<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 33-13789LA
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YOUBET.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4627253
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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)
-----------
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
As of November 13, 2000, the issuer had 19,520,750 shares of common stock
issued and outstanding.
<PAGE>
YOUBET.COM, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 and December 31, 1999............................................... 3
Statements of Operations for the three months and nine months ended September 30, 2000
and September 30, 1999............................................................................... 4
Statements of Cash Flows for the nine months ended September 30, 2000 and September 30, 1999................ 6
Summary of Accounting Policies.............................................................................. 7
Notes to Financial Statements............................................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................. 13
Item 2. Changes in Securities......................................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 15
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 15
Signatures.............................................................................................................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YOUBET.COM, INC.
BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ ------------------
(UNAUDITED) (AUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $ 30,636,124 $ 62,274,403
Restricted cash (Note 3) ............................................. 92,367 --
Receivables .......................................................... 101,341 211,474
Interest and other receivables ....................................... 57,853 319,162
Prepaid expense ...................................................... 1,259,229 164,889
------------------ ------------------
Total current assets ........................................... 32,146,914 62,969,928
Property and equipment ............................................... 7,411,061 3,675,190
Less: Accumulated depreciation and amortization ...................... (1,710,083) (1,298,416)
------------------ ------------------
Property and equipment, net .................................... 5,700,978 2,376,774
Restricted cash (Note 3) ............................................. 831,305 --
Capitalized software (Note 5) ........................................ 2,199,436 --
Deferred financing costs, net of amortization ........................ 587,860 1,440,324
Deposits and other assets ............................................ 186,802 71,341
------------------ ------------------
Total assets ................................................... $ 41,653,295 $ 66,858,367
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 920,428 $ 3,128,386
Accrued compensation and related items ............................... 293,035 218,470
Other accrued expenses ............................................... 567,791 2,194,506
Deferred revenues .................................................... 6,979 527,986
Current portion of capitalized lease obligations ..................... 22,069 52,786
------------------ ------------------
Total current liabilities ...................................... 1,810,302 6,122,134
Notes payable (Note 1) ............................................... 21,421,991 39,814,163
Capitalized lease obligations, less current portion .................. -- 7,348
------------------ ------------------
Total liabilities .............................................. 23,232,293 45,943,645
Commitments and Contingencies (Notes 3 and 4)
Stockholders' equity (Note 2):
Common stock, $.001 par value-Authorized-50,000,000 shares, 19,520,750
and 19,360,934 shares outstanding as of September 30, 2000 and
December 31, 1999, respectively ................................... 19,520 19,361
Additional paid-in capital ........................................... 84,930,260 84,551,055
Accumulated deficit .................................................. (65,757,606) (62,312,209)
Deferred compensation ................................................ (631,172) (1,203,485)
Notes receivable from stockholders ................................... (140,000) (140,000)
------------------ ------------------
Total stockholders' equity ..................................... 18,421,002 20,914,722
------------------ ------------------
Total liabilities and stockholders' equity ..................... $ 41,653,295 $ 66,858,367
================== ==================
</TABLE>
See accompanying notes to unaudited financial statements.
3
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues ........................................... $ 1,386,930 $ 1,132,054
Operating expenses :
Network operations .............................. 892,375 495,768
Research and development ........................ 948,796 537,131
Sales and marketing ............................. 1,259,901 5,647,820
General and administrative ...................... 1,852,083 1,436,642
Depreciation and amortization ................... 300,996 114,240
-------------- --------------
Total operating expenses ..................... 5,254,151 8,231,601
-------------- --------------
Loss from operations ............................... (3,867,221) (7,099,547)
Other income (expense):
Interest expense ................................ (570,423) (1,014,213)
Amortization of deferred financing costs ........ (41,990) (95,008)
Fair value of warrants issued for financing costs (12,570) (12,570)
Interest income ................................. 604,741 969,095
Other ........................................... (90,813) 8,197
-------------- --------------
Total other income (expense) ................. (111,055) (144,499)
-------------- --------------
Net loss ........................................... $ (3,978,276) $ (7,244,046)
============== ==============
Basic and diluted earnings per share:
Net loss per common share .......................... $ (.20) $ (.38)
============== ==============
Weighted average number of common shares outstanding 19,513,733 19,121,288
============== ==============
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues ........................................... $ 4,596,527 $ 2,325,922
Operating expenses:
Network operations .............................. 2,437,273 1,559,902
Research and development ........................ 2,300,524 1,555,148
Sales and marketing ............................. 4,589,964 7,280,225
General and administrative ...................... 4,922,066 4,114,465
Depreciation and amortization ................... 775,745 315,273
-------------- --------------
Total operating expenses ..................... 15,025,572 14,825,013
-------------- --------------
Loss from operations ............................... (10,429,045) (12,499,091)
Other income (expense):
Interest expense ................................ (2,466,061) (2,038,201)
Amortization of deferred financing costs ........ (175,921) (191,965)
Fair value of warrants issued for
financing costs ............................... (37,710) (478,221)
Interest income ................................. 2,214,653 1,488,699
Other ........................................... 160,854 7,197
-------------- --------------
Total other income (expense) ................. (304,185) (1,212,491)
-------------- --------------
Loss before extraordinary item ..................... (10,733,230) (13,711,582)
Extraordinary item (Note 1) ........................ 7,287,838 --
-------------- --------------
Net loss ........................................... $ (3,445,392) $ (13,711,582)
============== ==============
Basic and diluted earnings per share:
Net loss per common share before
extraordinary item ............................... $ (.55) $ (.85)
============== ==============
Extraordinary item ................................. $ .37 --
============== ==============
Net loss per common share .......................... $ (.18) $ (.85)
============== ==============
Weighted average number of common
shares outstanding ............................... 19,454,623 16,151,722
============== ==============
</TABLE>
See accompanying notes to unaudited financial statements.
5
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents Cash
flows from operating activities:
Net loss ................................................... $ (3,445,392) $ (13,711,582)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................... 775,745 315,273
Amortization of deferred financing costs ................ 175,921 191,966
Gain on repurchase of convertible notes ................. (7,964,800) --
Write-off of deferred financing costs relating to
repurchase of convertible notes ....................... 676,962 --
Other losses ............................................ -- 1,237
Non-cash compensation ................................... 534,599 2,404,786
Interest accreted on notes payable ...................... 2,451,603 2,020,068
Fair value of warrants issued for financing costs ....... 37,710 24,721
Settlement with vendors ................................. 140,089 --
Loss on disposal of assets .............................. 99,991 --
(Increase) decrease in:
Receivables ............................................. 110,133 (69,498)
Prepaid expenses ........................................ (1,094,339) (2,453,771)
Other current assets .................................... 261,309 (221,216)
Deposits and other ...................................... (115,461) (96,914)
Increase (decrease) in:
Accounts payable ........................................ (2,348,047) 189,152
Accrued compensation and related items .................. 74,565 143,008
Other accrued expenses .................................. (1,626,966) 1,737,205
Deferred revenues ....................................... (521,007) 528,690
-------------- --------------
Net cash used in operating activities ...................... (11,777,385) (8,996,875)
Cash flows from investing activities:
Restricted cash ............................................ (923,672) --
Expenditures on capitalized software ....................... (2,199,436) --
Purchases of property and equipment ........................ (4,199,943) (1,301,025)
-------------- --------------
Net cash used in investing activities ................... (7,323,051) (1,301,025)
Cash flows from financing activities:
Proceeds from (repurchase of) convertible notes ............ (12,878,975) 36,728,510
Proceeds from warrant purchase ............................. -- 2,438
Proceeds from exercise of stock options and warrants ....... 379,365 3,151,319
Increase in deferred financing costs ....................... (167) (1,684,214)
Proceeds from sale of securities, net of offering costs .... -- 38,305,002
Payments on capitalized lease obligations .................. (38,066) (162,645)
-------------- --------------
Net cash (used in) provided by financing activities ..... (12,537,843) 76,340,410
-------------- --------------
Cash and cash equivalents:
Net (decrease) increase .................................... (31,638,279) 66,042,510
Cash and cash equivalents at beginning of period ........... 62,274,403 1,540,616
============== ==============
Cash and cash equivalents at end of period .................... $ 30,636,124 $ 67,583,126
============== ==============
Supplemental disclosure of cash flow information Cash paid for:
Interest ................................................... $ 14,458 $ 18,035
============== ==============
</TABLE>
See accompanying notes to unaudited financial statements.
6
<PAGE>
YOUBET.COM, INC.
SUMMARY OF ACCOUNTING POLICIES
NINE MONTHS ENDED SEPTEMBER 30, 2000
ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS
Youbet.com, Inc. (the "Company") is a Delaware corporation. 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 intends to establish itself as the leading global brand for the
combined online offering of sports information, entertainment, competition for
prizes and legal wagering. The Company has initially focused its efforts
primarily on the United States horse racing industry. 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.
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements for the three and nine months ended September 30, 2000 and 1999
include all adjustments (consisting of normal recurring accruals) which
management considers necessary to present fairly the financial position of the
Company as of September 30, 2000, the results of its operations for the three
and nine months ended September 30, 2000 and September 30, 1999, and the
statements of its cash flows for the nine months ended September 30, 2000 and
September 30, 1999 in conformity with generally accepted accounting principles
("GAAP"). These financial statements have been prepared consistently with the
accounting policies described in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1999, as filed with the Securities and Exchange
Commission on March 30, 2000 and should be read in conjunction with this
Quarterly Report on Form 10-Q. The results of operations for the three and nine
months ended September 30, 2000 are not necessarily indicative of the results of
operations to be expected for the full fiscal year ending December 31, 2000.
Certain information and footnote disclosures normally included in the
financial statements presented in accordance with GAAP have been condensed or
omitted. The accompanying unaudited financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
incorporated by reference in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ from
these estimates.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted income (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 that would be antidilutive.
For all periods presented, potential dilutive securities were not included
in the earnings per share calculation since their effect would be anti-dilutive.
Basic and diluted earnings per share are the same for all periods presented.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial institutions.
Deposits not to exceed $100,000 for each institution are insured by the Federal
Deposit Insurance Corporation. At September 30, 2000, and September 30, 1999,
the Company had uninsured cash and cash equivalents in the amount of $31,359,796
and $67,483,126 respectively.
7
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS:
NOTE 1-NOTES PAYABLE
On April 5, 1999, the Company issued $45,500,000 principal amount of Senior
Convertible Discount Notes (the "Notes") for cash proceeds of $36,728,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001.
During February 2000, all of the holders of the Notes agreed to a First
Amendment to the Note Purchase Agreement. The modifications to the original
agreement increased the amount of indebtedness the Company can incur, broadened
the definition of permitted business for acquisition purposes, required the
Company to repurchase $4,000,000 of notes and required a reset of conversion
price on June 30, 2001 if the Company acquired the stock or assets of any
additional business on or prior to September 30, 2000 (See Note 3). During the
first quarter, the Company repurchased $4,000,000 in notes for $2,977,600 in
cash, which represented approximately 84% of the accreted value. Accordingly, a
gain was 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 of $124,139 was $429,633.
The Company did not acquire the stock or assets of any additional business on or
prior to September 30, 2000.
During the second quarter, the Company purchased an additional $18,950,000
of the notes for $9,901,375 in cash, which represented approximately 57% of the
accreted value. Accordingly, a gain was 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 of $552,823 was $6,858,205.
NOTE 2-STOCKHOLDERS' EQUITY
A. ISSUANCE OF COMMON STOCK AND WARRANTS
During the nine months ended September 30, 2000, the Company issued 159,816
shares of common stock, in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $0.01 to $4.00 per share, generating
proceeds to the Company of $379,365.
During the nine months ended September 30, 2000, the Company issued 10,000
warrants in exchange for services. The fair value of these warrants of $43,100
is being charged to operations over the service period. The warrants have an
exercise price of $4.28 and a term of five years. The warrants vest on the first
anniversary of issuance.
B. STOCK OPTIONS
During the nine months ended September 30, 2000, 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 800,000 shares of common
stock at exercise prices ranging from $4.44 to $4.94 per share, the
fair market value at the date of grant. The stock options vest at
specified dates ranging from two to four years and are exercisable for
a period of ten years.
(2) Stock options were granted to employees to purchase 349,025 shares of
common stock at exercise prices ranging from $1.94 to $5.88, the fair
market value at the date of grant. These options vest over four years
and are exercisable for a period of five years.
(3) Stock options were granted to several consultants to purchase 93,668
shares of common stock at exercise prices ranging from $1.94 to $5.88,
the fair market value at the date of grant. The fair value of these
options of $270,952 is being charged to deferred compensation and
amortized over the service period. These options vest over a period
between one year to four years and are exercisable for a period of
five years.
(4) Stock options were granted to a director to purchase 100,000 shares of
common stock at an exercise price of $4.94, the fair value at the date
of grant. The stock options vest ratably over a period of 25 months
starting on the date of grant and are exercisable for a period of ten
years. The director resigned from the board on June 30, 2000, and the
unvested portion of these options amounting to 76,000 options were
terminated.
(5) Stock options were granted to four outside directors to each purchase
25,000 shares of common stock at an exercise price of $4.78, the fair
value at the date of grant. The stock options vest ratably over a
period of 12 months starting on the date of grant and are exercisable
for a period of ten years.
8
<PAGE>
NOTE 3-SIGNIFICANT AGREEMENTS
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. The lease payments commenced on July 13, 2000.
In conjunction with this lease agreement, the Company obtained a one-year
$923,672 letter of credit with Bank of America, which is secured by cash (See
Liquidity and Capital Resources). The Company is obligated for the next ten
years to obtain a letter of credit equal to the original amount of $923,672 less
$92,367 per year for every year elapsed.
On March 14, 2000, the Company signed a letter of intent to acquire from
Ladbrokes, the betting and gaming division of Hilton Group plc ("Hilton"), 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 was
expected to be completed in fiscal 2000. Completion of the acquisition is
subject to negotiation and execution 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. Youbet.com had exclusive rights to negotiate a definitive purchase
agreement for the purchase of the Hilton's operations in Argentina through
August 4, 2000, at which time the exclusive rights lapsed. In addition
Youbet.com was advised that Hilton has entered into an exclusive agreement with
an unspecified party for the possible purchase of these same operations.
NOTE 4-LEGAL PROCEEDINGS
On June 4, 1999, a complaint was filed against Youbet.com in the Court of
Chancery of the State of Delaware in and for New Castle County entitled George
Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. The Company has answered the complaint and intends to defend
itself vigorously in the action. Mr. Von Opel moved for summary judgment on the
issue of liability, which on September 2, 2000, the court denied. The Company is
proceeding with discovery and has noticed the deposition of Mr. Von Opel. 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 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. 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 September 30, 2000, approximately 14% of Youbet.com's
subscribers were from California.
As previously disclosed by the Company in previous filings with the
Securities and Exchange Commission, on October 21, 1999, Representative
Goodlatte introduced a bill in the House of Representatives (H.R 3125) with
similar language as the Kyl bill. On April 6, 2000, the House Judiciary
Committee passed the Goodlatte bill. On July 18, 2000 the full House of
Representatives failed to pass a version of the Goodlatte bill under a
"suspension of rules" procedure. Although a majority of the members of the House
of Representatives voted in favor of the bill, it failed to receive the
two-thirds vote necessary to pass the bill using this procedure. The version of
the bill considered by the house would have allowed the states to regulate or
prohibit on-line pari-mutuel wagering. Other proposals similar to the Kyl bill
and the Goodlatte bill could emerge in Congress; many states have considered and
are considering interactive and Internet gaming legislations and regulations
which may not be worded so as to permit the Company's business to continue in
such states; and anti-gaming conclusions and recommendations of other
governmental or quasi-governmental bodies could form the basis for new laws,
regulations, or enforcement policies that could have a material adverse effect
on the Company's business.
9
<PAGE>
NOTE 5-CAPITALIZED SOFTWARE
During the nine months ended September 30, 2000, the Company incurred
approximately $2,200,000 in costs relating to the Company's efforts to further
expand its current software application from horse racing to include sports'
information and legal wagering, as well as international application of its
existing and in-development products. Management reviews these expenditures on a
quarterly basis and writes-off amounts capitalized when management believes the
related assets have been impaired.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion of the financial condition and results of
operations of Youbet.com, Inc. should be read in conjunction with the financial
statements and the related notes included elsewhere in this 10-Q. This
discussion contains 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.
OVERVIEW
Youbet.com intends to establish itself as the leading global brand for the
combined online offering of sports information, entertainment, competition for
prizes and legal wagering. 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 Mountain Laurel Racing, Inc., and Washington Trotting Association,
Inc., both of which are subsidiaries of Ladbroke USA (collectively "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, the Company receives a fee from Ladbroke equal to fifty percent
(50%) of the net commissions to Ladbroke derived from wagers placed by
Youbet.com subscribers. Second, the Company charges a monthly subscription fee,
currently $5.95 per month. Third, the Company receives revenue from the sale of
handicapping information.
Youbet.com has expanded its operations in recent years and has grown to 118
employees as of September 30, 2000. Youbet.com expects to add additional
personnel in the United States and plans to commence operations internationally
and add personnel as operations expand. Youbet.com currently expects to
significantly increase its operating expenses in order to grow its sales and
marketing operations, expand in international markets and upgrade and enhance
its service and technologies. As a result of these and other factors, the
Company expects to incur significant losses from operations at least through
2001.
On March 14, 2000, the Company signed a letter of intent to acquire from
Ladbrokes, the betting and gaming division of Hilton Group plc ("Hilton"), 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 was
expected to be completed in fiscal 2000. Completion of the acquisition is
subject to negotiation and execution 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. Youbet.com had exclusive rights to negotiate a definitive purchase
agreement for the purchase of the Hilton's operations in Argentina through
August 4, 2000, at which time the exclusive rights lapsed. In addition
Youbet.com was advised that Hilton has entered into an exclusive agreement with
an unspecified party for the possible purchase of these same operations.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues increased by 23% or $255,000 from $1,132,000 for the three months
ended September 30, 1999 to $1,387,000 for the three months ended September 30,
2000. The increase in revenues was primarily driven by the increased amount of
wagers placed by Youbet.com subscribers. Revenue consists of the commission on
the gross amount of each wager placed by its subscribers, the $5.95 monthly
subscription fee, and sales of handicapping information. Youbet.com commenced
charging a monthly subscription fee to its subscribers in February 1999, and
began charging subscribers for handicapping information in April 1999.
OPERATING EXPENSES
NETWORK OPERATIONS-Network operations costs consist primarily of salaries
and costs to support the closed-loop private network. For the three months ended
September 30, 2000, network operations costs increased by 80% or $396,000 from
$496,000 in 1999 to $892,000 in 2000 reflecting the continued development and
expansion of the You Bet Network. Management expects network operations costs to
continue 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. For the three months ended September 30, 2000, research and
development costs increased by 77% or $412,000 from $537,000 in 1999 to $949,000
in 2000. This increase resulted primarily from the hiring of developers and
consultants and the continued development of the You Bet Network. The Company
will continue to invest in the development of the You Bet Network and other
projects, which management 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 expense and salaries. For the three months ended September 30,
2000, sales and marketing expenses decreased by 78% or $4,388,000 from
$5,648,000 to $1,260,000. The decrease in sales and marketing reflects a
reduction in marketing programs in 2000. During the third quarter of 1999
Youbet.com expanded its marketing efforts to include television advertising,
which was discontinued in 2000. In addition, Youbet.com had greater direct
mailing costs and media advertising during 1999. Youbet.com expects sales and
marketing expenses to increase significantly to brand the You Bet Network, grow
its subscriber base, hire additional sales and marketing personnel and expand
internationally.
GENERAL AND ADMINISTRATIVE-General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. For the three months ended September 30, 2000, general and
administrative expenses increased by 29% or $415,000 from $1,437,000 to
$1,852,000. The increase resulted primarily from an increase in rents,
compensation and higher legal and professional fees. Youbet.com expects that
general and administrative expenses will increase in future periods as it hires
additional personnel to provide for the growth of the domestic and international
business.
OTHER INCOME AND EXPENSES
INTEREST EXPENSE-For the three months ended September 30, 2000, interest
expense decreased by 44% or $444,000 from $1,014,000 to $570,000. The decrease
in interest expense is due to the Company's repurchase of a portion of its
convertible notes during 2000.
AMORTIZATION OF DEFERRED FINANCING COSTS-For the three months ended
September 30, 2000, amortization of deferred financing costs decreased by 56% or
$53,000 from $95,000 to $42,000. The decrease is due to the Company's write-off
of the portion of deferred financing costs relating to the repurchase of the
convertible notes during 2000.
INTEREST INCOME-For the three months ended September 30, 2000, interest
income, decreased by 38% or $364,000 from $969,000 in 1999 to $605,000 in 2000.
The decrease is mainly due to lower cash balances being utilized for the period
in 2000 compared to 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
Revenues increased by 98% or $2,271,000 from $2,326,000 to $4,597,000 for
the nine months ended September 30, 2000. The increase in revenues was primarily
driven by the increased amount of wagers placed by Youbet.com subscribers.
Revenue consists of the commission on the gross amount of each wager placed by
its subscribers, the $5.95 monthly subscription fee, and sales of handicapping
information. Youbet.com commenced charging a monthly subscription fee to its
subscribers in February 1999, and began charging subscribers for handicapping
information in April 1999.
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OPERATING EXPENSES
NETWORK OPERATIONS-Network operations costs consist primarily of salaries
and costs to support the closed-loop private network. For the nine months ended
September 30, 2000, network operations costs increased by 56% or $877,000 from
$1,560,000 in 1999 to $2,437,000 in 2000 reflecting the continued development
and expansion of the You Bet Network. The Company expects network operations
costs to continue 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. For the nine months ended September 30, 2000, research and
development costs increased by 48% or $746,000 from $1,555,000 in 1999 to
$2,301,000 in 2000. This increase resulted primarily from the hiring of
developers and consultants and the continued development of the You Bet Network.
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 expense and salaries. For the nine months ended September 30,
2000, sales and marketing expenses decreased by 37% or $2,690,000 from
$7,280,000 to $4,590,000. The decrease in sales and marketing reflects a
reduction in marketing programs in 2000. During the third quarter of 1999
Youbet.com expanded its marketing efforts to include television advertising,
which was discontinued in 2000. In addition, Youbet.com had greater direct
mailing costs and media advertising during 1999. Youbet.com expects sales and
marketing expenses to increase significantly to brand the You Bet Network, grow
its subscriber base, hire additional sales and marketing personnel and expand
internationally.
GENERAL AND ADMINISTRATIVE-General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. For the nine months ended September 30, 2000, general and
administrative expenses increased by 20% or $808,000 from $4,114,000 to
$4,922,000. The increase resulted primarily from higher legal and professional
fees. Youbet.com expects that general and administrative expenses will increase
in future periods as it hires additional personnel to provide for the growth of
the domestic and international business.
OTHER INCOME AND EXPENSES
INTEREST EXPENSE-For the nine months ended September 30, 2000, interest
expense increased by 21% or $428,000 from $2,038,000 to $2,466,000. The increase
in interest expense is due to the notes payable being outstanding during the
entire nine months of 2000 as compared to five of the nine months of 1999,
offset by the Company's repurchase of a portion of the notes during 2000.
AMORTIZATION OF DEFERRED FINANCING COSTS-For the nine months ended
September 30, 2000, amortization of deferred financing costs decreased by 8% or
$16,000 from $192,000 to $176,000. The decrease is due to the Company's
write-off of the portion of deferred financing costs relating to the repurchase
of the convertible notes during 2000.
FAIR VALUE OF WARRANTS ISSUED-For the nine months ended September 30, 2000,
fair value of warrants issued decreased by 92% or $440,000 from $478,000 to
$38,000. The decrease is due to a much larger number of warrants issued during
the nine months ended September 30, 1999 as compared to the number of warrants
issued during the same period in 2000.
INTEREST INCOME-For the nine months ended September 30, 2000, interest
income increased by 49% or $726,000 from $1,489,000 in 1999 to $2,215,000 in
2000. The increase is mainly due to cash received during the quarter ended
September 30, 1999 being utilized for the full period in 2000 compared to a
partial utilization in 1999, and due to an increase in interest rates in 2000.
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EXTRAORDINARY ITEM
NET GAIN ON NOTE REPURCHASE-Net gain on note repurchase was $7,288,000 for
the nine months ended September 30, 2000. The net gain resulted from the
repurchase of $22,950,000 of notes for $12,878,000, which represented
approximately 62% of the accreted value. The gain was realized on the difference
between the amount paid and the accreted value of the notes on the date of
repurchase.
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 negative cash flow
from operations since inception. At September 30, 2000, Youbet.com had
$31,560,000 in cash and cash equivalents including $923,672 in restricted cash.
Youbet.com's principal commitments consist primarily of approximately
$21,000,000 in 11% Senior Convertible Discount Notes.
Net cash used in operating activities was $11,777,000 and $8,997,000 for
the nine months ended September 30, 2000 and 1999, respectively. The increase in
cash used in operating activities of $2,780,000 was mainly due to 1) a decrease
in non-cash compensation of $1,869,000, 2) payment of settlement costs of
$1,308,000 in connection with the civil resolution with the Los Angeles County
District Attorney and the Los Angeles Police Department, 3) a decrease in
deferred revenues of $1,050,000, and 4) payments of payables and other accruals
totaling $4,593,000. These changes were partially offset by 1) a decrease in
loss from operations of $2,979,000 (which represent net loss of $10,733,000
before a net gain of $7,288,000 relating to the repurchases of the convertible
notes) 2) an increase in accrued interest on notes by $432,000, 3) an increase
in depreciation and amortization of $461,000 and 4) an increase in prepaids,
other assets and receivables totaling $2,003,000.
Net cash used in investing activities was $7,323,000 and $1,301,000 for the
nine months ended September 30, 2000 and 1999, respectively. The increase in
cash used in investing activities of $6,022,000 was mainly due to 1) an increase
in restricted cash of $924,000, 2) the Company's purchasing of property and
equipment to support the growth of the company amounting to $4,200,000 in 2000
and 3) due to the Company's spending of $2,200,000 relating to the Company's
efforts to further expand its current software application from horse racing to
include sports' information and legal wagering, as well as international
application of its existing and in-development products. Management reviews
these expenditures on a quarterly basis and writes-off amounts capitalized when
management believes the related assets have been impaired. Although the Company
is actively pursuing applications for its sports and other in-development
software, there can be no assurance that the Company will be able to realize any
benefits from these expenditures.
Net cash used in financing activities was $12,538,000 for the nine months
ended September 30, 2000 as compared to net cash provided by financing
activities of $76,340,000 for the same period in the prior year. The decrease of
$88,878,000 was the primary result of the Company raising funds during 1999 from
sale of securities, the issuance of notes payable, and exercise of stock options
and warrants totaling $78,185,000 as compared with $379,000 in 2000 from the
exercise of stock options and warrants. In addition, the Company used
$12,879,000 in cash during the nine months ended September 30, 2000 to
repurchase its own 11% Convertible Senior Discount Notes. The remaining decrease
cash used in financing activities relates to a decrease of $1,684,000 in
deferred financing costs incurred in 1999, and a decrease of $125,000 in
payments made on capital lease obligations.
Management anticipates that it will continue to experience substantial
capital equipment purchases and lease commitments consistent with the company's
anticipated growth in operations and infrastructure, including various capital
expenditures associated with the expansion of operations into foreign markets.
In addition, the Company is expected to spend approximately $3,500,000 in
leasehold improvements and equipment in fiscal 2000 as part of the relocation to
its new facility. The company also 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 4, 1999, a complaint was filed against Youbet.com in the Court of
Chancery of the State of Delaware in and for New Castle County entitled George
Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. The Company has answered the complaint and intends to defend
itself vigorously in the action. Mr. Von Opel moved for summary judgment on the
issue of liability, which on June 2, 2000, the court denied. The Company is
proceeding with discovery. 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 District Attorney's Office. In cooperation
with the investigation,
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effective November 10, 1999, the Company voluntarily suspended reception and
transmission of wagering information from California residents. 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 would not be allowed to place wagers on the
You Bet Network. As of September 30, 2000, approximately 14% of Youbet.com's
subscribers were from California.
As previously disclosed by the Company in previous filings with the
Securities and Exchange Commission, on October 21, 1999, Representative
Goodlatte introduced a bill in the House of Representatives (H.R 3125) with
similar language as the Kyl bill. On April 6, 2000, the House Judiciary
Committee passed the Goodlatte bill. On July 18, 2000 the full House of
Representatives failed to pass a version of the Goodlatte bill under a
"suspension of rules" procedure. Although a majority of the members of the House
of Representatives voted in favor of the bill, it failed to receive the
two-thirds vote necessary to pass the bill using this procedure. The version of
the bill considered by the house would have allowed the states to regulate or
prohibit on-line pari-mutuel wagering. Other proposals similar to the Kyl bill
and the Goodlatte bill could emerge in Congress; many states have considered and
are considering interactive and Internet gaming legislations and regulations
which may not be worded so as to permit the Company's business to continue in
such states; and anti-gaming conclusions and recommendations of other
governmental or quasi-governmental bodies could form the basis for new laws,
regulations, or enforcement policies that could have a material adverse effect
on the Company's business.
ITEM 2. CHANGES IN SECURITIES
ISSUANCE OF COMMON STOCK AND WARRANTS
During the nine months ended September 30, 2000, the Company issued 159,816
shares of common stock, in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $0.01 to $4.00 per share, generating
proceeds to the Company of $379,365.
During the nine months ended September 30, 2000, the Company issued 10,000
warrants in exchange for services. The fair value of these warrants of $43,100
is being charged to operations over the service period. The warrants have an
exercise price of $4.28 and a term of five years. The warrants vest on the first
anniversary of issuance.
ISSUANCE OF STOCK OPTIONS
During the nine months ended September 30, 2000, 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 800,000 shares of common
stock at exercise prices ranging from $4.44 to $4.94 per share, the
fair market value at the date of grant. The stock options vest at
specified dates ranging from two to four years and are exercisable for
a period of ten years.
(2) Stock options were granted to employees to purchase 349,025 shares of
common stock at exercise prices ranging from $1.94 to $5.88, the fair
market value at the date of grant. These options vest over four years
and are exercisable for a period of five years.
(3) Stock options were granted to several consultants to purchase 93,668
shares of common stock at exercise prices ranging from $1.94 to $5.88,
the fair market value at the date of grant. The fair value of these
options of $270,952 is being charged to deferred compensation and
amortized over the service period. These options vest over a period
between one year to four years and are exercisable for a period of
five years.
(4) Stock options were granted to a director to purchase 100,000 shares of
common stock at an exercise price of $4.94, the fair value at the date
of grant. The stock options vest ratably over a period of 25 months
starting on the date of grant and are exercisable for a period of ten
years. The director resigned from the board on June 30, 2000, and the
unvested portion of these options amounting to 76,000 options were
terminated.
(5) Stock options were granted to four outside directors to each purchase
25,000 shares of common stock at an exercise price of $4.78, the fair
value at the date of grant. The stock options vest ratably over a
period of 12 months starting on the date of grant and are exercisable
for a period of ten years.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Youbet.com held its Annual Meeting of Shareholders (the "Meeting") on
September 21, 2000 in Arcadia, California, at which the Company's stockholders:
(1) elected the nominated slate of five directors, each to serve until the next
meeting and until his or her successor has been duly elected and qualified:
Robert M. Fell, Caesar P. Kimmel, Alan W. Landsburg, Charles D. Peebler Jr. and
William H. Roedy, (2) approved the amendment to the 1998 Stock Option Plan to
reserve an additional 1,000,000 shares of Youbet.com common stock for options in
addition to the 2,500,000 shares of common stock previously reserved for a total
of 3,500,000 shares of common stock and (3) approved BDO Seidman, LLP as the
Company's independent public accountants and auditors for the fiscal year ending
December 31, 2000.
Holders of record of the Company's common stock as of August 15, 2000 were
entitled to vote at the meeting. On August 15, 2000, there were 19,520,750
shares of common stock outstanding and entitled to vote and 14,333,091 of such
shares were represented at the Meeting. Of the shares cast, each of the
directors received at least 93.3% in favor of his election. The shares cast for
each director were as follows: Robert M. Fell: 13,375,217 for and 957,874
withheld; Caesar P. Kimmel: 14,139,929 for and 193,162 withheld; Alan W.
Landsburg: 14,139,829 for and 193,262 withheld; Charles D. Peebler Jr.:
14,140,129 for and 192,962 withheld; and William H. Roedy: 14,138,889 for and
194,202 withheld. For the approval of the amendment to the 1998 Stock Option
Plan, the shares cast were 4,711,464 for, 1,260,166 against, 250,513 shares in
abstention and 8,110,948 broker non-votes. With respect to the approval of BDO
Seidman, LLP, the shares cast were 14,126,747 for, 76,531 against and 129,813
shares in abstention.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibit are submitted herewith:
27 Financial Data Schedule (electronic filing only)
(B) REPORTS ON FORM 8-K
Youbet.com filed a Form 8-K dated September 26, 2000 with respect to
the Company's buy back of a portion of its outstanding notes payable.
(Item 5)
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
YOUBET.COM, INC.
Date: November 13, 2000 By: /s/ Robert M. Fell
Robert M. Fell
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Date: November 13, 2000 By: /s/ Phillip C. Hermann
Phillip C. Hermann
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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