<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
-----------------
YOUBET.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4627253
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 March 31, 2000, the issuer had 19,414,809 shares of common stock
issued and outstanding.
================================================================================
<PAGE>
YOUBET.COM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2000 and December 31, 1999..................................... 3
Statements of Operations for the three months ended March 31, 2000 and 1999................... 4
Statements of Cash Flows for the three months ended March 31, 2000 and 1999................... 5
Notes to Financial Statements................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 12
Item 2. Changes in Securities............................................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................................................. 13
Signatures................................................................................................. 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YOUBET.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $52,844,299 $62,274,403
Restricted cash (Note 4)...................................................... 923,672 -
Receivables................................................................... 143,549 211,474
Interest and other receivables................................................ 29,369 319,162
Prepaid expense............................................................... 501,268 164,889
----------------- -----------------
Total current assets..................................................... 54,442,157 62,969,928
Property and equipment........................................................ 4,694,713 3,675,190
Less: Accumulated depreciation and amortization............................... (1,507,276) (1,298,416)
----------------- -----------------
Property and equipment, net.............................................. 3,187,437 2,376,774
Deferred financing costs, net of amortization................................. 1,236,426 1,440,324
Deposits and other............................................................ 504,912 71,341
----------------- -----------------
Total assets............................................................. $59,370,932 $66,858,367
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $2,543,159 $3,128,386
Accrued compensation and related items........................................ 234,441 218,470
Other accrued expenses........................................................ 914,711 2,194,506
Deferred revenues............................................................. 151,596 527,986
Current portion of capitalized lease obligations.............................. 47,678 52,786
---------------- -----------------
Total current liabilities................................................ 3,891,585 6,122,134
Notes payable (Note 2)........................................................ 37,299,062 39,814,163
Capitalized lease obligations, less current portion........................... - 7,348
---------------- -----------------
Total liabilities........................................................ 41,190,647 45,943,645
Stockholders' equity (Note 3):
Common stock, $.001 par value - Authorized-50,000,000 shares,
19,414,809 and 19,360,934 shares outstanding as of March 31, 2000
and December 31, 1999, respectively........................................ 19,414 19,361
Additional paid-in capital.................................................. 84,690,139 84,551,055
Accumulated deficit......................................................... (65,299,905) (62,312,209)
Deferred compensation....................................................... (1,089,363) (1,203,485)
Notes receivable from stockholders.......................................... (140,000) (140,000)
---------------- -----------------
Total stockholders' equity............................................... 18,180,285 $20,914,722
---------------- -----------------
Total liabilities and stockholders' equity............................... $59,370,932 $66,858,367
================ =================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................................................... $1,705,237 $460,606
Operating expenses (1):
Network operations........................................................... 736,991 574,294
Research and development..................................................... 619,575 415,083
Sales and marketing.......................................................... 1,634,256 566,537
General and administrative................................................... 1,564,199 964,558
Depreciation and amortization................................................ 208,859 95,735
-------------- ---------------
Total operating expenses................................................ 4,763,880 2,616,207
-------------- ---------------
Loss from operations.............................................................. (3,058,643) (2,155,601)
Other income (expense):
Interest expense............................................................. (1,017,315) (7,444)
Amortization of deferred financing costs..................................... (79,926) (7,848)
Fair value of warrants issued for financing costs............................ (12,570) -
Interest income.............................................................. 784,684 25,249
Net gain on note repurchase.................................................. 429,633 -
Other........................................................................ (33,555) (1,414)
-------------- ---------------
Total other income...................................................... 70,951 8,543
-------------- ---------------
Net loss.......................................................................... $(2,987,692) $(2,147,058)
============== ===============
Net loss per common share-basic and diluted....................................... $(0.15) $(0.15)
============== ===============
Weighted average number of common shares outstanding.............................. 19,379,909 14,059,310
============== ===============
(1) Operating expenses include non-cash compensation expenses as follows:
Network operations $792 $162,019
Research and development 2,124 55,840
Sales and marketing 26,925 90,749
General and administrative 71,707 348,938
-------------- ---------------
Total $101,548 $657,546
============== ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
YOUBET.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
2000 1999
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss....................................................................... $(2,987,692) $(2,147,058)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................... 208,859 95,735
Amortization of deferred financing costs.................................... 79,926 7,848
Other losses................................................................ - 1,236
Non-cash compensation....................................................... 114,118 657,546
Interest accreted on notes payable.......................................... 1,016,271 -
Net gain on repurchase of convertible notes................................. (429,633) -
(Increase) decrease in:
Restricted cash............................................................. (923,672) -
Receivables................................................................. 374,958 (14,437)
Prepaid expenses............................................................ (336,379) (41,139)
Other current assets........................................................ (17,240) (4,857)
Deposits and other.......................................................... (433,571) 500
Increase (decrease) in:
Accounts payable............................................................ (585,223) 55,061
Accrued compensation and related items...................................... 15,971 3,262
Other accrued expenses...................................................... (1,279,795) 111,500
Deferred revenues........................................................... (376,390) -
--------------- ---------------
Net cash used in operating activities.......................................... (5,559,492) (1,274,803)
Cash flows from investing activities:
Purchases of property and equipment........................................... (1,019,526) (174,287)
--------------- ---------------
Net cash used in investing activities...................................... (1,019,526) (174,287)
Cash flows from financing activities:
Repurchase of convertible notes................................................ (2,977,600) -
Proceeds from exercise of stock options and warrants........................... 139,138 381,266
Increase in deferred financing costs........................................... (166) (55,271)
Net proceeds from sale of securities, net of offering costs.................... - 2,227,500
Payments on capitalized lease obligations...................................... (12,457) (52,542)
Increase in deferred offering costs............................................ - (49,395)
--------------- ---------------
Net cash (used in) provided by financing activities..................... (2,851,085) 2,451,558
--------------- ---------------
Cash and cash equivalents:
Net (decrease) increase....................................................... (9,430,103) 1,002,468
Cash and cash equivalents at beginning of period.............................. 62,274,402 1,540,616
--------------- ---------------
Cash and cash equivalents at end of period........................................ $52,844,299 $2,543,084
=============== ===============
Supplemental disclosure of cash flow information
Cash paid for:
Interest.................................................................... $1,030 $7,444
Non-cash transactions:
Incurred and deferred non-cash compensation................................. $146,536 $55,650
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
BUSINESS
Youbet.com, Inc. 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'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
The financial statements for the three months ended March 31, 2000 and
1999 include all adjustments, consisting of normal recurring adjustments, which
management considers necessary for a fair presentation of the results of these
periods. 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 months
ended March 31, 2000 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 2000.
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
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 differ from these estimates.
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.
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.
NOTE 2 - 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. 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 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. The Company repurchased the $4,000,000 of notes for $2,977,600 which
represented approximately 83% of the accreted value. Accordingly, 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.
6
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - STOCKHOLDERS' EQUITY
a. ISSUANCE OF COMMON STOCK AND WARRANTS
During the three months ended March 31, 2000, the Company issued 53,875
shares of common stock, in conjunction with the exercise of warrants and stock
options with exercise prices ranging from $2.50 to $4.00 per share, generating
proceeds to the Company of $139,138.
During the three months ended March 31, 2000, the Company issued 10,000
warrants in exchange for services. The fair value of these warrants of $30,841
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 three months ended March 31, 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 62,300
shares of common stock at exercise prices ranging from $4.44
to $6.31, 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 a consultant to purchase 10,000
shares of common stock at an exercise price of $5.88, the fair
value at the date of grant. The fair value of these options of
$44,988 is being charged to deferred compensation and
amortized over the service period. These options vest over
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.
(5) Stock options were granted to four outside directors to each
purchase 25,000 shares of common stock at an exercise price of
$4.88, 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.
NOTE 4 - 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. Lease payments will commence approximately 120
days from the date of the lease agreement. In conjunction with this lease
agreement, the Company obtained a $923,672 letter of credit with Bank of
America, which is secured by cash.
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. 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.
7
<PAGE>
YOUBET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - 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 Georg
von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. 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 this 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 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 March 31,
2000, approximately 14% of Youbet.com's subscribers were from California.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF YOUBET.COM, 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, it charges a monthly subscription fee, currently $5.95 per month.
Second, it receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Youbet.com has expanded its operations in recent years and has grown to
95 employees at March 31, 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 at least through 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES
Revenues increased by $1,244,000 or 270.2% to $1,705,000 for the three
months ended March 31, 2000 from from $461,000 for the three months ended March
31, 1999. 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.
9
<PAGE>
OPERATING EXPENSES
NETWORK OPERATIONS - Network operations costs consist primarily of
salaries and costs to support the closed-loop private network. Network
operations costs increased by $163,000 or 28.3% to $737,000 for the three months
ended March 31, 2000 from $574,000 for the comparable period in the prior year
reflecting the continued development and expansion of the You Bet Network.
Network operations costs include non-cash compensation of $800 and $162,000 in
the three months ended March 31, 2000 and 1999, respectively, the result of
issuance of warrants and options to third-party consultants or the issuance of
below market options to employees. 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. Research and development costs increased by $204,000 or
49.3% to $620,000 for the three months ended March 31, 2000 from $415,000 for
the three months ended March 31, 1999. This increase resulted primarily from the
hiring of developers and consultants and the continued development of the You
Bet Network. Research and development costs include non-cash compensation of
$2,000 and $56,000 in the three months ended March 31, 2000 and 1999,
respectively, the result of issuance of warrants and options to third-party
consultants or the issuance of below market options 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 expense and salaries. Sales and marketing expenses increased
by $1,067,000 or 188.5% to $1,634,000 for the three months ended March 31, 2000
from $567,000 for the three months ended March 31, 1999. The increase in sales
and marketing reflects the expansion of Youbet.com's marketing activities
beginning in the third quarter of 1999. Marketing activities during the current
quarter were concentrated on direct mailing campaigns, including the mailing of
CD's to potential subscribers. Sales and marketing expenses include non-cash
compensation of $27,000 and $91,000 in the three months ended March 31, 2000 and
1999, respectively, the result of issuance of warrants and options to
third-party consultants or the issuance of below market options to employees.
Youbet.com expects sales and marketing expenses to increase significantly to
brand the You Bet Network, grow its subscriber base, hire additional sales and
marketing personnel and expand internationally.
GENERAL AND ADMINISTRATIVE - General and administrative expenses
consist principally of salaries, facilities expenses, legal and accounting and
investor relations. General and administrative expenses increased by $599,000 or
62.2% to $1,564,000 for the three months ended March 31, 2000 from $965,000 for
the three months ended March 31, 1999. The increase resulted primarily from
higher legal and professional fees. General and administrative expenses include
non-cash compensation of $72,000 and $349,000 in the three months ended March
31, 2000 and 1999, respectively, the result of issuance of warrants and options
to third-party consultants or the issuance of below market options to employees.
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 (EXPENSE)
NET INTEREST INCOME (EXPENSE) - Net interest expense increased by
$250,000 or 1,406% to $233,000 for the three months ended March 31, 2000
compared to $18,000 for the three months ended March 31, 1999. The increase is
the result of the issuance of $45.5 million of 11% Senior Convertible Discount
Notes in April 1999. The Company will not pay cash interest on these notes until
October 2001, but is accreting interest since the notes are outstanding.
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.
NET GAIN ON NOTE REPURCHASE - Net gain on note repurchase increased
$430,000 for the three months ended March 31, 2000. The net gain resulted from
the repurchase of $4,000,000 of notes for $2,977,000 which represented
approximately 83% of the accreted value, therefore, 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, was $430,000.
10
<PAGE>
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 March 31, 2000, Youbet.com had
$52,844,000 in cash and cash equivalents. Youbet.com's principal commitments
consist primarily of the 11% Senior Convertible Discount Notes.
Net cash used in operating activities was $4,636,000 and $1,275,000 for
the three months ended March 31, 2000 and 1999, respectively. The principal use
of cash was to fund losses from operations. The increase over the prior three
month period primarily relates to a $1,308,000 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 payment of
marketing and other accrued expenses.
Net cash used in investing activities was $1,020,000 and $174,000 for
the three months ended March 31, 2000 and 1999, respectively, for purchases of
property and equipment to support the growth of Youbet.com. The Company
anticipates that it will continue to experience substantial capital equipment
purchases 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. In addition,
the Company is expected to spend approximately $3,000,000 in leasehold
improvements and equipment in fiscal 2000 as part of the relocation to its new
facility. Youbet.com anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that these
expenses will be a material use of cash resources. Youbet.com believes that its
existing cash will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures at least for the next twelve months.
Net cash provided by (used in) financing activities was $(2,851,000)
and $2,452,000 for the three months ended March 31, 2000 and 1999, respectively.
The decrease was the primary result of the repurchase of the 11% Convertible
Senior Discount Notes in February 2000. The first quarter of 1999 amount
resulted primarily from the collection of $2,100,000 in stock notes receivable.
11
<PAGE>
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 Georg
Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint, Mr. Von Opel
alleges that Youbet.com breached its obligation to register the shares of common
stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr.
Von Opel. The complaint seeks specific performance of the alleged obligation to
register such shares and damages for alleged breach of contract in the amount of
$8.7 million. 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 this 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 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 March 31,
2000, approximately 14% of Youbet.com's subscribers were from California.
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 2000, Youbet.com issued stock
options to four executives 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.
During the three months ended March 31, 2000, Youbet.com issued stock
options to employees to purchase 62,300 shares of common stock at exercise
prices ranging from $4.44 to $6.31, the fair market value at the date of grant.
These options vest over four years and are exercisable for a period of five
years.
During the three months ended March 31, 2000, Youbet.com issued stock
options to a consultant to purchase 10,000 shares of common stock at an exercise
price of $5.88, the fair value at the date of grant. The fair value of these
options of $44,988 is being charged to deferred compensation and amortized over
the service period. These options vest over four years and are exercisable for a
period of five years.
During the three months ended March 31, 2000, Youbet.com issued stock
options to a director to purchase 100,000 shares of common stock at an exercise
price of $4.94, the fair value on 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.
Stock options were granted to four outside directors to each purchase
25,000 shares of common stock at an exercise price of $4.88, 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.
During the three months ended March 31, 2000, Youbet.com issued 10,000
warrants in exchange for services. The fair value of these warrants of $30,841
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.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K - Three months ended March 31, 2000:
Youbet.com filed a Form 8-K dated January 14, 2000 with respect to the
civil resolution of the investigation by the Los Angeles County
District Attorney and the Los Angeles Police Department.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
YOUBET.COM, INC.
Date: May 15, 2000 By: /s/ ROBERT M. FELL
-------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
OF THE BOARD
Date: May 15, 2000 By: /s/ PHILLIP C. HERMANN
-------------------------------------
Phillip C. Hermann
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
14
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM YOUBET.COM,
INCORPORATED FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 143,549
<ALLOWANCES> 0
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<PP&E> 4,694,713
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<SALES> 1,705,237
<TOTAL-REVENUES> 1,705,237
<CGS> 0
<TOTAL-COSTS> 4,763,880
<OTHER-EXPENSES> 1,088,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,017,315
<INCOME-PRETAX> (2,987,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,987,692)
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