) $275,000 145,100 100,000 $262,994 $ --
Phillip C. Hermann.............. -- -- 23,850 106,250 43,228 101,953
Steve A. Molnar................. 10,000(4) 75,000 115,100 13,334 208,619 17,501
Russell M. Fine................. -- -- 100 -- 181 --
Robert M. Fell.................. -- -- 100 -- 181 --
David M. Marshall(5)............ -- -- 100 -- 181 --
------ -------- ------- ------- -------- --------
TOTAL......................... 46,667 $350,000 284,250 219,584 $515,203 $119,454
====== ======== ======= ======= ======== ========
</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 Plans" 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 closing market price
for the common stock of $4.3125 on December 31, 1999.
(3) Represents a cashless exercise of 55,000 options sold at $7.50 per share,
with 18,333 options forfeited.
(4) Represents a cashless exercise of 15,000 options sold at $7.50 per share,
with 5,000 options forfeited.
(5) Resigned as Vice Chairman of the Board on December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 24, 2000: (1) the names and
addresses of each beneficial owner of more than five (5%) of Youbet.com's common
stock known to Youbet.com, the number of shares of common stock beneficially
owned by each such person, and the percent of Youbet.com's common stock so
owned; and (2) the number of shares of common stock beneficially owned, and the
percent of Youbet.com's common stock so owned, by each director, and by all
directors and officers of Youbet.com as a group. Each person has sole voting and
investment power with respect to such shares of common stock,
33
<PAGE>
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
NAME OF BENEFICIAL OWNER(1)(2) OF BENEFICIAL OWNER PERCENT OF CLASS
- - ------------------------------ ------------------- ----------------
<S> <C> <C>
Robert M. Fell.............................................. 1,004,550(3) 5.2
David M. Marshall........................................... 2,073,265(4) 10.7
9229 Sunset Blvd. Suite 505
Los Angeles, CA 90069
Sid Marshall................................................ 870,490(5) 4.5
1170-M Pacific Coast Highway
Malibu, CA 90265
Marshall Gift Trust......................................... 482,250(6) 2.5
1700 Bank of America Plaza
300 South Fourth Street
Las Vegas, NV 80101
Russell M. Fine............................................. 1,938,941(7) 10.0
A. L. Frank................................................. 50,000(8) *
Ron W. Luniewski............................................ 170,100(9) *
Phillip C. Hermann.......................................... 55,100(10) *
Nour-Dean Anakar............................................ --(11) --
Steve A. Molnar............................................. 129,184(12) *
Caesar P. Kimmel............................................ 62,250(13) *
Alan Landsburg.............................................. 56,250(13) *
J. Terrance Lanni........................................... 16,000(14) *
Charles M. Peebler Jr....................................... 76,250(15) *
William H. Roedy............................................ 146,250(13) *
All executive officers and directors as a group (13
persons).................................................... 3,759,975(16) 19.4
</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 800,000 shares of common stock represented by the currently
exercisable portion of the Fell Warrant, but does not include the 400,000
shares of common stock represented by the portion of the Fell Warrant which
is fully vested but not exercisable within 60 days of March 24, 2000.
(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 purchase
warrants owned by Sid Marshall and the Marshall Gift Trust. David M.
Marshall is the son of Sid Marshall. Effective December 31, 1999 David
Marshall resigned as Vice-Chairman.
(5) Includes 448,668 shares of common stock represented by currently exercisable
common stock purchase warrants as follows: Series C-356,668;
Series D-92,000. Does not include shares of common
34
<PAGE>
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 91,333 shares of common stock subject to currently exercisable
common stock purchase warrants as follows: Series C-30,000;
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) Consists solely of 50,000 shares of common stock represented by stock
options exercisable within 60 days of March 24, 2000.
(9) Consists solely of 170,100 shares of common stock represented by stock
options exercisable within 60 days of March 24, 2000.
(10) Consists solely of 55,100 shares of common stock represented by stock
options exercisable within 60 days of March 24, 2000.
(11) Commenced employment on January 3, 2000.
(12) Includes 128,434 shares of common stock represented by stock options
exercisable within 60 days of March 24, 2000.
(13) Includes 46,250 shares of common stock represented by a stock option
exercisable within 60 days of March 24, 2000.
(14) Consists solely of 16,000 shares of common stock represented by a stock
option exercisable within 60 days of March 24, 2000.
(15) Includes 41,250 shares of common stock represented by a stock option
exercisable within 60 days of March 24, 2000.
(16) Includes 634,934 shares of common stock represented by fully vested stock
options and stock options exercisable within 60 days of March 24, 2000,
40,342 shares of common stock represented by currently exercisable common
stock purchase warrants, 800,000 shares of common stock represented by the
currently exercisable portion of the Fell Warrant, but does not include the
400,000 shares of common stock represented by the portion of the Fell
Warrant which is fully vested but not exercisable within 60 days.
CHANGES IN CONTROL:
Youbet.com is unaware of any contract or other arrangement, the operation of
which may at a subsequent date result in a change in control of Youbet.com.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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,
35
<PAGE>
the father of David M. 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, the father of David M. 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 (former member of the Board of Directors), 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. These shares were converted to common stock in conjunction
with the June 1999 secondary offering and were registered with the SEC as part
of a registration statement with an effective date of September 30, however,
they each agreed not to sell any common stock covered by the registration
statement until December 11, 1999.
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 has 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. On July 8, 1999, the
Board approved the recommendation of the Compensation Committee to grant Fell &
Company, Inc. a performance-based bonus as a result of the services of
Robert M. Fell which has been credited against the Notes, consisting of a
$280,000 (plus accrued interest), credited in recognition of the completion of
the placement of 11% Senior Convertible Discounts Notes, $140,000 (plus accrued
interest) credited in recognition of the completion of Youbet.com's secondary
offering, $70,000 (plus accrued interest) to be credited at such time as
Youbet.com achieves 15,000 subscribers and $70,000 (plus accrued interest) to be
credited at such time as Youbet.com achieves 25,000 subscribers. As result of
the bonuses described above, the $70,000 Note has been satisfied and the
outstanding principal balance on the $490,000 Note has been reduced to $140,000.
The Fell Trust
36
<PAGE>
has agreed that the $490,000 Note will be with full recourse to the Fell Trust
and Youbet.com has released to the Fell Trust all of the collateral pledged in
connection with the Notes.
37
<PAGE>
PART IV.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
1. Index to Financial Statements:
See Consolidated Financial Statements included as part
of this Form 10-KSB....................................... F-1
2. Financial Statement Schedule:
Report of Independent Accountants....................... F-2
3. Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------- ----------------------
<C> <S>
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 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.)
4.1 Form of Note Purchase Agreement by and among Youbet.com and
the Purchasers as defined therein, dated April 5, 1999
(Incorporated herein by reference to Youbet.com's
Registration Statement on Form S-3 (No. 333-85675) dated
September 29, 1999)
4.1A Form of First Amendment of Note Purchase Agreement dated
February 29, 2000
4.2 Form of Warrant to purchase Youbet.com common stock, issued
in connection with the Note Purchase Agreement dated
April 5, 1999 (Incorporated herein by reference to
Youbet.com's Prospectus Filed Pursuant to Rule 424 dated
October 4, 1999)
4.3 Registration Rights Agreement by and among Youbet.com
(formerly You Bet International, Inc.) and the other parties
listed therein, dated June 29, 1998. (Incorporated herein by
reference by reference to Youbet.com's Form 8-K dated
June 29, 1998)
4.4 Form of Series A Warrant to purchase Youbet.com common stock
(Incorporated herein by reference to Youbet.com's Prospectus
Filed Pursuant to Rule 424 dated October 4, 1999)
4.5 Form of Series B Warrant to purchase Youbet.com common stock
(Incorporated herein by reference to Youbet.com's Prospectus
Filed Pursuant to Rule 424 dated October 4, 1999)
4.6 Form of Series C Warrant to purchase Youbet.com common stock
(Incorporated herein by reference to Youbet.com's Prospectus
Filed Pursuant to Rule 424 dated October 4, 1999)
4.7 Form of Series D Warrant to purchase Youbet.com common stock
(Incorporated herein by reference to Youbet.com's Prospectus
Filed Pursuant to Rule 424 dated October 4, 1999)
4.8 Form of Series E Warrant to purchase Youbet.com common stock
(Incorporated herein by reference to Youbet.com's Prospectus
Filed Pursuant to Rule 424 dated October 4, 1999)
4.9 Form of Series M Warrant to purchase Youbet.com common stock
at $3.125 per share (Incorporated herein by reference to
Youbet.com's Prospectus Filed Pursuant to Rule 424 dated
October 4, 1999)
4.10 Form of Series M Warrant to purchase Youbet.com common stock
at $5.25 per share (Incorporated herein by reference to
Youbet.com's Prospectus Filed Pursuant to Rule 424 dated
October 4, 1999)
4.11 Warrant to purchase Youbet.com common stock issued to Robert
M. Fell, dated June 29, 1998 (Incorporated herein by
reference by reference to Youbet.com's Form 8-K dated
June 29, 1998)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------- ----------------------
<C> <S>
4.12 Form of warrant to purchase Youbet.com common stock at $2.50
per share, issued to Lorne Goldberg and Elizabeth Edlich
dated August 12, 1999 (Incorporated herein by reference to
Youbet.com's Registration Statement on Form S-3
(No. 333-85675) dated September 29, 1999)
10.1 1995 Stock Option Plan (Incorporated herein by reference to
Youbet.com's Form 10-K dated December 31, 1996.)
10.2 1995 Stock Option Plan for Non-Employee Directors
(Incorporated herein by reference to Youbet.com's Form 10-K
dated December 31, 1996.)
10.3 Stock Purchase Agreement dated June 29, 1998 (Incorporated
herein by reference to Youbet.com's Form 8-K dated 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.)
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 February 23, 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 February 23, 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 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.)
10.21 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.)
10.22 Civil Resolution with the Los Angeles County District
Attorney and Los Angeles Police Department (Incorporated
herein by reference to Youbet.com's Form 8-K dated
January 19, 2000)
10.23 Agreement between Youbet.com and Axcis dated September 1,
1999
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule.
</TABLE>
- - ------------------------
(b) Reports on Form 8-K:
1. Youbet.com filed a Form 8-K dated October 12, 1999 with respect to the
expected number of subscribers for its third quarter ended September 30,
1999 and to announce appointment of Charles
39
<PAGE>
Peebler as a new board member replacing Jess Rifkind and to announce
co-founder David Marshall's resignation as an officer and director effective
December 31, 1999.
2. Youbet.com filed Form 8-K's dated October 20, 1999 and November 12, 1999
with respect to the local investigation of legality of online and telephone
parimutuel wagering in California.
3. Youbet.com filed Form 8-K dated November 3, 1999 to report earnings for the
three months and nine months ended September 30, 1998 and 1999.
40
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
YOUBET.COM, INC.
Date: March 29, 2000 /s/ ROBERT M. FELL
-------------------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
</TABLE>
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
Date: March 29, 2000 /s/ ROBERT M. FELL
-------------------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
Date: March 29, 2000 /s/ RUSSELL M. FINE
-------------------------------------------------
Russell M. Fine
EXECUTIVE VICE PRESIDENT, CHIEF TECHNOLOGY OFFICER
AND DIRECTOR
Date: March 29, 2000 /s/ PHILLIP C. HERMANN
-------------------------------------------------
Phillip C. Hermann
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Date: March 29, 2000 /s/ CAESAR P. KIMMEL
-------------------------------------------------
Caesar P. Kimmel
DIRECTOR
Date: March 29, 2000 /s/ ALAN W. LANDSBURG
-------------------------------------------------
Alan W. Landsburg
DIRECTOR
Date: March 29, 2000 /s/ J. TERRENCE LANNI
-------------------------------------------------
J. Terrence Lanni
DIRECTOR
Date: March 29, 2000 /s/ CHARLES D. PEEBLER JR.
-------------------------------------------------
Charles D. Peebler Jr.
DIRECTOR
Date: March 29, 2000 /s/ WILLIAM H. ROEDY
-------------------------------------------------
William H. Roedy
DIRECTOR
</TABLE>
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Certified Public Accountants--BDO
Seidman, LLP.............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1999................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency)
for the three years ended December 31, 1999............... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Youbet.com, Inc.:
We have audited the accompanying consolidated balance sheets of
Youbet.com, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
1999. 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, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Youbet.com, Inc. and subsidiaries as of December 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Los Angeles, California
February 11, 2000, except for Note 15
which is as of March 14, 2000.
F-2
<PAGE>
YOUBET.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 62,274,403 $ 1,540,616
Stock subscriptions receivable (Notes 8a and 8c)............ -- 2,100,000
Receivables................................................. 211,474 50,364
Interest and other receivables.............................. 319,162 11,317
Prepaid expenses............................................ 164,889 22,344
------------ ------------
Total current assets.................................... 62,969,928 3,724,641
------------ ------------
Property and equipment (Notes 4 and 10)..................... 3,675,190 1,700,211
Less: Accumulated depreciation and amortization............. (1,298,416) (820,535)
------------ ------------
Property and equipment, net............................. 2,376,774 879,676
------------ ------------
Deferred financing costs, net of amortization (Note 7)...... 1,440,324 31,395
Deposits and other.......................................... 71,341 17,537
------------ ------------
Total assets............................................ $ 66,858,367 $ 4,653,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,128,386 $ 984,258
Accrued compensation and related items...................... 218,470 144,252
Accrued expenses (Note 5)................................... 2,194,506 451,127
Deferred revenues (Note 9).................................. 527,986 --
Current portion of capitalized lease obligation (Note 10)... 52,786 220,317
------------ ------------
Total current liabilities............................... 6,122,134 1,799,954
Notes payable (Note 7)...................................... 39,814,163 --
Capitalized lease obligations, less current portion (Note
10)....................................................... 7,348 60,134
------------ ------------
Total liabilities....................................... 45,943,645 1,860,088
------------ ------------
Commitments and contingencies (Notes 3, 10 and 11)
Stockholders' equity (Note 8):
Preferred stock, $.001 par value (aggregate liquidation
preference of $0 and $2,677,750 at December 31, 1999 and
1998, respectively)--Authorized 1,000,000 shares, 0
share and 107,110 shares outstanding as of December 31,
1999 and 1998, respectively............................. -- 107
Common stock, $.001 par value--Authorized 50,000,000
shares, 19,360,934 and 13,970,268 shares outstanding as
of December 31, 1999 and 1998, respectively............. 19,361 13,970
Additional paid-in capital (Note 8a)...................... 84,551,055 42,326,397
Accumulated deficit....................................... (62,312,209) (37,825,941)
Deferred compensation (Notes 8d and 8e)................... (1,203,485) (1,161,372)
Notes receivable from stockholders (Note 8c).............. (140,000) (560,000)
------------ ------------
Total stockholders' equity.............................. 20,914,722 2,793,161
------------ ------------
Total liabilities and stockholders' equity.............. $ 66,858,367 $ 4,653,249
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
YOUBET.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.............................................. $ 3,773,577 $ 263,793 $ --
Operating expenses (1):
Network operations.................................. 2,105,312 1,494,332 677,774
Research and development............................ 2,372,872 1,578,830 1,331,345
Sales and marketing................................. 14,461,694 1,818,472 948,489
General and administrative.......................... 7,381,177 6,071,132 3,652,344
Depreciation and amortization....................... 479,616 397,357 307,935
------------ ------------ ------------
Total operating expenses.......................... 26,800,671 11,360,123 6,917,887
------------ ------------ ------------
Loss from operations.................................. (23,027,094) (11,096,330) (6,917,887)
Other income (expense):
Interest income..................................... 2,419,896 70,627 1,145
Interest expense.................................... (3,106,111) (331,763) (390,471)
Amortization of deferred financing costs............ (285,567) (119,546) --
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into common
stock and warrants (Note 8a)...................... -- (849,963) (573,348)
Release of forfeiture restrictions on common stock
owned by officers/major shareholders (Note 8b).... -- -- (7,875,000)
Fair value of warrants issued for financing costs
(Note 8d)......................................... (490,791) (1,405,684) (3,656,202)
Other............................................... 5,799 (126,488) 4,569
------------ ------------ ------------
Total other expense............................... (1,456,774) (2,762,817) (12,489,307)
------------ ------------ ------------
Loss before provision for state income and franchise
taxes............................................... (24,483,868) (13,859,147) (19,407,194)
Provision for state income and franchise taxes (Note
13)................................................. (2,400) (2,400) (9,644)
------------ ------------ ------------
Net loss............................................ $(24,486,268) $(13,861,547) $(19,416,838)
============ ============ ============
Net loss per common share--basic and diluted.......... $ (1.45) $ (1.32) $ (3.06)
============ ============ ============
Weighted average number of common shares
outstanding......................................... 16,937,700 10,534,905 6,355,352
============ ============ ============
</TABLE>
(1) Operating expenses include non-cash compensation expenses (Notes 8d and 8e)
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Network operations.................................. $ 172,728 $ 207,037 $ 12,375
Research and development............................ 66,564 311,677 77,682
Sales and marketing................................. 401,356 413,720 237,957
General and administrative.......................... 1,567,117 3,330,529 1,848,168
------------ ------------ ------------
$ 2,207,765 $ 4,262,963 $ 2,176,182
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
YOUBET.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ---------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
---------- ---------- ---------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997........... -- $ -- 8,283,333 $ 8,283 $ 4,410,661 $(4,547,556) $ (277,087)
Shares issued as payment for
amounts due to vendors and
employees (Note 8a).............. -- -- 27,433 28 61,410 -- --
Shares issued in private placement
(Note 8a)........................ -- -- 897,760 898 2,243,502 -- --
Costs of private placement (Note
6a).............................. -- -- -- -- (291,020) -- --
Shares issued to bridge loans
investors for conversion into
common stock and warrants (Note
8a).............................. -- -- 895,468 895 1,678,105 -- --
Shares returned to Company for
cancellation by officers/major
stockholders (Note 8b)........... -- -- (750,000) (750) 750 -- --
Release of forfeiture restrictions
on common stock owned by
officer/major stockholders (Note
8b).............................. -- -- -- -- 7,875,000 -- --
Discount on conversion of bridge
loans, accounts payable, employee
deferred salaries into common
stock and warrants (Note 6)...... -- -- -- -- 573,348 -- --
Shares issued as finders fees for
capital raising transactions
(Note 8a)........................ -- -- 250,000 250 (250) -- --
Amortization of deferred
compensation (Notes 8d and 8e)... -- -- -- -- -- -- 167,965
Fair value of stock options and
warrants issued (Notes 8d and
8e).............................. -- -- -- -- 6,862,483 -- (1,198,064)
Net loss for the year.............. -- -- -- -- -- (19,416,838) --
---------- ---------- ---------- --------- ----------- ------------ -----------
Balance, December 31, 1997......... -- -- 9,603,994 9,604 23,413,989 (23,964,394) (1,307,186)
Warrants exercised and converted to
stock (Note 8a).................. -- -- 355,000 355 1,068,645 -- --
Shares issued as payment for
amounts due to vendors and
employees (Note 8a).............. -- -- 27,603 28 69,510 -- --
Shares issued as payment for
amounts due to officers and
directors (Note 8a).............. -- -- 96,220 96 180,317 -- --
Shares issued through financing
activities (Note 8a)............. -- -- 20,000 20 78,730 -- --
Shares issued to bridge loan
investors for conversion into
common stock and warrants (Note
8a).............................. -- -- 1,513,551 1,513 2,999,217 -- --
Preferred shares issued in private
placement (Note 8c).............. 262,500 262 -- -- 6,562,238 -- --
Cost of private placement (Note
8c).............................. -- -- -- -- (360,909) -- --
Proceeds from the sale of warrants
(Note 8c)........................ -- -- -- -- 4,531 -- --
Warrants purchased by officers
(Note 8c)........................ -- -- -- -- 75,000 -- --
Preferred stock converted to common
shares (Note 8c)................. (155,390) (155) 1,553,900 1,554 (1,399) -- --
Shares issued in private placement
(Note 8a)........................ -- -- 800,000 800 1,999,200 -- --
Cost of private placement (Note
8a).............................. -- -- -- -- (120,000) -- --
Discount on conversion of bridge
loans, accounts payable and
employee deferred salaries into
common stock and warrants (Note
6)............................... -- -- -- -- 849,963 -- --
Fair value of warrants issued for
financing costs (Note 8d)........ -- -- -- -- 1,405,684 -- --
Non-cash compensation (Notes 8d and
8e).............................. -- -- -- -- 4,196,881 -- (1,434,988)
Cancellation of warrants (Note
8d).............................. -- -- -- -- (95,200) -- --
Amortization of deferred
compensation (Notes 8d and 8e)... -- -- -- -- -- -- 1,580,802
Net loss for the year.............. -- -- -- -- -- (13,861,547) --
---------- ---------- ---------- --------- ----------- ------------ -----------
Balance, December 31, 1998......... 107,110 107 13,970,268 13,970 42,326,397 (37,825,941) (1,161,372)
Warrants exercised and converted to
stock (Note 8a).................. -- -- 412,832 413 965,853 -- --
Warrants exercised in conjunction
with secondary public offering
(Note 8a)........................ -- -- 654,275 654 2,162,899 -- --
Stock options exercised and
converted to stock (Note 8a)..... -- -- 275,372 275 537,979 -- --
Preferred stock converted to common
shares (Note 8a)................. (107,110) (107) 1,071,100 1,071 (964) -- --
Shares issued in secondary public
offering (Note 8a)............... -- -- 2,863,582 2,864 37,280,974 -- --
Secondary public offering related
costs (Note 8a).................. -- -- -- -- (1,660,142) -- --
Shares issued as payment for
amounts due to vendors (Note
8a).............................. -- -- 13,505 14 33,749 -- --
Shares issued in a private
placement (Note 8a).............. -- -- 100,000 100 249,900 -- --
Offset of notes receivable with
bonus to officer (Note 8c)....... -- -- -- -- -- -- --
Fair value of stock options and
warrants issued (Note 8d)........ -- -- -- -- 2,598,760 -- (1,567,167)
Non-cash compensation (Notes 8d and
8e).............................. -- -- -- -- 55,650 -- --
Amortization of deferred
compensation (Notes 8d and 8e)... -- -- -- -- -- -- 1,525,054
Net loss for the year.............. -- -- -- -- -- (24,486,268) --
---------- ---------- ---------- --------- ----------- ------------ -----------
Balance, December 31, 1999......... -- -- 19,360,934 $ 19,361 $84,551,055 $(62,312,209) $(1,203,485)
========== ========== ========== ========= =========== ============ ===========
<CAPTION>
STOCK
NOTES
RECEIVABLE TOTAL
----------- -----------
<S> <C> <C>
Balance, January 1, 1997........... $ -- $ (405,699)
Shares issued as payment for
amounts due to vendors and
employees (Note 8a).............. -- 61,438
Shares issued in private placement
(Note 8a)........................ -- 2,244,400
Costs of private placement (Note
6a).............................. -- (291,020)
Shares issued to bridge loans
investors for conversion into
common stock and warrants (Note
8a).............................. -- 1,679,000
Shares returned to Company for
cancellation by officers/major
stockholders (Note 8b)........... -- --
Release of forfeiture restrictions
on common stock owned by
officer/major stockholders (Note
8b).............................. -- 7,875,000
Discount on conversion of bridge
loans, accounts payable, employee
deferred salaries into common
stock and warrants (Note 6)...... -- 573,348
Shares issued as finders fees for
capital raising transactions
(Note 8a)........................ -- --
Amortization of deferred
compensation (Notes 8d and 8e)... -- 167,965
Fair value of stock options and
warrants issued (Notes 8d and
8e).............................. -- 5,664,419
Net loss for the year.............. -- (19,416,838)
----------- -----------
Balance, December 31, 1997......... -- (1,847,987)
Warrants exercised and converted to
stock (Note 8a).................. -- 1,069,000
Shares issued as payment for
amounts due to vendors and
employees (Note 8a).............. -- 69,538
Shares issued as payment for
amounts due to officers and
directors (Note 8a).............. -- 180,413
Shares issued through financing
activities (Note 8a)............. -- 78,750
Shares issued to bridge loan
investors for conversion into
common stock and warrants (Note
8a).............................. -- 3,000,730
Preferred shares issued in private
placement (Note 8c).............. (490,000) 6,072,500
Cost of private placement (Note
8c).............................. -- (360,909)
Proceeds from the sale of warrants
(Note 8c)........................ -- 4,531
Warrants purchased by officers
(Note 8c)........................ (70,000) 5,000
Preferred stock converted to common
shares (Note 8c)................. -- --
Shares issued in private placement
(Note 8a)........................ -- 2,000,000
Cost of private placement (Note
8a).............................. -- (120,000)
Discount on conversion of bridge
loans, accounts payable and
employee deferred salaries into
common stock and warrants (Note
6)............................... -- 849,963
Fair value of warrants issued for
financing costs (Note 8d)........ -- 1,405,684
Non-cash compensation (Notes 8d and
8e).............................. -- 2,761,893
Cancellation of warrants (Note
8d).............................. -- (95,200)
Amortization of deferred
compensation (Notes 8d and 8e)... -- 1,580,802
Net loss for the year.............. -- (13,861,547)
----------- -----------
Balance, December 31, 1998......... (560,000) 2,793,161
Warrants exercised and converted to
stock (Note 8a).................. -- 966,266
Warrants exercised in conjunction
with secondary public offering
(Note 8a)........................ -- 2,163,553
Stock options exercised and
converted to stock (Note 8a)..... -- 538,254
Preferred stock converted to common
shares (Note 8a)................. -- --
Shares issued in secondary public
offering (Note 8a)............... -- 37,283,838
Secondary public offering related
costs (Note 8a).................. -- (1,660,142)
Shares issued as payment for
amounts due to vendors (Note
8a).............................. -- 33,763
Shares issued in a private
placement (Note 8a).............. -- 250,000
Offset of notes receivable with
bonus to officer (Note 8c)....... 420,000 420,000
Fair value of stock options and
warrants issued (Note 8d)........ -- 1,031,593
Non-cash compensation (Notes 8d and
8e).............................. -- 55,650
Amortization of deferred
compensation (Notes 8d and 8e)... -- 1,525,054
Net loss for the year.............. -- (24,486,268)
----------- -----------
Balance, December 31, 1999......... $ (140,000) $20,914,722
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
YOUBET.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss.................................................. $(24,486,268) $(13,861,547) $(19,416,838)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 479,616 397,357 307,935
Amortization of deferred financing...................... 285,567 119,546 --
Other losses............................................ 1,237 70,640 --
Interest accreted on note payable....................... 3,085,653 -- --
Settlement of accounts payable and accrued
liabilities............................................ -- 520,212 280,438
Non-cash compensation................................... 2,698,557 4,262,964 2,176,182
Discount on conversion of bridge loans, accounts payable
and employee deferred salaries into common stock and
warrants............................................... -- 849,963 573,348
Fair value of warrants issued for financing costs....... -- 1,405,684 3,656,202
Release of forfeiture restrictions on common stock owned
by officers/major stockholders......................... -- -- 7,875,000
Change in assets and liabilities:
Receivables............................................. (247,359) (44,206) 1,350
Prepaid expenses........................................ (142,545) 10,296 93,923
Other current assets.................................... (82,305) 16,532 1,708
Deposits................................................ (193,094) (17,537) --
Accounts payable........................................ 2,144,126 73,980 82,679
Accrued compensation and related items.................. 170,220 (374,065) 311,542
Accrued interest payable................................ -- (71,128) 115,642
Other accrued expenses.................................. 1,681,141 110,019 76,797
Deferred revenues....................................... 527,986 -- --
State income taxes payable.............................. -- (6,400) 1,980
------------ ------------ ------------
Net cash used in operating activities............... (14,077,468) (6,537,690) (3,862,112)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment..................... (1,977,954) (359,800) (132,356)
------------ ------------ ------------
Net cash used in investing activities............... (1,977,954) (359,800) (132,356)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from convertible note.......................... 36,728,510 -- --
Proceeds from exercise of stock options and warrants.... 3,640,734 1,069,000 --
Increase in deferred financing costs.................... (1,694,500) (96,000) --
Proceeds from lease financing........................... -- -- 150,261
Proceeds from warrant purchase.......................... 2,438 -- --
Proceeds from sales of securities, net of offering
costs.................................................. 38,332,344 5,501,122 1,953,380
Proceeds from advances and bridge loans:
Related parties....................................... -- 888,875 844,000
Unrelated parties..................................... -- 1,190,000 1,315,000
Repayments of advances:
Related parties....................................... -- (23,875) (104,000)
Unrelated parties..................................... -- (30,000) (105,000)
Payments on capitilized lease obligations............. (220,317) (113,911) (93,596)
------------ ------------ ------------
Net cash provided by financing activities........... 76,789,209 8,385,211 3,960,045
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ 60,733,787 1,487,721 (34,423)
Cash and cash equivalents at the beginning of the period.... 1,540,616 52,895 87,318
------------ ------------ ------------
Cash and cash equivalents at the end of the period.......... $ 62,274,403 $ 1,540,616 $ 52,895
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid for:
Interest.................................................. $ 22,624 $ 26,780 $ 27,364
State income taxes........................................ 3,757 6,166 6,443
============ ============ ============
Non-cash investing and financing activities:
Equipment acquired under capital leases................... $ -- $ 80,000 $ --
Reduction of loan from settlement agreement............... -- -- --
Additions to deferred compensation.................... 1,567,167 1,434,988 --
Advances and bridge loans, including accrued interest,
converted into common stocks and warrants:
Related parties..................................... -- 1,366,365 632,500
Unrelated parties................................... -- 1,634,504 1,046,500
Conversion of accounts payable and accrued
compensation into common stock....................... 33,763 249,951 61,438
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BASIS OF PRESENTATION
Youbet.com, Inc., a Delaware corporation, You Bet!, Inc., a Delaware
corporation and a wholly-owned subsidiary of Youbet.com, Inc., and Middleware
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 22, 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 live event wagering. 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.
During June 1999, the Company determined it had successfully completed the
development stage by generating revenues of over $1,000,000 since the beginning
of the year. Accordingly, the Company is no longer in the development stage and
is now in the operating stage.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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 these estimates.
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
accordance 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 includes the You Bet Network and CD Rom software product
which subscribers install on their personal computers in order to access the You
Bet Network. Management believes technological feasibility was achieved in early
1998, and the Company's network became available for general release to
subscribers 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.
F-7
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, consisting
primarily of stock subscriptions receivable, receivables, accounts payable and
notes payable, 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.
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.
BASIC AND DILUTED LOSS PER SHARE
Basic loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss per
share is calculated by dividing net 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
1999, 1998 and 1997.
As of December 31, 1999, potential dilutive securities representing
13,842,795 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 2,435,231 outstanding stock options, 6,857,564
outstanding common stock
F-8
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purchase warrants, and $45,500,000 of 11% Senior Convertible Discount Notes
convertible into 4,550,000 shares of common stock.
For the year ended 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.
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.
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 8).
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), 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" ("APB 25"), but to disclose the pro forma effect on net loss and
diluted 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 (see Note 8e) 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Youbet.com adopted the Financial Accounting Standards Board Issued 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.
F-9
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Company is entitled to receive on a weekly basis one-half of the net
commissions 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 any full
twelve month period during the term of the agreement subsequent to the initial
eighteen month period.
For the year ended December 31, 1999 and 1998, $3,239,332 and $263,793 of
the Company's revenues were generated from the Ladbroke Agreement, respectively.
The Company currently estimates that net commissions will exceed $1,000,000 for
any twelve month period during the term of the agreement subsequent to the
initial eighteen month period ending June 1999. However, should net commissions
be less than $1,000,000 during such twelve month period, Ladbroke could elect to
terminate the agreement, which could have a material adverse effect on the
Company's business.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Computer equipment.................................. $ 2,940,251 $1,015,411
Office furniture and equipment...................... 244,711 202,504
Leasehold improvements.............................. 72,787 64,855
Assets under capital leases (Note 10)............... 417,441 417,441
----------- ----------
3,675,190 1,700,211
Less: Accumulated depreciation and amortization..... (1,298,416) (820,535)
----------- ----------
$ 2,376,774 $ 879,676
=========== ==========
</TABLE>
At December 31, 1999 and 1998, accumulated depreciation and amortization
included $83,487 and $113,540, respectively, related to assets under capital
leases.
F-10
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Civil resolution and settlement (Note 12)............. $1,308,250 $ --
Marketing expenses.................................... 452,910 7,801
Professional fees..................................... 160,612 133,250
Track commission...................................... 77,638 --
Legislative fees...................................... 70,825 --
Software licensing fee................................ 3,859 125,000
Private placement closing fee......................... -- 161,500
Other................................................. 120,412 23,576
---------- --------
Total................................................. $2,194,506 $451,127
========== ========
</TABLE>
NOTE 6--ADVANCES AND BRIDGE LOANS PAYABLE
Advances and bridge loans consisted of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES
----------- -----------
<S> <C> <C>
Advances:
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, 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>
During 1998, interest expense with respect to bridge loans and advances
payable aggregated $240,730, 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 recorded a charge to operations of $910,099 in
1998, including $500,600 allocable to related parties (see Note 8a).
F-11
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--ADVANCES AND BRIDGE LOANS PAYABLE (CONTINUED)
CONVERSION DISCOUNT
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 a s described in Note 8c, 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 7--NOTES PAYABLE
On April 5, 1999, the Company issued $45,500,000 principal amount of 11%
Senior Convertible Discount Notes for cash proceeds of $36,728,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001. The Company incurred approximately $1,625,000 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. 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, with a corresponding credit to paid-in capital. The notes also
contain covenants and restrictions limiting the ability of the Company to engage
in certain financings, other transactions and dividend distributions. At
December 31, 1999, $3,085,653 of interest expense has been accreted. During
February 2000 the noteholders agreed to a first amendment to the notes (see Note
15).
NOTE 8--STOCKHOLDERS' EQUITY
A. ISSUANCE OF COMMON STOCK AND RELATED 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
F-12
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
$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. 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 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. (See Note 10).
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 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 1999, the Company issued 74,833 shares of common stock in conjunction
with the exercise of stock options by certain employees. In order to effect a
cashless transaction, an additional 37,417 stock options were forfeited. This
cashless exercise resulted in a charge to non cash compensation of $300,000.
F-13
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
During 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 1999, the Company issued 13,505 shares of common stock in conjunction
with the conversion of vendor debt of $33,763.
During 1999, the Company issued 688,204 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 $1,504,520.
During 1999, 107,110 shares of convertible preferred stock were converted
into 1,071,100 shares of common stock.
As final settlement for the finder's fee related to the preferred stock
financing in June 1998, additional fees of $122,500 were paid to the finder. The
fees are charged to additional paid-in capital at June 30, 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.
In June 1999, the Company completed a public offering and issued 2,863,582
common stock shares at a price of $14.00 per share, generating gross proceeds of
$37,283,838. The Company also issued 654,275 shares of common stock, in
conjunction with the exercise of warrants, generating net proceeds to the
Company of $2,153,553. The Company incurred $1,660,142 of fees and expenses in
conjunction with the above transactions.
During 1999, the company issued 3,500 warrants to a consultant. The fair
value of the warrants of $25,685 is being charged to operations over a one year
period. The warrants have an exercise price of $2.50. The warrants expire in
three years.
During 1999, the Company issued 100,000 warrants to its joint venture
partner which concurrently agreed to purchase 142,857 shares at an aggregate
cost of $2,000,000 of the Company's common stock in the secondary public
offering and agreed to contribute funds to the joint venture project. The total
fair value of these warrants was $907,000 of which 50% was charged as financing
costs and the remaining 50% was charged against paid-in capital. The warrants
have an exercise price of $19.50 and a term of five years. (See Note 9).
During 1999, the Company issued 50,000 warrants in exchange for services.
The fair value of these warrants of $405,000 is being charged to operations over
the vesting period. The warrants have an exercise price of $11.50 and a term of
five years. The warrants vest over three years.
During 1999, the Company issued 25,000 warrants in exchange for services.
The fair value of the warrants of $142,000 is being charged to operations over
the vesting period. The warrants have an exercise price of $7.93 and a term of
five years. The warrants vest over three years.
During 1999, the Company issued 50,000 warrants to various finders in
connection with the issuance of the 11% Senior Convertible Discount Notes. The
warrants are exercisable at $10.00 per share and expire on April 5, 2004. The
fair value of the warrants is $352,000.
F-14
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
B. DIVESTMENT SHARES
In December 1995, 2,500,000 of 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 $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.
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.
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. 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. In connection with the public
secondary offering in June 1999, the remaining 107,110 shares of convertible
preferred stock were converted into 1,071,110 shares of common stock.
F-15
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
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"). 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. 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. 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. On July 8, 1999, the board approved
the recommendation of the Compensation Committee to grant Fell & Company, Inc. a
performance-based bonus as a result of the services of Robert M. Fell which has
been credited against the Notes, consisting of a $280,000 (plus accrued
interest), credited in recognition of the completion of the placement of 11%
Senior Convertible Discount Notes, $140,000 (plus accrued interest) credited in
recognition of the completion of Youbet.com's secondary offering, $70,000 (plus
accrued interest) credited at such time as Youbet.com achieves 15,000
subscribers and $70,000 (plus accrued interest) to be credited at such time as
Youbet.com achieves 25,000 subscribers. As a result of the bonuses described
above, the $70,000 Note has been satisfied and the outstanding principal balance
on the $490,000 Note has been reduced to $140,000. The Fell Trust has agreed
that the $490,000 Note will be with full recourse to the Fell Trust and
Youbet.com has released to the Fell Trust all of the collateral pledged in
connection with the Notes. The $490,000 Note and the $70,000 Note were recorded
as reductions to stockholders' equity at December 31, 1998.
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 &
F-16
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
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, 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. The increase reflects 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. Mr. Marshall resigned as an officer and
director of the Company on December 31, 1999. In accordance with the agreement,
his salary and benefits will be paid through December 31, 2001. In
December 1999, Russell M. Fine's compensation was increased to $165,000.
D. OTHER WARRANTS
The Company has issued various stock options and warrants 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 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
F-17
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
the remaining $828,916 was 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.
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 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 $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
F-18
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
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. The fair value of the warrants of $212,400 is being
charged to operations.
In February 1999, the company issued 3,500 warrants to a consultant. The
fair value of the warrants of $25,685 is being charged to operations over a one
year period. The warrants have an exercise price of $2.50. The warrants expire
in three years.
In April 1999, the Company issued 50,000 warrants to various finders in
connection with the issuance of the 11% Senior Convertible Discount Notes. The
warrants are exercisable at $10.00 per share and expire on April 5, 2004. The
fair value of the warrants of $352,000 is being charged to operations.
In April 1999, the Company issued 50,000 warrants to a horse racing track
for services rendered. The warrants are exercisable at $11.50 per share and
expire on March 25, 2004. The fair value of the warrants is $405,000 and is
being charged to operations over the service period of three years.
In May 1999, the Company issued warrants as final settlement to a finder in
connection with the issuance of Series A Convertible Preferred Stock in
June 1998. The Company issued 13,000 warrants with an exercise price of $.01 and
26,000 warrants with an exercise price of $2.50. The warrants are exercisable
through March 2004. The fair value of the warrants is $216,060 and was charged
to operations as financing costs.
In June 1999, the Company issued 100,000 warrants to its joint venture
partner. In connection with the sale of common stock at a total price of
$2,000,000 and the formation of a joint venture project (see Note 9). The
warrants are exercisable at $19.50 per share and expire on June 8, 2004. The
fair value of the warrants is $907,000 of which 50% was charged as financing
costs and the remaining 50% charged against paid-in-capital.
In August 1999, the Company issued 25,000 warrants to a horse racing track
for services rendered. The warrants are exercisable at $7.93 per share and
expire on August 3, 2002. The fair value of the warrants is $141,861 and is
being charged to operations over the service period of three years.
F-19
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
Information with respect to common stock purchase warrants issued is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
WARRANTS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balance, January 1, 1997............................ 1,387,188 $ 2.69
Warrants issued..................................... 4,508,823 $ 3.70
----------
Balance, December 31, 1997.......................... 5,896,011 $ 3.48
Warrants issued..................................... 2,148,628 $ 2.90
Exercised........................................... (375,000) $ 3.07
----------
Balance, December 31, 1998.......................... 7,669,639 $ 3.33
Warrants issued..................................... 267,500 $13.23
Exercised........................................... (1,079,575) $ 3.03
----------
Balance, December 31, 1999.......................... 6,857,564 $ 3.76
==========
</TABLE>
Additional information about outstanding warrants to purchase the Company's
common stock at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING AND EXERCISABLE
-----------------------------------------
WEIGHTED AVG. WEIGHTED
REMAINING AVG.
NUMBER CONTRACTUAL LIFE EXERCISE
OF SHARES (IN YEARS) PRICE
--------- ---------------- ----------
<S> <C> <C> <C>
Range of Exercise Prices:
$0.01.............................. 17,226 2.49 $ 0.01
$2.50.............................. 805,710 Not determinable $ 2.50
$2.50.............................. 2,313,110 4.12 $ 2.50
$2.51-$5.51........................ 3,496,518 Not determinable $ 4.20
$5.51 and over..................... 225,000 3.81 $ 14.83
--------- -------
Total.............................. 6,857,564 $ 3.76
========= =======
</TABLE>
E. STOCK OPTIONS
During 1995, the Company adopted the Employee Stock Option Plan 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. The Plans are closed and no other options
will be granted under these Plans.
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
F-20
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
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 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 was $18,000 in
1999, $63,561 in 1998 and $167,965 in 1997.
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
$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 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.
(3) 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.
During 1999, the Company granted various stock options, as follows:
(1) The Company issued stock options to four executives under the 1998 Stock
Option Plan to purchase a total of 350,000 shares of common stock at an
exercise price of $10.50 per share, the fair market price at the date of
grant. The stock options vest at specified dates during a period of four
years and are exercisable for a period of ten years. Subsequently, 156,250
of these options were canceled and 150,000 repriced to an exercise price of
$5.31.
F-21
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
(2) The Company issued stock options to employees to purchase 595,050 shares of
common stock at exercise prices ranging from $3.72 to $12.59. Of these stock
options issued, options representing 36,150 shares of common stock were
issued below the fair market value on the date of grant. The aggregate
difference between the exercise price and the fair market value at the date
of grant was $171,629, which is being charged to operations over the
options' vesting period. These options vest over four years and are
exercisable for a period of five years. Subsequently, 19,600 options were
repriced to an exercise price of $5.31.
(3) Stock options were granted to a consultant to purchase 25,000 shares of
common stock at an exercise price of $10.50. The fair value of these options
was $257,750, which was charged to deferred compensation and is being
amortized over the vesting period. These options vest ratably over two years
commencing on the grant date. These options are exercisable for a period of
ten years.
(4) Stock options were granted to a consultant to purchase 30,000 shares of
common stock at an exercise price of $11.13. The fair value of these options
was $238,927, which was charged to deferred compensation and is being
amortized over the vesting period. These options vest ratably over six
months commencing on the grant date. These options are exercisable for a
period of five years. Subsequently, the options were repriced to an exercise
price of $5.31.
(5) Stock options were granted to a Director to purchase 40,000 shares of common
stock at an exercise price of $7.00, the fair market value on the date of
grant. These options vest ratably over a 12 month period and are exercisable
for a period of ten years.
(6) Stock options were granted to a consultant to purchase 10,000 shares of
common stock at an exercise price of $5.00, the fair market value on the
date of grant. The fair value of these options was $47,287 which is being
amortized over the vesting period. These options vest ratably over a ten
month period are exercisable for a period of five years.
(7) Stock options were granted to a consultant to purchase 2,500 shares of
common stock at an exercise price of $6.13, the fair market value on the
date of grant. The fair value of these options was $14,808 which is being
amortized over the vesting period. These options vest ratably over a six
month period are exercisable for a period of five years.
F-22
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
Information with respect to activity under the Stock Option Plans is summarized
as follows:
<TABLE>
<CAPTION>
WEIGHTED
STOCK EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Balance, January 1, 1997.................................... 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............................................. 1,057,550 $7.50
Options exercised........................................... (275,372) $2.53
Options terminated.......................................... (261,159) $8.29
---------
Balance December 31, 1999................................... 2,435,231 $4.22
=========
Options exercisable (vested) at December 31, 1999........... 1,446,062 $2.84
=========
</TABLE>
Additional information about outstanding options to purchase the Company's
common stock at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
WEIGHTED AVG.
REMAINING
NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
OF SHARES LIFE (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
------------ --------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
RANGE OF EXERCISE PRICES:
$2.50................................ 1,317,036 4.61 $2.50 1,235,608 $ 2.50
$2.51 - $2.99........................ 25,625 7.25 $2.75 16,125 $ 2.75
$3.00................................ 152,310 7.26 $3.00 101,994 $ 3.00
$3.01 - $5.50........................ 561,060 5.19 $5.17 52,960 $ 4.51
$5.51 - $15.81....................... 379,200 5.28 $8.96 39,375 $ 10.98
------------ --------- ----- --------- ---------
Total................................ 2,435,231 5.92 $4.22 1,446,062 $ 2.84
============ ========= ===== ========= =========
</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
F-23
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life in years........................... 5 5 5
Risk free interest rate.......................... 6.75% 6.75% 6.75%
Dividend yield................................... 0% 0% 0%
Expected volatility.............................. 101.7% 83.4% 83.4%
</TABLE>
The weighted average fair value at the date of grant for stock options and
warrants granted during 1999, 1998 and 1997 was $6.11 per option and $7.65 per
warrant in 1999, $3.88 per option and $2.84 per warrant in 1998, and $2.12 per
option and $2.31 per warrant in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net loss
As reported....................................... $(24,486,268) $(13,861,547) $(19,416,838)
Pro forma......................................... $(25,825,592) $(15,389,025) $(20,015,044)
Net loss per share
As reported....................................... $ (1.45) $ (1.32) $ (3.06)
Pro forma......................................... $ (1.52) $ (1.46) $ (3.15)
</TABLE>
NOTE 9--JOINT VENTURE AGREEMENT
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. Subsequent to
December 31, 1999 the Company announced that it is restructuring its
relationship with Station Casinos. The Company intends to continue to develop an
interactive website to provide a broad spectrum of information on live sporting
events, to offer entertainment and prizes to subscribers and to facilitate
sports wagering in Nevada limited to Nevada residents. Station Casinos has
expressed interest in participating in this service along with other Nevada
casinos on terms to be negotiated.
NOTE 10--CAPITAL AND OPERATING LEASES
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 agreed
F-24
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--CAPITAL AND OPERATING LEASES (CONTINUED)
to pay the lessor $21,000, and thirty monthly payments of $4,495 commencing
September 15, 1998 under the restructured lease agreement. Future obligations
under capital lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- - ------------------------ --------
<S> <C>
1999........................................................ $60,134
2000........................................................ 8,909
-------
Total payments.............................................. 69,043
Less: amount representing interest.......................... 8,909
-------
Present value of minimum payments........................... $60,134
Current portion............................................. $52,786
Long-term portion........................................... 7,348
-------
$60,134
=======
</TABLE>
The Company leases its executive and operating offices under an operating
lease which expires on February 28, 2001. Rent expense under this lease was
$226,245, $228,578 and $106,269 for the years ended December 31, 1999, 1998 and
1997, respectively. Under this non-cancellable lease, the Company is committed
to future minimum payments of $316,400 through February 28, 2001. See Note 11
for lease commitments entered into subsequent to December 31, 1999.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The Company has entered into a Services Agreement with Fell and Company,
which expires on June 30, 2001. This agreement calls for Robert Fell to be
compensated at $225,000 per annum. (Additional details are described at
Note 8c).
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. Mr. Marshall resigned as an officer and director of the Company on
December 31, 1999. In accordance with the agreement, his salary and benefits
will be paid through December 31, 2001. In December 1999, Russell M. Fine's
compensation was increased to $165,000.
During June 1999, the Company amended its service agreements with Robert M.
Fell, David M. Marshall, and Russell M. Fine. The amendment included a bonus
award for the three officers when specified milestones are met. At June 30,
1999, two of the four milestones were met by the Company through the placement
of the convertible note and the June public offering. As such, Robert M. Fell
had earned bonuses totaling $420,000 which was applied against a note receivable
due from the Robert M. Fell Living Trust. David M. Marshall and Russell M. Fine
had earned bonuses totaling $150,000. These bonuses have been charged to
operations. If the remaining milestones are achieved the Company would grant
Robert M. Fell additional bonuses of $140,000 and David M. Marshall and Russell
M. Fine would receive additional bonuses of $150,000 each. These milestones were
not achieved as of December 31, 1999.
In February 1999, the Company renewed employment agreements with two
officers. Both employment agreements expire on April 30, 2000 and provide for
compensation of $150,000 per annum each. In December 1999, the compensation for
both officers was increased to $165,000 per annum.
F-25
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
On March 11, 2000, the Company entered into a lease agreement on
approximately 30,000 square foot facility in Woodland Hills, California. The
base term of the lease is ten years with an option to extend an additional five
years. Base rent payments are $60,078 per month with annual increases as
specified in the lease agreement. Lease payments will commence approximately
120 days from the date of the lease agreement.
NOTE 12--LEGAL PROCEEDINGS
On June 4, 1999, George von Opel filed a complaint against the Company in
the Court of Chancery of the State of Delaware, alleging that the Company
breached its obligation to register 400,000 stock purchase warrants and shares
of common stock underlying such warrants issued by the Company to an affiliate
of Mr. von Opel. Mr. von Opel is seeking specific performance of the alleged
registration obligation and money damages of $8.7 million. The Company has
answered the complaint and intends to defend itself vigorously in the action.
Mr. von Opel has moved for summary judgment on the issue of liability, to which
the Company has responded. No hearing has been scheduled to date. No discovery
has been taken by either side at that time. As the litigation is at an initial
stage, an outcome cannot be predicted at this time.
On October 13, 1999, a search warrant was served on the Company by the Los
Angeles Police Department in connection with an investigation by the Los Angeles
Police Department and the Los Angeles County District Attorney's Office. In
cooperation with the investigation, effective November 10, 1999, the Company
voluntarily suspended reception and transmission of wagering information from
California residents and accelerated its implementation of a new data center
outside the state of California. On January 14, 2000, the Company reached a
civil resolution with the Los Angeles County District Attorney and the Los
Angeles Police Department. The Company entered into a stipulation with the
District Attorney resulting in the entry of a civil judgment and injunction in
which the Company admitted no wrongdoing and no factual or legal findings were
made. In connection with the settlement, the Company disbursed a total of
$1,308,250, consisting of $208,250 in cost reimbursements, $600,000 in civil
payments, $300,000 in contributions to the Los Angeles County Education
Foundation in support of computer education and $200,000 to the California
Council on Problem Gambling. The Company incurred approximately $150,000 of
legal fees in connection with this investigation. As part of the settlement, the
Company agreed that until California law is clarified, California subscribers
will not be allowed to place wagers on the You Bet Network. As of December 31,
1999, approximately 16% of Youbet.com's subscribers were from California.
NOTE 13--INCOME TAXES
The Company has recorded a provision for current minimum state income taxes
in the accompanying consolidated financial statements. At December 31, 1999, the
Company has available Federal and State net operating loss carryforwards of
approximately $37,900,000 and $27,000,000, respectively, for income tax
purposes, which expire in varying amounts through 2019 for federal and 2004 for
state purposes.
F-26
<PAGE>
YOUBET.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--INCOME TAXES (CONTINUED)
The net operating loss carryforward generated a deferred tax asset of
approximately $15,300,000 as of December 31, 1999. The deferred tax asset has
not been recognized since management is unable to determine it is more likely
than not that it will be realized. Accordingly, a 100% valuation allowance has
been provided.
NOTE 14--RELATED PARTY TRANSACTIONS
See Notes 6 and 8.
NOTE 15--SUBSEQUENT EVENTS
In February 2000, all of the holders of the 11% Senior Convertible Discount
Notes agreed to a First Amendment to Note Purchase Agreement. The modifications
to the original amendment increased the amount of borrowed money the Company can
incur, broadened the definition of permitted business for acquisition purposes,
required the Company to repurchase $4,000,000 of notes at face value and
requires a reset of conversion price on June 30, 2001 if the Company acquires
the stock or assets of any additional business on or prior to September 30,
2000. The Company repurchased the $4,000,000 of notes for $2,977,600 which
represented approximately 83% of the accreted value, therefore, a gain will be
realized on the difference between the amount paid and the accreted value of the
notes on the date of repurchase. The amount of the gain, net of the
proportionate write-off of unamortized financing costs, is approximately
$430,000.
On March 14, 2000, the Company signed a letter of intent to acquire from
Ladbrokes, the betting and gaming division of Hilton Group plc, its subsidiaries
which own and operate six off-track betting and two bingo operations based in
Argentina. The purchase price is estimated to be approximately $26 million,
payable in cash and notes. This acquisition is expected to be completed in the
second quarter of fiscal 2000 subject to negotiation, execution and closing of a
definitive purchase agreement, completion of the Company's due diligence,
receipt of applicable regulatory approvals and absence of adverse changes in the
financial condition of the business.
F-27
<PAGE>
FIRST AMENDMENT TO
NOTE PURCHASE AGREEMENT
This First Amendment to Note Purchase Agreement ("the AMENDMENT") is
entered into as of February __ , 2000, by and among Youbet.com, Inc., a Delaware
corporation (the "COMPANY"), and the party whose name appears on the signature
line below (the "PURCHASER").
WHEREAS, the Company and the Purchaser are parties to one of the Note
Purchase Agreements dated as of April 5, 1999 (the "PURCHASE AGREEMENTS")
pursuant to which, among other things, the Company issued $45,500,000 aggregate
principal amount of its 11% Senior Convertible Discount Notes due 2004 (the
"CONVERTIBLE NOTES"). Capitalized terms used herein without definitions shall
have the meanings ascribed thereto in the Purchase Agreement.
WHEREAS, the Company desires to acquire and operate off-track betting
and bingo facilities or similar or ancillary businesses (the "ADDITIONAL
BUSINESSES").
WHEREAS, on January 13, 2000, the Company and the Los Angeles County
District Attorney entered into a Stipulation for Entry of Final Judgment (the
"Stipulation") pursuant to which a Final Judgment Pursuant to Stipulation (the
"JUDGMENT") was entered in the Superior Court of the State of California for the
County of Los Angeles in THE PEOPLE OF THE STATE OF CALIFORNIA V. YOUBET.COM
INC., (Case No. BC223065). The Judgment, among other things, enjoins the Company
from engaging in certain business activities in the State of California.
WHEREAS, the parties desire to (i) make certain amendments to the
Purchase Agreement to permit the Company to acquire and operate the Additional
Businesses, including incurring indebtedness to finance the payment of the
purchase price therefor, and (ii) waive any defaults which may have arisen under
the Purchase Agreements or the Convertible Notes as a result of the Company's
business activities in the State of California prior to the date hereof.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Amendment the parties agree as follows:
1. Section 6.4 of the Purchase Agreement is hereby amended and restated
to provide as follows:
Section 6.4 LIMITATIONS ON INDEBTEDNESS. The Company and the
Subsidiaries shall not, directly or indirectly, create, assume, incur,
guarantee, or otherwise become directly or indirectly liable with
respect to Indebtedness for Borrowed Money; PROVIDED, that the Company
may incur (i) Indebtedness for Borrowed Money in an amount not to
exceed $7,500,000 at any time outstanding from a reputable commercial
lender, and (ii) Indebtedness in respect of capital leases and
conditional sales of equipment and other property used in the ordinary
course of business ("Permitted Property"), incurred in the ordinary
course of
<PAGE>
business in an amount not to exceed $4,000,000 at any time outstanding;
provided, however, that if the Company shall acquire the stock or
assets of an Additional Business on or before September 30, 2000, the
Company may incur (x) Indebtedness for Borrowed Money in an amount not
to exceed $15,000,000 and (y) Indebtedness in respect of capital leases
and conditional sales of Permitted Property incurred in the ordinary
course of business in an amount not to exceed $4,000,000.
2. Section 7.17(k) of the Note Purchase Agreement is hereby amended and
restated to provide as follows:
(k) "PERMITTED BUSINESS" shall mean (i) any internet-related
gaming or wagering system operated in compliance with applicable law
(the "Original Business"), (ii) any other business ancillary or
reasonably related to the Original Business, such as a track or other
content provider, a licensed wagering facility, a merchandising
business targeted to customers and prospective customers of the
Original Business, and (iii) if the Company shall acquire the stock or
assets of an Additional Business and upon such acquisition, the
operations of off-track betting and bingo facilities and similar or
ancillary businesses.
3. If the Company shall acquire the stock or assets of an Additional
Business on or prior to September 30, 2000 and if Purchaser shall have executed
this Amendment, the Conversion Price of Purchaser's Convertible Note shall be
reset on June 30, 2001 to the lesser of (a) $10.00 per share of Common Stock and
(b) the average of the last trading price of the Company's Common Stock on the
principal exchange, upon which the Common Stock is traded (or if not traded on
an exchange on The Nasdaq Stock Market) for the twenty trading days ending on
June 30, 2001. If the Company shall acquire the stock or assets of an Additional
Business on or prior to September 30, 2000, the Company shall deliver to the
Purchaser an Allonge in the form of EXHIBIT A hereto (the "ALLONGE") within 10
days of the date such acquisition is consummated.
4. The Purchaser hereby waives any defaults which may have occurred
under the Purchase Agreement or the Convertible Notes prior to the date this
Amendment becomes effective as a result of the Company's operations in the State
of California. The Purchase Agreement and Convertible Notes shall be waived only
to the extent set forth herein. This waiver shall be limited precisely as
written and shall not be deemed to be a waiver of, or consent to any
modification of, any other provisions of the Purchase Agreement or the
Convertible Notes.
5. The Company represents and warrants to the Purchaser as follows:
5.1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
The Company does not have any Subsidiaries. The Company is duly
licensed or qualified to transact business in all jurisdictions in
which the nature of the business transacted by the Company or the
character of the properties owned or leased thereby requires that the
Company qualify to do business as a foreign corporation, except where
the
2
<PAGE>
failure to be so licensed or qualified would not have a Material
Adverse Effect. The Company has the corporate power and authority to
own and hold its properties and to carry on its business as now
conducted and as proposed to be conducted. The Company has the
corporate power and authority to execute and deliver this Amendment and
the Allonge and to perform its obligations hereunder and thereunder.
5.2. The execution and delivery by the Company of this
Amendment and the Allonge and the performance by the Company of its
obligations hereunder and thereunder have been duly authorized by all
requisite corporate action and will not violate (i) any provision of
any law, order of any court or other agency of government applicable to
the Company, the Certificate of Incorporation of the Company, or the
By-Laws of the Company, as amended, or (ii) any provision of any
indenture, agreement or other instrument to which the Company or any of
its properties or assets is bound, or (iii) conflict with, result in a
breach of or constitute (with due notice or lapse of time or both) a
default under any such indenture, agreement or other instrument, or
(iv) result in the creation or imposition of any lien, charge,
restriction, claim or encumbrance of any nature whatsoever upon any of
the properties or assets of the Company, which in the cases of clauses
(ii), (iii) and (iv) would have a Material Adverse Effect.
5.3. This Amendment has been, and if the stock or assets of an
Additional Business are acquired by the Company, the Allonge will be,
duly executed and delivered by the Company and constitute the legal,
valid and binding obligations of the Company, enforceable in accordance
with their terms, subject to laws of general application from time to
time in effect affecting creditors' rights and the exercise of judicial
discretion in accordance with general equitable principles.
6. The Purchaser represents and warrants to the Company, for itself
only, as follows:
6.1. If the Purchaser is a corporation, partnership, trust or
other entity, (i) the individual executing this Agreement on its behalf
has been duly authorized to execute and deliver this Amendment, (ii)
the signature of such individual is binding upon such partnership,
corporation, trust and other entity, (iii) the Purchaser is duly
organized, validly existing and in good standing in its jurisdiction of
incorporation or organization and has all requisite power and authority
to execute and deliver this Amendment, and (iv) the execution and
delivery of this Amendment and the amendment of the Convertible Note
hereunder as provided in the Allonge will not result in the violation
of, constitute a breach or default under, or conflict with, any term or
provision of the charter, bylaws or other governing document of the
Purchaser or, to its knowledge, constitute a material breach or default
under any agreement, judgment, decree, order, statute or regulation by
which it is bound or applicable to it.
3
<PAGE>
6.2. This Amendment constitutes the legal, valid and binding
obligation of the Purchaser, enforceable in accordance with its terms,
subject to laws of general application from time to time in effect
affecting creditors' rights and the exercise of judicial discretion in
accordance with general equitable principles.
7. Prior to May 31, 2000 the Company shall purchase in the open market
or in negotiated transactions no less than $4,000,000 aggregate principal amount
of Convertible Notes.
8. This Amendment (and the waivers and obligations herein) shall not be
effective unless and until the holders of at least 66 2/3% of the outstanding
principal amounts of Convertible Notes (including the Purchaser) execute this
Amendment or a document substantially similar to this Amendment (the "Requisite
Consents"). This Amendment shall become effective, if at all, on the date the
Company shall have received the Requisite Consents. If the Company receives the
Requisite Consents, the provisions of this Amendment shall be binding on all
holders of Convertible Notes and their successors and assigns; provided that
only those holders of Convertible Notes who execute this Amendment or a document
substantially similar to this Amendment by February ___, 2000 shall have the
benefit of Section 3 of this Amendment or such substantially similar document.
9. This Amendment, including the exhibit hereto, constitutes the sole
and entire agreement of the parties with respect to the subject matter hereof.
Except as amended hereby, the Purchase Agreement shall remain in full force and
effect.
10. This Agreement may be executed in one or more counterparts, each of
which shall be deemed and original, but all of which together shall constitute
one and the same instrument.
11. If any provision of this Amendment shall be declared void or
unenforceable by any judicial or administrative authority, the validity of
another provision and of the entire Amendment shall not be affected thereby.
12. Capitalized terms used herein without definition shall have the
meanings set forth in the Purchase Agreement.
13. From and after the date of this Amendment, upon the request of a
Purchaser or the Company, the Company and the Purchaser shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carryout and to effectuate fully the
intent and purpose of this Amendment.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first above written.
YOUBET.COM, INC., a Delaware corporation
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
-----------------------------------
Name of Purchaser
-----------------------------------
Signature of Purchaser
--------------------------------
Principal Amount of Notes Held
5
<PAGE>
LICENSE AGREEMENT BETWEEN YOUBET.COM, INC.
AND AXCIS INFORMATION NETWORK, INC.
THIS AGREEMENT, dated September 1, 1999 is entered into by and between
Youbet.com, Inc., a Delaware corporation, with its principal place of business
located at 1950 Sawtelle Boulevard, Suite 180, Los Angeles, California 90025
(hereinafter referred to as "YOUBET") and AXCIS Information Network, Inc., a
corporation organized pursuant to the laws of the State of California, with its
principal place of business located at 851 Fremont Avenue, Suite 109, Los Altos,
CA 94024, (hereinafter referred to as "AXCIS").
Fully intending to be legally bound by the terms hereof the parties hereto agree
as follows:
1. GRANT OF AND DATA CONTAINED IN LICENSE
1.1. For the term of this Agreement, AXCIS hereby grants a
non-exclusive license to YOUBET to distribute to its
accountholders as defined in section 1.1.2 the products as listed
in Exhibit 1 (such information hereinafter referred to as the
"PRODUCTS"), subject to all restrictions, limitations and
conditions contained in this Agreement
1.1.1. YOUBET limits the use of the PRODUCTS to display in its
personal computer products.
1.1.2. An accountholder is any household or entity that has
password protected access to YOUBET's private closed loop
network.
1.2. YOUBET understands and agrees that nothing herein contained shall
be construed to require the PRODUCTS to contain information which
AXCIS does not in fact collect, compile and/or receive;
notwithstanding that such information was collected or received by
AXCIS as of the effective date of this Agreement, or was, at some
time during the term of this Agreement, collected, compiled and/or
received by AXCIS.
2. ACCESS T0 THE PRODUCTS
2.1. The primary method AXCIS shall use to provide YOUBET with the
PRODUCTS will be via the Internet/World Wide Web in accordance
with AXCIS's specifications. Each party shall be responsible for
their own expenses associated with accessing the Internet.
2.2. All new files, additions, adjustments, ALTERATIONS, corrections or
modifications made to the PRODUCTS (hereinafter referred to as
"UPDATES") will be electronically transmitted to the YOUBET
computer system as soon as possible after such UPDATES are
processed by AXCIS.
<PAGE>
2.3. In addition to the limitation of liability contained in Section 7,
AXCIS shall not be liable to YOUBET for any loss suffered by
YOUBET due to a malfunction of the AXIS computer system, for
whatever reason.
2.4. For purposes of security, and in order to improve the quality of
its service, AXCIS reserves the right to change the delivery
system referred to In the first sentence of Section 2.1 upon
giving reasonable notice of its intent to do so to YOUBET,
provided any such changes do not adversely affect the ability or
cost of YOUBET to access the PRODUCTS.
3. SCOPE OF LICENSE
3.1. It is expressly understood between the parties hereto that the
license granted hereunder is for the sole purpose of distributing
the PRODUCTS set forth in Subsection 1.1 above for use by YOUBET
accountholders as and users, and not for any other purposes, and
to that end YOUBET is expressly prohibited from selling products
and/or services made with or from an analysis of the PRODUCTS.
3.2. YOUBET shall use its best efforts to ensure that all PRODUCTS
transmitted to YOUBET accountholders by YOUBET are encrypted or
transmitted with appropriate security measures to insure that the
PRODUCTS are usable only by such customers.
4. FEES
4.1. YOUBET shall pay to AXCIS, in consideration for the license
granted hereunder, the sum of the per product access amounts as
detailed in Exhibit 1.
4.2. If for any month during the term of this License Agreement the
total amount payable to AXIS under the provisions of Subsection
4.1 for the PRODUCTS referred to in Exhibit I as "TrackMaster/PPs
Condensed Format" and "TrackMaster/PPs 10-line Format"
(hereinafter referred to "TRACKMASTER/PP REVENUE") is less than
[***], YOUBET shall make an additional payment to AXCIS for an
amount equal to [***].
4.3. YOUBET shall make an accounting and payment no later than [***].
4.4. All payments due under sections 4.1 and 4.2 and, if not received
within five business days of their due date, shall be subject to
an interest charge of one and one-half percent (1.5%) per month or
fraction thereof until paid.
4.5. AXCIS shall have the right, upon thirty (30) days notice to
YOUBET, to audit or have audited the books of YOUBET; provided
that Axcis may not
*** Represents confidential information filed separately with the
Commission
<PAGE>
audit the books more than two times a calendar year. This right shall expire
with respect to each calendar year one year after the close of each such
calendar year.
5. TERM
5.1. This Agreement shall continue in full force and effect for a
period of three (3) years, commencing with the date first above
written, unless earlier terminated as provided for herein.
5.2. If this Agreement is in full force and effect on the expiration of
its initial term, and if neither party has expressed to the other
party a desire to terminate this Agreement within ninety (90) days
prior to such date, then this Agreement shall automatically renew
for a one-year period and on each succeeding anniversary this
Agreement, if in full force and effect on such date. shall
automatically renew for a one-year period provided that neither
party has notified the other party of its desire to terminate this
Agreement within ninety (90) days prior to such date.
5.3. During the term of this Agreement, AXCIS shall not be held liable
for the provision of the PRODUCTS to YOUBET where the provision of
such data is depended upon the existence and terms of contracts
with other data providers, including Equibase and/or the United
States Trotting Association ("USTA"). AXCIS has the right to
terminate this Agreement without penalty if it is unable to
provide the PRODUCTS for reasons related to its inability to
secure the supply of the data it needs from other data providers
as required to produce the PRODUCTS,
6. DISCLAIMER OF WARRANTIES
6.1. EXCEPT AS PROVIDED FOR IN SECTION 22, AXCIS MAKES NO
REPRESENTATIONS OR WARRANTIES EXPRESS OR IMPLIED INCLUDING THOSE
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY
MATTER WHATSOEVER INCLUDING BUT NOT LIMITED TO THE ACCURACY OF ANY
INFORMATION (INCLUDING THE PRODUCTS) FURNISHED HEREUNDER AND
YOUBET ACCEPTS EVERYTHING TRANSFERRED HEREUNDER INCLUDING BUT NOT
LIMITED TO SUCH INFORMATION AND DATA ON AN "AS IS" BASIS.
7. LIMITATION OF LIABILITY
7.1. WITH MULTIPLE PROCESSING OF COMPLEX DATA, AND RELIANCE UPON
INFORMATION ACQUIRED FROM MULTIPLE SOURCES ERRORS AND OMISSIONS
CAN AND DO OCCUR DESPITE EFFORTS TO AVOID THEM. AXCIS EXPRESSLY
DISCLAIMS ANY RESPONSIBILITY OR LIABILITY FOR ANY LOSS OR DAMAGES
<PAGE>
RESULTING TO YOUBET OR ANY THIRD PARTY FROM ERRORS OR OMISSIONS IN
THE PRODUCTS CAUSED BY PERSONS OTHER THAN AXCIS.
7.2. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
INDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE, OR
INCIDENTAL DAMAGES. WHETHER IN TORT, CONTRACT OR OTHERWISE ARISING
FROM OR RELATING TO THIS AGREEMENT.
8. NOTICE OF DISCLAIMER AND COPYRIGHT
8.1. With respect to YOUBET dissemination of products which contain
PRODUCTS, the following disclaimer notice (or similar notice
reasonably requested by AXCIS) shall be prominently displayed in
the product information section of the YOUBET network:
8.1.1. Data provided or compiled by AXCIS Information Network,
Inc. generally is accurate but occasionally errors and
omissions occur as a result of incorrect data received from
others, mistakes in processing and other causes, AXCIS
Information Network, Inc. and YOUBET disclaim
responsibility for the consequences, if any, of such
errors.
8.2. WITH RESPECT TO AXCIS dissemination of Information which contain
PRODUCTS. the following copyright notice (or similar notice
reasonably requested by AXCIS) shall be displayed just prior to
the data to which it relates;
[insert year] AXCIS Information Network, Inc. and YOUBET, all
rights reserved.
9. FORCE MAJEURE
9.1. Notwithstanding anything contained herein to the contrary, in the
event either party to this Agreement falls to perform any of its
obligations hereunder assumed by it and such failure Is due to
acts of God, injunctions, lookouts, riots or civil unrest, fires,
epidemics, casualties, boycotts, technical difficulties (whether
computer related or otherwise), failure of suppliers to supply
data, strikes or labor disputes, acts of a governmental authority,
or other interference through legal proceedings or for any other
cause which is not due to a fault or negligence of such party,
such failure shall not be deemed to be a breach by such party of
its obligations hereunder, though such party shall use its best
efforts to put itself in a position to carry out all of the
obligations which, by the terms hereof, it has assumed
irrespective of the occurrence of any force majeure event.
9.2. SHOULD A SINGULAR force majeure event be in existence for a
continuous period of thirty (30) days or more the party not
claiming the protection of
<PAGE>
Subsection 9.1 above may terminate this agreement notwithstanding
anything contained herein to the contrary, by giving 30 days
written notice of such termination to the party against whom the
force majeure is working. At the end of the said 30-day period
this Agreement shall automatically terminate so long as the force
majeure event which generated said letter is still in existence.
10. CONFIDENTIALITY
10.1. Each party hereto hereby covenants with the other to keep
confidential the terms of this License Agreement and all
information relating to the other party's business affairs of
which it may become aware, unless the information has been
disclosed to the public without breach of this Section 10, or the
information is required by a court of law or equity to be
disclosed, or by a governmental agency authorized to demand such
disclosure or is disclosed to any lender, owner or potential
acquirer of a party hereto or is required to be disclosed pursuant
to applicable securities laws.
11. EVENTS OF DEFAULT
Any one or more of the following shall constitute an event of default
hereunder:
11.1. Either party to this Agreement fails to perform or observe any
material covenant, term or condition contained herein, including,
but not limited to, breach of performance or payment requirements;
or
11.2. Any representation or warranty contained herein or in any document
issued in connection herewith or made by or furnished on behalf of
either party hereto pursuant to or in connection with this
Agreement, shall be false or misleading in any material respect as
of the date made or deemed to have been made.
12. REMEDIES
12.1. Upon the occurrence and during the continuance of an Event of
Default as described in Section 11, the non-defaulting party may,
at its option, give written notice specifying the Event of Default
together with a statement of its intent to terminate this
Agreement if such default is not corrected by the defaulting party
within the 30 day period Immediately following the date of such
notice (the "Cure Period"), If, at the end of the Cure Period, the
defaulting party has not cured or otherwise remedied the specified
Event of Default, the non-defaulting party may, at its option at
any time on or after expiration of the Cure Period, in addition to
all other rights and remedies available to such party at law or in
equity, deem this Agreement to be terminated upon the date of
issuance of written notice to the defaulting party, provided that
the specified default is then continuing.
12.2. Upon termination of this Agreement by either party, neither party
shall have
<PAGE>
any further rights or obligations hereunder except as otherwise
specifically provided for hereunder.
13. NOTICES
13.1. All notices and statements provided for in this Agreement must be
in writing, and shall be deemed to have been given or made when
delivered (if the United States Postal Service is not used) or
sent (if the United States Postal Service is Used) BY overnight
delivery, first-class, registered or certified mail to the
addresses of the parties as first above. written unless either
party notifies the other of another address in accordance with the
provisions of this Section 13. Provided, however that all such
notices sent pursuant to Section 12 shall be sent only by courier
or overnight delivery service. In all of the above Instances, the
cost of postage or delivery shall be prepaid.
14. RELATIONSHIP OF THE PARTIES
14.1. Nothing contained in this Agreement shall be construed to place
the parties in the relationship of partners or joint venturers,
agents or legal representatives of the other, and outside the
terms of this Agreement neither party shall have the power, under
the terms of this Agreement, to obligate or bind the other party
in any manner whatsoever.
15. WAIVERS
15.1. No waiver, modification or cancellation of any term or condition
of this Agreement shall be effective unless executed in writing by
the party granting such waiver, modification or cancellation.
15.2. A waiver of any breach of this Agreement by one party to the other
shall not be construed to have been given in perpetuity.
15.3. A failure or delay of either party hereto to enforce at any time
any of the provisions to this Agreement, or to exercise any option
which Is herein provided for, or to require at any time
performance of any of the provisions hereof, shall in no way be
construed to be a waiver of any such option or provision of this
Agreement.
16. ENTIRE UNDERSTANDING
16.1. This Agreement contains the entire understanding of the parties
with respect to the transactions contemplated hereby, and
supersedes all prior agreements, understandings and negotiations,
both written and oral, between the parties with respect to the
subject matter hereof.
17. NON-ASSIGNABILITY
<PAGE>
17.1. The license granted hereunder may not be conveyed, assigned, or
transferred to any other person without the prior written consent
of AXCIS.
18. NON-EXCLUSIVITY
18.1. Nothing contained in this Agreement shall be construed to prevent
AXCIS from granting any other licenses during the term of this
Agreement, whether such other licenses are similar or dissimilar
to the license granted hereunder.
19. SUCCESSORS AND PERMITTED ASSIGN
19.1. This Agreement shall be binding upon and shall inure to the
benefit of the successors and permitted assigns of the parties
hereto.
19.2. Notwithstanding anything contained herein to the contrary, in the
case of a dissolution of AXIS, to the extent that the PRODUCTS, or
data substantially similar to the PRODUCTS is not produced by any
successor-in-interest, nothing contained herein shall be construed
to require any successor-in-interest to continue the business
activities of AXCIS. Additionally, upon such dissolution, all
obligations of AXCIS, With respect to providing any data, shall
cease and have no legal effect immediately upon the dissolution.
20. GOVERNING LAW
20.1. This Agreement shall be governed by and interpreted and enforced
in accordance with the laws of the State of California, without
regard to the conflicts of laws and rules thereof. The parties
hereto hereby consent to the exclusive jurisdiction and venue of
the Federal and state courts located in the State of California,
County of Santa Clara, for the purpose of any action or proceeding
brought by either of them arising out of, on or in connection with
this Agreement or any alleged breach thereof. The parties hereby
further irrevocably consent to the service of process in
connection with any controversy by the mailing thereof by
registered or certified mail, postage prepaid, to the parties
hereto, at their respective addresses as first above written or as
otherwise indicated in accordance with Section 13 above.
21. CAPTIONS
21.1. The captions of the sections in this Agreement are inserted for
convenience only and shall not affect the Interpretation or
construction of this Agreement.
22. REPRESENTATIONS
22.1. Each party hereto hereby represents that it has the power and
authority to enter into this Agreement that all action required to
permit it to enter into
<PAGE>
this Agreement have been authorized, and that this Agreement is
duly executed and delivered.
22.2. Each party hereto hereby represents that this Agreement is a
legal, valid and binding obligation of such party and is
enforceable against such party in accordance with its terms.
22.3. YOUBET agrees to cease the distribution of the United States
Trotting Association's program pages within 45 days of the
effective date of this Agreement.
22.4. AXCIS hereby represents that YOUBET shall be entitled to acquire
and distribute the PRODUCTS on substantially similar terms and
conditions as AXCIS's other licensees of these PRODUCTS. In the
event that AXIS grants more favorable terms to other licensees,
then AXCIS shall notify YOUBET in writing of this event within ten
(10) days. YOUBET, at its sole discretion, can accept same terms
and conditions offered to the aforementioned licensees.
22.5. Axcis represents and warrants that it has obtained all consents
and approvals necessary in order to distribute the PRODUCTS.
23. SURVIVAL
23.1. The respective rights and obligations of AXCIS and YOUBET under
the provisions of Sections 6, 7, 8, 10, 14 through 22 shall
survive any termination of this Agreement.
24. INDEMNIFICATION
YOUBET agrees to indemnify, defend and hold harmless AXIS from and
against any and all liability, expense, losses, or damages arising under
any action by a third party against AXCIS, resulting from the YOUBET's
acts or omissions under this License Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
AXCIS INFORMATION NETWORK, INC, YOUBET.COM, INC.
by: by: /s/ Ron Luniewski
-------------------------------- --------------------------------
David C. Siegel, CEO Ron Luniewski, COO
<PAGE>
EXHIBIT 1
PRODUCTS
1. TrackMaster/PPs for Harness Racing - Condensed Version
1.1. Price to YOUBET: [***].
1.2. Suggested retail: [***]
2. TrackMaster/PPs for Harness Racing - 10 line Version
2.1. Price to YOUBET: [***]
2.2. Suggested retail: [***]
3. TrackMaster Selections for Harness Racing
3.1. Price to YOUBET: [***]
3.2. Suggested retail: [***]
4. Jim Quinn Winners Circle Selections for Thoroughbred Racing (subject to
approval by Equibase).
4.1. Price to YOUBET: [***]
4.2. Suggested retail: [***]
*** Represents confidential information filed separately with the
Commission
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Youbet.com, Inc.
Los Angeles, California
We consent to incorporation by reference in the Registration Statement of
Form S-8 No. 333-88047 and Form S-3 No. 333-85675 of Youbet.com, Inc. of our
report dated February 11, 2000 except for Note 15 which is as of March 14,
2000 relating to the consolidated balance sheet of Youbet.com, Inc. as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended, which
report appears in the December 31, 1999 annual report on Form 10-KSB of
Youbet.com, Inc.
/s/ BDO SEIDMAN, LLP
-----------------------------------
Los Angeles, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YOUBET.COM,
INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 62,274,403
<SECURITIES> 0
<RECEIVABLES> 211,474
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 62,969,928
<PP&E> 3,675,190
<DEPRECIATION> (1,298,416)
<TOTAL-ASSETS> 66,858,367
<CURRENT-LIABILITIES> 6,122,134
<BONDS> 0
0
0
<COMMON> 19,361
<OTHER-SE> 20,895,361
<TOTAL-LIABILITY-AND-EQUITY> 66,858,367
<SALES> 3,773,577
<TOTAL-REVENUES> 3,773,577
<CGS> 0
<TOTAL-COSTS> 26,800,671
<OTHER-EXPENSES> 770,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 686,215
<INCOME-PRETAX> (24,483,868)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (24,486,268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,486,268)
<EPS-BASIC> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
