Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995
Commission File Number 33-13789 LA
YOU BET INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
Delaware 87-0422246
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1950 Sawtelle Boulevard, Suite 180
Los Angeles, California 90025
(Address of principal executive office)
Registrant's telephone number, including area code
(310) 444-3300
Securities registered pursuant to Section 12(g) of the Act:
(Title of each class) (Name of each exchange
- --------------------- on which registered)
Common Stock, .001 par value ----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES______NO X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Issuer's revenue for the fiscal year ended December 31, 1995: $151,000
As of July 26, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $12,981,532.
As of July 26, 1996, the Registrant had 8,283,333 shares of its common stock
("Common Stock"), $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into Parts I, II or III.
1
2
PART I
ITEM 1: BUSINESS
GENERAL
You Bet International, Inc. (the "Registrant" and together with its
consolidated subsidiaries, the "Company"), is an on-line communications company
that is developing interactive software for consumer use to be provided over a
private network. The Company's initial focus will be on its interactive horse
racing product line (tentatively called You Bet!), which is expected to undergo
field testing in the fourth quarter of 1996. The software package will enable
users, via modem over regular telephone lines, the Internet or cellular
carriers, to connect to the Company's network, allowing personal computer (PC)
users to establish accounts, access sports and handicapping information, engage
in recreational games and contests for points and prizes and, where consistent
with the Company's "Business Guidelines" (as described in "Government
Regulations; Legality"), transmit actual cash wagers to licensed gaming
agencies. The Company's principal executive offices are located at 1950
Sawtelle Boulevard, Suite 180, Los Angeles, CA 90025, and its telephone number
at that address is 310-444-3300.
The Company's initial business objective is to develop and market an
on-line computer software application which addresses the growing consumer
demand for sophisticated, interactive computer-based programs. The Company
believes that the proliferation of multimedia PCs, the advancement of
technologies for data compression and the production of sophisticated
interactive software have spurred a demand in the market for interactive
entertainment products. The Company is currently developing and testing its
initial on-line, pari-mutuel software program having horse racing as its
subject matter. Management believes that a market opportunity exists to
develop this type of product for individuals who are either dedicated track
enthusiasts or dedicated PC users with a modest interest in horse racing. In
the United States, off-track betting on horse racing, which includes intertrack
wagering (normally featuring simulcasts from other tracks), wagering from off-
track betting (OTB) facilities and telephone betting, has grown at a 16% rate
from 1994 to reach $10 billion wagered in 1995. In 1995, off- track betting
accounted for 68% of the total legal wagering ($14.3 billion) on horse racing.
Total pari-mutuel wagering, which also includes dog racing and jai-alai, was
over $17 billion in 1995. To pursue its business plan and address this
perceived opportunity, beginning in mid-1995 the Company began to assemble a
team of employees and consultants with extensive experience in the horse racing
industry, information technology and on-line networks, with a view towards
bringing the "race track" to the desktop computer environment.
Management believes that the Company has the requisite technology and
experience to develop and implement an on-line pari-mutuel software product.
The Company's principal operating subsidiary, You Bet!, Inc., ("YBI") was
originally incorporated in Delaware under the name PC Totes, Inc. and has over
eight years of experience developing wagering systems. In 1987, YBI developed
a PC based computer "totalisator" system that is used to operate the
pari-mutuel wagering
2
3
systems at horse and dog racing tracks. The system is called the "PC Tote" and
includes facilities for infield scoreboards, closed circuit television, and
numerous types of customer ticket issuing machines. The system is currently in
use at several race tracks in the Far East. Through the implementation of this
horse and dog racing pari-mutuel wagering system, YBI was one of the first
companies worldwide to employ PC based technology in a real-time, transaction
processing environment. The Company believes that this proprietary totalisator
technology is important to the successful implementation of an on-line
interactive program that permits the transmission of pari-mutuel wagering
information as (i) the network itself requires a totalisator for compiling
information prior to transmission and (ii) this knowledge should facilitate
the interface of the information so transmitted with the systems operated by
licensed gaming agencies. (FLS)(1)
__________________________________
(1) Forward Looking Statements. The symbols "FLS" and "FLP" refer to a
"forward looking statement" or "forward looking paragraph". The information
contained therein is subject to various risks, uncertainties and other factors
that could cause actual results to differ materially from the results
anticipated in such forward looking statements or paragraphs. Included among
the important risks, uncertainties and other factors are those hereinafter
discussed.
The business of the Company is dependent upon successful deployment of the
Company's initial product You Bet! Such deployment is subject to all of the
inherent risks in software development, including programming errors, and
conflicts with other software or computer equipment. Additionally, as the
Company is concurrently establishing an on-line network to implement its
product, the Company will be subject to other related risks, such as delays (or
failures) in transmission of data, under-capacity and the inability to access
the network, and general lack of support personnel. The Company's success will
be largely dependent on the ability of the software application and network to
perform as anticipated, as well as market acceptance of the product.
Secondly, the Company will be largely dependent upon negotiating agreements
with third parties, including various track and information providers. Those
third parties will have different business objectives than those of the Company.
Unless the Company and such third parties are able to compromise their
respective objectives in a manner that is mutually acceptable, agreements and
arrangements will not be consummated.
Assuming the Company's product can be developed as anticipated, the Company
will need additional capital to market the product. The Company's need for
additional capital will be dependent upon a number of factors, including the
rate at which the Company's products are utilized and the level of effort needed
to develop and commercialize additional applications. The unavailability of
additional funds when needed could have a material adverse affect on the
Company. The availability of debt and or equity financing, as well as financing
from joint venture sources, is affected by, among other things, world wide
economic conditions, interest rates, and the general competition for funds. No
assurance can be given that the Company will be successful in obtaining
additional financing.
Finally, the Company's software will be affected by the changing and
dynamic nature involving the gaming industry, which is subject to extensive
regulation by both state and federal governments, as well as the current
environment in which Internet and on-line services are offered to computer
users. The gaming industry is heavily regulated, and the policies of the
agencies and legislatures which regulate the gaming industry are subject to
changing political and economic concerns. No assurance can be given that the
Company will not be subject to additional legislation which could materially
impact the Company's planned operations. Moreover, the entire on-line,
Internet-based, communications and entertainment industry is newly emerging and
is rapidly developing, thus subjecting the Company to a variety of volatile
changes, any one of which could have a material adverse affect on the Company's
ability to effectively deploy its products and compete in the marketplace.
3
4
The Company's business plan is to derive most of its revenues through
subscription and transaction fees, rather than through the sale of software
products. (FLS) The Company will explore distribution avenues which
management believes will provide significant and rapid market penetration; the
actual revenue derived from software distribution is less important to the
Company than the size of the subscriber population and the potential revenue
streams it represents.
RECENT DEVELOPMENTS
On December 6, 1995, the Company (which concurrently changed its name
to You Bet International, Inc.), completed the acquisition (the "Acquisition")
of YBI. At the time of the Acquisition, YBI had been offering (and after the
Acquisition, the Registrant, as successor, continued to offer) securities in
private transactions to accredited and offshore investors. Gross proceeds to
the Company from the combined offering were approximately $4.8 million
including $605,000 of indebtedness which was canceled in consideration of the
issuance of Company securities. The remaining proceeds have been, and will
continue to be, used for product development and other general corporate
purposes. (FLS)
BUSINESS PLAN IMPLEMENTATION
The Company is attempting to combine the programming skills and
technical knowledge of its computer industry personnel and network engineers
with the skills and knowledge of its horse racing and pari-mutuel wagering
staff, in order to develop its interactive horse racing software program. The
You Bet! application is intended to integrate computer and software technology
with a secure private network to address a perceived market interest in horse
racing. Elements of this business strategy include:
Use Industry Experts. The Company is using experts from three
disciplines- software development, network implementation and horse racing-- to
develop its on-line programming. For example, an internal product manager with
an intensive horse racing background has major product development
responsibilities to insure that the program, both in content and format, will
be useful to horse racing enthusiasts. One of horse racing's leading jockeys,
Chris McCarron, is working with the Company on the product.
Enhance Proprietary Technology and Production Techniques. The Company
is developing an integrated multimedia process using technologies such as
on-line metering and billing, multi-platform translation and communication, and
financial transaction processing and tracking for use in running the network.
The Company believes that these technologies provide a competitive advantage by
facilitating a real-time transactional environment that will permit the
development of sophisticated interactive programming. (FLS) The Company hopes
to enhance and improve its
4
5
technologies through close collaboration among software programmers, network
engineers and creative talent. (FLS) The Company also plans to actively pursue
patent protection of certain aspects of its technology. (FLS) See "Intellectual
Property" below.
Develop a Broad Line of High-Quality Products. Subject to the
successful implementation of its initial product, the Company intends to
develop a broad product line, including, with respect to horse racing, an
on-line multimedia magazine, audio and video imaging, and chat rooms designed
to appeal to key segments of the horse racing market. (FLS) The Company also
will seek to apply this technology to other sports and gaming activities, in a
manner consistent with the Business Guidelines. (FLS) Although no assurance
can be given that these product enhancements can be developed or, if developed,
can be marketed in a manner which will enhance the Company's anticipated
revenue stream, the Company is devoting significant resources to these
activities and believes that their development has commercial potential.
Pursue Strategic Relationships. The Company is currently discussing
ventures or other strategic relationships in which it can pair its creative and
technical capabilities with companies that already enjoy mass market consumer
appeal. In addition, the Company plans to license its proprietary technology
and production process to international partners to create products and
services for foreign markets. (FLS) No assurance can be given that the Company
will be successful in implementing this plan, and no long term license
agreements have been entered into, although management has been exploring
forming joint ventures or other arrangements in certain areas. To date, the
Company has entered an arrangement with a leading supplier of horse racing data
for redistribution of the data over the Company's network. In addition, the
Company will test its initial product with three tracks managed by an East
Coast horse racing association. (FLS)
Focus on Platforms with the Greatest Market Potential. The Company's
strategy is to focus on developing products for those platforms that have the
greatest installed base among consumers and that offer the capabilities
necessary to produce high quality interactive content. The Company has
targeted PCs as its initial platform for product development. As additional
platforms which are suitable for the Company's products, such as interactive
television, gain commercial acceptance, the Company expects to develop products
for these platforms. (FLS) Certain key elements of the Company's software have
been developed to be portable to other hardware platforms, such as interactive
television (to the extent such services are provided over cable networks) and
hand held digital assistants.
THE WAGERING INDUSTRY
Wagering in the United States. In 1995, over $550 billion was legally
wagered in the United States, representing a 14% increase from 1993. Legal
wagering in the United States, which includes pari-mutuels (horse racing, dog
racing and jai-alai), casino gambling, sports betting, lottery and bingo, has
grown at a rate of 12% a year since 1982. Over the last ten years, 44 states
have passed legislation legalizing various types of wagering, including
lotteries. Management believes that
5
6
during this period no state passed legislation revoking any type of legalized
wagering. The only states that do not currently have some form of legalized
wagering are Hawaii and Utah.
Pari-mutuel Wagering. Pari-mutuel wagering, which includes horse
racing, greyhound racing, and, to a small degree, jai-alai, accounted for over
$17 billion in wagers during 1995, representing an increase of over $900
million from 1994. Horse racing takes place virtually every day of the year in
the United States and the rest of the world. In the U.S. alone, there were
over 12,918 race days in 1995, and the annual attendance was over 40 million.
Aggregate pari-mutuel wagering (as well as other wagering) is much larger
outside of the United States than in the domestic market.
In many states, players can place wagers on races, including out-of
state races, at a track other than the one where the race is run (normally
featuring simulcasting), at OTB locations, or via telephone. Currently, seven
states allow telephone betting, and other states that offer pari-mutuel
wagering may in the future allow telephone betting. (FLS) The Company has been
advised that several states, including New York, Pennsylvania and Connecticut,
permit tracks or other licensed entities in such states to accept wagers placed
by telephone from outside such jurisdictions.
INITIAL PRODUCTS AND SERVICES
On-line wagering, often called "interactive" wagering, is the
placement of wagers from electronic devices such as personal computers,
interactive television sets or hand held personal digital assistants.
Initial Product: The Company anticipates marketing its first program
under the name You Bet!, which will deliver horse racing entertainment and
direct communications with participating licensed wagering facilities such as
the New York Racing Association. (FLS) Horse racing was selected because of
the Company's background in the sport, and because intrastate telephone betting
on these contests is currently permitted in seven states, as well as numerous
foreign countries. See "Business- Government Regulations"
The Company believes that a test (beta) version of You Bet! will be
available for testing by winter of 1996, with a market version available in
early 1997. You Bet! will first be available to customers with IBM compatible
personal computers. (FLP)
You Bet! is being designed to be played for points, prizes and cash
through participating licensed wagering facilities. All of the types of wagers
offered at racetracks will be available through You Bet!, including simple
wagers such as Win, Place, Show, Win-Place, and Win-Place-Show, as well as
exotic wagers such as Perfecta, Quinella, Trifecta, Daily Double, Pick-3,
Pick-6, and Pick-9. (FLP)
6
7
For the novice or occasional handicapper, You Bet! will include
features that make complex handicapping information easier to understand and
manipulate. These features include on-line descriptions of the various pieces
of information available and their meaning, as well as intuitive graphical and
animated interfaces. For the advanced handicapper, You Bet! is expected to
include handicapping tools, including commonly used handicapping methods and
algorithms, as well as a flexible environment for handicappers to enter their
own formulas and generate their own customized, daily handicapping form. (FLP)
Subscribers should be able to track their wagering performance through
You Bet!, viewing their results from a variety of standpoints including: by
track, by type of wager, by amount of wager and by date range. It is
anticipated that the software will be designed to analyze a player's wagering
record, identify areas where the subscriber is successful. For example, You
Bet! can tell a player that Win-Place bets are that player's greatest money
earner, or that the player is having greater difficulty in selecting winning
horses at certain tracks (i.e., at Santa Anita as compared to Aqueduct). (FLP)
MARKETING AND SALES
The Company's business plan is to derive most of its revenues through
subscription and transaction fees, rather than through the sale of software
products. (FLS) Therefore, the Company will explore distribution avenues that
promise significant penetration. The actual revenue derived from software
distribution is less important to the Company than the size of the subscriber
population and the revenue streams it represents.
The Company anticipates that during its first two years of operation
after completion of testing of You Bet!, it will work with a software publisher
or distributor to package, market, and distribute You Bet! and other Company
software access products. (FLS)
The Company's sales and marketing efforts are designed to broaden
product distribution, increase the number of first time purchasers, promote
brand-name recognition, and properly position, package and merchandise the
Company's products. The Company will utilize various marketing techniques
designed to promote brand awareness and recognition, including selective
"bundling" arrangements, shareware, press tours, direct mail, advertising and
trade shows. Additionally, the Company intends to post messages in sports and
wagering discussion forums available on the Internet or other on-line networks.
(FLP)
You Bet! has two principal target markets: existing handicappers and
individuals with access to a personal computer and modem. The Company's
marketing to existing handicappers is expected to focus on You Bet! providing
convenient, current and more detailed information than that available from
traditional sources. The other target market is those individuals who
otherwise have access to PC/Modems but have not previously exhibited a
substantial interest in racing. The Company will attempt to interest PC users
on the basis of the intellectual and financial challenge of either simulated
7
8
betting or actual betting. Both of these groups consists of large populations
of individuals with generally high levels of discretionary income, and the
former group has evidenced serious interest in wagering and gaming. (FLP)
Existing Handicappers: In 1995, racetracks in the United States
recorded over 40 million admissions. Frequent patrons, who go to the track at
least once a month, make up the target group of existing handicappers: people
who are experienced with horse and dog racing, understand the concepts and
rules behind pari-mutuel wagering, and have a demonstrated desire to play.
The Company anticipates that marketing to existing handicappers will
involve traditional methods, because there are a number of existing sources
that handicappers use to acquire information about the races in which they are
interested. The Company's marketing efforts to be directed to existing
handicappers are expected to focus on the several aspects of the You Bet!
service which are believed to be superior to existing formats, including You
Bet!'s ability to (i) provide more handicapping statistics than can be
typically accessed at a racetrack, accompanied by flexible handicapping
analysis tools; and (ii) permit handicappers to play and manage their accounts
from sites they select, regardless of inclement weather and other factors that
keep people from going to the racetrack.
PC Modem/ Commercial On-Line Users: PC modem users represent a
significant potential market of people who play computer games and have shown a
willingness to pay for on-line services. Currently there are over 22 million
households with computers and modems. This figure is expected to increase
dramatically over the next four years. (FLS) Among PC users are subscribers to
existing pay-per-use on-line services such as CompuServe, America On-line,
Prodigy, and Delphi. Over 10 million Americans pay for on-line usage with a
growth rate of 30% per year. These users are adept at using computers and
modems, and are accustomed to receiving entertainment and information through
their computers
Internet users are the largest users of interactive technology in the
world, estimated to number in excess of 25,000,000 people. The Internet users'
growth rate is expected to continue at 25-40% per year for the foreseeable
future. (FLS) A significant portion of the user base pays a monthly service
charge ranging from $5.95 to $19.95 for Internet access. Internet subscribers
represent a large group of individuals, many of whom already use personal
computers as an entertainment device and are accustomed to paying for on-line
service access.
Although this group can be reached through traditional print and
broadcast means, the Company plans to employ a strategy that leverages the low
cost and wide reach of on-line services and the Internet. The Company plans to
have on-line marketing representatives engage people in on-line discussions,
and put the shareware You Bet! access software on-line for people to download.
(FLS)
8
9
Additionally, the Company intends to post messages in sports and wagering
discussion forums on commercial services and Usenet on the Internet, purchase
advertising space from on-line services and Internet providers; and provide
access to shareware You Bet! access software in appropriate forum libraries on
commercial services and via the Internet. The Company also intends to advertise
in specialty magazines such as On-Line Access, .net, Internet World, and
CompuServe magazine. (FLP)
INTELLECTUAL PROPERTY
The Company regards certain of its software and production techniques as
proprietary and will attempt to protect such software and techniques under
patent, copyright, trademark or trade secret laws as well as through contractual
restrictions on disclosure, copying and distribution. While the Company
considers it to be in its best interest to pursue patents and other protections
of its intellectual property rights, it currently does not intend to file for
such protection until You Bet! is launched. The Company does not believe,
however, that its ability to obtain patent protection is critical to the
Company's business of creating entertainment products. (FLS) No assurance can be
given that the Company will be able to adequately protect its intellectual
property.
MANUFACTURING AND SHIPPING
The production of the Company's software will include CD-ROM pressing and
diskette duplication, assembly of purchased product components, printing of
product packaging and user manuals and shipping of finished goods, which will be
performed by third-party vendors in accordance with the Company's specifications
and orders. The Company believes that there are multiple sources for these
services.
COMPETITION
Numerous Internet and other interactive gaming ventures have been announced over
the past several months. The Company expects to compete with these entities, as
well as other established gaming companies which may engage in computer-based
gaming activities. Competition on the Internet with companies providing
entertainment activities, as well as competition with interactive gaming, is and
is expected to continue to be intense. (FLS) The Company's competitors range
from small companies with limited resources to large companies with greater
financial, technical and marketing resources than those of the Company. The
Company considers its principal competitors in the interactive pari-mutuel
gaming market to be ODS and IWN, among others.
X ODS is a division of the company that provides the Prevue program viewing
channel on most cable systems. ODS is developing an in-home pari-mutuel
wagering system that requires an ODS television set-top box and interactive
technology. The system is currently being tested in Kentucky.
9
10
X IWN is a division of NTN Communication, a publicly traded company that
provides interactive trivia entertainment in sports bars, hotels, and other
hospitality environments. IWN has announced that it will release an
in-home pari-mutuel wagering system based on PC's in 1996. Until recently,
YBI was the technology development partner of IWN, providing all technical
expertise and manpower. IWN and YBI signed a Separation and Settlement
agreement, providing IWN with what management believes is an early and
incomplete version of the PC client software. IWN has no rights or access
to YBI's interactive host technology. In addition, YBI retained all
personnel involved in the development of the interactive wagering products
and devices and has since gone on to develop the second generation client
software.
Because the market for interactive software products is still emerging
and the cost barriers to entry into this market are relatively low, the Company
expects the number of competitors to increase. Companies with greater
financial resources than the Company may be able to carry larger inventories,
undertake more extensive marketing campaigns, invest more in the development of
production technology and communication networks, adopt more aggressive pricing
policies and make higher offers or guarantees than the Company. In addition,
the Company believes that potential new competitors, including large software
companies, media companies, and gaming companies, are increasing their focus on
the interactive software market and network connectivity. Competition for the
Company's product is influenced by the timing of competitive product releases
and the similarity of such products to those of the Company, which may result
in significant price competition or reduced profit margins.
GOVERNMENT REGULATION; LEGALITY
The gaming industry, which is subject to extensive statutory and
regulatory control by both state and federal agencies, may be affected by
changes in the political climate and economic and regulatory policies, which
changes may impact the operations of the Company. To the extent that the
Company facilities are used by subscribers to place intrastate or interstate
wagers or the Company receives commissions in respect thereof, such statutes
and regulations could have a direct and material effect on the business and
indirectly could have a material effect on the public demand for the Company's
products and services.
Currently, all 50 states have statutes or regulations restricting
gambling activities, and two states have absolute prohibitions on gambling. In
most states it is illegal for anyone either to accept or make a wager with
certain statutory exceptions. The Federal Interstate Wire Act contains
provisions which may make it a crime for anyone in the business of gambling to
use an interstate or international telephone line to transmit information
assisting in the placing of bets, unless the betting is legal in the
jurisdictions from which and into which the transmission is made. Other
federal laws impacting gaming activities include the Interstate Wagering
Paraphernalia Act, the Travel Act and the Organized Crime Control Act. Various
regulatory and legislative agencies are conducting studies of interstate and
interactive wagering. No assurance can be given that new
10
11
legislation will not be adopted which limits either (i) the intrastate or
interstate activities the Company proposes or hopes to engage in with respect
to actual wagering, or (ii) the type of activities (initially pari-mutuel horse
racing) associated therewith. Any change in either the substance or the
enforcement of the applicable rules and regulations in these areas could have a
material effect on the Company's business and prospects.
The Company has been advised by counsel that it can legally provide
the facilities through which subscribers communicate intrastate wagers in the
seven states that allow in-state telephone account wagering, subject to local
licensing requirements. These states, Connecticut, Kentucky, Maryland, Nevada,
New York, Ohio and Pennsylvania, accounted for approximately 34% of the
estimated $17 billion of pari-mutuel wagering in the United States in 1995.
The Company also believes that it can operate (or license technology) in
numerous countries that allow telephone and account wagering, including Canada,
Mexico, the United Kingdom, Australia, and Hong Kong.
In connection with its proposed activities, the Company might be
considered to be engaged in the gaming business. The Company will not actually
be placing or accepting any wagers. All wagers will be placed by subscribers,
and all actual betting accounts will be maintained by subscribers with licensed
entities such as the New York Racing Association with which the Company has
appropriate contractual relationships. Although the Company hopes to obtain
indemnification from each such entity, no assurance can be given that such
indemnification will be available or, if obtained, that such provisions will be
enforceable or adequate from a financial standpoint.
The Company has adopted a policy (referred to herein as its "Business
Guidelines") pursuant to which it will not engage in any proposed activity
unless (i) the Company has received an opinion of legal counsel (experienced in
gaming or other relevant matters) that it is such counsel's opinion that,
although not necessarily free from doubt, the proposed activity of the Company
is permitted under applicable law, or (ii) the Company's Board of Directors
including a majority of the independent directors, after reasonable inquiry
including consultation with independent legal counsel experienced in gaming or
other relevant matters, determines with a high degree of confidence that
although the matter is not necessarily free from doubt the Company will not be
found to have been violating applicable law by reason of engaging in the
proposed activity.
Since the Company's Business Guidelines permit the Company to engage
in activities as to which it has not received a legal opinion that the
activities are permitted under applicable law, the possibility of violation of
applicable law is enhanced. In addition, the uncertain application of existing
laws to interactive gaming and the lack of applicable precedents suggest that
legal opinions in this field may be qualified on the basis that the matters
expressed therein are not free from doubt. Even when the Company is operating
in accordance with the advice of counsel, a risk exists that the Company may be
found to have violated applicable law. A failure to comply with applicable
regulations could result in the initiation of civil or criminal proceedings
against the Company. The results of such proceedings could include substantial
litigation expense, fines, incarceration of
11
12
Company executives, diversion of the attention of key Company employees,
disqualification of the Company from licensure, and injunctions or other
prohibitions preventing the Company from engaging in various anticipated
activities.
Distribution of the Company's products in countries other than the
United States may be subject to regulation in those countries. There can be no
assurance that the Company will obtain the approvals necessary to market in
such territories.
EMPLOYEES
As of July 8, 1996, the Company engaged twenty-four employees and two
consultants. Of the employees, six are administrative or support personnel.
The Company believes that its relationship with its employees is good.
Additional employees will be hired to help develop and run the host computer
site and to market You Bet!.
ITEM 2: PROPERTIES
In February, 1996, the Company entered into a lease for 7,779 square
feet of space in an office building located at 1950 Sawtelle Boulevard in Los
Angeles, California, which houses the Company's executive offices. The lease
is for a 26 month term, expiring March 31, 1998, with expenses per month of
$7,688. The Company prepaid the $193,220 aggregate lease payments. The
Company believes that this property is adequate for its present purposes.
ITEM 3: LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
13
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Stock: The Company's Common Stock has been traded on the electronic
bulletin board under the symbol UBET. The following table sets forth for the
periods shown, the high and low bid prices as reported by NASDAQ. The bid
prices reflect interdealer prices without retail mark- ups, mark-downs or
commissions and may not necessarily represent actual transactions. Prior to
the Acquisition, the Company's stock traded irregularly. Since the
Acquisition, the limited number of shares of free trading stock may have
impacted the market for the Company's share.
Common Stock
- ------------
High Low
---- ---
1996:
First Quarter . . . . . . . . . . . . . . . . 5.75 3.00
Second Quarter . . . . . . . . . . . . . . . . 5.00 1.00
Third Quarter (through July 26, 1996) . . . . 4.75 3.25
1995:
Fourth Quarter (From December 7, 1995) . . . . 7.00 5.00
On July 26, 1996, the closing bid price for the Common Stock was $3.25 and the
closing asked price was $4.00 per share. The approximate number of holders of
record of Common Stock on that date was 255.
The Company has never paid a dividend on its Common Stock and
presently intends to retain all earnings for use in its business.
b. Warrants: Registrant issued and sold 970,000 Series A Warrants, and
517,188 Series B Warrants (collectively, the "Warrants") in connection with the
Acquisition and the concurrent and subsequent placement by the Company of its
securities to accredited and offshore investors. Each of the Series A and
Series B Warrants is exercisable for one share of Common Stock. There is
currently no public market for the Warrants. The Series A Warrants are
exercisable for shares of Common Stock at a price of $5.25 per share, and
expire on the earlier of (a) two years from the later of (i) the date of
issuance of the last Series A Warrant to be issued or (ii) the date of
effectiveness of a registration statement under the Securities Act covering the
issuance and sale of the shares of Common Stock upon issuable exercise of such
Warrants or resale of such shares by the holder,
13
14
which period shall be extended day-for-day for any time that a prospectus
meeting the requirements of the Securities Act is not available, or (b) the
date specified in a notice of redemption from the Registrant (subject to the
prior right of the holder to exercise the Warrants for at least 30 trading days
following the date of such notice), which notice can only be given if the
closing price of the Common Stock for the twenty consecutive trading days
preceding such notice exceeds $7.50 per share and a current prospectus covering
the underlying shares is then available and the Company has a good faith belief
that it will remain available during said period of at least 30 trading days.
A Series A Warrant may not be exercised during the first year following
issuance, and the Company may not call the Series A Warrants for redemption
during the 15 months immediately following the initial issuance of Series A
Warrants or while any Series A Warrant may not be exercised. The Series B
Warrants are substantially similar to the Series A Warrants, except that (i)
the Series B Warrants are exercisable for shares of Common Stock at a price of
$3.125 per share; (ii) the Series B Warrants expire three years after they are
first issued, and (iii) the Company may not call the Series B Warrants for
redemption.
ITEM 6: SELECTED FINANCIAL DATA
Selected historical financial data presented below as of and for the
three years ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company. The following financial
information should be read in conjunction with Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, and the
Consolidated Financial Statements of the Company and the notes thereto,
included in Item 8.
SUMMARY OF SELECTED FINANCIAL DATA
(in thousands except per share)
YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 1995 1994 1993
- ----------------------------- ---- ---- ----
REVENUES
Consulting Revenue $ 151 $ 186 $ 1
Royalty - 0 - - 0 - 80
----- ----- ----
Total 151 186 81
----- ----- ----
EXPENSES:
Research and development 318 2 20
General and administrative 235 107 203
----- ----- ----
Total Expenses: 553 109 223
----- ----- ----
(LOSS) INCOME FROM OPERATIONS (401) 77 (142)
INTEREST INCOME (EXPENSE) NET (20) (25) (16)
----- ----- ----
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES AND
EXTRAORDINARY ITEM
(421) 52 (158)
14
15
PROVISION FOR INCOME TAXES (2) (1) (2)
(Note 5) ----- ----- ------
(Loss) Income Before
Extraordinary Item (423) 51 (160)
Extraordinary Item 20 ----- ------
----- ----- ------
NET (LOSS) INCOME (403) $ 51 ($160)
===== ===== ======
WEIGHTED AVERAGE COMMON
STOCK AND COMMON
EQUIVALENT SHARES OUTSTANDING 678 343 343
PER SHARE AMOUNTS:
NET (LOSS) INCOME PER SHARE
BEFORE EXTRAORDINARY ITEM $(.62) $.15 $(.46)
EXTRAORDINARY ITEMS $ .03
NET (LOSS) INCOME $(.59) $.15 $(.46)
====== ==== ======
BALANCE SHEET DATA
WORKING CAPITAL $3,339 $ 85
TOTAL ASSETS $3,417 $ 85
LONG-TERM DEBT AND
OBLIGATIONS UNDER CAPITAL
LEASES (including current $ 0 $ 0
portions)
STOCKHOLDERS' EQUITY $3,105 $(258)
(Deficit)
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Registrant, formerly Continental Embassy Acquisitions, Inc.
("CEA") acquired You Bet!, Inc. ("YBI") (formerly PC Totes, Inc.) on December
6, 1995. The Registrant was organized in 1987 to evaluate, structure and
complete a merger with, or acquisition of, any privately held business
enterprise seeking to obtain the perceived advantages of being a publicly-owned
company. Concurrently with such Acquisition, YBI acquired MiddleWare Telecom
Corporation ("MTC"). MTC is an interactive, multimedia, software development
company specializing in host based interactive systems, which was formerly
owned by affiliates of YBI. MTC's proprietary technologies consist of software
and architecture for on-line metering and billing, multi-platform translation
and communication, financial transaction processing and tracking, and other
critical know-how and technology for interactive wagering and on-line
transaction processing. At the time of the Acquisition, the shareholders of
MTC contributed all of the outstanding shares of common stock of MTC to YBI.
Since such date, MTC has been a wholly-owned subsidiary of the Company.
The Company's 1993 revenues were attributable to royalties YBI was
paid on sales of PC based computer "totalisator" application that is used to
operate the wagering system at horse and dog tracks, and its 1994 and 1995
revenue relates to Internet and software consulting services performed by MTC.
Operating expenses include costs associated with the start-up of the consulting
business in 1993 and 1994 and the development of the You Bet! on-line program
in 1995, including amounts paid to subcontractors for consulting and research
and development services.
Management believes that the historical financial information relating
to the Company is not indicative of the operations of the Company in the future
for the following reasons:
X YBI's totalisator operations have been largely dormant since 1993.
Other than $80,000 in royalty income received in 1993 with respect to
the totalisator program, YBI has not had any significant revenue since
1992. It is not anticipated that royalty revenue will be received in
connection with the "totalisator" software during the current year or
in subsequent periods, unless the Company were successfully to
re-market the system which it has no present plans to do.
X Since 1993, the Company has pursued most of its ongoing business
activity through MTC. MTC generated a modest amount of revenue through
consulting projects relating to on-line marketing and wagering. It is
not anticipated that consulting assignments will be sought or
significant consulting revenue will be received in the current year or
subsequent periods.
X Revenue and expenses for the foreseeable future are expected to be
related to the You Bet! on-line software product.
16
17
Year Ended December 31, 1995 Compared to Year ended December 31, 1994.
Revenues declined $35,000 (18.8%) to $151,000 in 1995 from $186,000
for 1994 as a result of the cessation of consulting business in the fourth
quarter of 1995 in connection with the Company's decision to focus exclusively
on the research and development of the You Bet! product. During 1995, the
Company signed a termination agreement with its principal consulting customer.
Operating expenses increased $444,000 (407%) to $553,000 in 1995 from
$109,000 in 1994 because of costs incurred in developing the You Bet! product.
The components of the increase were payroll and consulting expense of $279,000
as more programmers and development personnel were added, other development
costs of $69,000, marketing costs of $68,000 to promote the product and the
Company, and increased general and administrative costs of $28,000 associated
with the increased number of employees.
Interest income of approximately $14,200 was earned in 1995, primarily
from the short term deployment of funds raised from the Company's private
placement in late 1995. The Company did not earn any interest income in 1994.
Interest expense increased approximately $9,000 (or 37%) to $33,533 in
1995 from $24,500 in 1994, primarily resulting from an increase in short-term
borrowings.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993.
Revenues increased $105,000 (128%) in 1994 from 1993 as the royalty
income from PC Totes was ended and the consulting segment of MTC began to
generate revenue.
Expenses declined $114,000 (or 51%) to $109,000 in 1994 from $223,000
in 1993 as PC Totes ceased active operations at the end of 1993. PC Totes
incurred $82,000 of operating expense in 1993 versus $300 in 1994. MTC
incurred $140,000 of expense in 1993 versus $104,000 in 1994, principally
associated with the development of its proprietary technologies.
Interest expense increased to approximately $9,000 to $24,500 in 1994
from $15,533 in 1993 as a result of additional short-term borrowings.
Liquidity and Capital Resources
Historically, the Company's primary sources of liquidity and capital
resources have been cash flow from operations and borrowing from related
parties. During the year ended December 31,
17
18
1995, the Company's cash position increased to $3.3 million as of December 31,
1995, compared to $55,000 at December 31, 1994. In December 1995, the Company
closed a portion of a private offering, issuing 1,290,000 shares and warrants
to purchase an additional 645,000 shares of Common Stock at an exercise price
of $5.25 and receiving net proceeds of approximately $3.0 million after
payments of commissions and other offering expenses. The private placement
offering generated an additional $950,000 after commissions and expenses in
1996 from the issuance of 650,000 additional shares and warrants to purchase in
325,000 additional shares of Common Stock. Substantially all of the Company's
then existing indebtedness (aggregating $605,000) was converted to equity in
the Offering.
Net cash used by operating activities totaled $112,000 during 1995,
substantially all of which was incurred in the development of the You Bet!
product.
Cash flows used in investing activities totaled $81,000 for capital
expenditures. Capital expenditures were primarily for equipment utilized in
the development of the You Bet! product.
The Company has entered into a capital lease that provides for a
$100,000 sale and leaseback of equipment previously purchased by the Company
and a $150,000 line for new equipment purchases. The lease terms are 30 month,
20% security deposit of which 1/3 is returned after each year with an effective
interest rate of approximately 15% per annum.
The Company plans to begin a new private placement offering in the
summer of 1996. The Company plans to offer for sale, on a "best efforts" basis,
a maximum of 1,115,000 shares of the Company's .001 par value Common Stock. The
shares are expected to be offered only to persons other than U.S. Persons, as
defined in Regulation S ("Regulation S"), promulgated under the Securities Act
of 1933 as amended (the "Securities Act"), in offshore transactions, as defined
in Regulation S.
The Company expects that the cash on hand coupled with the cash to be
raised from the new private placement, assuming it will be successful, will be
sufficient for operating expenses and capital expenditures through at least
June 1997. No assurance can be given that the Company will be successful in
raising additional funds. If the Company is not successful in raising this
additional financing, management will be required to consider a variety of
other options including seeking joint venture partners, selling or licensing
all or a portion of its proprietary technology, curtailing product development
and delaying the roll-out of its first product, as well as other cost cutting
actions, including suspending all or a portion of its activities. (FLS)
18
19
The Company's need for capital (beyond that contemplated in the
anticipated private placement) during the next year or more will vary based
upon a number of factors, including the rate at which demand for products
expands, the level of sales and marketing activities for its products, and the
level of effort needed to develop and commercialize additional applications.
In addition, the Company's business plans may change or unforeseen events may
occur which require the Company to raise additional funds. Additional funds
may not be available on terms acceptable to the Company when the Company needs
such funds. The unavailability of additional funds when needed could have a
material adverse effect on the Company. (FLP)
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a board meeting on January 15, 1996 the Board of Directors of the
Company (the "Board") authorized the Company's executive officers to engage new
auditors for the fiscal year ended December 31, 1995. As of February 28, 1996
the Company engaged the accounting firm of Deloitte & Touche LLP as independent
accountants for the Company for the fiscal year ended December 31, 1995. The
firm of Robinson, Hill & Co. (sometimes referred to herein as "Prior Firm")
was replaced because the Prior Firm was located in Salt Lake City and the
Company has moved its offices to Los Angeles, California after its December 6,
1995 Acquisition of YBI. The Board's decision to retain Deloitte & Touche LLP
was based primarily on its national reputation, partner availability and
familiarity with the Company's general business in the computer software
industry. During the two most recent fiscal years ended December 31, 1994 and
1993, and the interim period beginning January 1, 1995 through February 28,
1996 there were no disagreements with the Prior Firm on matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
19
20
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
OF THE REGISTRANT; COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
First Became a
Name Age Director or Officer
- ----- --- -------------------
David Marshall, Chairman and 33 1989
CEO
Russell Fine, Executive Vice 32 1989
President, Chief Technology
Officer, Director
Ron Luniewski, Chief Operating 32 1996
Officer
Barry Peters, Chief Financial 37 1996
Officer
Steve Molnar, Executive Vice 52 1995
President, Racing
Jess Rifkind, Director 64 1995
DAVID MARSHALL, CHAIRMAN AND CEO. Mr. Marshall has been a technology
entrepreneur and manager for over fifteen years. He has been the founder and
an officer or managing partner of numerous companies, including Sunward Video
Services, an off-line video tape editing and production company achieving
national recognition as the exclusive editing facility for the United Nations
Association. For the past seven years, Mr. Marshall was the CEO (and
co-founder) of both PC Totes, Inc. and MTC. In addition to its work in
interactive system development, MTC also provided consulting services on new
media. Mr. Marshall has led MTC's consulting projects for clients including
General Motors, NTN Communications, and Wanna-Be Interactive Media. Mr.
Marshall attended Babson College in Boston majoring in finance, investments,
communications and economics.
20
21
RUSSELL FINE, EXECUTIVE VICE-PRESIDENT, CHIEF TECHNOLOGY OFFICER. Mr. Fine
began his professional career at the age of 17 by becoming the youngest
business systems analyst in the history of PennCorp Financial, which at the
time had one of the largest mainframe data centers in the United States. He
has consulted for numerous companies such as Maxwell Communications, Hit or
Miss (a division of Zayres) and the Lightguide Industries, has analyzed the
investment potential of advanced technologies and has managed software
development projects. He studied business at Babson College, majoring in
finance and investments. For over the past seven years, as Chief Technical
Officer and co-founder of MTC and as a founder of PC Totes, Mr. Fine designed
and oversaw the development of interactive wagering software, including
development of real-time billing and metering systems, data translation
software, and multimedia CD-ROM content developing.
RON LUNIEWSKI, CHIEF OPERATING OFFICER. Ron Luniewski was previously employed
at Electronic Data Systems ("EDS") where he acquired more than 11 years of
experience directing large software development efforts and managing key
business areas. Prior to joining the Company, Mr. Luniewski was Vice
President of EDS responsible for General Motors marketing and advertising where
he was responsible for providing information technology and consulting services
to General Motors. In this capacity, he was responsible for deployment of one
of the largest integrated Internet projects in the world and the development
of a large number of multimedia applications for GM dealerships and for other
GM marketing events. He was also responsible for reengineering existing GM
marketing applications to support the new brand management strategies. Mr.
Luniewski has a Bachelor of Arts degree from Robert Morris College in
Accounting and Computer Sciences.
BARRY PETERS, CHIEF FINANCIAL OFFICER. From April 1993 until February 1996,
Barry Peters was employed as Chief Financial Officer of Interactive Cable
Systems. ICS pioneered providing cable television, telephone and security
services to the residents of multi-family buildings. Besides being Chief
Financial Officer, Mr. Peters also held senior management positions in
Operations, Sales and Product Development. From January 1990 until April 1993,
Mr. Peters was Financial Director of Field Operations at Spectradyne, Inc. He
was responsible for the financial activities for more than 400 employees serving
more than 48 district offices. Previously Mr. Peters was an international
consultant/auditor for United Technologies Corporation and held financial
positions at Rheem Manufacturing and Transamerica Corporation. He has a
Bachelor of Arts degree from Northern Illinois University and is a Certified
Public Accountant and Certified Management Accountant.
STEVE MOLNAR, EXECUTIVE VICE PRESIDENT-RACING. Since June 1995, Mr. Molnar has
been engaged by the Company to represent the Company in its relationship with
the racing industry. Prior to that time, and for the preceding five years, Mr.
Molnar was a director of marketing, and then President and CEO of McKinney
Systems. At McKinney, he led that company to become the number one computer
software supplier to race tracks in North America. Mr. Molnar was a member of
the Thoroughbred Racing Associations' 1995 committee, and conceptualized,
coordinated and
21
22
led the effort with the Association of Racing Commissioners International in
implementing a nationwide licensing system based on Smart Card technology.
JESS RIFKIND, DIRECTOR. For the past fourteen years, Mr. Rifkind has been an
independent management consultant providing advice to clients in the areas of
management, finance and high technology. Prior to establishing his current
practice in 1982, Mr. Rifkind held operating and research executive positions
with Xerox Corporation for 15 years. His technical work is focused in the
fields of computers and communications, while his management emphasis is in the
areas of product and competitive strategy. A 1954 engineering graduate of the
University of Southern California, Mr. Rifkind serves as a director of Gemstone
Corporation, a privately held supplier of client-server software; and Cloud
Nine Interactive, Inc., a privately held interactive multi-media developer and
publisher.
ITEM 11: EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal years
ended December 31, 1995, 1994, and 1993, individual compensation for services to
the Company and its subsidiaries of the President and Executive Vice President
(the "Named Officers").
22
23
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Awards Payouts
------------------- ----------------------------- -----------
Securities
Other Annual Restricted Stock Underlying LTIP All Other
Salary Bonus Compensation Award(s) Options/ Payouts Compensation
Name Year ($) ($) ($) ($) SARs (#) ($) ($)
---- --- --- --- ----- ---------- ------ -----
David Marshall 1995 72,800 --- --- --- --- --- ---
Russell Fine 1995 52,558 --- --- --- --- --- ---
Steve Molnar 1995 19,750 --- --- --- --- --- ---
OPTION GRANTS IN LAST FISCAL YEAR
Shown below is information on grants of stock options pursuant to the
1995 Stock Option Plan during the fiscal year ended December 31, 1995 to the
Officers which are listed in the Summary Compensation Table above.
Option/SAR Grants In Last Fiscal Year
Potential Realized Value at Assigned
Annual Rates of Stock Price
Individual Grants in 1995
-----------------------------------
Number of
Securities Percentage of
Underlying Total Exercise
Options Options/ or Base
SARs granted to Price Per Stock Dollar Stock Dollar
Granted Employees in Share Expiration Price Gains Price Gains
Name (#) Fiscal Year ($) Date ($) ($) ($) ($)
- ---- ------- ------- ----- ------ ----- ----- ----- -----
David Marshall 0 --- --- --- --- --- --- ---
Russell Fine 0 --- --- --- --- --- --- ---
Steve Molnar 80,000 12.4% 2.50 7/05 --- --- --- ---
23
24
DIRECTOR COMPENSATION
Directors holding salaried positions with the Company do not receive
compensation for their services as directors. It is the intention of the
Company that each non-employee director will receive options to purchase 5,000
shares per year, retroactive to each year of service rendered by such director.
See "Item 13 - Certain Transactions" for a discussion of consulting fees paid
to Jess Rifkind, a director of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee. The
Board of Directors has designated David Marshall and Russell Fine to serve as
the members of the Stock Option Committee for purposes of administering the
1995 Employee Stock Option Plan, including designating participants and the
amounts of the awards thereto. Messrs. Marshall and Fine are ineligible to
receive awards under this Plan. The compensation paid to Messrs. Marshall and
Fine was approved by Mr. Rifkind, the sole outside director.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
Employment Agreements:
Messrs. Marshall and Fine are parties to employment agreements
providing for terms of four years commencing as of December 6, 1995. The
agreements provide for annual compensation of $130,000, and $120,000,
respectively; a car allowance of $500 per month; and other usual and customary
benefits. In addition, each is entitled to such bonuses as may be declared
from time to time by the Company's Board of Directors.
In the event of a "Change of Control" (as defined below) of the
Company, each of Mr. Marshall and Mr. Fine shall have the right, but not the
obligation, to consider such event to be a termination of his employment
agreement. In such event, neither Mr. Marshall nor Mr. Fine shall have a duty,
either express or implied, to mitigate any damages under his agreement, and the
Company shall remain liable for all compensation (whether salary, bonus or
other benefits) provided for under the terms of the agreements. Moreover, any
compensation earned by either Messrs. Marshall or Fine in any capacity after
the date of such termination will not reduce or mitigate the amounts payable by
the Company under the applicable agreement. For purposes of their employment
agreements, "Change of Control" shall mean (i) any sale of all or
substantially all of the assets of the Company; (ii) any stock sale, merger or
other business combination in which the members of the management of the
Company (a) no longer are affiliates of the surviving entity, (b) no longer
are in control of the surviving entity or (c) no longer own in excess of 20% of
the outstanding stock of such surviving entity.
24
25
Option Plans
In November 1995, the Company's Board of Directors approved, and
recommended for adoption by the shareholders, the You Bet 1995 Stock Option
Plan (the "Employee Plan") and the 1995 Stock Option Plan for Non-Employee
Directors (the "Non-Employee Directors Plan" and together with the Employee
Plan, the "1995 Plans"). As of July 15, 1996, options to purchase 901,601
shares of Common Stock were outstanding under the 1995 Plans, of which 85,500
are vested. The options vest ratably over four years. Common Stock purchased
upon the exercise of such options are subject to restrictions which prohibit
the resale of such Shares for a 24 month period commencing from the issuance of
the options.
The following summary is qualified in its entirety by reference to the
full text of the 1995 Plans. Unless otherwise indicated, the summary is
applicable to each plan.
The 1995 Plans. The 1995 Plans provide for the granting of awards of
incentive stock options ("ISOs") within the meaning of Section 422 of the Code,
Nonqualified stock options ("NSOs"), and stock appreciation rights ("SARs")
(awards of ISOs, NSOs, and SARs sometimes hereinafter collectively referred to
herein as "Awards"). The aggregate number of shares of Common Stock available
for issuance under the 1995 Plans is 15% of the total number of shares of
Common Stock issued and outstanding from time to time.
Purpose. The purpose of the 1995 Plans is to provide key employees,
officers (other than Messrs. Marshall and Fine) and directors with an
additional incentive to promote the success of the Company's business and to
encourage employees to remain in the employ of the Company.
Administration -- Employee Plan. The Employee Plan is administered by
a committee (the Employee Plan Committee"), which consists of at least two
directors of the Company appointed by the Board. The members of the Employee
Plan Committee are not eligible to receive Options except pursuant to a formula
contained in the Non-Employee Directors Plan and must be "disinterested
persons" as defined in Rule 16b-3(d)(3) promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"). The aggregate number of
shares of Stock that may be granted to non-employee members of the Board
pursuant to the Plan may not exceed 12% of the aggregate amount of shares of
Common Stock of the Company then outstanding.
Administration -- Non-Employee Directors Plan. The Plan is
administered by a committee (the "Non-Employee Plan Committee") of not less
than two persons, appointed by the Board and serving at the pleasure of the
Board. However, the Non-Employee Plan Committee has no discretion as to the
issuance of Options under this Plan. Directors initially will receive options
to purchase 10,000 shares when first elected to the Board. On the day after
(i) the 1996 annual stockholders' meeting of the Company and on the day after
each annual stockholders' meeting of the Company thereafter during the term of
the Plan or (ii) if there shall be no annual meeting during the preceding
thirteen months, on June 30 of such year, each non-employee member of the Board
shall be granted
25
26
a Non-Qualified Stock Option to purchase 5,000 shares of Common Stock. The
option price per share of Common Stock purchasable under such Stock Options
shall be 100% of the fair market value on the date of grant. Such options
shall be exercisable immediately on the date of grant by payment in full of the
purchase price in cash. The aggregate number of shares of Stock that may be
granted to non-employee members of the Board pursuant to the Plan may not
exceed 3% of the aggregate amount of shares of Common Stock of the Company then
outstanding.
INCENTIVE STOCK OPTIONS. The Employee Plan authorizes the Employee
Plan Committee to grant ISOs to any key employee of the Company or any
affiliate of the Company and to determine the terms and conditions of each
grant, including without limitation, the number of shares subject to each ISO.
The ISO exercise price would also be determined by the Committee and would not
be less than the fair market value of the Common Stock on the date of grant.
The exercise price would not be less than 110% of such fair market value and
the exercise period would not exceed five years if the recipient of such ISO
was the holder of more than 10% of the Company's outstanding voting securities.
NONQUALIFIED STOCK OPTIONS. The Employee Plan provides that the
Employee Plan Committee has the authority to grant NSOs to any key employee of
the Company or its affiliates. The Committee is authorized to grant NSOs to
any qualified participant and to determine the terms and conditions of each
such grant, including the number of shares subject to each NSO, the option
period and the option exercise price. The exercise price for NSOs would not be
less than the fair market value of the shares subject to the NSO on the date
of grant.
THE MANNER OF EXERCISE. The exercise price for options granted under
the 1995 Plans may be paid in cash or shares of Common Stock, including shares
of Common Stock which the Plan participants received upon the exercise of one
or more options provided that, with respect to the exercise of ISOs, such
shares, if acquired through the exercise of an option, have been held by such
participant for a period not shorter than the later of two years from the date
the option was granted and one year after the shares of Common Stock were
acquired by the participant through the exercise of options.
The option exercise price may also be paid by the participant's
delivery of an election directing the Company to withhold shares of Common
Stock from the Common Stock otherwise due upon exercise of the option.
VESTING. Unless the Employee Plan Committee establishes a different
vesting schedule at the time of grant, awards under the Employee Plan will vest
ratably over 4 years.
NONTRANSFERABILITY. Awards are not transferable other than by will or
the laws of descent and distribution. During a participant's lifetime, his
options may be exercised only by the participant.
26
27
Discretionary Awards. It is not possible to state the amount of
discretionary awards that will be received by any of the participants under the
Employee Plan since the grant of awards are within the discretion of the
Committee.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common
Stock as of July 26, 1996. The table shows the beneficial ownership of each
person known to the Company who beneficially own more than 5% of the shares of
the Company's Common Stock, each current director, and all directors and
officers as a group. Except as otherwise indicated, the Company believes that
the beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
Name and Address Shares Percent
of Beneficial Beneficially of
Owner* Owned Class(6)
------ ----- --------
David Marshall(1) 2,517,375 30.39%
Russell Fine(1) 2,490,575 30.07%
Trafina Privatbank 800,000 9.66%
Marshall Gift Trust(2) 428,500 5.17%
Sid Marshall(3) 40,000 .48%
Ron Luniewski(4) 0 0
Barry Peters(4) 0 0
Jess Rifkind(5) 30,000 **
All Directors and
Officers as a group
(5 persons)(1) (2) 5,037,950 60.75%
27
28
(1) Includes 1,156,250 Divestment Shares (as hereinafter defined) for each
of Messrs. D. Marshall and R. Fine. If the Divestment Shares are all
forfeited, Messrs. D. Marshall and Fine would own 16.42% and 16.22%
respectively.
(2) Includes 187,500 Divestment Shares for the Marshall Gift Trust. If the
Divestment Shares are all forfeited, Marshall Gift Trust would own
2.91%.
(3) Does not include Shares held by the Marshall Gift Trust, of which Mr.
Sid Marshall is co-trustee. See Note 2 and related information.
(4) The options held by Messrs. Luniewski and Peters are not exercisable
during 1996.
(5) Includes currently exercisable options to acquire 10,000 shares at
$2.50 a share, as well as 10,000 shares owned by his wife.
(6) Based upon 8,283,333 shares of Common Stock, which were outstanding as
of July 26, 1996.
* The address for Messrs. D. Marshall, R. Fine, Luniewski and Peters is
c/o the Company, 1950 Sawtelle Boulevard, Suite 180, Los Angeles,
California 90025. The address for Trafina Privatbank is Rennweg 50
CH-4020 Basel, Switzerland. The address for Sid Marshall and the
Marshall Gift Trust is 11770-M Pacific Coast Highway, Malibu, CA.
90265. The address for Jess Rifkind is 5227 Bianca Avenue, Encino,
California 91316.
** Less than 1%
DIVESTMENT SHARES
Upon completion of the Offerings, David Marshall and Russell Fine, who
are respectively the President and Executive Vice President of the Company,
own, in the aggregate 5,007,950 shares of the Company's common stock. Of this
amount, 2,312,500 shares of Company Common Stock owned by such shareholders,
plus 187,500 shares of Common Stock owned by Marshall Gift Trust
(collectively, the "Divestment Shares") are subject to forfeiture and
cancellation by the Company if certain conditions are not satisfied.
Forfeiture of the Divestment Shares will occur if either the Company does not
achieve the subscription levels indicated below or the market price of the
Company's Common Stock does not exceed $5.25 per share. The possibility of
forfeiture will terminate, regardless of the share price or the level of
subscriptions, upon a sale of substantially all of the assets of the Company,
or upon a merger or other business combination involving the Company, provided
either (i) such transaction has been approved by holders of a majority of the
outstanding shares of the Company which are not owned by beneficial holders of
Divestment Shares and their affiliates or (ii) the consideration to be received
by the holders of Company Common Stock shall be in the form of cash or
marketable securities (valued as of the date of the shareholder vote with
respect thereto) having a value of not less than $7.50 per share of Common
Stock.
28
29
Divestment Shares will no longer be subject to the risk of forfeiture
according to the following schedule, assuming the market price condition is
satisfied:
29
30
Forfeiture Schedule
2,500,000 shares subject to forfeiture
Based on subscribers
Incremental Aggregate
Minimum Shares No Shares No
Number of Longer Subject Longer Subject
Subscribers To Forfeiture To Forfeiture Time Frame
----------- ------------- ------------- ----------
12,500 500,000 500,000 December 5, 1998
25,000 500,000 1,000,000 December 5, 1998
37,500 500,000 1,500,000 December 5, 1998
50,000 500,000 2,000,000 December 5, 1998
100,000 500,000 2,500,000 December 5, 1999
The termination of the possibility of forfeiture with respect to the
Divestment Shares will be deemed to be the payment of compensation to the
recipients and will result in a charge to the earnings of the Company in the
year or years the possibility of forfeiture terminates, in an amount equal to
the fair market value of the Divestment Shares at the time such possibility
terminates. This charge to earnings, if required, could have a substantial
negative impact on the earnings of the Company in the year or years in which
the compensation expense is recognized and could adversely affect the Company's
qualifications for listing on various securities exchanges. In no event,
however, may the possibility of forfeiture terminate unless the then current
trading price for the Company's common stock exceeds $5.25 per share, provided
that the market price condition may be satisfied within six months after the
expiration of the time frame indicated above with respect to the relevant
subscription level. The market price requirement for the Divestment Shares
will be satisfied when the closing price for Common Stock on the principal
national securities exchange on which it is then listed, or if not so listed,
the mean between the highest closing bid and lowest closing asked prices,
exceeds $5.25 for twenty consecutive trading days after the relevant subscriber
level is achieved and maintained.
The effect of the charge to earnings associated with the termination of
the possibility of forfeiture with respect to the Divestment Shares could place
the Company in a net loss position for the relevant year. Moreover, there is no
assurance that the operations of the Company will be
30
31
profitable either in the year or years in which possibility of forfeiture of
the Divestment Shares terminates or in any prior or subsequent periods. The
management of the Company may have the discretion to accelerate or defer or
otherwise influence certain transactions that could affect the number of
subscribers. For purposes of the foregoing, a person utilizing the Company's
products will be considered a "subscriber" only if such person is paying for
such subscription at bona fide commercial rates approved by a majority of the
Company's independent directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jess Rifkind, who is a non-employee director, receives $2,400 per
month from the Company as consulting fees.
See "Item-12: Security Ownership of Certain Beneficial Owners and
Management" for a discussion of the Divestment Shares currently owed by Messrs.
Marshall and Fine.
31
32
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this annual report:
1. Financial Statement Schedules:
None required.
2. Financial Statements:
The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this annual report.
3. Exhibits:
The exhibits listed below are filed as a part of this annual report.
2.1 Acquisition Agreement, dated as of December 6, 1995
between the Company and CEA Acquisition Corp. (1)
3.1 Restated Articles of Incorporation. (1)
3.2 By-laws of the Company. (1)
4.1 Form of Series A Warrant Agreement dated as of
December 6, 1995 between the Company and U.S. Stock
of Transfer Corp. (2)
10.1 Employment Agreement, dated as of December 6, 1995,
between the Company and David Marshall. (2)
10.2 Employment Agreement between the Company and
Russell Fine, dated as of December 6, 1995. (2)
10.3 Lease between the Company and Storage Tek. (2)
10.4 1995 Employees Stock Option Plan (2)
10.5 1995 Non-Employee Directors Stock Option Plan (2)
32
33
21.1 List of subsidiaries of Registrant (2)
(1) Filed as Exhibit 1 to form 8-K, filed as of December 15, 1995.
(2) Included herewith.
33
34
INDEX TO FINANCIAL STATEMENTS
Auditor's Report Pg. 1
Consolidated Balance Sheets - December 31, 1995 and 1994 Pg. 2
Consolidated Statements of Operations - December 31, 1995 and 1994 Pg. 3
Consolidated Statements of Shareholders' Equity (Deficit) -
December 31, 1995 and 1994 Pg. 4
Consolidated Statements of Cash Flows December 31, 1995, 1994, 1993 Pg. 5
Notes to the Financial Statements Pgs. 6 - 10
34
35
YOU BET INTERNATIONAL, INC.
AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY
ACQUISITION, INC.)
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
INDEPENDENT AUDITORS' REPORT
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
You Bet International, Inc.
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of You Bet
International, Inc. (formerly Continental Embassy Acquisition, Inc.) and
subsidiary as of December 31, 1995 and 1994 and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of You Bet International, Inc. and
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations and current rate of cash expenditures raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Los Angeles, California
July 9, 1996
37
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY ACQUISITION, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- ------------------------------------------------------------------------------
1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $3,297,908 $ 55,477
Receivables 35,608 30,000
Prepaid and other current assets 5,364
--------- ---------
Total current assets 3,338,880 85,477
EQUIPMENT, Net of accumulated depreciation of
$2,856 (Note 2) 78,154
--------- ---------
TOTAL $3,417,034 $ 85,477
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 259,214
Accrued officers salaries 45,213
Due to officers/stockholders $ 13,406
Loans payable -- related parties (Note 3) 292,017
Loan payable (Note 6) 20,000
Accrued interest 17,079
Income taxes payable (Note 5) 2,400 800
Other current liabilities 5,410
--------- ---------
Total current liabilities 312,237 343,302
--------- ---------
COMMITMENTS (Notes 4 and 7)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 3):
Common stock, $.001 par value; authorized 50,000,000
shares; issued and issuable and outstanding
8,071,333 (1995) and 343,333 (1994) 8,071 343
Additional paid-in capital 4,030,648 21,657
Accumulated deficit (682,822) (279,825)
Deferred compensation (251,100)
--------- ---------
Total shareholders' equity (deficit) 3,104,797 (257,825)
--------- ---------
TOTAL $3,417,034 $ 85,477
========= =========
See independent auditors' report and notes to consolidated financial statements.
-2-
38
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY ACQUISITION, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
1995 1994 1993
REVENUES:
Consulting (Notes 2 and 6) $ 151,477 $185,531 $ 750
Royalties 80,000
--------- -------- ---------
Total revenues 151,477 185,531 80,750
--------- -------- ---------
EXPENSES:
Research and development 318,067 1,700 19,619
General and administrative 234,676 106,879 203,520
--------- -------- ---------
Total expenses 552,743 108,579 223,139
--------- -------- ---------
(LOSS) INCOME FROM OPERATIONS (401,266) 76,952 (142,389
INTEREST EXPENSE (33,533) (24,495) (15,553)
INTEREST INCOME 14,202
--------- -------- ---------
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM (420,597) 52,457 (157,942)
PROVISION FOR INCOME TAXES (Note 5) (2,400) (1,600) (1,600)
--------- -------- ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (422,797) 50,857 (159,542)
EXTRAORDINARY ITEM, Forgiveness of debt
(Note 6) 20,000
--------- -------- ---------
NET (LOSS) INCOME $(402,997) $ 50,857 $(159,542)
========= ======== =========
WEIGHTED AVERAGE SHARES OUTSTANDING
(Note 3) 677,899 343,333 343,333
========= ======== ========
PER SHARE AMOUNTS (Note 2):
(Loss) income before extraordinary item $ (0.62) $ 0.15 $ (0.46)
Extraordinary item 0.03
--------- -------- ---------
Net (loss) income $ (0.59) $ 0.15 $ (0.46)
========= ======== ========
See independent auditors' report and notes to consolidated financial statements.
-3-
39
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY ACQUISITION, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
COMMON STOCK
--------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------ ------ ------- ----------- ------------ -------
BALANCE,
JANUARY 1,
1993 (Note 3) 343,333 $ 343 $ 21,657 $(171,140) $ (149,140)
Net loss (159,542) (159,542)
---------- ------ ---------- --------- ----------
BALANCE,
DECEMBER 31,
1993 343,333 343 21,657 (330,682) (308,682)
Net income 50,857 50,857
---------- ------ ---------- --------- ----------
BALANCE,
DECEMBER 31,
1994 343,333 343 21,657 (279,825) (257,825)
Issuance of
shares in reverse
merger (Note 1) 5,800,000 5,800 (522,796) (516,996)
Shares issued in
private placement
net of offering costs
(Note 3) 1,490,000 1,490 3,147,650 3,149,140
Shares and options
issued for services
(Note 3) 200,000 200 789,375 $(289,575) 500,000
Shares issued
in exchange for debt
(Note 3) 238,000 238 594,762 595,000
Amortization of
deferred
compensation
(Note 3) 38,475 38,475
Net loss (402,997) (402,997)
---------- ------ ---------- --------- --------- ----------
BALANCE,
DECEMBER 31,
1995 8,071,333 $8,071 $4,030,648 $(682,822) $(251,100) $3,104,797
========= ====== ========== ========= ========= ==========
See independent auditors' report and notes to consolidated financial
statements.
-4-
40
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY ACQUISITION, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (402,997) $ 50,857 $(159,542)
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Amortization of deferred compensation 38,475
Extraordinary item -- forgiveness of
debt (20,000)
Depreciation and amortization 2,856
Changes in operating assets and
liabilities:
Receivables (5,608) 50,000
Prepaid and other current assets (5,364) 200 400
Accounts payable 259,214 (82,858) 2,858
Accrued interest (17,079) 12,574 4,505
Accrued officers salaries 45,213
Due to officers/stockholders (13,406) (34,753) 48,159
Income taxes payable 1,600 800
Other current liabilities 5,410
---------- -------- ---------
Net cash used in operating
activities (111,686) (3,180) (103,620)
---------- -------- ---------
NET CASH USED IN INVESTING ACTIVITIES --
Acquisition of equipment (81,010)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 3,729,909 2,000
Offering costs (580,769)
Loan payable -- related parties 285,987 11,920 128,048
Loan payable 20,000
---------- -------- ---------
Net cash provided by financing
activities 3,435,127 31,920 130,048
---------- -------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,242,431 28,740 26,428
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 55,477 26,737 309
---------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,297,908 $ 55,477 $ 26,737
========== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION --
Cash paid for --
Income taxes $ 800 $ 800 $ 1,600
See independent auditors' report and notes to consolidated financial statements.
-5-
41
YOU BET INTERNATIONAL, INC. AND SUBSIDIARY
(FORMERLY CONTINENTAL EMBASSY ACQUISITION, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(SEE INDEPENDENT AUDITORS' REPORT)
1. BUSINESS AND PRINCIPLES OF CONSOLIDATION
Principles of Consolidation - The consolidated financial statements include
the accounts of You Bet International, Inc. (formerly Continental Embassy
Acquisition, Inc. - "CEA") its wholly owned subsidiary, You Bet!, Inc.
(formerly P.C. Totes, Inc.) and Middleware Telecom, Inc., a wholly owned
subsidiary of You Bet!, Inc. (together the "Company" - see Note 3). All
significant intercompany transactions have been eliminated in
consolidation.
Business - The Company is an on-line communications company located in Los
Angeles, California that is developing interactive software and services
for consumer use to be provided over its secure private network.
Going Concern - The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has had recurring
losses and at its current rate of cash expenditures will need additional
financing and/or equity infusions to continue as a going concern.
Management intends to raise additional funds through a private placement of
approximately 1,115,000 shares. The Company expects that the cash on-hand
coupled with the cash to be raised in this offering will be sufficient to
fund operations and capital expenditures through the second quarter of
1997. If the Company is not successful in raising this additional
financing, management will be required to consider a variety of other
options, including seeking joint venture partners, selling or licensing all
or a portion of its proprietary technology, curtailing product development
and delaying the roll-out of its first product, as well as other cost
cutting activities, including suspending all or a portion of its
activities. The Company's need for capital (beyond that contemplated in the
anticipated private placement) during the next year or more will vary based
upon a number of factors, including the rate at which demand for products
expands, the level of sales and marketing activities for its products, and
the level of effort needed to develop and commercialize additional
applications. In addition, the Company's business plans may change, or
unforeseen events may occur, which require the Company to raise additional
funds. Additional funds may not be available on terms acceptable to the
Company when the Company needs such funds. The unavailability of additional
funds when needed could have a material adverse effect on the Company. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Acquisition - CEA was organized in the state of Utah in 1987 for the
purpose of raising capital and acquiring any suitable assets, properties
and businesses by means of completing a merger with, or acquisition of, any
privately held business enterprises seeking to obtain the perceived
advantages of being a publicly owned company. On December 6, 1995, CEA
reorganized in the state of Delaware, renamed itself You Bet International,
Inc. and completed the acquisition of the Delaware corporation, You Bet!,
Inc. (the "Acquisition"). The Acquisition was completed through the
issuance of 5,800,000 shares of CEA common stock in exchange for all of the
outstanding shares of You Bet!, Inc. Concurrent with the Acquisition, CEA
changed its name to You Bet International, Inc., and the management of You
Bet!, Inc. became the
-6-
42
management of the consolidated Company. The Acquisition has been reflected
for accounting purposes as the acquisition of You Bet International, Inc.
by You Bet!, Inc. (a reverse acquisition). The operating results reflected
in the accompanying consolidated financial statements do not include CEA's
operating activities prior to the Acquisition, as the amounts are not
significant.
Concurrent with the Acquisition, the shareholders of Middleware Telecom,
Inc. ("Middleware") (which are substantially the same as the shareholders
of You Bet!, Inc.,) contributed their shares of Middleware to You Bet!,
Inc., for no consideration. The historical financial information presented
include the combined financial statements of You Bet!, Inc. and Middleware,
due to the common control, management and operations of the companies. All
intercompany transactions have been eliminated in the combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - The Company considers all investments with
original purchased maturities of three months or less to be cash
equivalents.
Software Development Costs - The Company's initial software development
costs are charged to operations as research prior to the development of a
detailed program design or a working model. Costs incurred subsequent to
demonstrating technological feasibility of a working model will be
capitalized and amortized over the estimated product life.
Equipment - Equipment is stated at cost and consists primarily of computers
and office equipment. The assets are being depreciated using the
straight-line method over their estimated useful life of three to five
years.
Revenue Recognition - Revenue is primarily derived from various software
consulting agreements and is recognized upon rendering of services.
Net (Loss) Income Per Share - Net (loss) income per share is computed using
the weighted average common shares outstanding during the year and the
dilutive effect of common share equivalents (stock options and warrants).
For the year ended December 31, 1995 the effect of common share equivalents
was antidilutive. There were no common share equivalents in 1994 and 1993.
A total of 2,500,000 shares, which are subject to a divestiture of shares
agreement (see Note 3), have been excluded from the earnings per share
calculation in 1995 as the amounts are antidilutive.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of cash equivalents, and accounts receivable and payable.
The book value of these financial instruments are representative of their
fair value due to their short-term maturity.
Recent Accounting Pronouncements - In 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of." The principles established in the
new
-7-
43
statement must be applied by the Company in fiscal 1996. Among other
provisions, the statement changed current accounting practices for the
evaluation of impairment of long-lived assets. Management has not yet
completed its analysis of the effect of adopting the new statement.
In 1995, the FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
APB Opinion No. 25, which requires compensation cost based on the intrinsic
value of the equity instrument awarded. The Company will continue to apply
APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
3. COMMON STOCK
Stock Split - Concurrent with the closing of the Acquisition (see Note 1),
the Company effected a 1 for 1.5 reverse stock split. All references to
share and per share amounts have been retroactively restated to reflect
this stock split.
Private Placement - Concurrent with the closing of the Acquisition, the
Company completed a private placement offering to new investors of 149
units for $25,000 per unit, each consisting of 10,000 shares of common
stock, and Series A Warrants to purchase 5,000 shares of the Company's
common stock. A total of 1,490,000 shares and 745,000 Series A Warrants
were issued with proceeds totaling $3,729,909. The Series A Warrants are
exercisable at $5.25 per share and expire on the later of the second
anniversary of the date of issuance, or two years from the date on which a
registration statement registering the warrants is declared effective.
Total costs of the offering of $580,769 have been charged against the
proceeds. Included in cash at December 31, 1995 is $504,909 held in escrow
pending the issuance of 200,000 of the total shares sold.
The Company issued 200,000 shares of its common stock and Series B Warrants
to purchase an additional 417,188 shares as commission to the underwriter
of the offering. The Series B Warrants are exercisable at $3.25 and expire
December 6, 1998.
Conversion of Debt - Concurrent with the closing of the Acquisition, bridge
financing in the amount of $250,000 was exchanged for 10 of the units
offered in the private placement, and additional loans in the amount of
$345,000 were exchanged for 138,000 shares of common stock.
Stock Options Plans - In November 1995, the Company's Board of Directors
approved the 1995 Stock Option Plan and the 1995 Stock Option Plan for
Non-Employee Directors (collectively the "1995 Plans"). The 1995 Plans
provide for the granting of awards of incentive stock options, nonqualified
stock options and stock appreciation rights. The aggregate number of shares
of common stock available for issuance under the 1995 Plans is 15% of the
total number of shares of common stock outstanding from time to time. A
total of 643,500 options were issued in 1995 that are exercisable at $2.50
per share through December 2005 and vest in four equal installments. A
total of 85,500 options have vested at December 31, 1995. Deferred
compensation totaling $289,575 was recorded upon the issuance of the
options and is being amortized over the vesting period of the options.
-8-
44
Divestiture of Shares - A total of 2,500,000 of the issued shares of the
Company, which are owned by two officers of the Company and a third
shareholder, are subject to forfeiture by the shareholders and cancellation
by the Company if certain conditions are not satisfied. Forfeiture of such
divestment shares will occur if either the Company does not achieve certain
subscriber levels or the Company's stock does not exceed $5.25 by certain
target dates. These contingent shares are excluded from the calculation of
weighted average shares outstanding in the accompanying financial
statements and, upon termination of the forfeiture restrictions, will be
reflected as compensation expense and the issuance of capital in the period
the forfeiture restrictions are terminated.
4. COMMITMENTS
Employment Agreements - The Company has entered into employment agreements
with two of its officers providing for base compensation totaling $250,000
per year through December 1999.
Lease - Through December 31, 1995, the Company leased office space on a
month to month basis. In January 1996, the Company entered into a lease for
office space which provides for monthly payments of $7,687 through March
1998. Rent expense for the year ended December 31, 1995 totaled $5,472.
5. INCOME TAXES
The provision for income taxes consists of the following:
1995 1994 1993
Current-state $ 2,400 $ 1,600 $ 1,600
Deferred income taxes 148,000 (11,000) 59,000
Change in deferred tax asset valuation
allowance (148,000) 11,000 (59,000)
--------- --------- --------
Provision for income taxes $ 2,400 $ 1,600 $ 1,600
========= ========= ========
A reconciliation between the statutory federal income tax rate and the
effective income tax rate is as follows:
1995 1994 1993
Federal statutory income tax rate (35.0)% 35.0 % (35.0)%
State taxes, net of federal benefit (6.0)% 6.0 % (6.0)%
Use of net operating loss carryforwards (38.0)%
Effects of losses without current year benefit 40.5 % 42.0 %
----- ----- -----
0.5 % 3.0 % 0.1 %
===== ===== =====
Deferred income taxes are computed annually for differences between
financial statement and income tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. Such deferred
income tax asset and liability computations are based on enacted laws and
rates applicable to periods in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the income tax payable or refundable for the period plus or
minus the change during the period in deferred income tax assets and
liabilities. Net deferred tax assets, consisting primarily of the
differences in the recognition of software development costs for income tax
purposes ($100,000) and net operating loss carryforwards ($96,000) have
been reduced to zero by valuation allowances due to the uncertainty of
their recoverability.
-9-
45
6. EXTRAORDINARY ITEM
In May 1995, the Company entered into a settlement with IWN, Inc. ("IWN").
The Company had been performing consulting services for IWN in connection
with the joint development of certain interactive wagering software. In
connection with this arrangement, the Company was paid $119,000 by IWN in
1994, and was loaned $20,000 by IWN. On May 18, 1995 the Company and IWN
entered into a separation and settlement agreement whereby the loan was
forgiven.
7. SUBSEQUENT EVENT
In July 1996, the Company entered into a lease that provides for a $100,000
sale and leaseback of equipment previously purchased and a $150,000 line
for new equipment purchases.
* * * * * *
-10-
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los
Angeles, State of California, on the _______ day of July, 1996.
YOU BET INTERNATIONAL, INC.
BY:______________________
DAVID MARSHALL
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
Signature Capacity Date
- --------- -------- ----
___________________ Chairman of the Board, July __, 1996
DAVID MARSHALL President, Chief Executive
Officer and Director
___________________ Executive Vice President, July __, 1996
RUSSELL FINE Director
___________________ Chief Financial Officer July __, 1996
BARRY PETERS
___________________ Director July __, 1996
JESS RIFKIND