UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 0-26015
YOUBET.COM, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-4627253
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(State of incorporation)
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(I.R.S. employer identification no.)
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2600 West Olive Avenue, 5
th
floor, Burbank, CA. 91505
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91505
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (818) 668-2100
Securities registered under Section 12(b) of the Act:
Common Stock, par value $.001 per share
Securities registered under Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
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No
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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.
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No
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Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) 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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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The aggregate market value of the voting common equity held by non-affiliates of the registrant as
of the last business day of the registrant’s most recently completed second fiscal quarter (June
30, 2009) was approximately $99.1 million based on the closing sale price of $3.30/share as
reported on the NASDAQ Capital Market on June 30, 2009.
As of December 31, 2009, there were 41,730,038 shares of common stock, $.001 par value per share,
outstanding (net of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this report.
YOUBET.COM, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
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Preliminary Notes
The words “Youbet,” “we,” “our,” “ours,” “us,” and the “Company” refer to Youbet.com, Inc.,
together with its subsidiaries, except where the context otherwise requires. This annual report on
Form 10-K is for the year ended December 31, 2009. This annual report modifies and supersedes
documents filed prior to this annual report. The Securities and Exchange Commission (the “SEC”)
allows us to “incorporate by reference” information that we file with them, which means that we can
disclose important information to you by referring you directly to those documents. Information
incorporated by reference (such as exhibits to this annual report) is considered to be part of this
annual report. In addition, information that we file with the SEC in the future will automatically
update and supersede information contained in this annual report.
Industry and market data used throughout this annual report is based on independent industry and
government publications, reports by market research firms and other published independent sources.
Some data is also based on our good faith estimates, which are derived from our review of internal
surveys and independent sources. Although we believe these sources are reliable, we have not
independently verified the information from these third-party sources and cannot guarantee their
accuracy or completeness.
Cautionary Statement
This annual report on Form 10-K contains forward-looking statements which include, but are not
limited to, statements about our pending merger with and into Churchill Downs Incorporated
(“Churchill Downs”) and statements concerning expectations as to our revenues, expenses, and net
income, our growth strategies and plans, our assessment of strategic alternatives for United Tote
Company (“United Tote”), the timely development and market acceptance of our products and
technologies, the competitive nature of and anticipated growth in our markets, our ability to
achieve further cost reductions, the status of evolving technologies and their growth potential,
the adoption of future industry standards, expectations as to our financing and liquidity
requirements and arrangements, the need for additional capital, and other matters that are not
historical facts. These forward-looking statements are based on our current expectations,
estimates, and projections about our industry, management’s beliefs, and certain assumptions made
by it. Words such as “anticipates”, “appears”, “expects”, “intends”, “plans”, “believes, “seeks”,
“estimates”, “may”, “will” and variations of these words or similar expressions are intended to
identify forward-looking statements. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. These statements, which are included in accordance
with the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended,
are not guarantees of future performance and are subject to risks, uncertainties, and assumptions
that are difficult to predict. Therefore, actual results could differ materially and adversely from
those results expressed in any forward-looking statements, as a result of various factors, some of
which are listed under Item 1A “Risk Factors” of this report. Readers are cautioned not to place
undue reliance on forward-looking statements, which are based only upon information available as of
the date of this report. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
PART I.
Business Overview
We are a diversified provider of technology and pari-mutuel horse racing content for consumers
through Internet and telephone platforms, and a leading supplier of totalizator systems, terminals
and other pari-mutuel wagering services and systems to the pari-mutuel industry. Youbet is a
leading online advance deposit wagering (“ADW”) company focused on horse racing primarily in the
United States.
Our website,
www.youbet.com
, enables our customers to securely wager on horse races at over 180
racetracks worldwide from the convenience of their homes or other locations. Our customers receive
the same odds and expected payouts they would receive if they were wagering directly at the host
track and their wagers are commingled with the host track betting pools.
We appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop”
experience. To place a wager, customers open an account and deposit funds with us via several
convenient options, including our ExpressCash system, which links our customers’ wagering accounts
directly to their personal checking accounts. To enable our customers to make informed wagers, we
provide 24-hour access to up-to-the-minute track information, real-time odds and value-added
handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics
and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality,
television speed live audio/video broadcasts with our xStreamAV
tm
of races as well as
replays of a horse’s past
races. Our convenient automated services are complemented by our skilled player service agents, who
are available 15 hours a day, seven days a week to provide technical support and address any
wagering or funding questions.
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Our content partners provide us the same live satellite feeds that they normally broadcast at the
track and to off-track betting facilities (“OTBs”). As a result, our content partners have the
opportunity to increase the total handle wagered on their racing signal, which we believe leads to
higher revenues for the host track and a higher quality of racing through larger purses for the
horse owners. In return, we receive a commission, or a percentage of the wager (handle) processed
through Youbet Express.
We acquired United Tote Company (“United Tote”) in February 2006. United Tote is a leading supplier
of totalizator systems (equipment and technology that processes wagers and payouts). United Tote
supplies pari-mutuel tote services to approximately 100 racing facilities in North America and
additional facilities in a number of foreign markets. As a result of this acquisition, we now
operate two business segments for financial accounting purposes, ADW and totalizator systems. For
more information, see Note 15 “Segment Reporting” in our consolidated financial statements at the
end of this report.
We were incorporated in Delaware on November 13, 1995. Our executive offices are located at 2600
West Olive Avenue, 5th floor, Burbank, CA 91505 and our telephone number is (818) 668-2100. Our
website address is
www.youbet.com
.
Churchill Downs Merger Agreement
On November 11, 2009, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Churchill, Tomahawk Merger Corp., a wholly owned subsidiary of Churchill Downs (“Merger Corp”), and
Tomahawk Merger LLC, a wholly owned subsidiary of Churchill Downs (“Merger LLC”). The Merger
Agreement provides that, upon the terms and subject to the conditions set forth in the Merger
Agreement, (i) Merger Sub will merge with and into Youbet, with Youbet surviving as a wholly owned
subsidiary of Churchill Downs (the “Merger”) and (ii) following completion of the Merger, the
surviving corporation from the Merger will merge with and into Merger LLC, with Merger LLC
surviving such merger.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger,
each share of our common stock issued and outstanding immediately prior to the effective time of
the Merger (other than treasury shares, shares held by our wholly owned subsidiaries or shares of
our common stock held by Churchill Downs or any of its subsidiaries) will be converted into the
right to receive (i) 0.0598 of a share of Churchill Downs common stock and (ii) $0.97 in cash,
subject to adjustment to ensure that the Merger does not require Churchill Downs to issue more than
19.6% of the outstanding Churchill Downs common stock outstanding as of immediately prior to the
effective time of the Merger.
The Merger is subject to customary closing conditions, including (i) approval and adoption by our
stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, (iii) absence of litigation or injunctions prohibiting the transactions
contemplated by the Merger Agreement and (iv) subject to certain materiality exceptions, the
accuracy of the representations and warranties made by us and Churchill Downs, and compliance by us
and Churchill Downs of our and Churchill Downs’s respective obligations under the Merger Agreement.
We have made customary representations, warranties and covenants in the Merger Agreement,
including, among others, covenants to conduct our business in the ordinary course during the
interim period between the execution of the Merger Agreement and consummation of the Merger. We are
also subject to a “no-shop” restriction on our ability to solicit alternative acquisition
proposals, provide certain information and engage in discussions with third parties, subject to
certain exceptions. The Merger Agreement also provides for certain termination rights for both us
and Churchill Downs, including our right to terminate the Merger Agreement under certain
circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement under
specified circumstances, we may be required to pay Churchill Downs a termination fee of $4,326,000
and reimburse Churchill Downs’s transaction expenses up to $500,000 and Churchill Downs may be
required to pay us a termination fee of $5,000,000.
Additional information regarding the Merger is provided in the proxy statement/prospectus filed
with the SEC by Churchill Downs on March 2, 2010 and mailed to our stockholders on March 4, 2010.
Industry Overview
According to The Jockey Club, which is the breed registry for all thoroughbred horses in North
America, total U.S. handle on thoroughbred racing, the most popular type of horse racing, was
estimated at approximately $12.3 billion in 2009, of which 89% represented wagers made away from
the host track, such as at OTBs, at other tracks, or via Internet and telephone wagering. We
believe that the ADW segment has outpaced overall pari-mutuel industry growth in recent years and
that the largest volume of ADW wagers in the U.S. were processed through entities licensed as
multi-jurisdictional ADW wagering hubs.
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In 2000, the United States Congress amended the Interstate Horseracing Act of 1978, as amended (the
“IHA”), to clarify the legality of wagering across state lines via telephone or other electronic
media and the commingling of pari-mutuel wagering pools.
In the fourth quarter of 2006, Congress passed the Unlawful Internet Gambling Enforcement Act of
2006 (the “UIGEA”), which includes certain racing protective provisions by maintaining the
status-quo with respect to wagering activities covered under the IHA. This Act prohibits the
acceptance of credit cards, electronic funds transfers, checks, or the proceeds of other financial
transactions by persons engaged in unlawful betting or wagering businesses; however, the Act
specifically excludes from the definition of
unlawful Internet gambling
“any activity that is
allowed under the Interstate Horseracing Act of 1978”. On November 12, 2008, the Department of
Treasury and Federal Reserve Board jointly published the final rule (the “UIGEA Rule”) implementing
the UIGEA.
Competitive Advantages
We are a leading ADW company focused on horse racing primarily in the U.S. and have processed over
$3.1 billion in wagers from January 1, 2004 to December 31, 2009. We believe we have the following
competitive advantages:
Extensive customer database and strong analytical capability
We utilize sophisticated data mining software, which generates detailed customer segmentation
analyses based on variables such as wagering propensities and preferences. With this information,
we are able to personalize our product offerings through targeted special offers, contests and
promotions tailored to specific customer segments. This information also helps us maximize revenue
yield by allowing us to target promotions and incentives to wagers on tracks that generate greater
revenue yield to us.
Highly scalable infrastructure
Our highly scalable technological infrastructure and automated online and telephonic wagering
platform provide us with significant operating leverage. We typically operate at less than 33% of
system capacity. This built-in excess capacity enables us to easily process significantly greater
wagering volume at a low incremental cost. Additionally, we continuously build automation into our
core online and interactive voice recognition wagering platform in order to minimize our
incremental staffing requirements. With this operating leverage, we are well-positioned to
capitalize on handle growth to increase earnings.
Growth Strategies
We aim to maintain our strong position in the ADW segment and build upon the strength of our brand.
We have adopted the following key growth strategies to achieve these objectives:
Continue to develop high-quality wagering products
We intend to continue to develop industry-leading technology and to expand the diversity and
breadth of our product offerings and services. We believe this will translate into a more enjoyable
customer experience, and as a result, we believe our customers will place a greater portion of
their wagering dollars through us.
Seek additional content
We intend to continue to seek access to both additional domestic and international content for our
customers to view and to wager on. By entering into additional content agreements with
international racing and gaming entities, this will provide our customers with a more diverse array
of content to view and to wager on across more hours of the day. In 2009 we derived less than 5% of
our handle from races outside of the U.S. and Canada.
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Expand geographic presence
We intend to seek opportunities in the U.S. and abroad to leverage our highly scalable online and
telephone wagering platforms and to diversify our customer base, revenue streams and content. We
hope to increase our penetration of the international market by entering
into content and technology agreements with international racing and gaming entities that will
enable us to expand our customer base internationally.
Expansion into new gaming opportunities
International jurisdictions permit a broader array of wagering activities than the U.S., including
fixed-odds sports betting. We believe that, with modifications, our robust operating platform can
be adapted to facilitate such international opportunities.
Leverage our flexible wagering platform to provide online solutions for track operators and other
gaming companies
A limited number of track operators currently operate a website that accepts ADW wagers. If track
operators or other gaming companies decide to enter the online ADW segment, our experience and
technological leadership make us highly qualified to assist in building and supporting such
websites. In addition, with our technologically advanced, highly scalable and flexible online
platform and our excess capacity, we are well-positioned to provide the technological
infrastructure for the online initiatives of track operators or other gaming companies.
Revenue Sources
For each pari-mutuel wager placed by our customers, we receive a commission calculated as a
percentage of the wager. In the aggregate, these commissions represented approximately 79% of our
total revenue for 2009. We generate additional revenue primarily from processing fees, monthly
subscription service fees and the sale of handicapping information.
United Tote revenue is derived from contractual arrangements for the supply, installation,
operation, servicing and maintenance of totalizator systems at pari-mutuel facilities, including
horse and dog racing tracks. This revenue is supplemented by sales and licensing of supplies,
software and equipment used by the facilities.
Marketing
Using a variety of media channels, consisting primarily of online marketing and search engine
optimization, supported by tactical print and radio advertising and complimented by brand placement
through our track partners, media and promotions channels, we focus our integrated marketing
efforts on targeted marketing to horse racing enthusiasts. An integrated marketing approach allows
us to cycle a series of targeted messages and promotions centered on key product features,
differentiators, benefits, key content, online tournaments and contests, and event-specific
promotions. A complimentary strategy, implemented in 2008, includes design and content
modifications to the Youbet.com website aimed at increasing its prominence in natural search
results in order to drive new customers to the website.
Our marketing campaigns and customer retention strategies are supported with customer research and
analysis and are intended to satisfy the needs of existing customers and drive new customers to
Youbet Express
SM
. We frequently initiate communication with our customers via phone,
email and online channels. One-to-one messaging through the Youbet Express
SM
platform
allows us to tailor dynamic personalized messages and offers to our members based on their wagering
propensity, preferences and frequency of visitation.
Acquisitions and Dispositions
Disposition of Bruen Productions
In October 2006, we acquired privately-held Bruen Productions International, Inc. We funded the
acquisition with common stock held in treasury, payable in four installments over three years, and
the assumption of approximately $0.2 million of debt. We delivered 13,953 shares of common stock in
October 2006 as the first installment. As of December 31, 2007, we sold Bruen Productions back to
the original owner in exchange for return of the delivered shares, termination of future stock
obligations and cash. The decision to sell Bruen Productions was reached after management
concluded that Bruen Productions was not a core business for Youbet, and that the sale would free
up management resources to focus on our ADW platform and totalizator services. For more information
regarding the sale of Bruen Productions, see Note 14 “Discontinued Operations” in our consolidated
financial statements at the end of this report.
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Shutdown of IRG
The International Racing Group (“IRG”) business was adversely impacted by a severe reduction in
wagering activity following the commencement of an investigation involving the IRG business by the
U.S. Attorney’s Office in Las Vegas, Nevada. Accordingly, on February 15, 2008, we stopped taking
wagers and ceased all other operations associated with its business. On March 14, 2008, we entered
into agreements with the U.S. Attorney’s Office in Las Vegas. Pursuant to one agreement, the U.S.
Attorney’s Office agreed not to pursue any charges against Youbet or IRG in exchange for our
continued cooperation with the government’s ongoing investigation. In separate agreements, we
agreed to forfeit approximately $1.5 million previously seized by the government as part of its
investigation. In connection with the IRG shutdown, we surrendered IRG’s license with the Oregon
Racing Commission (“ORC”). For more information regarding the discontinued operations of IRG, see
Note 14 “Discontinued Operations” in our consolidated financial statements at the end of this
report.
Research and Development
Expenses
During 2009, 2008 and 2007, we spent approximately $4.2 million, $4.5 million and $4.4 million,
respectively, on research and development activities, including capitalized expenses of $0.9
million, $1.1 million and $0.5 million in 2009, 2008 and 2007, respectively.
New Products
We have made important investments in product development areas focused on meeting our customers’
needs. A number of these improvements were released in the fourth quarter of 2008 rolling into
2009. These developments include “experience” related modification such as enhancing the video
streaming quality with higher resolution and speed, through implementation of Flash video. This
improvement will allow our customers who use Apple’s Mac products to enjoy our streaming service
for the first time. We have created other key wagering and analytic tools including “myROI”, a
“return on investment” tool to help customers identify and reproduce their greatest areas of
success. Additionally, we have launched tools to enhance the wagering experience, leveraging
conditional logic and key improvements to our Wager Queue Pro offerings. We have also developed a
number of key new promotional capabilities to improve trial and conversion as well as rebuilding
and revising our referral program offering, which provides incentives for our customers to invite
their friends to join the Youbet.com family.
In 2008, we began providing a co-branded product for a group of racetracks in Illinois, pursuant to
a co-branding agreement with those racetracks which provides for the sharing of the revenue and
expenses associated with wagers placed by Illinois customers. The co-branded product provides
virtual off-track betting systems and services to customers, including, but not limited to,
information regarding horse races enabling customers to transmit wagering instructions on horse
races via a Website. This is accomplished through the creation of dynamic pages with a specific URL
address to enable visitors and customers to use the service.
Pursuant to the terms of the co-branding agreement, we provide ADW services, including an Internet
platform and customer service representatives, and retain a share of the net revenue (commissions
less associated direct costs) generated from related wagering and handicapping activity. All
revenue and expenses associated with the co-branding agreement are captured and accounted for in
the same manner as revenue and expenses associated with our operations for customers outside of
Illinois, with the exception that the co-branded product transactions are segregated into a
separate profit center. At each month end, we prepare a separate profit and loss analysis for the
co-branded product to determine the net revenue generated and remit to the tracks a percentage of
the net revenue, which is similar to a source market fee. We account for the amount remitted to
the group of race tracks as a track fee in our statement of operations, which reduces our gross
profit and Youbet Express yield, as described in more detail under Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
Competition
Web-based interactive gaming and wagering is a new and rapidly changing marketplace. We anticipate
competition will become more intense as many web-based ventures focus on the gaming industry.
Management believes that we are well-positioned to compete with these entities, as well as other
established gaming companies seeking to enter the interactive, pari-mutuel gaming market.
7
Our primary competitors in the domestic interactive pari-mutuel wagering market include ODS
Technologies, L.P. and ODS Properties, Inc., collectively doing business as TV Games Network
(“TVG”), Churchill Downs Technology Initiatives Company, doing business as TwinSpires
(“Twinspires”), and XpressBet, Inc. (“XpressBet”). We do, however, compete with a host of other
interactive and off-track pari-mutuel wagering firms on a national, regional, and local level.
TVG currently accepts wagers from customers in 16 states. TVG is a 24-hour national horse racing
channel broadcast over cable and satellite. In January 2009, Betfair Group Ltd., a gaming company
based in the United Kingdom (“Betfair”), purchased TVG from Macrovision Solutions Corporation.
Twinspires is an ADW platform owned by Churchill Downs. Aside from its namesake track, where the
Kentucky Derby is held, Churchill Downs also owns and operates Arlington Park, Calder Race Course
and Fair Grounds Race Course.
XpressBet is an ADW platform owned by Magna Entertainment Corp. (“Magna”). Magna owns and operates
horse racetracks throughout North America, including Santa Anita Park, Gulfstream Park, Golden Gate
Fields and Pimlico Race Course, where The Preakness Stakes is held. Magna also owns AmTote
International, Inc., which is a provider of totalizator services.
In March 2007, Magna and Churchill Downs announced that they had formed a joint venture called
TrackNet Media Group LLC (“TrackNet”) through which the companies’ horse racing content would be
available to each other’s various distribution platforms, including XpressBet and Twinspires, as
well as third parties, including racetracks, casinos and other ADW providers. TrackNet also
purchases horse racing content to make available through its partners’ respective distribution
platforms. Magna and Churchill Downs also jointly own Horse Racing Television.
In 2007 and 2008, we were unable to carry a significant portion of TrackNet content due to the
failure to successfully negotiate an agreement with TrackNet, as well as the impact on the
distribution of content stemming from disputes among tracks, ADWs, and a number of horsemens’
groups that have consent rights under the IHA. We have had an agreement with TrackNet to carry all
of its content since the end of 2008 and anticipate being able to continue to carry that content in
the future, although the agreement with TrackNet, like all our agreements with content providers,
is subject to cancellation by TrackNet at any time. In addition, we may not be able to arrange to
carry such content in the future, as any such arrangement is subject to contractual negotiations
and the consent of the relevant horsemens’ groups and racing commissions pursuant to the IHA and
applicable state law.
Other competitors include, but are not limited to, Elite Turf Club, Racing & Gaming Services,
Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, AmWest
Entertainment, New Jersey Account Wagering, The New York Racing Association ( “NYRA”), Connecticut
OTB, Sol Mutuel Limited, Royal River Racing, Penn National Gaming, Inc., Day at the Track, Inc.,
and Racing2Day LLC.
According to The Jockey Club, total North American handle on thoroughbred racing, the most popular
type of horse racing, was estimated at approximately $12.3 billion in 2009, of which 89% was
wagered away from the host track, such as at OTBs, at other tracks, or via Internet and telephone
wagering. Our thoroughbred handle in 2009 was approximately $400.5 million or 3.3% of North
American thoroughbred handle.
We believe potential new domestic and international competitors looking to enter the interactive
wagering marketplace may include the tracks themselves, off-track betting parlors, large
established interactive and online software companies, media companies and domestic and
international gaming companies. Our business strategies may be influenced by the timing of a
competitor’s product releases and the similarity of such products to our products. Additional
competition may result in significant pressure on our pricing and profit margins.
United Tote competes primarily on the basis of the design, performance, reliability and pricing of
our products as well as contract services provided. To effectively compete, we expect to make
continued investments in product development and/or acquisitions of technology. Our principal
competitors in this business segment are AmTote International, Inc. (owned by Magna), Scientific
Games Corporation and Las Vegas Dissemination Company. Our competition outside of North America is
more fragmented, with competition also being provided by several international and regional
companies.
8
Government Regulation and Legislation
Current licensing
In May 2009, the ORC approved Youbet’s application to renew for one year our multi-jurisdictional
simulcast and interactive wagering totalizator hub license to accept and place online and telephone
horse racing pari-mutuel wagers. Also, in June 2009, the Washington Horse Racing Commission
approved Youbet’s application to renew for one-year our ADW license to accept and place online and
telephone horse racing and pari-mutuel wagers.
In October 2009, the Illinois Racing Board approved Youbet’s application for an Advance Deposit
Wagering license through the end of 2010.
In November 2009, the Idaho State Racing Commission approved Youbet’s application to renew for one
year our multi-jurisdictional simulcast and interactive wagering totalizator hub license to accept
and place online and telephone horse racing and pari-mutuel wagers.
In December 2009, the California Horse Racing Board renewed our in-state and out-of-state ADW
licenses through the end of 2010. Also, in December 2009, the Virginia Racing Commission approved
Youbet’s application to renew for our license to accept and place online and telephone horse racing
pari-mutuel wagers through the end of 2010.
We intend to apply for renewal of each of the licenses described above and, at this time, we have
no reason to believe that these licenses will not be renewed.
Other government regulation and licensing
Gaming activities are subject to extensive statutory and regulatory control by federal, state and
foreign agencies and could be significantly affected by any changes in the political climate and
changes to economic and regulatory policies. These changes may impact our operations in a
materially adverse way. Our facilities are used by customers to place wagers and we receive
commissions derived from such wagers; therefore various statutes and regulations could have a
direct and material impact on our business and on the public demand for our products and services.
For a description of pertinent federal legislation, see “Industry Overview.”
From time to time, we receive correspondence from various governmental agencies inquiring into the
legality of our activities. We believe that our activities conform to those federal and state laws
and regulations applicable to our activities. However, we face the risk of either civil or criminal
proceedings brought by governmental or private litigants who disagree with our interpretation of
the applicable laws and therefore, we are at risk of losing such lawsuits or actions and may be
subject to significant damages or civil or criminal penalties.
A number of states have enacted, considered or are considering interactive and Internet gaming
legislation and regulations which may inhibit our ability to do business in such states or reduce
the profitability of doing business in such states, and anti-gaming conclusions and recommendations
of other governmental or quasi- governmental bodies could form the basis for new laws, regulations
and enforcement policies that could have a material adverse impact on our business.
Any expansion into international markets may subject us to additional regulation in those countries
into which we expand.
Seasonality and Backlog
Our business segments are subject to seasonal fluctuations in demand associated with racing
schedules. The first and fourth quarters of the calendar year traditionally comprise the weakest
seasons for our pari-mutual wagering business. As a result of inclement weather during the winter
months, a number of racetracks do not operate and those that do operate often experience missed
racing days. This adversely affects the amounts wagered and the corresponding service revenues. Due
to the services we provide, we do not experience a material backlog in sales orders or the
fulfillment of client services.
9
Employees
As of December 31, 2009, we had a total of 346 employees, 295 of whom were full-time and 51 were
part-time. Of the 346 total, 93 were employed in our ADW segment and 253 were employed in our
totalizator segment. We have never had a work stoppage. Eighteen of our totalizator segment
employees as of December 31, 2009, were represented by a labor union. We consider our relations
with our employees and the union that represents some of our employees to be good.
Available Information
Our internet website address is
http://www.youbet.com
. We make available, free of charge through
our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents
are electronically filed with, or otherwise furnished to, the SEC.
The risks and uncertainties described below may not be the only risks we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations or financial results. If any of the following risks occur, our business,
prospects, financial condition, operating results and cash flows could be adversely affected in
amounts that could be material.
Risks Related to Our Business
Our pending Merger with Churchill Downs may cause disruption in our business and, if the pending
Merger does not occur, we will have incurred significant expenses and our stock price may decline.
The announcement of our pending Merger with Churchill Downs, whether or not consummated, may result
in a loss of key personnel and may disrupt our sales and operations, which may have an impact on
our financial performance. The Merger agreement generally requires us to operate our business in
the ordinary course pending consummation of the Merger, but includes certain contractual
restrictions on the conduct of our business that may affect our ability to execute on our business
strategies and attain our financial goals. Additionally, the announcement of the pending Merger,
whether or not consummated, may impact our relationships with third parties.
The completion of the pending Merger is subject to certain conditions, including, among others (i)
approval and adoption by our stockholders, (ii) the expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act, (iii) absence of litigation or injunctions
prohibiting the transactions contemplated by the Merger Agreement and (iv) subject to certain
materiality exceptions, the accuracy of the representations and warranties made by us and Churchill
Downs, respectively, and compliance by us and Churchill Downs of our and Churchill Downs’s
respective obligations under the Merger Agreement.
We cannot predict whether all of the closing conditions for the pending Merger set forth in the
Merger Agreement will be satisfied. As a result, we cannot assure you that the pending Merger will
be completed. If the closing conditions for the pending Merger set forth in the Merger Agreement
are not satisfied or waived pursuant to the Merger Agreement, or if the transaction is not
completed for any other reason, the market price of our common stock may decline. In addition, if
the pending Merger does not occur, we will nonetheless remain liable for significant expenses that
we have incurred related to the transaction.
If the Merger Agreement is terminated under certain circumstances, then we would be required to pay
Churchill Downs a termination fee of approximately $4,326,000 and reimburse Churchill Downs’s
transaction expenses up to $500,000.
These matters, alone or in combination, could have a material adverse effect on our business and
financial results.
If it is determined that our business practices violate state gaming laws or regulations, we could
be subject to claims for damages, fines or other penalties and may be prohibited from accepting
pari-mutuel wagers from these states in the future.
We currently have licenses in the states of California, Idaho, Oregon, Virginia, Illinois and
Washington to operate an ADW multi-jurisdictional wagering hub and/or to accept wagers from
residents of such states. We also accept pari-mutuel wagers from subscribers in other states where,
we believe, accepting such wagers is permitted pursuant to the IHA, state laws, and certain other
laws and legal principles, including those contained in the U.S. Constitution. However, state
attorneys general and gaming regulators may interpret state gaming laws, the federal statutes and
constitutional principles and doctrines in a narrower manner than we do. If a federal or state
court were to adopt such a narrow interpretation of these laws, we may face criminal or civil
damages, fines or other penalties and may be prohibited from accepting pari-mutuel wagers in one or
more states in the future, which may adversely affect our business and results of operations.
10
In addition, if any proceedings were brought by governmental or private litigants who disagree with
our interpretation of the applicable laws, the adverse publicity and cost of such litigation and
diversion of management’s focus and time away from our business operations may have a materially
adverse effect on our financial condition and results of operations. From time to time, we have
received correspondence from various state governmental agencies inquiring into the legality of our
business activities and, in certain circumstances, alleging our non-compliance with state gaming
laws. To date, we have responded in a timely manner to all of these inquiries outlining our legal
position, which we believe permits our business operations in such states. We cannot assure you
that any of these state governmental agencies agree with our legal position or that proceedings
intended to prohibit or restrict our business will not be brought against us by one or more of
these state governmental agencies in the future.
Furthermore, a number of states have considered, enacted or are considering interactive and
Internet gaming legislation and regulations which may inhibit our ability to do business in such
states or reduce the profitability of doing business in such states, and anti-gaming conclusions
and recommendations of other governmental or quasi-governmental bodies could form the basis for new
laws, regulations and enforcement policies that could have a material adverse impact on our
business. The extensive regulation by both state and federal authorities of gaming activities also
can be significantly affected by changes in the political climate and changes in economic and
regulatory policies. Such effects could be materially adverse to us.
Laws and regulations proposed by Congress and various state legislatures or federal or state
authorities that are directly applicable to online and Internet gambling could have a material
adverse effect on our business.
The UIGEA was signed into law on October 13, 2006. On November 12, 2008, the Department of Treasury
and Federal Reserve Board jointly published the UIGEA Rule, implementing the UIGEA.
The UIGEA includes certain racing protective provisions by maintaining the status quo with respect
to wagering activities under the IHA. Certain versions of this legislation and other bills
introduced in prior years have not included exemptions applicable to our business, and we cannot be
certain legislation will not be introduced in the future that could threaten to materially and
adversely affect our business.
A number of states have enacted, considered or are considering interactive and Internet gaming
legislation and regulations which may or may not be worded so as to permit our business to continue
in such states; and anti-gaming conclusions and recommendations of other governmental or
quasi-governmental bodies could form the basis for new laws, regulations, or enforcement policies
that could have a material adverse effect on our business. International expansion of our business
could result in our business being subject to laws and regulations of additional foreign
jurisdictions, and changes in such laws and regulations or enforcement policies could have a
material adverse effect on our business.
If credit card companies, banks or third party processing companies, as a policy, refuse to process
account wagering transactions as a result of perceived legal uncertainty surrounding online live
event wagering, our business and results of operations could be adversely affected.
Credit card companies, banks and third party processing companies may in the future become hesitant
to process deposits, fees and online transactions by our customers as a result of perceived legal
uncertainty, including perceived uncertainty under the UIGEA and the UIGEA Rule, which prohibit the
acceptance of credit cards, electronic funds transfers, checks, or the proceeds of other financial
transactions by persons engaged in unlawful betting or wagering businesses, even though the UIGEA
contains a specific exemption for activities that are permitted under the IHA of 1978. The refusal
by credit card companies, banks and third party processing companies to process such transactions
would limit the methods of payment available to our subscribers, reducing the convenience of our
services, and may make competitive services more attractive. This may adversely affect our
business.
If the federal government or state governments impose taxes on wagers or increase fees on wagers,
our business could be adversely affected.
If one or more governmental authorities successfully assert that we should collect taxes on wagers,
it could adversely affect our business. We do not currently collect taxes on wagers. However, one
or more local, state or foreign jurisdictions may seek to tax Internet wagering when a subscriber
is physically within their jurisdiction at the time the wager is placed. Such taxes, if imposed,
could have a material adverse effect on our business. We currently pay all applicable fees on
wagers in accordance with the applicable rules and regulations of the jurisdictions where we are
licensed and regulated. If the regulatory authorities in such jurisdictions increase the fees
required to be paid on wagers, it would have a material adverse effect on our business.
11
If any of our significant license and content agreements are terminated or are not renewed, our
business and results of operations may be adversely affected.
TVG has formed purported exclusive relationships with a number of major U.S. horse racetracks. In
May 2001, we entered into a license and content agreement with TVG. Pursuant to this agreement, we
have a non-exclusive license to access the simulcast audio, video and data content, as well as the
wagering pools, of certain racing content at these racetracks. If our agreement with TVG is
terminated or if such relationships between TVG and such racetracks are terminated or not renewed,
and if, following any such termination or non-renewal, we are not able to license such content
directly from the track operators, our business and results of operations may be adversely
affected. We also have content agreements with TrackNet, NYRA and Hollywood Park which allow us to
access the video and data content, as well as the wagering pools, of certain racing content
controlled by them or their affiliates. If any of these content agreements are terminated or we are
not able to renew such agreements, our business and results of operations may be adversely
affected.
We face strong competition, and we expect competition to increase.
TVG, which operates an ADW website and the Television Games Network, is a direct competitor in the
interactive, pari-mutuel wagering market. The Television Games Network is a 24-hour national racing
channel for distribution over cable, Dish Network and DIRECTV
®
, along with an in-home
pari-mutuel wagering system that requires a dedicated television set-top box. TVG currently
operates in 16 states. Expansion by TVG into states where TVG does not currently operate would
increase competition for us.
In January 2009, Betfair completed its purchase of TVG. Changes by Betfair in the operation of TVG,
including investment of significant resources into the operation of TVG or expansion into states
where TVG currently does not operate, would increase competition for us.
Magna and its affiliated ADW website XpressBet, and Churchill Downs and its affiliated ADW website
Twinspires.com, are also direct competitors in the domestic interactive, pari-mutuel wagering
market. In March 2007, Magna and Churchill Downs announced that they had formed a joint venture
called TrackNet through which the companies’ horse racing content would be available to each
other’s various distribution platforms, including XpressBet and Twinspires, and to third parties,
including racetracks, casinos and other ADW providers. Magna and Churchill Downs also jointly own
Horse Racing Television. For more information about TrackNet, see Item 1. “Business—Competition”.
Other competitors include, but are not limited to, Elite Turf Club, Racing & Gaming Services,
Premier Turf Club, The Racing Channel, doing business as Oneclickbetting.com, Lien Games, AmWest
Entertainment, New Jersey Account Wagering, NYRA, Connecticut OTB, Sol Mutuel Limited, Royal River
Racing, Penn National Gaming, Inc., Day at the Track, Inc., and Racing2Day LLC. We expect to
compete with these entities, as well as new domestic and international competitors which may enter
the interactive, pari-mutuel gaming market, including tracks themselves, off-track betting parlors,
large established interactive and online software companies and domestic and international gaming
companies. It is possible that our current and potential competitors may have greater resources
than us.
The refusal by horsemen’s groups to approve content agreements could have a material adverse effect
on our business.
In 2008, the Thoroughbred Horsemen’s Group (the “THG”), a collection of horsemen’s groups from
several states, refused to approve agreements for the distribution of certain content by ADW
operators pursuant to the IHA. Such refusal by the THG did not significantly limit the content we
could provide to our customers or have any material effect on our operations for 2008 since we did
not have agreements to carry most of the content that was subject to such refusal by the THG.
However, it is possible that the THG, other collections of horsemen groups, or individual horsemen
groups, could refuse to approve content agreements to which we are a party in the future and such
refusal may limit the content we could provide to our customers and therefore have a material
adverse affect on our business.
12
Our inability to retain our relationships with our content providers would have a material adverse
effect on our business.
We depend upon a limited number of suppliers for the majority of our premier content, and the
cancellation or non-renewal of our license agreements with any one of those suppliers, such as
TrackNet, NYRA, Del Mar or Hollywood Park, would have a material adverse effect on our business.
Our inability to retain our core customer base or our failure to attract new customers would have a
material adverse effect on our business.
Our data mining software generates detailed customer segmentation analyses based on variables such
as wagering propensities and preferences, which allows us to personalize our product offerings
through targeted special offers tailored to specific customer segments. We believe that these
techniques help us to retain our best customers. In addition, our marketing relationships with the
Daily Racing Form and others help us attract new customers. If we are unable to retain our core
customer base through robust content offerings and other popular features, if we lose customers to
our competitors, or if we fail to attract new customers, our businesses would fail to grow or would
be adversely affected.
Current economic climate may adversely impact customers wager frequency and amounts.
The continuing credit crisis, increasing unemployment and the stock market declines may impact our
customers’ ability to wager with the same frequency and maintain their wagering level profiles. A
significant loss of customers or a considerable decline in wagering would adversely affect our
business and results of operations. In addition, the current economic climate could adversely
impact wagering levels and profitability at racetracks from which we carry racing content, which
may cause certain racetracks to cancel races or cease operations and therefore reduce the content
we could provide to our customers. A reduction in the content we provide to our customers could
reduce our revenue and have an adverse impact on our profitability.
System failures or damage from earthquakes, fires, floods, power loss, telecommunications failures,
break-ins or other unforeseen events could harm our business.
Our business depends upon our communications hardware and our computer hardware. Currently, our
hardware is stored in two different locations. Our web services and internet connection hardware
are located in a Tier IV co-location facility in Miami, Florida. Our AV distribution systems are
stored at a co-location facility in Denver, Colorado. We have built certain redundancies into our
systems to avoid downtime in the event of outages, system failures or damage; however, we do not
have duplicate geographic locations for our site of operations. Thus, our systems remain vulnerable
to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist
attacks, hardware or software error, computer viruses, computer denial-of-service attacks and
similar events. Despite any precautions we may take, the occurrence of a natural disaster or other
unanticipated problems could result in lengthy interruptions in our services. Any unscheduled
interruption in the availability of our website and our services results in an immediate, and
possibly substantial, loss of revenue. Frequent or persistent interruptions in our services could
cause current or potential users to believe that our systems are unreliable, leading them to switch
to our competitors or to avoid our site, and could permanently harm our reputation and brand. These
interruptions also increase the burden on our engineering staff, which, in turn, could delay our
introduction of new features and services on our website. We have property and business
interruption insurance covering damage or interruption of our systems. However, this insurance
might not be sufficient to compensate us for all losses that may occur.
We may not be able to respond to rapid technological changes in a timely manner or without service
interruptions, which may cause customer dissatisfaction.
The gaming sector is characterized by the rapid development of new technologies and continuous
introduction of new products. Our main technological advantage versus potential competitors is our
software lead-time in the market and our experience in operating an Internet-based wagering
network. However, we may not be able to maintain our competitive technological position against
current and potential competitors, especially those with greater financial resources. Our success
depends upon new product development and technological advancements, including the development of
new wagering platforms. While we expend a significant amount of resources on research and
development and product enhancement, we may not be able to continue to improve and market our
existing products or technologies or develop and market new products in a timely manner. Further
technological developments may cause our products or technologies to become obsolete or
noncompetitive.
13
If we were to lose the services of key personnel, we may not be able to execute our business
strategy.
Our future success depends in a large part upon the continued service of key members of our senior
management team. They are critical to our overall management, as well as the development of our
technology, culture and strategic direction. Our future success depends on our ability to identify,
attract, hire, train, retain and motivate highly skilled technical, managerial, marketing,
finance/accounting and customer service personnel. Competition for such personnel is intense, and
we may not be able to retain and attract such employees.
Our operating results fluctuate seasonally and may be adversely impacted by a reduction in live
racing dates as a result of regulatory factors.
We experience significant fluctuations in quarterly operating results as a result of the
seasonality associated with the racing schedules. Generally, revenue is greater in the second and
third quarters of the calendar year. We carry a limited number of live racing dates and the number
of live racing dates varies somewhat from year to year. The allocation of live racing dates in most
of the jurisdictions is subject to regulatory approval from year to year and, in any given year,
there may not be the same or more racing dates than in prior years. A significant decrease in the
number of live racing dates would reduce our revenue and cause our businesses to suffer.
If the horse racing tracks that we carry experience unfavorable weather, it may cause races to be
cancelled which would reduce our revenue and have an adverse impact on our profitability.
Because horse racing is conducted outdoors, unfavorable weather conditions, including extremely
high or low temperatures, excessive precipitation, storms or hurricanes, may cause races to be
cancelled. Because a substantial portion of our operating expenses are fixed, a reduction in the
number of races held or in the number of horses racing due to unfavorable weather would reduce our
revenue and have an adverse impact on our profitability.
A horse racing industry controversy could cause a decline in bettor confidence and result in
changes to legislation, regulation or industry practices, which could materially reduce the amount
wagered on horse racing and increase our costs, and therefore, adversely affect our revenue and
operating results.
A horse racing industry controversy could cause a decline in bettor confidence and result in
changes to legislation, regulation or industry practices. For example, on October 26, 2002, in
connection with the Breeders’ Cup World Thoroughbred Championships held at Arlington Park in
Chicago, Illinois, only one person placed winning bets on the Pick 6, a bet to pick the winning
horse in six consecutive races. The bettor purchased all six winning tickets, valued at more than
$2.5 million, through an off-track betting telephone system. Payment of the winnings was withheld
when an examination of the winning bets revealed an unusual betting pattern. Scientific Games
Corporation, the parent company of Autotote Systems, Inc., later announced that it had fired an
employee who had allegedly accessed the totalizator system operated by Autotote Systems, altered
the winning Pick 6 tickets, and erased the record of his access. The Federal Bureau of
Investigation conducted an investigation, and three individuals pled guilty in federal court to
conspiring to commit fraud and money laundering. Industry controversy, like the Pick 6 matter,
could result in a perceived lack of integrity or security, a decline in bettor confidence, and
could lead to a decline in the amount wagered on horse racing. Any such controversy could lead to
changes in legislation, regulation or industry practices, which could result in a material
reduction in the amount wagered on horse racing and in the revenue and earnings of companies in the
horse racing industry, including us.
The inability of our systems and controls to handle online security risks would have a material
adverse effect on our business.
We use packet filters, fire walls and proxy servers which are all designed to control and filter
the data allowed to enter our data centers. However, advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments may make it easier for
someone to compromise or breach the technology we use to protect our subscribers’ transaction data.
If such a breach of security were to occur, it could cause interruptions in service and loss of
data or cessation in service to our subscribers. This may also allow someone to introduce a “virus”
or other harmful component to Youbet causing an interruption or malfunction.
To the extent our activities involve the storage and transmission of information such as credit
card numbers, security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability, as well as costs of complying with laws governing disclosure and
remediation following such breaches. Our insurance policies might not be sufficient to reimburse us
for losses caused by such security breaches.
14
The U.S. government’s investigation into the wagering activities of certain IRG customers may
adversely affect our financial condition and results of operations.
The U.S. government’s investigation into the wagering activities of certain IRG customers resulted
in the seizure of approximately $1.5 million held in IRG bank accounts on October 11, 2007, among
other things. On March 14, 2008, we entered into agreements with the U.S. Attorney’s Office in Las
Vegas. Pursuant to one agreement, the U.S. Attorney’s Office agreed not to pursue any charges
against Youbet or IRG in exchange for our continued cooperation with the government’s ongoing
investigation. In separate agreements, we agreed to forfeit approximately $1.5 million previously
seized by the government as part of its investigation.
While these agreements resolve the matter for Youbet, the U.S. government’s ongoing investigation
creates other ancillary risks. Our continued cooperation with the U.S. government’s investigation
may continue to divert management’s attention from managing our day-to-day operations and expenses
arising from cooperating and responding to the U.S. government’s investigation may be significant.
In addition, current and former employees, officers and directors may seek indemnification,
advancement or reimbursement of expenses from us, including attorneys’ fees, with respect to
current or future proceedings related to this matter. These events could adversely affect our
financial condition, results of operations and the price of our common stock.
15
Our credit facility imposes significant restrictions on us.
Our credit facility, which consists of a $5.0 million revolving line of credit and a $10.0 million
term loan and matures on November 30, 2010, contains customary covenants under the loan and
security agreement, including restrictions on our ability to incur indebtedness, make investments,
pay dividends or engage in mergers and acquisitions. The loan and security agreement also contains
certain financial covenants, including (i) a requirement to maintain a specified debt service
coverage ratio, (ii) a requirement to maintain a leverage ratio not to exceed 2:1, (iii) a
requirement to maintain a certain minimum specified adjusted EBITDA and (iv) limitations on capital
expenditures. Our indebtedness under the loan and security agreement is guaranteed by UT Gaming,
Inc. (“UT Gaming”), the direct parent of United Tote, and secured by substantially all of our
assets, including our intellectual property, and UT Gaming’s equity in United Tote. The covenants
contained in the loan and security agreement may limit our ability to expand, pursue our business
strategies and obtain additional funds. Our ability to meet the financial covenants in the loan and
security agreement may be adversely affected by deterioration in business conditions or our results
of operations, adverse regulatory developments and other events beyond our control. As of December
31, 2009, we were in compliance with financial covenants under the loan and security agreement.
Failure to comply with these covenants may result in the occurrence of an event of default. Upon
the occurrence of an event of default, the lender may terminate our credit facility and demand
immediate payment of all amounts borrowed by us, which would have adverse consequences on our
business and results of operations and may adversely affect the trading price of our common stock.
The Merger will result in a change of control under our credit facility, which constitutes an event
of default. As a result, the lenders on the credit facility may accelerate our obligations under
the credit facility.
Risks Related to United Tote
United Tote
’
s totalizator business depends on its relationships with its track and other partners
for a substantial portion of its revenue. The loss of all or a portion of these relationships could
result in the failure to realize the expected level of revenue from United Tote
’
s totalizator
business.
United Tote has contracts to provide totalizator services to more than 100 tracks and other
facilities that accept pari-mutuel wagers, such as off-track betting parlors, casinos, and jai alai
frontons. As a result, the success of United Tote depends, in part, on our ability to maintain
successful relationships with United Tote’s contract partners. Should these contract partners
discontinue purchasing totalizator services from United Tote, we will fail to realize our expected
level of revenue from United Tote’s totalizator business.
United Tote
’
s totalizator business depends on the total amount of wagers placed with its track
partners.
Many of United Tote’s contracts provide that it will receive a percentage of the pari-mutuel wagers
for which it provides totalizator services. As the amount of pari-mutuel wagering increase, United
Tote’s revenue increases. Accordingly, a decrease in wagers placed at one or more of United Tote’s
contract partners could cause a decline in United Tote’s revenue and, in turn, our consolidated
revenue as the owner of United Tote. Further, any material reduction by any one of United Tote’s
contract partners in its level of commitment of resources, funding, personnel, and interest in
continued development of horse racing or other wagering-based businesses could cause a decline in
wagering and United Tote’s and our consolidated revenue.
United Tote
’
s totalizator business depends upon leading with and responding to technological
changes.
United Tote’s success depends upon new product development and technological advancements,
including the development of more advanced wagering terminals. While United Tote devotes resources
to research and development and product enhancement, it may not be able to continue to improve and
market existing products or technologies or successfully develop and market new products in a
timely manner. Further technological developments by competitors may cause United Tote products or
technologies to become obsolete or noncompetitive.
Technological or human errors could have a material adverse effect on United Tote’s totalizator
business
Errors by United Tote technology or personnel may subject United Tote to liabilities, including
financial penalties under its totalizator service contracts, which could have a material adverse
effect on United Tote’s business.
Current economic conditions may lead to a cessation or reduction of operations by United Tote’s
contract partners that could have a material adverse effect on United Tote’s totalizator business.
The continuing credit crisis, increasing unemployment and the stock market declines may impact the
ability of United Tote’s contract partners to continue operations at current levels. A cessation or
reduction of operations by United Tote’s contract partners could cause
them to discontinue or limit the totalizator services they purchase from United Tote, which could
adversely affect our business and results of operations.
16
Risks Related to Ownership of Our Common Stock
If we fail to continue to meet all applicable Nasdaq Capital Market requirements and Nasdaq
determines to delist our common stock, the delisting could adversely affect the market liquidity of
our common stock, impair the value of your investment and harm our business.
Our common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, we must
satisfy minimum financial and other requirements. One such requirement is a $1.00 per share minimum
bid price. For example, in March 2008, our common stock did not meet the $1.00 per share minimum
bid price requirement for 30 consecutive business days, and on March 31, 2008, Nasdaq delivered a
notice regarding our noncompliance with their continued listing requirements. The share price
subsequently increased above $1.00 for the minimum time period specified by Nasdaq and the
situation was cured. If, in the future, our share price drops below the minimum bid price
requirement for the applicable period prescribed by Nasdaq, our common stock would be delisted if
we are unable to demonstrate compliance within the applicable grace period.
In such a scenario, we may seek stockholder approval to affect a reverse stock split to cause an
increase in the trading price of our common stock to a level above the minimum bid price
requirement. However, a reverse stock split may not prevent the common stock from dropping back
down towards the Nasdaq minimum per share price requirement or below the required level. It is also
possible that we would otherwise fail to satisfy another Nasdaq requirement for continued listing
of our common stock.
If we fail to meet all applicable Nasdaq Capital Market requirements in the future and Nasdaq
determines to delist our common stock, the delisting could adversely affect the market liquidity of
our common stock, adversely affect our ability to obtain financing for the continuation of our
operations and harm our business. This delisting could also impair the value of your investment.
The share price of our common stock may be volatile and can decline further.
The trading price of our common stock has been volatile and is likely to continue to be volatile.
Our stock price could be subject to wide fluctuations in response to a variety of issues, including
broad market factors that may have a material adverse impact on our stock price, regardless of
actual performance. These factors include the following:
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periodic variations in the actual or anticipated financial results of our business or
that of our competitors;
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downward revisions in securities analysts’ estimates of our future operating results or
of the future operating results of our competitors;
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material announcements by us or our competitors;
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public sales of a substantial number of shares of our common stock; and
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adverse changes in general market conditions or economic trends or in conditions or
trends in the markets in which we operate.
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If our quarterly results are below the expectations of securities market analysts and investors,
the price of our common stock may decline further.
Many factors, including those described in this report, can affect our business, financial
condition and results of operations, which makes the prediction of our financial results difficult.
These factors include:
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changes in market conditions that can affect the demand for horse race wagering;
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general economic conditions that affect the availability of disposable income among
consumers; and
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the actions of our competitors.
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If our quarterly operating results fall below the expectations of securities market analysts and
investors due to these or other risks, securities analysts may downgrade our common stock and some
of our stockholders may sell their shares, which could adversely affect the trading prices of our
common stock.
17
We have the ability to issue additional equity securities, which would lead to further dilution of
our issued and outstanding common stock.
The issuance of additional equity securities or securities convertible into equity securities would
result in dilution of then-existing stockholders’ equity interests in us. We may from time to time
seek additional capital to fund operations and reduce liabilities in response to changes in the
business environment. To raise capital, we may seek to sell additional equity securities, issue
debt or convertible securities or seek to obtain credit facilities through financial institutions
or other resources. Our Board of Directors has the authority to issue, without vote or action of
stockholders, up to 1,000,000 shares of preferred stock in one or more series, and has the ability
to fix the rights, preferences, privileges and restrictions of any such series. Any such series of
preferred stock could contain dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences or other rights superior to the rights of
holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may
dilute the current common stockholders’ interest. Our Board of Directors has no present intention
of issuing any such preferred stock, but reserves the right to do so in the future.
|
|
|
|
|
ITEM 1B.
|
|
UNRESOLVED STAFF COMMENTS
|
None.
As of December 31, 2009, we owned no real property. We currently lease our facilities for
administrative, service and/or sales activities. The terms of the leases for our leased facilities
expire at various dates from June 2010 to December 2016. The following table sets forth the
location, business segment, approximate square footage and purpose of our properties as of December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Business Segment
|
|
Square Footage
|
|
|
Use
|
|
Woodland Hills, California
|
|
ADW
|
|
|
30,000
|
|
|
Administrative
|
|
Burbank, California
|
|
ADW
|
|
|
3,000
|
|
|
Executive
|
|
Louisville, Kentucky
|
|
Totalizator
|
|
|
26,900
|
|
|
Service
|
|
San Diego, California
|
|
Totalizator
|
|
|
12,103
|
|
|
Sales/Service
|
|
Ottawa, Canada
|
|
Totalizator
|
|
|
2,000
|
|
|
Sales/Service
|
We believe that our facilities are adequate for our current and anticipated future levels of
operations.
|
|
|
|
|
ITEM 3.
|
|
LEGAL PROCEEDINGS
|
On November 17, 2009, a putative class action lawsuit,
Wayne Witkowski v. Youbet.com, Inc., et al.
,
was filed in the Superior Court of Los Angeles, California against Youbet, various of our
directors, Churchill Downs, Merger Corp and Merger LLC. Subsequently, five additional lawsuits were
also filed in the Los Angeles Superior Court, two of which name Youbet and our directors as
defendants and three of which also name Churchill Downs as a defendant. All six lawsuits (the “Los
Angeles Litigation”), are putative class actions brought on behalf of our stockholders. Plaintiffs
in the Los Angeles Litigation have since moved to consolidate the Los Angeles Litigation, to file a
single consolidated complaint and to appoint lead counsel. That motion was granted on January 22,
2010.
The complaints in the Los Angeles Litigation all allege that our directors have breached their
fiduciary duties, including alleged duties of loyalty, due care and candor, in connection with the
proposed Merger. In that regard, the various complaints include, among other things, allegations
that the proposed Merger is the result of an inadequate sales process which has not been designed
to maximize stockholder value; that the consideration to be received by our shareholders is unfair
and inadequate; that the Merger Agreement includes inappropriate “no solicitation,” “matching
rights,” no standstill waiver, and termination fee provisions; that the combined effect of these
provisions, together with the waiver of our stockholder rights agreement that we signed in
connection with the Merger Agreement with respect to Churchill Downs and the entry into voting
agreements by defendants and certain others pursuant to which they have agreed to vote in favor of
the Merger, is to “lock up” the proposed Merger, foreclose potential alternative bidders and
illegally restrain our ability to solicit or engage in negotiations with a third party; that
various defendants acted for their own benefit in approving the proposed Merger, including for the
purpose of obtaining positions or pursuing opportunities at Churchill Downs; and that material
information has not been provided in connection with the proposed Merger and was not provided at
the time that we submitted our stockholder rights agreement to a stockholder vote. Those lawsuits
which name Churchill Downs or its affiliates as defendants also allege that Churchill Downs has
aided and abetted the alleged breaches of fiduciary duty by our directors. We are also alleged to
have aided and abetted the alleged breaches of fiduciary duty by our directors. Among the relief
sought by the complaints is an enjoining of the proposed Merger, or unspecified damages if the
transaction is consummated, together with payment of attorneys’ fees and costs.
18
On December 23, 2009, a putative class action lawsuit,
Raymond Balch v. Youbet.com, Inc., et al.,
was filed in the Delaware Court of Chancery against Youbet, various of our directors, Churchill
Downs, Merger Corp and Merger LLC. The initial
Balch
complaint contained allegations similar to
those made in the Los Angeles Litigation, including a claim that Churchill Downs aided and abetted
alleged breaches of fiduciary duty by our directors. On January 8, 2010, an amended complaint was
filed in
Balch
, adding a claim against our directors for an alleged breach of the fiduciary duty of
disclosure, and adding allegations that the draft Registration Statement on Form S-4 filed by
Churchill Downs with the SEC in connection with the proposed Merger omits material information and
is materially misleading in various respects. Among the relief sought by the
Balch
amended
complaint is an enjoining of the proposed Merger, or unspecified damages if the transaction is
consummated, together with payment of attorneys’ fees and costs.
On March 2, 2010, Youbet, our directors, Churchill Downs, Merger Corp, and Merger LLC entered into
a memorandum of understanding with the plaintiffs in the Los Angeles litigation and the plaintiffs
in the Balch litigation reflecting an agreement in principle to settle the cases based on
defendants’ agreement to include additional disclosures relating to the proposed Merger in Youbet’s
proxy statement/prospectus relating to the Merger that was mailed to Youbet stockholders on March
4, 2010. Youbet, our directors, Churchill Downs, Merger Corp, and Merger LLC each deny that they
have committed or aided and abetted in the commission of any violation of law or engaged in any of
the wrongful acts alleged in the complaints, and expressly maintain that they diligently and
scrupulously complied with any and all of their legal duties. Although Youbet, our directors,
Churchill Downs, Merger Corp, and Merger LLC believe the lawsuits are without merit, they entered
into the memorandum of understanding to eliminate the burden and expense of further litigation. The
memorandum of understanding provides that the settlement is subject to customary conditions
including the completion of appropriate settlement documentation, completion of confirmatory
discovery, court approval of the settlement, dismissal of the Los Angeles litigation with
prejudice, dismissal of the Balch litigation with prejudice, and the consummation of the proposed
Merger by the Outside Date (as such term is defined in the Merger Agreement). Additionally,
plaintiffs’ counsel is entitled to void the memorandum of understanding if they determine in good
faith that, based upon facts learned subsequent to the execution of the memorandum of
understanding, the proposed settlement is not fair, reasonable and adequate.
If the settlement is consummated, the Los Angeles litigation and the Balch litigation will each be
dismissed with prejudice and the defendants and other released persons will receive from or on
behalf of all of our non-affiliated public stockholders who held our common stock at any time from
November 10, 2009, through the date of the consummation of the Merger a release of all claims
relating to the proposed Merger, the Merger Agreement and the transactions contemplated therein,
disclosures made relating to the proposed Merger, and any compensation or other payments made to
the defendants in connection with the proposed Merger; except that the settlement will not include
a release of claims by current and former Youbet stockholders to exercise their appraisal rights
under Delaware law. Likewise, the plaintiffs will receive a release from the defendants, on the
same or substantially equivalent terms as the release to be provided to the defendants. Members of
the purported plaintiff class will be sent notice of the proposed settlement, and a hearing date
before the Superior Court of California, County of Los Angeles, California, will be scheduled
regarding, among other things, approval of the proposed settlement and any application by
plaintiffs’ counsel for an award of attorneys’ fees and expenses.
We are party to various legal proceedings that are ordinary and incidental to our business. We do
not expect that any of these currently pending legal proceedings will have a material adverse
impact on our consolidated financial position, consolidated results of operations or cash flows.
|
|
|
|
|
ITEM 4.
|
|
(REMOVED AND RESERVED)
|
19
PART II.
|
|
|
|
|
ITEM 5.
|
|
MARKET FOR REGISTRANT
’
S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
Market Information
Our common stock currently trades on the Nasdaq Capital Market under the symbol “UBET”. The
following table sets forth, for the periods indicated, the high and low sale price per share for
our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.28
|
|
|
$
|
0.65
|
|
|
Second Quarter
|
|
|
1.72
|
|
|
|
0.67
|
|
|
Third Quarter
|
|
|
2.09
|
|
|
|
1.04
|
|
|
Fourth Quarter
|
|
|
1.54
|
|
|
|
0.66
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.70
|
|
|
$
|
0.85
|
|
|
Second Quarter
|
|
|
3.59
|
|
|
|
1.59
|
|
|
Third Quarter
|
|
|
3.91
|
|
|
|
1.93
|
|
|
Fourth Quarter
|
|
|
3.03
|
|
|
|
2.05
|
|
On December 31, 2009, the closing sale price per share of our common stock as reported on the
Nasdaq Capital Market was $2.87 per share. As of December 31, 2009, we had 114 shareholders of
record.
Purchases of Equity Securities by Youbet
In March 2007, our board of directors authorized a $10.0 million repurchase of up to two million
shares of our common stock. Share repurchases are administered by a special committee of directors
and may not be made at any time we are in default under the terms of our credit agreement. Since
the inception of this repurchase program through the end of 2007, we repurchased 586,766 shares of
our common stock at a weighted average price of $1.71 per share for an aggregate purchase price of
approximately $1.0 million. We used cash on hand and cash provided by operating activities to fund
these share repurchases. In April 2009, our board of directors approved the modification and
extension of its share repurchase plan, which was scheduled to expire on March 31, 2009. Under the
modified repurchase plan, the Company is authorized to purchase up to 10% of its common stock
outstanding as of March 31, 2009, subject to certain limitations under its existing credit
facility. We did not repurchase any shares of our common stock during 2009 pursuant to this
repurchase program. Under the Merger Agreement, we have agreed not to repurchase any of our common
stock without the approval of Churchill Downs, and we do not expect to repurchase any more shares
while the proposed Merger is pending.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about securities authorized for issuance under our equity
compensation plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Remaining
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Available for Future Issuance
|
|
|
|
|
Number of Securities to be Issued
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation Plans
|
|
|
|
|
upon Exercise of Outstanding
|
|
|
Outstanding Options,
|
|
|
(excluding securities reflected in
|
|
|
Plan Category
|
|
Options, Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
column (a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by security holders
|
|
|
6,794,594
|
|
|
|
1.72
|
|
|
|
1,309,599
|
|
|
Equity compensation plans not approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,794,594
|
|
|
|
1.72
|
|
|
|
1,309,599
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Comparison of Cumulative Total Returns
The chart below compares the performance of Youbet’s common stock with the performance of the
Nasdaq Composite and a peer group index by measuring the changes in common stock prices from
December 31, 2004 through December 31, 2009. Pursuant to the SEC’s rules, we created peer group
indexes with which to compare our own stock performance since a relevant published industry or
line-of-business index does not exist. We have selected a grouping of companies that have lines of
business similar to our own. All of the companies included in the peer group index are also engaged
in other businesses in which Youbet does not participate. The common stocks of the following
companies have been included in the Peer Group Index: Churchill Downs, Inc., Magna Entertainment
Corp and Scientific Games Corp. The chart assumes $100 was invested on December 31, 2004 in
Youbet’s common stock and in each of the foregoing indices.
The stock performance shown on the
graph below is not necessarily indicative of future price performance.
Dividends
We have never declared or paid any dividends on our common stock. We intend to retain any future
earnings primarily for use in the operation and expansion of our business. Consequently, we do not
anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable
future. Our ability to pay dividends is restricted by the loan and security agreement relating to
our credit facility. Our ability to declare or pay dividends in the future may be dependent upon
our financial condition, results of operations, capital requirements, terms of any debt instruments
or preferred stock then outstanding and such other factors as our board of directors may deem
relevant at the time. Under the Merger Agreement, we have agreed not to pay dividends on our common
stock without the approval of Churchill Downs while the proposed Merger is pending.
21
|
|
|
|
|
ITEM 6.
|
|
SELECTED CONSOLIDATED FINANCIAL DATA
|
The following tables set forth the selected consolidated financial data for each of the years
during the five-year period ended December 31, 2009. We derived the selected consolidated financial
data from our audited consolidated financial statements. Prospective investors should read this
selected financial data in conjunction with “Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial statements and the
related notes included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2009
|
|
|
2008 (1)
|
|
|
2007(2)
|
|
|
2006 (3)
|
|
|
2005(4)
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
111,380
|
|
|
$
|
109,028
|
|
|
$
|
122,494
|
|
|
$
|
114,594
|
|
|
$
|
82,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
107,682
|
|
|
|
114,193
|
|
|
|
133,867
|
|
|
|
118,161
|
|
|
|
78,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income tax (benefit)
|
|
|
3,698
|
|
|
|
(5,165
|
)
|
|
|
(11,373
|
)
|
|
|
(3,567
|
)
|
|
|
3,765
|
|
|
Income tax (benefit)
|
|
|
(7,938
|
)
|
|
|
658
|
|
|
|
2,814
|
|
|
|
734
|
|
|
|
(1,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
11,636
|
|
|
|
(5,823
|
)
|
|
|
(14,187
|
)
|
|
|
(4,301
|
)
|
|
|
5,619
|
|
|
Income (loss) from discontinued operations (5)
|
|
|
(18
|
)
|
|
|
1,372
|
|
|
|
(14,231
|
)
|
|
|
2,270
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,618
|
|
|
$
|
(4,451
|
)
|
|
$
|
(28,418
|
)
|
|
$
|
(2,031
|
)
|
|
$
|
5,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.18
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(0.00
|
)
|
|
|
0.03
|
|
|
|
(0.34
|
)
|
|
|
0.06
|
|
|
|
0.00
|
|
|
Net income (loss)
|
|
$
|
0.28
|
|
|
|
(0.11
|
)
|
|
|
(0.68
|
)
|
|
|
(0.06
|
)
|
|
|
0.18
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
0.16
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(0.00
|
)
|
|
|
0.03
|
|
|
|
(0.34
|
)
|
|
|
0.06
|
|
|
|
0.00
|
|
|
Net income (loss)
|
|
$
|
0.27
|
|
|
|
(0.11
|
)
|
|
|
(0.68
|
)
|
|
|
(0.06
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,884
|
|
|
$
|
16,538
|
|
|
$
|
6,551
|
|
|
$
|
21,051
|
|
|
$
|
16,686
|
|
|
Working capital (deficit)
|
|
|
7,064
|
|
|
|
(771
|
)
|
|
|
(14,300
|
)
|
|
|
5,019
|
|
|
|
12,015
|
|
|
Total assets
|
|
|
51,644
|
|
|
|
48,880
|
|
|
|
65,050
|
|
|
|
105,605
|
|
|
|
40,829
|
|
|
Current portion of long-term debt
|
|
|
7,196
|
|
|
|
8,704
|
|
|
|
10,390
|
|
|
|
8,311
|
|
|
|
620
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
3,996
|
|
|
|
4,767
|
|
|
|
12,054
|
|
|
|
178
|
|
|
Stockholders’ equity
|
|
$
|
29,676
|
|
|
$
|
16,843
|
|
|
$
|
19,981
|
|
|
$
|
52,774
|
|
|
$
|
22,884
|
|
|
|
|
|
|
(1)
|
|
In connection with our evaluation of strategic alternatives for United Tote, in February
2009, we concluded that the carrying value of United Tote was impaired and recorded a non-cash
impairment charge of $11.2 million as of December 31, 2008, which
includes the elimination of $6.9 million in goodwill and reductions in the carrying value of
computer equipment and intangible assets of $3.1 million and $1.2 million, respectively.
|
|
|
|
(2)
|
|
In connection with our evaluation of strategic alternatives for United Tote, in March 2008,
we concluded that United Tote goodwill was impaired and recorded a non-cash impairment charge
of $8.0 million as of December 31, 2007.
|
|
|
|
(3)
|
|
In February 2006, we acquired United Tote, and in October 2006, we acquired Bruen
Productions. In 2006, we paid amounts and incurred associated legal fees totaling $2.7 million
in connection with an arbitration award related to an audit of amounts paid to TVG under our
license agreement with TVG for the period April 2002 through March 2005.
|
|
|
|
(4)
|
|
In June 2005, we acquired IRG.
|
22
|
|
|
|
|
(5)
|
|
In December 2007, we sold Bruen Productions and in February 2008, we ceased operations at
IRG. The results of both Bruen Productions and IRG have been accounted for as discontinued
operations. See Note 14 to our consolidated financial statements at the end of this report.
|
Selected Unaudited Quarterly Results of Operations
In the opinion of management, the accompanying unaudited quarterly financial information presented
below includes all adjustments which management considers necessary to present fairly the results
of its operations for the periods presented below in conformity with accounting principles
generally accepted in the United States of America. This quarterly financial information has been
prepared consistently with the accounting policies described in the accompanying audited
consolidated financial statements for the year ended December 31, 2009. The results of operations
for the periods presented below are not necessarily indicative of the results of operations to be
expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarters ended
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sep. 30
|
|
|
Dec. 31
|
|
|
Mar. 31(2)
|
|
|
Jun. 30
|
|
|
Sep. 30
|
|
|
Dec. 31
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
28,048
|
|
|
$
|
30,184
|
|
|
$
|
27,876
|
|
|
$
|
25,272
|
|
|
$
|
24,511
|
|
|
$
|
29,239
|
|
|
$
|
29,318
|
|
|
$
|
25,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track fees
|
|
|
13,063
|
|
|
|
13,786
|
|
|
|
12,807
|
|
|
|
11,066
|
|
|
|
8,277
|
|
|
|
10,199
|
|
|
|
10,599
|
|
|
|
10,228
|
|
|
Licensing fees
|
|
|
1,317
|
|
|
|
1,343
|
|
|
|
705
|
|
|
|
889
|
|
|
|
2,098
|
|
|
|
2,378
|
|
|
|
2,482
|
|
|
|
2,166
|
|
|
Network operations
|
|
|
1,005
|
|
|
|
981
|
|
|
|
999
|
|
|
|
886
|
|
|
|
925
|
|
|
|
983
|
|
|
|
985
|
|
|
|
1,035
|
|
|
Contract costs
|
|
|
3,240
|
|
|
|
3,842
|
|
|
|
4,052
|
|
|
|
3,644
|
|
|
|
3,536
|
|
|
|
3,859
|
|
|
|
3,906
|
|
|
|
3,493
|
|
|
Cost of equipment sales
|
|
|
58
|
|
|
|
40
|
|
|
|
14
|
|
|
|
75
|
|
|
|
88
|
|
|
|
142
|
|
|
|
159
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,683
|
|
|
|
19,992
|
|
|
|
18,577
|
|
|
|
16,560
|
|
|
|
14,924
|
|
|
|
17,561
|
|
|
|
18,131
|
|
|
|
16,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,365
|
|
|
|
10,192
|
|
|
|
9,299
|
|
|
|
8,712
|
|
|
|
9,587
|
|
|
|
11,678
|
|
|
|
11,187
|
|
|
|
8,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,181
|
|
|
|
4,263
|
|
|
|
4,256
|
|
|
|
4,304
|
|
|
|
4,198
|
|
|
|
4,983
|
|
|
|
3,633
|
|
|
|
4,938
|
|
|
Sales and marketing
|
|
|
1,406
|
|
|
|
1,487
|
|
|
|
1,547
|
|
|
|
1,654
|
|
|
|
1,243
|
|
|
|
1,160
|
|
|
|
1,351
|
|
|
|
1,519
|
|
|
Research and development
|
|
|
903
|
|
|
|
800
|
|
|
|
769
|
|
|
|
834
|
|
|
|
862
|
|
|
|
934
|
|
|
|
796
|
|
|
|
838
|
|
|
Depreciation and amortization
including intangibles
|
|
|
1,834
|
|
|
|
1,786
|
|
|
|
1,807
|
|
|
|
1,790
|
|
|
|
1,806
|
|
|
|
1,972
|
|
|
|
2,197
|
|
|
|
2,099
|
|
|
Goodwill and intangible
impairment writedown (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,324
|
|
|
|
8,336
|
|
|
|
8,379
|
|
|
|
8,582
|
|
|
|
8,109
|
|
|
|
9,049
|
|
|
|
7,977
|
|
|
|
20,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
1,041
|
|
|
|
1,856
|
|
|
|
920
|
|
|
|
130
|
|
|
|
1,478
|
|
|
|
2,629
|
|
|
|
3,210
|
|
|
|
(11,645
|
)
|
|
Interest expense, net of interest income
|
|
|
(198
|
)
|
|
|
(184
|
)
|
|
|
(184
|
)
|
|
|
(170
|
)
|
|
|
(285
|
)
|
|
|
(270
|
)
|
|
|
(223
|
)
|
|
|
(233
|
)
|
|
Other income (expense)
|
|
|
81
|
|
|
|
124
|
|
|
|
194
|
|
|
|
88
|
|
|
|
9
|
|
|
|
(73
|
)
|
|
|
101
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income tax (benefit)
|
|
|
924
|
|
|
|
1,796
|
|
|
|
930
|
|
|
|
48
|
|
|
|
1,202
|
|
|
|
2,286
|
|
|
|
3,088
|
|
|
|
(11,741
|
)
|
|
Income tax (benefit)
|
|
|
88
|
|
|
|
341
|
|
|
|
52
|
|
|
|
(8,419
|
)
|
|
|
19
|
|
|
|
57
|
|
|
|
286
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
836
|
|
|
|
1,455
|
|
|
|
878
|
|
|
|
8,467
|
|
|
|
1,183
|
|
|
|
2,229
|
|
|
|
2,802
|
|
|
|
(12,037
|
)
|
|
Income (loss) from discontinued operations (3)
|
|
|
(16
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
(213
|
)
|
|
|
(120
|
)
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
820
|
|
|
$
|
1,453
|
|
|
$
|
878
|
|
|
$
|
8,467
|
|
|
$
|
774
|
|
|
$
|
2,016
|
|
|
$
|
2,682
|
|
|
$
|
(9,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.19
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
|
$
|
(0.29
|
)
|
|
Income (loss) from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
0.05
|
|
|
Net income (loss) per common share
|
|
|
0.02
|
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.19
|
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
(0.24
|
)
|
|
|
|
|
|
(1)
|
|
We recognized impairment charges in United Tote as of December 31, 2008 in the amount of
$11.2 million.
|
|
|
|
(2)
|
|
In February 2008, we ceased operations at IRG. The results of IRG have been accounted for as
discontinued operations. See Note 14 to our consolidated financial statements at the end of
this report.
|
23
|
|
|
|
|
ITEM 7.
|
|
MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
We are a diversified provider of technology and pari-mutuel horse racing content for consumers
through Internet and telephone platforms and a leading supplier of totalizator systems, terminals
and other pari-mutuel wagering services and systems to the pari-mutuel industry.
To date, we have focused on the United States pari-mutuel horse race wagering market through our
main product, Youbet Express
SM
, which features online wagering, simulcast viewing, and
in-depth, up-to-the-minute information on horse racing. Our customers receive interactive,
real-time audio/video broadcasts, access to a comprehensive database of handicapping information,
and, in most states, the ability to wager on a wide selection of horse races in the United States.
We are working to expand the Youbet.Express
SM
brand, its products, and its services
throughout the United States and in select international markets.
Based on information compiled by The Jockey Club, over 89% of pari-mutuel wagers, or handle, on
thoroughbred racing in the United States were placed at locations away from the host track during
2009. We believe the shift toward off-track wagering has been driven by the betting public’s
desire for convenience and access to a broader range of content. Our website,
www.youbet.com
,
enables our customers to securely wager on horse races at over 180 racetracks worldwide from the
convenience of their homes or other locations. Our customers receive the same odds and expected
payouts they would receive if they were wagering directly at the host track and their wagers are
commingled with the host track betting pools.
We appeal to both new and experienced handicappers by providing a user-friendly “one-stop-shop”
experience. To place a wager, customers open an account and deposit funds with us via several
convenient options, including our ExpressCash system, which links our customers’ wagering accounts
directly to their personal checking accounts. To enable our customers to make informed wagers, we
provide 24-hour access to up-to-the minute track information, real-time odds and value-added
handicapping products, such as Turfday Super Stats, a comprehensive database of racing statistics
and a grading system to assess trainers, jockeys and horses. Our customers can view high-quality,
live audio/video broadcasts of races as well as replays of a horse’s past races. Our convenient
automated services are complemented by our player service agents, who are available 15 hours a day,
seven days a week to provide technical support and address any wagering or funding questions.
Our content partners provide us the same live satellite feeds that they normally broadcast at the
track and to off-track betting facilities (“OTBs”). As a result, our partners have the opportunity
to increase the total handle wagered on their racing signal, which we believe leads to higher
revenues for the host track and a higher quality of racing through larger purses for the horse
owners. In return, we receive a commission, or a percentage of the wagers (handle) processed by
Youbet Express.
We acquired United Tote in February 2006. United Tote is a leading supplier of totalizator systems
(equipment and technology that processes wagers and payouts) and processes more than $7 billion in
handle annually on a global basis, approximately 90% of which is North American pari-mutuel handle.
United Tote supplies pari-mutuel tote services to approximately 100 racing facilities in North
America and additional facilities in a number of foreign markets.
As a result of the United Tote acquisition, we operate two business segments for financial
accounting purposes: ADW and totalizator services. Our ADW segment consists of the operations of
Youbet Express and Youbet Services Corporation. Our totalizator services segment consists of the
operations of United Tote. Each segment operates independently, under separate management and
provides distinctly separate services. The ADW segment provides internet wagering services and
caters to the general public, whereas the totalizator segment provides totalizator equipment and
services to racetracks, as well as off-track betting facilities and ADWs, including our ADW
segment. Both segments are impacted by the amount of wagering handle processed, however, the ADW
segment is more immune to track closures due to inclement weather, and other factors as players may
shift their wagering activities to other tracks. The revenue and expenses attributable to the
services provided by our totalizator segment to our ADW segment are eliminated in our consolidated
financial statements. Our reporting segments follow the same accounting policies used for our
consolidated financial statements. Management evaluates each segment’s performance based upon its
individual financial results of operations. For information regarding results for each segment, see
Note 15 “Segment Reporting” in our consolidated financial statements at the end of this report.
24
Our ADW segment also included IRG until it closed as of February 15, 2008, and Bruen Productions,
which we sold in December 31, 2007, the results of both of which are accounted for as discontinued
operations. For information on IRG and Bruen Productions, see Note 14 “Discontinued Operations” in
our consolidated financial statements at the end of this report.
Churchill Downs Merger Agreement
On November 11, 2009, we entered into the Merger Agreement with Churchill Downs, Merger Corp and
Merger LLC. The Merger Agreement provides that, upon the terms and subject to the conditions set
forth in the Merger Agreement, (i) Merger Sub will merge with and into Youbet, with Youbet
surviving as a wholly owned subsidiary of Churchill Downs and (ii) following completion of the
Merger, the surviving corporation from the Merger will merge with and into Merger LLC, with Merger
LLC surviving such merger.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger,
each share of our common stock issued and outstanding immediately prior to the effective time of
the Merger (other than treasury shares, shares held by our wholly owned subsidiaries or shares of
our common stock held by Churchill Downs or any of its subsidiaries) will be converted into the
right to receive (i) 0.0598 of a share of Churchill Downs common stock and (ii) $0.97 in cash,
subject to adjustment to ensure that the Merger does not require Churchill Downs to issue more than
19.6% of the outstanding Churchill Downs common stock outstanding as of immediately prior to the
effective time of the Merger.
The Merger is subject to customary closing conditions, including (i) approval and adoption by our
stockholders, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, (iii) absence of litigation or injunctions prohibiting the transactions
contemplated by the Merger Agreement and (iv) subject to certain materiality exceptions, the
accuracy of the representations and warranties made by us and Churchill Downs, and compliance by us
and Churchill Downs of our and Churchill Downs’s respective obligations under the Merger Agreement.
We have made customary representations, warranties and covenants in the Merger Agreement,
including, among others, covenants to conduct our business in the ordinary course during the
interim period between the execution of the Merger Agreement and consummation of the Merger. We are
also subject to a “no-shop” restriction on our ability to solicit alternative acquisition
proposals, provide certain information and engage in discussions with third parties, subject to
certain exceptions. The Merger Agreement also provides for certain termination rights for both us
and Churchill Downs, including our right to terminate the Merger Agreement under certain
circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement under
specified circumstances, we may be required to pay Churchill Downs a termination fee of $4,326,000
and reimburse Churchill Downs’s transaction expenses up to $500,000 and Churchill Downs may be
required to pay us a termination fee of $5,000,000.
Additional information regarding the Merger is provided in the proxy statement/prospectus filed
with the SEC by Churchill Downs on March 2, 2010 and mailed to our stockholders on March 4, 2010.
25
Results of Operations for 2009 Compared to 2008
The following table sets forth, for the years ended December 31, 2009 and 2008, certain operating
data for each of our operating segments prior to the elimination of intersegment revenues of $1.1
million and $1.2 million in the years ended December 31, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADW Segment
|
|
|
Totalizator Segment
|
|
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
%
|
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
$
|
90,727
|
|
|
$
|
85,831
|
|
|
$
|
4,896
|
|
|
|
5.7
|
%
|
|
$
|
21,737
|
|
|
$
|
24,443
|
|
|
$
|
(2,706
|
)
|
|
|
-11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,796
|
|
|
|
32,229
|
|
|
|
(1,433
|
)
|
|
|
-4.4
|
%
|
|
|
6,772
|
|
|
|
9,184
|
|
|
|
(2,412
|
)
|
|
|
-26.3
|
%
|
|
As % of revenues
|
|
|
33.9
|
%
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
31.2
|
%
|
|
|
37.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
23,226
|
|
|
|
23,417
|
|
|
|
(191
|
)
|
|
|
-0.8
|
%
|
|
|
10,395
|
|
|
|
22,324
|
|
|
|
(11,929
|
)
|
|
|
-53.4
|
%
|
|
As % of revenues
|
|
|
25.6
|
%
|
|
|
27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
47.8
|
%
|
|
|
91.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing
operations before
other income
(expense) and
income tax
|
|
$
|
7,570
|
|
|
$
|
8,812
|
|
|
$
|
(1,242
|
)
|
|
|
-14.1
|
%
|
|
$
|
(3,623
|
)
|
|
$
|
(13,140
|
)
|
|
$
|
9,517
|
|
|
|
72.4
|
%
|
|
As % of revenues
|
|
|
8.3
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
-16.7
|
%
|
|
|
-53.8
|
%
|
|
|
|
|
|
|
|
|
Note: Revenues exclude intersegment eliminations of $1.1 million in 2009 and $1.2 million in 2008, respectively.
Revenues
Total revenues increased $2.4 million, or 2%, for the year ended December 31, 2009 when compared
with 2008. Excluding the impact of intersegment eliminations, the revenue increase was the result
of an increase in our ADW segment revenues of $4.9 million, or approximately 6%, which was
partially offset by a decrease in our totalizator segment revenues of $2.7 million, or
approximately 11%, over those periods. Set forth below is a quantitative and qualitative analysis
of the effects of the various factors affecting our revenues on an operating segment basis.
ADW Segment Revenues
ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net
of player incentives, increased approximately $4.9 million, or approximately 6%, in the year ended
December 31, 2009, when compared to 2008. Gross commissions, before deduction of player incentives,
during 2009 increased $9.1 million, or approximately 10% compared to 2008 due primarily to a 10%
improvement in handle resulting from increased track content. However, the increase in gross
commissions was partially offset by higher player incentives in 2009 of $3.7 million, a 46%
increase compared to 2008. Approximately $0.4 million of the increase in player incentives relates
to the redemption of expired player reward points in the first quarter of 2009, $0.3 million
relates to a prospective change in estimate of the value of outstanding reward points and the
remainder is associated with the impact of our more aggressive incentive marketing efforts.
Total handle for the year ended December 31, 2009 was $480.3 million, an increase of $42.0 million,
or 10%, compared to 2008 primarily as a result of our ability to carry all TrackNet content during
2009 compared to 2008, during which we were unable to carry a significant portion of TrackNet
content due to the failure to successfully negotiate an agreement with TrackNet until the end of
2008, as well as our aggressive marketing efforts during 2009.
Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage
of handle” (each calculated in accordance with generally accepted accounting principles), decreased
approximately 1.0% to 6.9% in 2009 versus 7.9% in 2008. The lower yield reflects the impact of
increased track fees due to changes in track mix (which are driven by player preferences due to
such things as race type, time of day and wagering pool size) resulting from the return of the
TrackNet content, which generally includes tracks with higher costs and, correspondingly, lower
yields, as well as increased revenue sharing expense associated with our co-branding agreement with
tracks in Illinois and the increase in player incentives described above.
26
The following table sets forth our calculation of Youbet Express yield for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
(Decrease)
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
Handle
|
|
$
|
480,297
|
|
|
$
|
438,261
|
|
|
$
|
42,036
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
88,320
|
|
|
|
82,929
|
|
|
|
5,391
|
|
|
|
6.5
|
%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track fees
|
|
|
50,722
|
|
|
|
39,303
|
|
|
|
11,419
|
|
|
|
29.1
|
%
|
|
License fees
|
|
|
4,254
|
|
|
|
9,124
|
|
|
|
(4,870
|
)
|
|
|
-53.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
33,344
|
|
|
$
|
34,502
|
|
|
$
|
(1,158
|
)
|
|
|
-3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield %
|
|
|
6.9
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
We believe that yield is a useful measure to evaluate our operating results and profitability.
Yield, however, should not be considered an alternative to operating income or net income as
indicators of Youbet’s financial performance and may not be comparable to similarly titled measures
used by other companies.
Totalizator Segment Revenues
Totalizator segment revenues, which consist of contract revenues associated with the service of
totalizator systems and equipment sales, decreased $2.7 million,
or approximately 11%, when
compared to 2008. Contract revenues from the service of totalizator systems, which are driven by
wagering handle at tracks serviced, were $20.9 million a decrease of $2.4 million, or approximately
10%, compared to 2008, primarily as a result of track closures, a general industry decline in
wagering and reduced racing days.
Equipment sales in 2009 were $0.8 million, representing a decrease of $0.3 million, or
approximately 28% compared to 2008 due to the reluctance of track owners to invest in new equipment
in the current global economy.
Costs and Expenses
Consolidated costs and expenses increased $6.2 million, or approximately 9%, in 2009 compared to
2008 primarily as a result of increased track fees, which were partially offset
by decreases in licensing fees and totalizator equipment costs, as discussed below. As a percentage
of revenues, consolidated costs and expenses increased from approximately 62% in 2008 to
approximately 66% in 2009. Set forth below is a quantitative and qualitative analysis of the
effects of the various factors affecting our costs and expenses on an operating segment basis.
ADW Segment Costs and Expenses
Costs and expenses in our ADW segment consist of track fees, licensing fees and network operations,
each as described below.
Track fees
: Track fees, which primarily consist of host and market access fees paid and payable to
various tracks, increased $11.4 million, or approximately 29%, in 2009 compared to 2008. The
increase is partially attributable to the 10% increase in handle and
host fee rate increases and a
shift of costs from license fees to tracks fees resulting from a reduced number of TVG exclusive
tracks. The increase is also attributable to TV streaming costs, source market fees, host fees and
track revenue sharing fees associated with the Company’s co-branding agreement with tracks in
Illinois, which increased $2.5 million, $1.3 million, $6.4 million and $2.6 million, respectively,
in 2009 compared to 2008. The increase in track fees was partially offset by a decrease in
California market access fees of $1.8 million over the same period in 2008 due to reduced wagering
in California.
Licensing fees
: Licensing fees, which represent amounts paid and payable under our licensing
agreement with TVG, decreased $4.9 million, or approximately 53%, in 2009 compared to 2008,
primarily due to a decrease in the number of TVG exclusive tracks we carried over those periods.
27
Network operations
: Network operations expense, which consists of costs for salaries, data center
management, telecommunications and various totalizator fees, decreased $0.1 million or
approximately 2% in 2009 compared to 2008. This decrease was primarily attributable to a reduction
of totalizator fees of $0.3 million associated with renegotiated totalizator contracts and computer
supplies, which was partially offset by higher decoder and AV expenses and
increased salaries.
As a percentage of ADW segment revenues, costs and expenses in our ADW segment increased from
approximately 62% in 2008 to approximately 66% in 2009.
Totalizator Segment Costs and Expenses
Costs and expenses in our totalizator segment consist of contract costs and equipment costs, each
as described below.
Contract costs
: Contract costs, which represent costs associated with providing totalizator
services at racetracks, remained flat in 2009 when compared to 2008. Reductions of $0.2 million in
communication expenses, $0.2 million in salaries and $0.2 million in travel/entertainment related
expenses in 2009 compared to 2008 were offset by $0.7 in expenses related to inventory write-downs
in 2009.
Equipment Costs:
Equipment costs, which represent costs associated with equipment sales, decreased
from $0.5 million in 2008 to $0.2 million for the comparable period in 2009, due to a decrease in
equipment sales.
As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment
increased from approximately 62% in 2008 to approximately 69% in 2009.
Gross Profit
Consolidated gross profit decreased $3.8 million, or approximately 9%, in 2009 compared to 2008
primarily due to increased track fees and player incentives in our ADW segment and the decline in
revenues and flat cost structure in our totalizator segment. As a percentage of revenues,
consolidated gross profit decreased from approximately 38% in 2008 to approximately 34% in 2009.
Set forth
below is a quantitative and qualitative analysis of the effects of the various factors affecting
our gross profit on an operating segment basis.
ADW Segment Gross Profit
Gross profit in our ADW segment was $30.8 million for 2009, representing a decline of $1.4 million,
or approximately 4%, compared to 2008. The decline was primarily due to increased track fees
attributable to the change in track mix associated with the return of TrackNet content, which carry
higher track fees, increased revenue share expense associated with our co-branding agreement with
tracks in Illinois and the increase in player incentives, the total of which offset the revenue
gains experienced as a result of increased handle. As a percentage of ADW segment revenues, gross
profit in our ADW segment decreased from approximately 38% in 2008 to approximately 34% in 2009.
Totalizator Segment Gross Profit
Gross profit in our totalizator segment was $6.8 million for 2009, representing a decline of $2.4
million, or approximately 26%, compared to 2008. This decline is primarily attributable to the 11%
decline in totalizator segment revenues over the same periods and the $0.7 million in expenses
related to inventory write-downs in 2009. Due to the nature of the totalizator business and
contractual obligation to provide equipment and totalizator services, its cost structure is fairly
rigid and less variable to fluctuations in handle processed and reduction in race days. As a
percentage of segment revenues, gross profit in our Totalizator segment decreased from
approximately 38% in 2008 to approximately 31% in 2009.
Operating Expenses
Research and development
: Research and development expense of $3.3 million decreased slightly in
2009 when compared with 2008 due to a reduction in employee related costs in the Totalizator
segment.
Sales and marketing
: Sales and marketing expense of $6.1 million in 2009 increased $0.8 million, or
approximately 16%, compared to 2008. This increase was primarily in the Youbet Express business and
resulted from an increase in sales and marketing personnel and management’s priority to more
appropriately develop and target marketing efforts to specific initiatives including online
customer acquisition, conversion and retention.
28
General and administrative
: General and administrative expense of $17.0 million in of 2009
decreased $0.7 million, or approximately 4% in 2009 compared to 2008. This decrease is
attributable to reductions of $1.7 million in employee benefit costs related to reduced severance
and bonus accruals, $0.4 million in non-cash compensation due to higher than expected option
forfeitures, $0.3 in licenses and $1.1 million in business taxes as a result of a settlement with
the City of Los Angeles concerning the proper classification of
Youbet operations; business taxes
were reserved for in prior periods pending resolution of the matter. These reductions were
significantly offset by an increase in salaries of $0.6 million due to an increase in employees,
and increases in legal and
investment banking costs of $1.6 million and $0.5 million, respectively, primarily related to our
proposed merger with Churchill Downs. As a percentage of total revenues, general and
administrative costs decreased from approximately 16% in 2008 to approximately 15% in 2009.
Depreciation and amortization
: Depreciation and amortization in 2009 decreased $0.9 million, or
approximately 11%, compared to 2008 due to the aging of equipment and software in our totalizator
segment, which was partially offset by the purchase of new software in our ADW segment.
Impairment Write downs:
In connection with our exploration of strategic alternatives for United
Tote, we continue to evaluate the goodwill related to United Tote, including comparing the current
estimated fair value to the carrying value of the goodwill. In February 2009, we performed an
evaluation and concluded that the carrying value of United Tote was impaired as of December 31,
2008. The total amount of this additional non-cash impairment charge was $11.2 million, which
included a $6.9 million impairment of goodwill, and write downs in computer equipment and
intangible assets of $3.1 million and $1.2 million, respectively. In 2009, we performed our annual
asset impairment evaluation and concluded that an additional impairment write-down was not deemed
necessary.
Interest expense (income)
: Interest expense of $0.8 million in 2009, decreased $0.4 million
compared to $1.2 million in 2008. This decrease is primarily due to lower interest rates and lower
debt levels. Interest income in 2009 was $0.2 million lower than 2008, primarily due to lower
investment yields in 2009 compared with 2008.
Other income
: Other income in 2009 increased $0.3 million when compared to 2008 due to the recovery
by United Tote of pre-acquisition receivables previously written off to expense.
Income Taxes:
Income taxes were favorably impacted by a $8.1 million reduction in our valuation
allowance relating to deferred tax assets for net operating loss carry forwards. According to the
provisions of Accounting Standards Codification (“ASC”) Topic 7402
Income Taxes
that are derived
from Statement of Financial Accounting Standards Board Statement (“SFAS”) No. 109,
Accounting for
Income Taxes
, a deferred tax asset should be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or all of the deferred
tax asset will not be realized. All available evidence, both positive and negative, must be
considered in determining the need for a valuation allowance. For 2009, positive evidence we
considered included future revenue and expenses, reversals of book to tax temporary differences,
and the implementation of and/or ability to employ various tax planning strategies. Negative
evidence included book and tax losses generated in prior periods, and the inability to carryback
deferred benefits to those periods. Based upon this evaluation and expected future profitability,
we concluded that our valuation allowance against our net operating loss carry forwards should be
reduced.
Discontinued Operations:
Effective February 15, 2008, we ceased operations at IRG and, accordingly,
have accounted for such operations retroactively as discontinued operations. For the year ended
December 31, 2009, IRG sustained a loss of $18 thousand compared to income of $1.4 million in 2008.
29
Results of Operations for 2008 Compared to 2007
The following table sets forth, for the years ended December 31, 2008 and 2007, certain operating
data for each of our operating segments prior to the elimination of intersegment revenues of $1.2
million and $1.3 million in the years ended December 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADW Segment
|
|
|
Totalizator Segment
|
|
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
%
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
$
|
85,831
|
|
|
$
|
97,652
|
|
|
$
|
(11,821
|
)
|
|
|
-12.1
|
%
|
|
$
|
24,443
|
|
|
$
|
26,093
|
|
|
$
|
(1,650
|
)
|
|
|
-6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,229
|
|
|
|
32,781
|
|
|
|
(552
|
)
|
|
|
-1.7
|
%
|
|
|
9,184
|
|
|
|
9,080
|
|
|
|
104
|
|
|
|
1.1
|
%
|
|
As % of revenues
|
|
|
37.5
|
%
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
37.6
|
%
|
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
23,417
|
|
|
|
31,192
|
|
|
|
(7,775
|
)
|
|
|
-24.9
|
%
|
|
|
22,324
|
|
|
|
21,041
|
|
|
|
1,283
|
|
|
|
6.1
|
%
|
|
As % of revenues
|
|
|
27.3
|
%
|
|
|
31.9
|
%
|
|
|
|
|
|
|
|
|
|
|
91.3
|
%
|
|
|
80.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing
operations before
other income
(expense) and
income tax
|
|
$
|
8,812
|
|
|
$
|
1,589
|
|
|
$
|
7,223
|
|
|
|
454.6
|
%
|
|
$
|
(13,140
|
)
|
|
$
|
(11,961
|
)
|
|
$
|
(1,179
|
)
|
|
|
-9.9
|
%
|
|
As % of revenues
|
|
|
10.3
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
-53.8
|
%
|
|
|
-45.8
|
%
|
|
|
|
|
|
|
|
|
Note: Revenues exclude intersegment eliminations of $1.2 million in 2008 and $1.3 million in 2007, respectively.
Revenues
Total revenues decreased $13.5 million, or approximately 11%, for the year ended December 31, 2008
when compared with 2007. Excluding the impact of intersegment eliminations, the revenue decrease
was the result of a decrease in our ADW segment revenues of $11.8 million, or approximately 12%,
and a decrease in our totalizator segment revenues of $1.7 million, or approximately 6%, over those
periods. Set forth below is a quantitative and qualitative analysis of the effects of the various
factors affecting our revenues on an operating segment basis.
ADW Segment Revenues
ADW segment revenues, which consist primarily of commissions on wagers placed by our customers, net
of player incentives, decreased by approximately $11.8 million, or 12%, in the year ended December
31, 2008 compared to 2007. Gross commissions, before deduction of player incentives, for 2008
decreased $8.5 million or 9% compared to 2007 due to a 10% decline in wagering handle. ADW segment
revenues were further negatively impacted by an increase in player incentives during 2008 of $2.5
million, or approximately 45%, when compared with 2007. In addition, the non-commission related
portion of our ADW segment revenues, consisting of subscriptions, information and processing fees,
decreased $0.8 million compared to 2007 due to player promotions.
Total handle for 2008 was $438.3 million, a decrease of $46.0 million, or 10%, compared to 2007
primarily due to the loss of certain track content and changes in jurisdictions where we accept
wagers.
Youbet Express yield, defined as “commission revenue less track and licensing fees as a percentage
of handle” (each calculated in accordance with generally accepted accounting principles), increased
70 basis points to 7.9% in 2008 versus 7.2% in 2007. The yield improvement reflects the impact of
changes in track mix (which are driven by player preferences due to such things as race type, time
of day and wagering pool size) favoring tracks with higher yields, the loss of lower yielding
TrackNet content and a reduction in lower yielding TVG content in 2008. TrackNet content generally
includes tracks with higher costs and, correspondingly, lower yields. Loss of a significant portion
of TrackNet content had the impact of shifting player wagers to higher yielding tracks, thus
changing the proportion of funds wagered on lower versus higher yielding content.
30
The following table sets forth our calculation of Youbet yield for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
Handle
|
|
$
|
438,261
|
|
|
$
|
484,216
|
|
|
$
|
(45,955
|
)
|
|
|
-9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
82,929
|
|
|
|
93,969
|
|
|
|
(11,040
|
)
|
|
|
-11.7
|
%
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track fees
|
|
|
39,303
|
|
|
|
39,246
|
|
|
|
57
|
|
|
|
0.1
|
%
|
|
License fees
|
|
|
9,124
|
|
|
|
19,810
|
|
|
|
(10,686
|
)
|
|
|
-53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
34,502
|
|
|
$
|
34,913
|
|
|
$
|
(411
|
)
|
|
|
-1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield %
|
|
|
7.9
|
%
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
We believe that yield is a useful measure to evaluate our operating results and profitability.
Yield, however, should not be considered an alternative to operating income or net income as
indicators of Youbet’s financial performance and may not be comparable to similarly titled measures
used by other companies.
Totalizator Segment Revenues
Totalizator segment revenues, which consist of contract revenues associated with the service of
totalizator systems and equipment sales, decreased $1.7 million, or approximately 6%, in 2008 when
compared 2007 due to a decrease in contract revenues, which was partially offset by an increase in
equipment sales. Contract revenues from the service of totalizator systems, which are driven by
wagering handle at tracks serviced, were $23.3 million in 2008, representing a decrease of $1.9
million, or approximately 8%, compared to 2007, primarily as a result of track closures, a general
industry decline in wagering and reduced racing days. Equipment sales in 2008 were $1.1 million,
representing an increase of $0.3 million, or approximately 29%, compared to 2007 due to several
international sales transactions.
Costs and Expenses
Consolidated costs and expenses decreased $13.0 million, or approximately 16%, in 2008 compared to
2007 primarily as a result of a $10.7 million decrease in license fees associated with the fewer
number of TVG exclusive tracks in 2008 and a $1.8 million reduction in totalizator contract costs.
As a percentage of revenues, consolidated costs and expenses decreased from approximately 66% in
2007 to 62% in 2008. Set forth below is a quantitative and qualitative analysis of the effects of
the various factors affecting our costs and expenses on an operating segment basis.
ADW Segment Costs and Expenses
Costs and expenses in our ADW segment consist of track fees, licensing fees and network operations,
each as described below.
Track fees
: Track fees, which primarily consist of host and market access fees paid and payable to
various tracks remained flat in 2008 when compared to 2007. A year-over-year decrease in track fees
attributable to reduced handle was offset by the shift of costs from license fees to track fees
resulting from a reduced number of TVG exclusive tracks and higher host fees paid to the NYRA
tracks as a result of such shift. TV streaming costs, source market fees and track revenue
sharing fees increased $1.1 million, $1.6 million and
$0.3 million, respectively, in 2008 compared to 2007 whereas California market access fees
decreased $2.7 million over the same period due to reduced wagering in California.
Licensing fees
: Licensing fees, which represent amounts paid and payable under our licensing
agreement with TVG, decreased $10.7 million, or 54%, in 2008 compared to 2007, primarily due to
decreased wagering on horse races at TVG tracks and the fact that, in 2007, certain California
racetracks and, beginning in 2008, NYRA racetracks were no longer TVG exclusive and, therefore,
became subject to lower licensing fees.
Network operations
: Network operations expense, which consists of costs for salaries, data center
management, telecommunications and various totalizator fees, declined $0.6 million or 14% in 2008
when compared to 2007. This decrease was primarily attributable to lower data communication, AV
fees and totalizator fees, partially offset by higher outside service expenses related to the
relocation of our servers to a more secure facility in the latter part of 2007.
31
As a percentage of ADW segment revenues, costs and expenses in our ADW segment decreased from
approximately 66% in 2007 to 63% in 2008.
Totalizator Segment Costs and Expenses
Costs and expenses in our totalizator segment consist of contract costs and equipment costs, each
as described below.
Contract costs
: Contract costs, which represent costs of United Tote associated with providing
totalizator services at racetracks, decreased $1.8 million, or 11%, in 2008 compared to 2007,
largely due to lower compensation costs resulting from the restructuring initiated during the
second half of 2007. In addition, lower repair and maintenance costs, professional fees and data
communication expenses were partially offset by higher equipment rental and outside labor expense.
Equipment Costs:
Equipment
costs, which represent costs of United Tote associated with earning equipment
sales revenue, increased 9% in 2008, when compared with 2007, due to an increase in equipment
sales.
As a percentage of totalizator segment revenues, costs and expenses in our totalizator segment
decreased from approximately 65% in 2007 to 62% in 2008.
Gross Profit
Consolidated gross profit decreased $0.4 million, or approximately 1%, in 2008 compared to 2007
primarily due to the 10% decline in overall wagering handle, increased incentives provided players
to mitigate the impact of the handle decline and revenue decline experienced by our totalizator
segment, which were partially offset by a $13.0 million, or 16% decline, in consolidated costs and
expenses. As a percentage of revenues, consolidated gross profit increased from approximately 34%
in 2007 to 38% in 2008. Set forth below is a quantitative and qualitative analysis of the effects
of the various factors affecting our gross profit on an operating segment basis.
ADW Segment Gross Profit
Gross profit in our ADW segment was $32.2 million for 2008, as compared to $32.8 million in 2007, a
$0.6 million or 2% decline. The decline was primarily due to reduced commission revenue as a result
of the decline in wagering handle, as well as increased player incentives, which were partially
offset by reduced license fees as described above. As a percentage of ADW segment revenues, gross
profit in our ADW segment increased from approximately 34% in 2007 to 38% in 2008.
Totalizator Segment Gross Profit
Gross profit in our totalizator segment was $9.2 million for 2008, representing an increase of $0.1
million, or approximately 1%, compared to 2007. This increase is primarily attributable to measures
taken to reduce contract operating costs in consideration of reduced contract revenue and improved
margins on equipment sales. As a percentage of totalizator segment revenues, gross profit in our
totalizator segment increased from approximately 35% in 2007 to 38% in 2008.
Operating Expenses
Research and development
: Research and development expense decreased $0.5 million, or approximately
13%, in 2008 compared with 2007 primarily due to labor cost savings and higher capitalization of
internally developed software. We continue to invest in the development of our network
infrastructure and to support continued technology upgrades as necessary, which may increase our
research and development expenses in the future.
Sales and marketing
: Sales and marketing expense decreased $4.7 million, or approximately 47%, in
2008 compared to 2007. This decrease was primarily all in the Youbet Express business and resulted
from a management priority to reduce and more appropriately target marketing efforts to specific
initiatives including online customer acquisition, conversion and retention.
32
General and administrative
: General and administrative expense decreased $3.4 million, or
approximately 16%, in 2008 compared to 2007. The decrease in these expenses results primarily from
reduced personnel relating to the recording of severance/termination charges of $2.0 million in the
fourth quarter of 2007 and employee reductions, benefits and recruiting costs totaling $1.1
million, accounting fees and expenses related to improving and testing our internal control over
financial reporting of $0.9 million, as well as other cost reduction initiatives that commenced in
the fourth quarter of 2007. These reductions were partially offset by a $0.7 million severance
payment to our former interim chief executive officer accrued in the second quarter of 2008 and
higher non-cash compensation expense of $0.5 million in 2008 compared with 2007.
Depreciation and amortization
: Depreciation and amortization decreased $1.0 million, or
approximately 11%, compared to 2007, primarily due to the amortization of $0.5 million of
capitalized software development costs associated with our King Contest product in 2007 and
continued aging of assets.
Impairment Write downs:
In connection with our exploration of strategic alternatives for United
Tote, we re-evaluated the goodwill related to United Tote. As part of this evaluation, we compared
the current estimated fair value to the carrying value of goodwill, and on March 25, 2008, we
concluded that United Tote goodwill was impaired and recorded a non-cash impairment charge of $8.0
million as of December 31, 2007. In February, 2009, we concluded that the carrying value of United
Tote was further impaired as of December 31, 2008. The total amount of this additional non-cash
impairment charge was $11.2 million, which included a $6.9 million impairment of goodwill, and
write downs in computer equipment and intangible assets of $3.1 million and $1.2 million,
respectively.
Interest expense (income)
: Interest expense of $1.2 million in 2008 decreased $0.6 million compared
to $1.8 million in 2007. This decrease is primarily due to lower debt levels during 2008 and lower
interest rates. Interest income was $0.4 million lower than 2007, primarily due to lower
investment yields in 2008 compared with 2007.
Other income
: Other income remained flat in 2008 when compared to the 2007.
Income Taxes:
Income taxes in 2008 were negatively impacted by several permanent and non-permanent
book/tax differences such as amortization of intangibles, asset impairments, stock based
compensation and depreciation. Additionally, in the third quarter of 2008, the State of California
suspended the use of net operating loss carry forwards, resulting in additional tax of $0.4 million
being recognized in 2008. In 2007, we increased our valuation allowance relating to deferred tax
assets for net operating loss carry forwards by $2.9 million. According to ASC Topic 740, a
deferred tax asset should be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax asset will not be
realized. All available evidence, both positive and negative, must be considered in determining the
need for a valuation allowance. For 2008, positive evidence we considered included future revenue
and expenses, reversals of book to tax temporary differences, and the implementation of and/or
ability to employ various tax planning strategies. Negative evidence included book and tax losses
generated in prior periods, and the inability to achieve forecasted results for those periods.
Based upon this evaluation, we concluded that a valuation allowance was warranted against our net
operating loss carry forwards.
Discontinued Operations:
Effective February 15, 2008, we ceased operations at IRG and, accordingly,
have accounted for such operations retroactively as discontinued operations. For the year ended
December 31, 2008, IRG generated income of $1.4 million resulting from a negotiated earn-out
settlement, reducing the earn-out accrual as of December 31, 2007, by $2.2 million. For the year
ended December 31, 2007, IRG sustained a net loss of $13.3 million, including an impairment charge
for the intangibles associated with the IRG business of $10.9 million. Additionally, effective
December 31, 2007, we sold Bruen Productions back to the original owner and we have accounted for
Bruen’s operations as discontinued operations. For the year ended December 31, 2007, Bruen
generated a loss of $0.9 million, which includes a $0.4 million third quarter charge for the
impairment of goodwill.
Liquidity and Capital Resources
The United States is currently experiencing a recession accompanied by, among other things, reduced
credit availability and highly curtailed gaming and other recreational activities. The effects and
duration of these developments and related risks and uncertainties on our future operations and
cash flows cannot be estimated by management at this time; however, such effects may be
significant.
Nevertheless management presently believes that our borrowing capacity, as well as on-going efforts
to contain costs and operate efficiently, and growth in handle and yield improvement at Youbet
Express will generate sufficient cash flow to adequately support its operations. We believe that
our cash flow from operations and our unrestricted cash and cash equivalents are sufficient to fund
our working capital and capital expenditure requirements for at least the next 12 months. However,
we may from time to time seek additional capital to fund our operations, and to reduce our
liabilities in response to changes in the business environment. To raise capital, we may seek to
sell additional equity securities, issue debt or convertible securities or seek to obtain credit
facilities through financial institutions or other resources. We have an effective shelf
registration statement under which we may from time to time issue shares of preferred stock, shares
of common stock, warrants, stock purchase contracts, stock purchase units, and stock purchase
rights for an original maximum aggregate offering amount of approximately $30 million. Unless
otherwise described in future prospectus supplements, we intend to use the net proceeds from the
sale of securities registered under this universal shelf registration statement for general
corporate purposes, which may include additions to working capital, the repayment or redemption of
existing indebtedness and the financing of capital expenditures and future acquisitions. The sale
of additional equity or convertible securities would result in additional dilution to our
stockholders.
33
During 2009, we funded our operations primarily with net cash provided by operating activities.
As of December 31, 2009, we had net working capital of $7.1 million, compared to negative net
working capital of $0.8 million at December 31, 2008. On December 31, 2009, the principal balance
of our term loan with National City Bank (NCB) was $3.8 million and no amounts had been borrowed
under the revolving and letter of credit facility with NCB. The terms of the credit facility are
more fully described below under “Credit Facility.”
As of December 31, 2009, we had $15.9 million in cash and cash equivalents and $4.6 million in
restricted cash.
Our principal ongoing cash requirements consist of payroll and benefits, business insurance, real
estate and equipment leases, legal fees, data center operations, telecommunications and debt
service.
Cash Flows for 2009 Compared to 2008
The following table presents a summary of the net increase (decrease) in cash and cash equivalents
in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Net cash provided by operating acivities, from continuing operations
|
|
$
|
7,725
|
|
|
$
|
15,049
|
|
|
Net cash used in investing activities
|
|
|
(3,032
|
)
|
|
|
(1,350
|
)
|
|
Net cash used in financing activities
|
|
|
(5,303
|
)
|
|
|
(3,327
|
)
|
|
Net cash used in operating activities, discontinued operations
|
|
|
(21
|
)
|
|
|
(312
|
)
|
|
Foreign currency translation adjustments
|
|
|
(23
|
)
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(654
|
)
|
|
$
|
9,987
|
|
|
|
|
|
|
|
|
|
Operating Activitie
s
Net cash provided by operating activities was $7.7 million for 2009, compared to $15.0 million for
2008. The year-over-year decrease was primarily due to gross profit erosion in our ADW and
totalizator segments of $1.4 million and $2.4 million, for the reasons described above and negative
fluctuations in working capital impacting our cash. These negative working capital fluctuations
impacting cash were primary attributable to cash payments in the first quarter 2009 in respect of
liabilities incurred in 2008, consisting of $1.3 million in license fees, $0.5 million in estimated
taxes, $0.2 million in accrued severance, $0.7 million in legal fees and $1.8
million in bonuses. Operating cash flow is impacted by wagering activity that typically peaks in
the second and third quarters of the year.
Investing Activities
Net cash used in investing activities for 2009 was $3.0 million, compared to $1.4 million for 2008.
The $1.6 million increase is attributable to increased capital spending in 2009, associated with
the continued improvement of our ADW platform, including functionality, product offering and social
communication. Capital spending in 2009 in our ADW and Totalizator segments was $2.4 million and
$0.6 million, respectively. We continue to invest in the development of our network infrastructure
and to support continued technology upgrades as necessary.
Financing Activities
Net cash used in financing activities in 2009 was $5.3 million, an increase of $2.0 million when
compared to 2008, due to higher loan repayments (net of new borrowings) in 2009 in accordance with
the terms of our credit facility.
34
Cash Flows for 2008 Compared to 2007
The following table presents a summary of the net increase (decrease) in cash and cash equivalents
in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Net cash provided (used) by operating acivities, from continuing operations
|
|
$
|
15,049
|
|
|
$
|
(614
|
)
|
|
Net cash used in investing activities
|
|
|
(1,350
|
)
|
|
|
(7,123
|
)
|
|
Net cash used in financing activities
|
|
|
(3,327
|
)
|
|
|
(6,325
|
)
|
|
Net cash used in operating activities, discontinued operations
|
|
|
(312
|
)
|
|
|
(392
|
)
|
|
Foreign currency translation adjustments
|
|
|
(73
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
9,987
|
|
|
$
|
(14,500
|
)
|
|
|
|
|
|
|
|
|
Operating Activitie
s
Net cash provided by operating activities was $15.0 million for 2008, compared to net cash used by
operating activities of $0.6 million for 2007. The year-over-year increase was primarily due to
improved earnings resulting from a 70 basis point improvement in wagering yield experienced by our
ADW segment, reduced expenses from headcount reductions, reduced consulting and marketing costs, as
well as favorable working capital fluctuations resulting from improved receivable collections and
increased accruals relating to the deferral of bonuses and business tax payments. Additionally, we
made a non-recurring payment of a $1.2 million arbitration award to TVG in the first quarter of
2007. Operating cash flow is impacted by wagering activity that typically peaks in the second and
third quarters of the year.
Investing Activities
Net cash used in investing activities for 2008 was $1.4 million, compared to net cash used in
investing activities of $7.1 million for 2007. The year-over-year decrease was primarily due to the
net cash paid out in 2007 in connection with the United Tote ($4.5 million) acquisition and
decreased purchases of property and equipment ($1.1 million). Our primary investing activities
relate to the continued improvement of our wagering platform and new equipment acquired by our
totalizator segment, which is driven by service contract renewals and maintenance requirements.
Financing Activities
Net cash used in financing activities was $3.3 million and $6.3 million for 2008 and 2007,
respectively. The year-over-year decrease of $3.0 million was primarily due the refinancing of our
term loan and pay down of debt. In December 2008, we entered into a new credit facility, the terms
of which are described below under “Credit Facility.” Proceeds of $4.6 million from the term loan
under the
new credit facility were used to repay principal and interest in full amounts owed to the prior
lender, as well as fees and expenses associated with the refinancing. Total repayment of debt in
2008 was $14.0 million, which included a $1.25 million repayment on the new term loan versus
repayment of $11.0 million of debt in 2007.
Credit Facility
Our credit facility currently consists of a $5.0 million revolving line of credit and a $10.0
million term loan. At December 31, 2009, $3.8 million was owed on the term loan and we had no
outstanding borrowings under the revolving credit facility.
On December 3, 2008, we entered into a loan and security agreement with NCB. The loan and security
agreement with NCB provides for a $10.0 million term loan, and a $5.0 million revolving line of
credit and letter of credit facility. In no event, however, may the aggregate principal amount
borrowed by us under the loan and security agreement exceed a borrowing base determined by the
amount of our available cash plus a percentage, differing in each case, of the value of certain of
our eligible accounts, inventory and equipment, subject to additional reserves established by
National City Bank at its discretion. In connection with closing the loan and security agreement,
we paid National City Bank a fee of $225,000.
35
On December 3, 2008, we borrowed the full $10.0 million under the term loan. We used $4.6 million
to repay principal and interest in full amounts owed to Wells Fargo Foothill, Inc., as well as fees
and expenses associated with the refinancing, and the remaining proceeds will be used for general
corporate purposes. As of December 31, 2009, the principal balance outstanding under the term
loan was $3.8 million. We have not borrowed any amounts under the revolving and letter of credit
facility.
Any indebtedness under the term loan and the revolving credit facility bears interest at a variable
rate equal to either, at our discretion, prime plus 200 to 250 basis points or LIBOR plus 325 to
375 basis points. The applicable basis point margin is determined by our leverage ratio as at the
most recently delivered calculation thereof pursuant to provisions of the loan and security
agreement. Any interest accruing on the basis of the prime rate is due and payable on the first
business day of each month. Any interest accruing on the basis of LIBOR is due and payable on the
date upon which such LIBOR loan ends as determined by us. LIBOR loans may have a one, two or three
month term. At December 31, 2009, the interest rate on the term loan was 5.75% per annum.
The outstanding principal amount under the term loan is due and payable on the last day of each
quarter beginning on December 31, 2008 in installments of $1.25 million. The term loan and the
revolving credit facility each mature on November 30, 2010. The loan and security agreement
provides for mandatory prepayment in the event of certain asset sales and recovery events; provided
that, so long as an event of default has not occurred, a mandatory prepayment of the net proceeds
is not required, subject to certain thresholds or amounts as more fully described in the loan and
security agreement. Our indebtedness under the loan and security agreement is guaranteed by UT
Gaming, the direct parent of United Tote, and secured by substantially all of our assets, including
our intellectual property, and UT Gaming’s equity in United Tote.
We are subject to customary covenants under the loan and security agreement, including restrictions
on our ability to incur indebtedness, make investments, pay dividends or engage in mergers and
acquisitions. The loan and security agreement also contains certain financial covenants, including
(i) a requirement to maintain a specified debt service coverage ratio, (ii) a requirement to
maintain a leverage ratio not to exceed 2:1, (iii) a requirement to maintain a certain specified
adjusted EBITDA and (iv) limitations on capital expenditures.
As of December 31, 2009, we were in compliance with financial covenants under the loan and security
agreement.
The Merger will result in a change of control under our credit facility, which constitutes an event
of default. As a result, the lenders on the credit facility may accelerate our obligations under
the credit facility.
Youbet Promissory Notes
On February 10, 2006, we issued three promissory notes with an aggregate principal amount of $10.2
million in connection with the acquisition of United Tote. For information regarding this
acquisition, see Item 1 “Business-Acquisitions and Dispositions”.
The first promissory note had a principal amount of $5.2 million, matured on February 9, 2007, and
bore interest at 5.02% per annum, which interest was payable on a quarterly basis beginning May 31,
2006. The terms of this promissory note required that we promptly prepay this obligation if we
receive any “excess capital”, and our December 2006 registered direct offering created “excess
capital”. In
accordance with the terms of the first promissory note, we prepaid the $5.2 million note, including
interest, from the proceeds of our registered direct offering in December 2006.
The second promissory note had a principal amount of $1.8 million and bore interest at 5.02%. The
terms of the $1.8 million note provide that we are not required to make a mandatory “excess
capital” prepayment under the $1.8 million note until the $5.2 million note has been paid in full,
but no earlier than March 12, 2007. We prepaid the $1.8 million principal amount, including accrued
interest of $0.1 million, on March 12, 2007 with a portion of the proceeds of our December 2006
registered direct offering.
The third promissory note has a principal amount of $3.2 million, bears interest at 5.02%, and is
currently due, but is subject to rights of indemnification and offset. The terms of the $3.2
million note provide that: (i) we are not required to make a mandatory “excess capital” prepayment
under the $3.2 million note until both the $5.2 million note and the $1.8 million note have been
paid in full, but no earlier than June 11, 2007; and (ii) we may set off from the amount we owe
under this note any loss suffered by us for which we are entitled to indemnification under the
United Tote stock purchase agreement. We repaid this promissory note, including accrued interest
through December 31, 2009 of $0.5 million, less reimbursable costs of $0.1 million, on January 12,
2010.
36
Off Balance Sheet Arrangements
We have a standby letter of credit outstanding that is collateralized by a restricted cash account
in connection with the lease of our executive and operating offices in Woodland Hills, California.
This letter of credit includes automatic renewals on the anniversary date of the lease origination,
and permits annual automatic reductions of approximately $0.1 million. As of December 31, 2009, the
letter of credit obligation and corresponding cash collateral balance was $58,000.
At December 31, 2009, we had outstanding various other irrevocable standby letters of credit issued
to the benefit of the California Horse Racing Board, ORC and Washington Horse Racing Commission
totaling $0.7 million. These letters of credit include automatic renewals on their anniversary
dates.
Contractual Obligations, Contingent Liabilities and Commitments
We have contractual obligations and commitments primarily with regard to facilities leases and
employment contracts. The following table aggregates our expected contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
|
|
More than 5
|
|
|
|
|
Total
|
|
|
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
years
|
|
|
Gary Sproule
|
|
|
106,000
|
|
|
|
106,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases (1)
|
|
|
246,354
|
|
|
|
246,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating facility leases (2)
|
|
|
1,249,130
|
|
|
|
662,611
|
|
|
|
208,724
|
|
|
|
181,973
|
|
|
|
195,822
|
|
|
Operating equipment leases (3)
|
|
|
189,908
|
|
|
|
163,376
|
|
|
|
26,532
|
|
|
|
|
|
|
|
|
|
|
Bank debt (National City Bank) (4)
|
|
|
3,750,000
|
|
|
|
3,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable (Kinderhook ) (5)
|
|
|
3,200,000
|
|
|
|
3,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
105,334
|
|
|
|
105,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,846,726
|
|
|
|
8,233,675
|
|
|
|
235,256
|
|
|
|
181,973
|
|
|
|
195,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of capital lease arrangements for networking equipment, computer equipment and
software.
|
|
|
|
(2)
|
|
Consists of minimum rental payments under non-cancelable operating leases for office and
production facilities in California, Oregon, Kentucky and Canada.
|
|
|
|
(3)
|
|
Consists of operating lease arrangements for network and computer equipment.
|
|
|
|
(4)
|
|
Consists of the aggregate principal amount of the term loan under our credit facility with
National City Bank, but excludes interest payments on the term loan, which bears interest at a
variable rate equal to either, at our discretion, prime plus 200 to 250
basis points or LIBOR plus 325 to 375 basis points. The terms of the term loan are more fully
described above under “Liquidity and Capital Resources — Credit Facility.”
|
|
|
|
(5)
|
|
Consists of the principal amount of the third promissory note we issued in connection with
the United Tote acquisition, but excludes interest payments on the note, which bears interest
at a rate of 5.02% per annum, as described above under “Liquidity and Capital Resources -
Youbet Promissory Notes.” This note was paid in full in January 2010.
|
Critical Accounting Estimates and Policies
Critical accounting policies are those that are important to the portrayal of our financial
condition and results, and which require management to make difficult, subjective or complex
judgments. Critical accounting policies cover accounting matters that are inherently uncertain
because the future resolution of such matters is unknown. We have made critical estimates in the
following areas. We also believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
37
Revenue recognition
Through Youbet Express, we earn and record commissions on wagers placed with tracks for customers
as revenue and the related track and market area access fees as operating expenses when the wagers
are settled, typically the same day as the wager, based upon associated track contracts. Other
sources of revenue, including membership and information fees, are relatively insignificant.
Prepayments of such fees are treated as deferred revenue and later recognized over the duration of
the subscription. Incentives offered to customers to encourage wagering on events at tracks that
generate higher margins are charged immediately to operations as reductions in commissions earned.
We launched a player rewards program during the second quarter of 2006 called Youbet Advantage.
Participating members earn points based on the amount they wager, and they can redeem their points
for merchandise, travel rewards, and wager credits. Our Player Advantage incentives and other
volume incentives are recorded as a reduction of commission revenue (a contra-revenue) and the
associated liability is accrued as the points are issued. Reward points are valued based upon a
“par” value applied to points earned based upon the rewards category the player is assigned.
Player reward categories are assigned to players based upon their respective wagering volume. An
estimated point redemption rate, by reward category, is applied against the outstanding points to
estimate the future utilization of points awarded for proper valuation.
The majority of United Tote’s revenues are derived from service contracts principally for the
installation and operation of pari-mutuel wagering networks. Services provided via these networks
include accepting wagers, performing odds and payout calculations and calculating ticket payouts.
United Tote charges the track for these services either by transaction count or by dollar volume in
accordance with the related service contract. In order to perform its services under these
agreements, United Tote may incur various costs associated with the installation of the totalizator
equipment at the track to enable it to function as required. Such installation costs include
service personnel, including electricians, to set up networks and other items necessary for the
proper functioning of all terminals being deployed at the track, which in some cases number as many
as several hundred. Such installation costs are capitalized and amortized over the life of the
related contract, since such costs are a prerequisite for the proper operation of the equipment,
which in turn is necessary to generate future totalizator revenue. United Tote is also required to
provide various levels of routine operational support and software maintenance throughout the life
of the contract, which is expensed as incurred. Revenue from the sale of pari-mutuel gaming systems
equipment and related parts is recognized upon delivery and customer acceptance.
Sales and similar revenue-based taxes collected from customers are excluded from revenue but rather
are recorded as a liability payable to the appropriate taxing authority and included in accrued
expenses.
Allowance for doubtful accounts
We are required to make judgments, based on historical experience and future expectations, as to
the collectability of accounts receivable. The allowances for doubtful accounts represent
allowances for trade accounts receivable that are estimated to be partially or entirely
uncollectible. These allowances are used to reduce gross trade receivables to their estimated net
realizable value. We record these allowances as a charge to general and administrative expenses
based on estimates related to the following factors:
|
|
•
|
|
customer specific allowance;
|
|
|
•
|
|
amounts based upon an aging schedule; and
|
|
|
|
|
•
|
|
an estimated amount, based on our historical experience, for issues not yet identified.
|
Inventory obsolescence
We regularly review inventory quantities on hand and record provisions for excess and obsolete
inventory based primarily on our estimated forecast of product demand and production requirements.
Valuation of long-lived and intangible assets
Long-lived assets consist primarily of property, plant and equipment, goodwill and intangibles.
Long-lived assets, including goodwill, are reviewed for impairment annually and whenever events or
changes in circumstances have indicated that their carrying amounts may not be recoverable.
Recoverability of assets is measured by comparing the carrying amount of an asset to its fair value
in a current transaction between willing parties, other than in a forced liquidation sale. Recorded
fair value is estimated by using independent appraisals or other valuation techniques.
38
Factors we consider important which could trigger an impairment review include the following:
|
|
•
|
|
Significant underperformance relative to expected historical or projected future
operating results;
|
|
|
•
|
|
Significant changes in the manner of our use of the acquired assets or the strategy of
our overall business;
|
|
|
•
|
|
Significant negative industry or economic trends;
|
|
|
•
|
|
Significant decline in our stock price for a sustained period; and
|
|
|
•
|
|
Our market capitalization relative to net book value.
|
If we determine that the carrying value of long-lived assets and related goodwill may not be
recoverable, we would measure any impairment based on comparing the carrying amount of the asset to
its fair value in a current transaction between willing parties or, in the absence of such
measurement, on a projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business model. Any amount of
impairment so determined would be written off as a non-cash charge to the income statement,
together with an equal reduction of the related asset.
Intangibles, such as licenses and patents are stated at cost and are amortized over their estimated
economic life or agreement term, whichever is shorter.
Internally developed software
The capitalization of software development costs under the provisions of Statement of Position
98-1, or SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
requires judgment in determining when a project has reached and concluded the development stage
and the period over which the Company expects to benefit from the use of that software. We amortize
capitalized software development costs using the straight-line method over the expected useful life
of the product, generally between two and four years. We regularly review the carrying value and
amortization lives of capitalized software development costs, and we recognize a non-cash charge if
the estimated future revenue stream of using the asset falls below its unamortized cost.
Indemnification agreements
Under our bylaws and certain consulting and employment agreements, we have agreed to indemnify our
officers, directors and other service providers. The term of the indemnification period is for the
individual’s lifetime. The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited. However, Youbet has a director and officer
liability insurance policy that limits its exposure and enables it to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair
value of these indemnification agreements is minimal.
We enter into indemnification provisions under our agreements with other companies in the ordinary
course of business. Under these provisions, we generally indemnify the indemnified party for losses
suffered or incurred by the indemnified party as a result of our
activities. These indemnification provisions generally survive termination of the underlying
agreement. We have not incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements.
We believe the estimated fair value of these agreements is minimal (based on level 2 inputs as
defined in ASC Topic 820). Accordingly, we had no liabilities for these agreements recorded under
ASC Topic 460, Guarantees derived from FIN 45,
Guarantor
’
s Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others
—
an interpretation of
Statements No. 5,
57
and 107 and rescission of FIN 34
, as of December 31, 2009 and 2008.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements issued,
not yet effective or early adopted, that management believes are of significance, or potential
significance to the Company.
39
|
|
|
|
|
ITEM 7A.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Investments
Our exposure to market risk and related changes in interest rates may impact our investment
portfolio. As of December 31, 2009, our portfolio of investments included $15.9 million of cash and
cash equivalents and $4.6 million of restricted cash. In 2009, due to the existing economic
environment and substantial investment risk that existed, we maintained our portfolio of cash
primarily in our checking and savings accounts at our principal banking institutions and took
advantage of the expanded FDIC insurance protection offered. The average yield on our investments
in 2009 was approximately 0.2%. Due to the conservative nature of our investment portfolio, we
believe that a sudden 1% change in interest rates would not have a material effect on the value of
the portfolio. The impact on our future interest income will depend largely on the gross amount of
our investment portfolio. We do not expect our operating results or cash flows to be affected to
any significant degree by a sudden change in market interest rates.
Debt
We had aggregate debt of $7.2 million outstanding at December 31, 2009 under a term loan,
promissory note and capital lease obligations. The following table shows the breakdown of our
fixed-rate and variable-rate debt at December 31, 2009:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Variable-rate debt
|
|
$
|
3,750
|
|
|
Fixed-rate debt
|
|
|
3,446
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,196
|
|
|
|
|
|
|
The weighted average interest rate paid during 2009 on outstanding indebtedness was 6.5%. For
variable-rate debt outstanding at December 31, 2009, a 0.25% increase in interest rates would have
increased our annual interest expense by approximately $24,000. Amounts outstanding under the
revolving credit facility provides for interest at the banks’ prime rate plus a base rate margin.
Our market risk exposure with respect to financial instruments changes in relation to the prime
rate.
|
|
|
|
|
ITEM 8.
|
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The consolidated financial statements for Youbet.com, Inc. are included at the end of this report
beginning on page F-1.
|
|
|
|
|
ITEM 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
|
|
|
|
ITEM 9A(T).
|
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures.
As of December 31, 2009, our management,
including the Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (“the Exchange Act”)). These disclosure controls and procedures are designed to ensure
that material information we must disclose in this report is recorded, processed, summarized and
filed or submitted on a timely basis and that such information is accumulated and communicated to
management, including our Chief Executive Officer, Chief Financial Officer
and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required
disclosure. Based on that evaluation, management, including the Chief Executive Officer,
Chief Financial Officer and Chief Accounting Officer, concluded that our
disclosure controls and procedures were effective as of December 31, 2009.
Changes in Internal Control Over Financial Reporting.
No change in our internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the
quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management
’
s
Report on Internal Control Over Financial Reporting.
Management’s report on our internal
control over financial reporting is included with our consolidated financial statements at the end
of this report under the caption, “Management’s Report on Internal Control Over Financial
Reporting” and is incorporated herein by reference.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in this annual report.
40
|
|
|
|
|
ITEM 9B.
|
|
OTHER INFORMATION
|
None.
PART III.
|
|
|
|
|
ITEM 10.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information called for by Item 10 of Form 10-K will be set forth in our proxy statement for our
annual meeting of stockholders (the Proxy Statement) and is incorporated herein by reference.
Code of Ethics
Youbet has a code of business conduct and ethics, referred to as the Youbet.com Code of Conduct
(the “Code”), which applies to our Chief Executive Officer, Chief
Financial Officer and all other employees. Among other provisions, the Code sets forth standards
for honest and ethical conduct, full and fair disclosure in public filings and stockholder
communications, compliance with laws, rules and regulations, reporting of code violations and
accountability for adherence to the Code. The text of the Code has been posted on our website
(http://www.youbet.com/aboutyoubet/investors/code_of_conduct/). A copy of the Code can be obtained
free-of-charge upon written request to:
Corporate Secretary
Youbet.com, Inc.
2600 West Olive Avenue, 5
th
floor
Burbank, CA 91505
If we make any amendment to, or grant any waivers of, a provision of the Code that applies to our
principal executive officer or principal financial officer and that requires disclosure under
applicable SEC rules, we intend to disclose such amendment or waiver and the reasons for the
amendment or waiver on our website.
Material Changes to the Procedures By Which a Stockholder May Recommend Nominees for Election to
the Board of Directors
None.
|
|
|
|
|
ITEM 11.
|
|
EXECUTIVE COMPENSATION
|
Information called for by Item 11 of Form 10-K will be set forth in the Proxy Statement and is
incorporated herein by reference.
|
|
|
|
|
ITEM 12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
Information called for by Item 12 of Form 10-K will be set forth in the Proxy Statement and is
incorporated herein by reference.
41
|
|
|
|
|
ITEM 13.
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Information called for by Item 13 of Form 10-K will be set forth in the Proxy Statement and is
incorporated herein by reference.
|
|
|
|
|
ITEM 14.
|
|
PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES
|
Information called for by Item 14 of Form 10-K will be set forth in the Proxy Statement and is
incorporated herein by reference.
PART IV.
|
|
|
|
|
ITEM 15.
|
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
|
The following documents are filed as part of this report:
|
|
|
(1)
|
|
The consolidated financial statements of Youbet.com, Inc., which are listed on the Index
to consolidated financial statements appearing on page F-1 of this report.
|
|
|
(2)
|
|
Schedule II — Valuation and Qualifying Accounts. All other schedules are omitted because
they are not applicable, not required or the information is included elsewhere in the
consolidated financial statements or notes thereto.
|
|
|
|
|
|
|
|
|
2.1
|
|
|
Agreement and Plan of Merger, dated as of November 11, 2009, among Churchill Downs
Incorporated, Youbet.com, Inc., Tomahawk Merger Corp. and Tomahawk Merger LLC
(incorporated by reference to Exhibit 2.1 to our current report on Form 8-K filed
November 13, 2009).
|
|
|
|
|
|
|
|
|
3.1
|
|
|
Certificate of Incorporation of Youbet.com, Inc., as amended (incorporated by
reference to Exhibit 3.1 to our quarterly report on Form 10-QSB for the quarter ended
September 30, 2003).
|
|
|
|
|
|
|
|
|
3.2
|
|
|
Certificate of Designations of Series B Junior Participating Preferred Stock, as
filed with the Secretary of State of Delaware on April 1, 2009 (incorporated by reference
to Exhibit 3.1 to our current report on Form 8-K filed April 1, 2009).
|
|
|
|
|
|
|
|
|
3.3
|
|
|
Certificate of Amendment of the Certificate of Incorporation of Youbet.com, Inc.,
as filed with the Secretary of State of Delaware on June 2, 2009 (incorporated by
reference to Exhibit 3.1 to our current report on Form 8-K filed June 2, 2009).
|
|
|
|
|
|
|
|
|
3.4
|
|
|
Amended and Restated Bylaws of Youbet.com, Inc. (incorporated by reference to
Exhibit 3.1 to our current report on Form 8-K filed April 20, 2007).
|
|
|
|
|
|
|
|
|
4.1
|
|
|
Registration Rights Agreement by and among Youbet.com, Inc. (formerly You Bet
International, Inc.) and the other parties listed therein dated June 29, 1998
(incorporated by reference to Exhibit 99.5 to our current report on Form 8-K filed July
14, 1998).
|
|
|
|
|
|
|
|
|
4.2
|
|
|
Warrant to purchase Youbet common stock issued to Robert M. Fell dated June 29,
1998 (incorporated by reference to Exhibit 99.3 to our current report on Form 8-K filed
July 14, 1998).
|
|
|
|
|
|
|
|
|
4.3
|
|
|
Rights Agreement, dated as of March 31, 2009, between Youbet.com, Inc. and American
Stock Transfer & Trust Company LLC, as Rights Agent (incorporated by reference to Exhibit
4.1 to our current report on Form 8-K filed April 1, 2009).
|
|
|
|
|
|
|
|
|
4.4
|
|
|
Amendment to Rights Agreement, dated as of November 11, 2009, between Youbet.com,
Inc. and American Stock Transfer & Trust Company LLC (incorporated by reference to
Exhibit 4.2 to our current report on Form 8-K filed November 13, 2009).
|
42
|
|
|
|
|
|
|
|
10.1
|
|
|
Youbet.com, Inc. Equity Incentive Plan (incorporated by reference to Exhibit 10.2
to our registration statement on Form S-3, File No. 333-126131).*
|
|
|
|
|
|
|
|
|
10.2
|
|
|
Amendment Number One to the Youbet.com, Inc. Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to our current report on Form 8-K filed June 16, 2006).*
|
|
|
|
|
|
|
|
|
10.3
|
|
|
Amendment Number Two to the Youbet.com, Inc. Equity Incentive Plan (incorporated by
reference to Exhibit 10.3 to our current report on Form 8-K filed June 17, 2008).*
|
|
|
|
|
|
|
|
|
10.4
|
|
|
Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.4
to our current report on Form 8-K filed June 17, 2008).*
|
|
|
|
|
|
|
|
|
10.5
|
|
|
Form of Performance Stock Option Agreement (incorporated by reference to Exhibit
10.5 to our current report on Form 8-K filed June 17, 2008).*
|
|
|
|
|
|
|
|
|
10.6
|
|
|
Form of Non-Employee Director Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.6 to our current report on Form 8-K filed June 17, 2008).*
|
|
|
|
|
|
|
|
|
10.7
|
|
|
Lease Agreement for the Woodland Hills Facility dated March 11, 2000 (incorporated
by reference to Exhibit 10.26 to our annual report on Form 10-K for the year ended
December 31, 2000).
|
|
|
|
|
|
|
|
|
10.8
|
|
|
Amendment, dated as of September 8, 2003, to lease agreement for the Woodland Hills
Facility dated March 11, 2000 (incorporated by reference to Exhibit 10.6 to our annual
report on Form 10-KSB for the year ended December 31, 2003).
|
|
|
|
|
|
|
|
|
10.9
|
|
|
Assignment and Assumption of Lease, dated as of December 15, 2008, by and between
Youbet.com, Inc. and Youbet Services Corporation (incorporated by reference to Exhibit
10.9 to our annual report on Form 10-K for the year ended December 31, 2008).
|
|
|
|
|
|
|
|
|
10.10
|
|
|
License and Content Agreement, dated as of May 18, 2001, by and among ODS
Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by reference
to Exhibit 10.27 to our quarterly report on Form 10-Q for the quarter ended June 30,
2001).
|
|
|
|
|
|
|
|
|
10.11
|
|
|
Amendment to License and Content Agreement dated as of June 6, 2007, by and among
ODS Technologies, L.P., ODS Properties, Inc. and Youbet.com, Inc. (incorporated by
reference to Exhibit 10.2 to our current report on Form 8-K filed June 12, 2007).
|
|
|
|
|
|
|
|
|
10.12
|
|
|
Youbet.com, Inc. Offer Letter to Michael D. Nelson, dated December 12, 2006 and
accepted December 13, 2006 (incorporated by reference to Exhibit 99.2 to our current
report on Form 8-K filed January 8, 2007).*
|
|
|
|
|
|
|
|
|
10.13
|
|
|
Employment Agreement, dated as of July 9, 2007, by and between Youbet.com, Inc.
and James A. Burk (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed July 11, 2007).*
|
|
|
|
|
|
|
|
|
10.14
|
|
|
Employment Agreement, dated as of March 1, 2008, by and between Youbet.com, Inc.
and Daniel Perini (incorporated by reference to Exhibit 10.7 to our quarterly report on
Form 10-Q for the quarter ended June 30, 2008).*
|
|
|
|
|
|
|
|
|
10.15
|
|
|
Severance and General Release Agreement, by and between Youbet.com, Inc. and James
A. Burk (incorporated by reference to Exhibit 10.15 to our annual report on Form 10-K for
the year ended December 31, 2008).*
|
|
|
|
|
|
|
|
|
10.16
|
|
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.16 to
our annual report on Form 10-K for the year ended December 31, 2008).
|
|
|
|
|
|
|
|
|
10.17
|
|
|
Promissory Notes issued by Youbet.com, Inc. in favor of UT Group, LLC
(incorporated by reference to Exhibit 10.4 to our current report on Form 8-K filed
February 13, 2006).
|
43
|
|
|
|
|
|
|
|
10.18
|
|
|
Settlement Agreement, dated as of November 13, 2008, by and among Youbet.com,
Inc., Louis J. Tavano, James Scott, Richard M. Tavano and Jacktrade LLC (incorporated by
reference to Exhibit 10.1 to our current report on Form 8-K filed November 19, 2008).
|
|
|
|
|
|
|
|
|
10.19
|
|
|
Loan and Security Agreement, dated as of December 3, 2008, by and among
Youbet.com, Inc., United Tote Company and Youbet Services Corporation, as borrowers, and
National City Bank, as lender (incorporated by reference to Exhibit 10.1 to our current
report on Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.20
|
|
|
Term Note A, dated as of December 3, 2008, made by Youbet.com, Inc., United Tote
Company and Youbet Services Corporation in favor of National City Bank (incorporated by
reference to Exhibit 10.2 to our current report on Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.21
|
|
|
Revolving Note, dated as of December 3, 2008, made by Youbet.com, Inc., United
Tote Company and Youbet Services Corporation in favor of National City Bank (incorporated
by reference to Exhibit 10.1 to our current report on Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.22
|
|
|
Guaranty, dated as of December 3, 2008, made by UT Gaming, Inc. in favor of
National City Bank (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.23
|
|
|
Stock Pledge Agreement, dated as of December 3, 2008, between UT Gaming, Inc. and
National City Bank (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.24
|
|
|
Intellectual Property Security Agreement, dated as of December 3, 2008, by and
among Youbet.com, Inc., United Tote Company and Youbet Services Corporation, as
borrowers, and National City Bank, as secured party (incorporated by reference to Exhibit
10.1 to our current report on Form 8-K filed December 9, 2008).
|
|
|
|
|
|
|
|
|
10.25
|
|
|
Employment Agreement, dated as of January 1, 2004, by and between Youbet.com, Inc.
and Gary W. Sproule (incorporated by reference to Exhibit 10.2 to our quarterly report on
Form 10-Q for the quarter ended June 30, 2004).*
|
|
|
|
|
|
|
|
|
10.26
|
|
|
First Amendment, dated as of August 1, 2005, to Employment Agreement, dated as of
January 1, 2004, by and between Youbet.com, Inc. and Gary W. Sproule (incorporated by
reference to Exhibit 10.4 to our quarterly report on Form 10-Q for the quarter ended
September 30, 2005).*
|
|
|
|
|
|
|
|
|
10.27
|
|
|
Employment Letter Agreement, dated as of September 8, 2009, between Youbet.com,
Inc. and Susan Bracey (incorporated by reference to Exhibit 10.1 to our current report on
Form 8-K filed September 9, 2009).*
|
|
|
|
|
|
|
|
|
10.28
|
|
|
Youbet Retention Program (incorporated by reference to Exhibit 10.1 to our current
report on Form 8-K filed February 23, 2010).*
|
|
|
|
|
|
|
|
|
16.1
|
|
|
Letter from Piercy Bowler Taylor & Keen, Certified Public Accountants, regarding
change in certifying accountant (incorporated by reference to Exhibit 16.1 to Amendment
No. 1 to Form 8-K on Form 8-K/A filed April 17, 2009)
|
|
|
|
|
|
|
|
|
21.1
|
|
|
List of subsidiaries (incorporated by reference to Exhibit 21.1 to our annual
report on Form 10-K for the year ended December 31, 2008).
|
|
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Piercy Bowler Taylor & Kern, Certified Public Accountants.**
|
|
|
|
|
|
|
|
|
24.1
|
|
|
Power of Attorney (set forth on the signature page of this report).
|
|
|
|
|
|
|
|
|
31.1
|
|
|
Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended.**
|
|
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.**
|
|
|
|
|
|
|
|
|
32.1
|
|
|
Certifications Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934,
as amended.**
|
|
|
|
|
|
*
|
|
Management contract or compensatory plan.
|
|
|
|
**
|
|
Filed herewith.
|
44
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.
|
|
|
|
|
|
|
|
YOUBET.COM, INC.
|
|
|
March 15, 2010
|
By:
|
/s/ David Goldberg
|
|
|
|
|
David Goldberg,
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
Power of Attorney
Youbet.com, Inc., a Delaware corporation, and each person whose signature appears below,
constitutes and appoints David Goldberg and Susan Bracey, and either of them, with full power to
act without the other, as such person’s true and lawful attorneys-in-fact, with full power of
substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this annual report on Form 10-K and any and all amendments to such annual
report on Form 10-K and other documents in connection therewith, and to file the same, and all
exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying
and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of Youbet.com, Inc. and in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ David Goldberg
David Goldberg
|
|
President and Chief Executive Officer
(Principal
Executive Officer)
|
|
March 15 , 2010
|
|
|
|
|
|
|
/s/ Susan Bracey
Susan Bracey
|
|
Chief Financial Officer
(Principal
Financial Officer)
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Michael D. Nelson
Michael D. Nelson
|
|
Corporate Controller
(Principal
Accounting Officer)
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ F. Jack Liebau
F. Jack Liebau
|
|
Chairman of the Board
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Michael Brodsky
Michael Brodsky
|
|
Executive Chairman of the Board
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Gary Adelson
Gary Adelson
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Michael D. Sands
Michael D. Sands
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ James Edgar
James Edgar
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Michael Soenen
Michael Soenen
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
|
/s/ Raymond Anderson
Raymond Anderson
|
|
Director
|
|
March 15, 2010
|
45
Index to Consolidated Financial Statements and Schedule
|
|
|
|
|
|
|
Page
|
|
|
|
F-1
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
Consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
F-25
|
46
MANAGEMENT
’
S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934,
as amended). The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America. The Company’s internal control over financial reporting
includes those policies and procedures that:
|
|
(i)
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets;
|
|
|
(ii)
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles in the United States of America, and that the Company’s receipts and expenditures
are being made only in accordance with authorizations of the Company’s management and
directors; and
|
|
|
(iii)
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
|
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not
expect that the Company’s internal controls will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation of the
effectiveness of controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over
financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
evaluation, management has concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2009.
|
|
|
|
|
|
|
|
/s/ David Goldberg
David Goldberg
|
|
|
|
/s/ Susan Bracey
Susan Bracey
|
|
|
|
President and Chief Executive Officer
|
|
|
|
Chief Financial Officer
|
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Youbet.com, Inc.
Burbank, California
We have audited the accompanying consolidated balance sheets of Youbet.com, Inc. and Subsidiaries
(the Company) as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years ended December 31,
2009, 2008 and 2007. Our audits included the financial statement schedule of Valuation and
Qualifying Accounts included in Item 15(a)(2). Our responsibility is to express an opinion on
these financial statements and financial statement schedule and an opinion on the company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion. 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 opinions.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of December 31, 2009 and
2008, and the consolidated results of its operations and cash flows for each of the three years
ended December 31, 2009, 2008 and 2007, in conformity with accounting principles generally accepted
in the United States. Also in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
PIERCY BOWLER TAYLOR & KERN
Certified Public Accountants
/s/ Piercy Bowler Taylor & Kern
Las Vegas, Nevada
March 15, 2010
F-2
YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and 2008
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,884
|
|
|
$
|
16,538
|
|
|
Restricted cash
|
|
|
4,616
|
|
|
|
4,698
|
|
|
Accounts receivable, net of allowance for doubtful collection of $578 and $541
|
|
|
3,413
|
|
|
|
3,031
|
|
|
Inventories
|
|
|
1,278
|
|
|
|
1,937
|
|
|
Prepaid expenses and other
|
|
|
1,141
|
|
|
|
1,066
|
|
|
Current portion of deferred tax asset
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,032
|
|
|
|
27,270
|
|
|
Property and equipment, net of accumulated depreciation
and amortization of $34,928 and $28,623
|
|
|
12,890
|
|
|
|
16,218
|
|
|
Intangibles, other than goodwill, net of accumulated amortization
|
|
|
3,948
|
|
|
|
4,588
|
|
|
Deferred tax asset, net of current portion
|
|
|
5,400
|
|
|
|
|
|
|
Other assets
|
|
|
374
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,644
|
|
|
$
|
48,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
7,196
|
|
|
$
|
8,704
|
|
|
Trade payables
|
|
|
5,430
|
|
|
|
6,484
|
|
|
Accrued expenses
|
|
|
4,622
|
|
|
|
8,287
|
|
|
Customer deposits
|
|
|
4,558
|
|
|
|
4,445
|
|
|
Deferred revenues
|
|
|
162
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,968
|
|
|
|
28,041
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
3,996
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
21,968
|
|
|
|
32,037
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, authorized 1,000,000
shares, none
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, authorized 100,000,000 shares,
42,829,373 and 42,562,805 shares issued
|
|
|
43
|
|
|
|
43
|
|
|
Additional paid-in-capital
|
|
|
136,970
|
|
|
|
135,732
|
|
|
Deficit
|
|
|
(104,806
|
)
|
|
|
(116,424
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(152
|
)
|
|
|
(129
|
)
|
|
Less treasury stock, 1,099,335 shares at cost
|
|
|
(2,379
|
)
|
|
|
(2,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
29,676
|
|
|
|
16,843
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,644
|
|
|
$
|
48,880
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-3
YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
88,320
|
|
|
$
|
82,929
|
|
|
$
|
93,969
|
|
|
Contract revenues
|
|
|
19,841
|
|
|
|
22,064
|
|
|
|
23,965
|
|
|
Equipment sales
|
|
|
812
|
|
|
|
1,133
|
|
|
|
877
|
|
|
Other
|
|
|
2,407
|
|
|
|
2,902
|
|
|
|
3,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,380
|
|
|
|
109,028
|
|
|
|
122,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Track fees
|
|
|
50,722
|
|
|
|
39,303
|
|
|
|
39,246
|
|
|
Licensing fees
|
|
|
4,254
|
|
|
|
9,124
|
|
|
|
19,810
|
|
|
Network operations
|
|
|
3,871
|
|
|
|
3,928
|
|
|
|
4,564
|
|
|
Contract costs
|
|
|
14,778
|
|
|
|
14,794
|
|
|
|
16,584
|
|
|
Cost of equipment sales
|
|
|
187
|
|
|
|
466
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,812
|
|
|
|
67,615
|
|
|
|
80,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,568
|
|
|
|
41,413
|
|
|
|
41,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
17,004
|
|
|
|
17,752
|
|
|
|
21,160
|
|
|
Sales and marketing
|
|
|
6,094
|
|
|
|
5,273
|
|
|
|
10,009
|
|
|
Research and development
|
|
|
3,306
|
|
|
|
3,430
|
|
|
|
3,947
|
|
|
Depreciation and amortization
|
|
|
7,217
|
|
|
|
8,074
|
|
|
|
9,117
|
|
|
Impairment write downs
|
|
|
—
|
|
|
|
11,212
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,621
|
|
|
|
45,741
|
|
|
|
52,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before other income (expense) and income tax (benefit)
|
|
|
3,947
|
|
|
|
(4,328
|
)
|
|
|
(10,372
|
)
|
|
Interest income
|
|
|
44
|
|
|
|
233
|
|
|
|
642
|
|
|
Interest expense
|
|
|
(780
|
)
|
|
|
(1,244
|
)
|
|
|
(1,796
|
)
|
|
Other
|
|
|
487
|
|
|
|
174
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax (benefit)
|
|
|
3,698
|
|
|
|
(5,165
|
)
|
|
|
(11,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
|
|
|
(7,938
|
)
|
|
|
658
|
|
|
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
11,636
|
|
|
|
(5,823
|
)
|
|
|
(14,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of $731 income tax benefit in 2007
|
|
|
(18
|
)
|
|
|
1,372
|
|
|
|
(14,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
11,618
|
|
|
$
|
(4,451
|
)
|
|
$
|
(28,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.28
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.34
|
)
|
|
Income (loss) from discontinued operations
|
|
|
(0.00
|
)
|
|
|
0.03
|
|
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
0.28
|
|
|
|
(0.11
|
)
|
|
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.34
|
)
|
|
Income (loss) from discontinued operations
|
|
|
(0.00
|
)
|
|
|
0.03
|
|
|
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
|
0.27
|
|
|
|
(0.11
|
)
|
|
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,543,528
|
|
|
|
41,463,470
|
|
|
|
41,796,218
|
|
|
Diluted
|
|
|
43,840,875
|
|
|
|
41,463,470
|
|
|
|
41,796,218
|
|
See notes to consolidated financial statements
F-4
YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
Years Ended
December 31, 2009, 2008 and 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Stock
|
|
|
Total
|
|
|
Balances at January 1, 2007
|
|
|
42,119
|
|
|
$
|
42
|
|
|
$
|
137,597
|
|
|
$
|
(10
|
)
|
|
$
|
(83,555
|
)
|
|
$
|
(1,300
|
)
|
|
$
|
52,774
|
|
|
Stock options exercised
|
|
|
444
|
|
|
|
1
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
Payment to former owners of United Tote under “make-whole” provision
|
|
|
|
|
|
|
|
|
|
|
(4,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,473
|
)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,019
|
)
|
|
|
(1,019
|
)
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
898
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,418
|
)
|
|
|
|
|
|
|
(28,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
42,563
|
|
|
$
|
43
|
|
|
$
|
134,286
|
|
|
$
|
(56
|
)
|
|
$
|
(111,973
|
)
|
|
$
|
(2,319
|
)
|
|
$
|
19,981
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
(60
|
)
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
(73
|
)
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,446
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,451
|
)
|
|
|
|
|
|
|
(4,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
42,563
|
|
|
$
|
43
|
|
|
$
|
135,732
|
|
|
$
|
(129
|
)
|
|
$
|
(116,424
|
)
|
|
$
|
(2,379
|
)
|
|
$
|
16,843
|
|
|
Stock options exercised
|
|
|
266
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,037
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,618
|
|
|
|
|
|
|
|
11,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
42,829
|
|
|
$
|
43
|
|
|
$
|
136,970
|
|
|
$
|
(152
|
)
|
|
$
|
(104,806
|
)
|
|
$
|
(2,379
|
)
|
|
$
|
29,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-5
YOUBET.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
11,618
|
|
|
$
|
(4,451
|
)
|
|
$
|
(28,418
|
)
|
|
Income (loss) from discontinued operations
|
|
|
(18
|
)
|
|
|
1,372
|
|
|
|
(14,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
11,636
|
|
|
|
(5,823
|
)
|
|
|
(14,187
|
)
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities, continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
6,577
|
|
|
|
7,332
|
|
|
|
8,376
|
|
|
Amortization of intangibles
|
|
|
640
|
|
|
|
742
|
|
|
|
741
|
|
|
Deferred tax assets
|
|
|
(8,100
|
)
|
|
|
|
|
|
|
1,797
|
|
|
Goodwill, intangibles and fixed asset impairment
|
|
|
|
|
|
|
11,212
|
|
|
|
8,000
|
|
|
Stock-based compensation
|
|
|
1,037
|
|
|
|
1,446
|
|
|
|
898
|
|
|
Bad debt
|
|
|
508
|
|
|
|
707
|
|
|
|
1,105
|
|
|
Increase in operating (assets) and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash, Players Trust
SM
|
|
|
(141
|
)
|
|
|
32
|
|
|
|
48
|
|
|
Accounts receivable
|
|
|
(890
|
)
|
|
|
971
|
|
|
|
430
|
|
|
Inventory
|
|
|
659
|
|
|
|
148
|
|
|
|
502
|
|
|
Prepaid expenses
|
|
|
(75
|
)
|
|
|
310
|
|
|
|
(372
|
)
|
|
Other assets
|
|
|
430
|
|
|
|
213
|
|
|
|
2,473
|
|
|
Trade payables
|
|
|
(1,053
|
)
|
|
|
(3,375
|
)
|
|
|
(3,783
|
)
|
|
Accrued expenses
|
|
|
(3,657
|
)
|
|
|
1,385
|
|
|
|
(6,737
|
)
|
|
Customer deposits
|
|
|
113
|
|
|
|
(160
|
)
|
|
|
90
|
|
|
Deferred revenues
|
|
|
41
|
|
|
|
(91
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
7,725
|
|
|
|
15,049
|
|
|
|
(614
|
)
|
|
Net cash (used) by discontinued operations
|
|
|
(21
|
)
|
|
|
(312
|
)
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities
|
|
|
7,704
|
|
|
|
14,737
|
|
|
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,280
|
)
|
|
|
(1,384
|
)
|
|
|
(2,482
|
)
|
|
Proceeds from sale of property and equipment
|
|
|
31
|
|
|
|
34
|
|
|
|
|
|
|
Cash paid for United Tote acquisition, net of $159 cash acquired in 2006
|
|
|
|
|
|
|
|
|
|
|
(4,473
|
)
|
|
Other
|
|
|
217
|
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) in investing activities
|
|
|
(3,032
|
)
|
|
|
(1,350
|
)
|
|
|
(7,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and warrants
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(60
|
)
|
|
|
(1,019
|
)
|
|
Proceeds from sale-leaseback transaction
|
|
|
|
|
|
|
|
|
|
|
1,065
|
|
|
Proceeds from debt
|
|
|
|
|
|
|
10,752
|
|
|
|
4,409
|
|
|
Repayment of debt
|
|
|
(5,504
|
)
|
|
|
(14,019
|
)
|
|
|
(11,045
|
)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities
|
|
|
(5,303
|
)
|
|
|
(3,327
|
)
|
|
|
(6,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(23
|
)
|
|
|
(73
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(654
|
)
|
|
|
9,987
|
|
|
|
(14,500
|
)
|
|
Cash and cash equivalents at the beginning of period
|
|
|
16,538
|
|
|
|
6,551
|
|
|
|
21,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
15,884
|
|
|
$
|
16,538
|
|
|
$
|
6,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
466
|
|
|
$
|
772
|
|
|
$
|
1,322
|
|
|
Cash paid for income taxes
|
|
|
889
|
|
|
|
603
|
|
|
|
381
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired with capital lease and other financing arrangements
|
|
|
|
|
|
|
810
|
|
|
|
1,428
|
|
See notes to consolidated financial statements
F-6
Youbet.com and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: THE COMPANY AND THE MERGER AGREEMENT WITH CHURCHILL DOWNS
Youbet.com, Inc. (Youbet) and its consolidated subsidiaries (collectively, the Company) is a
licensed, multi-jurisdictional facilitator of online pari-mutuel horse race wagering and a leading
supplier of tote equipment and services to the racing industry. Through its main product, Youbet
Express
SM
, Youbet offers its customers interactive, real-time audio/video broadcasts,
access to a comprehensive database of handicapping information, and, in most states, the ability to
wager on a wide selection of horse races in the United States, Canada, the United Kingdom,
Australia and South Africa. Youbet is working to expand its brand, products and services throughout
the United States and in select international markets.
In 2006, Youbet expanded its product and service offering through the acquisition of United Tote
Company and United Tote Canada (collectively with U.T. Gaming, Inc., referred to as United Tote).
United Tote is a leading supplier of totalizator systems (a system that processes wagers and
payouts).
Churchill Downs Merger Agreement
On November 11, 2009, Youbet entered into an Agreement and Plan of Merger (the Merger Agreement)
with Churchill Downs Incorporated (Churchill Downs), Tomahawk Merger Corp., a wholly owned
subsidiary of Churchill Downs (Merger Corp), and Tomahawk Merger LLC, a wholly owned subsidiary of
Churchill Downs (Merger LLC). The Merger Agreement provides that, upon the terms and subject to the
conditions set forth in the Merger Agreement, (i) Merger Sub will merge with and into Youbet, with
Youbet surviving as a wholly owned subsidiary of Churchill Downs (the Merger) and (ii) following
completion of the Merger, the surviving corporation from the Merger will merge with and into Merger
LLC, with Merger LLC surviving such merger.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger,
each share of Youbet common stock issued and outstanding immediately prior to the effective time of
the Merger (other than treasury shares, shares held by Youbet’s wholly owned subsidiaries or shares
of Youbet common stock held by Churchill Downs or any of its subsidiaries) will be converted into
the right to receive (i) 0.0598 of a share of Churchill Downs common stock and (ii) $0.97 in cash,
subject to adjustment to ensure that the Merger does not require Churchill Downs to issue more than
19.6% of the outstanding Churchill Downs common stock outstanding as of immediately prior to the
effective time of the Merger.
The Merger is subject to customary closing conditions, including (i) approval and adoption by
Youbet stockholders, (ii) the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act, (iii) absence of litigation or injunctions
prohibiting the transactions contemplated by the Merger Agreement and (iv) subject to certain
materiality exceptions, the accuracy of the representations and warranties made by Youbet and
Churchill Downs, and compliance by Youbet and Churchill Downs of Youbet’s and Churchill Downs’s
respective obligations under the Merger Agreement.
Youbet has made customary representations, warranties and covenants in the Merger Agreement,
including, among others, covenants to conduct its business in the ordinary course during the
interim period between the execution of the Merger Agreement and consummation of the Merger. Youbet
is also subject to a “no-shop” restriction on its ability to solicit alternative acquisition
proposals, provide certain information and engage in discussions with third parties, subject to
certain exceptions. The Merger Agreement also provides for certain termination rights for both
Youbet and Churchill Downs, including Youbet’s right to terminate the Merger Agreement under
certain circumstances to enter into a “Superior Proposal.” Upon termination of the Merger Agreement
under specified circumstances, Youbet may be required to pay Churchill Downs a termination fee of
$4,326,000 and reimburse Churchill Downs’s transaction expenses up to $500,000 and Churchill Downs
may be required to pay Youbet a termination fee of $5,000,000.
Additional information regarding the Merger is provided in the proxy statement/prospectus filed
with the SEC by Churchill Downs on March 2, 2010 and mailed to our stockholders on March 4, 2010.
For a description of litigation relating to the Merger and Youbet’s entry into a Memorandum of
Understanding regarding settlement of such litigation, see Note 12.
F-7
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation and accounting
The consolidated financial statements include the accounts of Youbet and its wholly-owned
subsidiaries (inclusive of Youbet Services Corporation, International Racing Group (consisting of
IRG U.S. Holdings Corp, IRG Holdings Curacao, N.V., International Racing Group, N.V. and IRG
Services (collectively, IRG), United Tote and Bruen Productions International, Inc. from October 9,
2006 until it was sold effective December 31, 2007 (Bruen)). The operations of IRG were shut down
effective February 15, 2008. Both IRG and Bruen are retroactively reported as discounted operations
(Note 14). All inter-company accounts and transactions have been eliminated in consolidation.
The Company has not elected to adopt the option available under Financial Accounting Standards
Board (FASB)
Accounting Standards Codification
(ARS)Topic 825,
The Fair Value Option for Financial
Assets and Financial Liabilities
, to measure any of its eligible financial instruments or other
items, except as may be required under generally accepted accounting principles or otherwise
disclosed elsewhere herein. Accordingly, with such exceptions, the Company continues to measure all
of its assets and liabilities on the historical cost basis of accounting.
Preparation of these unaudited consolidated financial statements involves and requires the use of
estimates and judgments where appropriate. Events through the date these consolidated financial
statements were issued March 15, 2010 were evaluated by management to determine if adjustments to
or disclosure in these consolidated financial statements were necessary. In the opinion of
management, all adjustments, consisting of normal recurring accruals considered necessary for a
fair presentation, have been included. The results for current interim periods are not necessarily
indicative of the results to be expected for the full year.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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.
Revenue recognition
Through Youbet, the Company earns and records commissions on wagers placed with tracks for
customers as revenue and the related track and market area access fees as operating expenses when
the wagers are settled, typically the same day as the wager. Other sources of revenue, including
membership and information fees, are relatively insignificant. Prepayments of such fees are treated
as deferred revenue and later recognized over the duration of the subscription. Incentives offered
to customers to encourage wagering on events at tracks that generate higher margins are charged
immediately to operations as reductions in commissions earned.
Youbet launched a player rewards program during the second quarter of 2006 called Youbet Advantage.
Participating members earn points based on the amount they wager, and they can redeem their points
for merchandise, travel rewards, and wager credits. Youbet’s Player Advantage incentives and other
volume incentives are recorded as a reduction of commission revenue (a contra-revenue) and the
associated liability is accrued as the points are issued. Reward points are valued based upon a
“par” value applied to points earned based upon the rewards category the player is assigned.
Player reward categories are assigned to players based upon their respective wagering volume. An
estimated point redemption rate, by reward category, is applied against the outstanding points to
estimate the future utilization of points awarded for proper valuation.
The majority of United Tote’s revenues are derived from service contracts principally for the
installation and operation of pari-mutuel wagering networks. Services provided via these networks
include accepting wagers, performing odds and payout calculations and calculating ticket payouts.
United Tote charges the track for these services either by transaction count or by dollar volume in
accordance with the related service contract. In order to perform its services under these
agreements, United Tote may incur various costs associated with installation of its totalizator
equipment at the track to enable it to function as required. Such installation costs include
service personnel, including electricians, to set up networks and other items necessary for the
proper functioning of all terminals being deployed at the track, which in some cases number as many
as several hundred. Such installation costs are capitalized and amortized over the life of the
related contract, since such costs are a prerequisite for the proper operation of the equipment,
which in turn is necessary to generate future totalizator revenue. United Tote is also required to
provide various levels of routine operational support and software maintenance throughout the life
of the contract, which is expensed as incurred. Revenue from the sale of pari-mutuel gaming systems
equipment and related parts is recognized upon delivery and customer acceptance.
F-8
Sales and similar revenue-based taxes collected from customers are excluded from revenue but rather
are recorded as a liability payable to the appropriate taxing authority and included in accrued
expenses.
Cash equivalents and restricted cash
Cash equivalents consist of highly liquid investments with maturities of three months or less at
the date of purchase. For purposes of the financial statements, restricted cash (Note 3), current
and non-current, is excluded from cash and cash equivalents.
Accounts receivable and allowance for doubtful accounts
The Company manages its
concentrations of credit risk by evaluating the creditworthiness of tracks
before extending credit. Accounts receivable are uncollateralized and carried, net of
an appropriate allowance, at their estimated collectible value. The allowance for doubtful accounts
(Note 4) is established based on historic loss experience, the
individual tracks the
relative strength of the Company’s legal position, the related cost of any proceedings, and general
economic conditions. Since customer credit is generally extended on a short-term basis, trade
receivables do not normally bear interest. Accounts for which no payments have been received for
two consecutive months are considered delinquent, and customary collection efforts are initiated.
The maximum losses that the Company would incur if a track failed to pay would be limited
to the amount due after the related allowances provided.
Fair value of financial instruments
The carrying value of financial instruments, including cash and cash equivalents, restricted cash,
accounts receivable, accounts payable and accrued expenses, approximate their estimated fair value
due to the short maturities of these financial instruments. The estimated fair value of long-term
receivables and debt approximates their carrying value. In estimating the fair value of other
financial instruments, consisting of long-term receivables and debt, the Company generally uses
third-party market quotes (level 2 inputs, as defined in ASC Topic 820).
Foreign currency
The Company translates assets and liabilities at exchange rates in effect at the balance sheet date
and income and expense accounts at average exchange rates during the year. The functional currency
of United Tote Canada is Canadian dollars.
Inventories
Inventories consist of totalizator components to build totalizator equipment and ticket paper
stock. Inventories are stated at the lower of cost (using the first-in, first-out method) or market
value.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation and amortization.
Depreciation of property and equipment, which includes equipment under capital leases, is provided
on the straight-line method over estimated useful lives, generally ranging from three to five
years. Leasehold improvements are amortized over the estimated economic life or the term of the
lease, including lease renewal option periods, if intended to be exercised, whichever is shorter.
The majority of United Tote’s equipment is in place at various pari-mutuel gaming sites located
throughout North America.
F-9
Goodwill
The Company evaluates its goodwill, if any, on an annual basis (Note 16) and if events and
circumstances (such as, significant decreases in the market value of an asset, a change in
operating model or strategy and competitive forces) indicate that the carrying amount of an asset
may not be recoverable. If the expected undiscounted future cash flow attributable to the asset is
less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s
carrying value over its fair value is recorded. The estimated fair value is determined using inputs
from among the three levels of the fair value hierarchy set forth in ASC Topic 820,
Fair Value
Measurements and Disclosures,
derived from Financial Accounting Standards Board Statement (“FASB”)
No. 157,
Fair Value Measures
, as follows: Level 1 inputs — Unadjusted quoted prices in active
markets for identical assets or liabilities, which prices are available at the measurement date.
Level 2 inputs — Include quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (
i.e.
, interest rates, yield
curves,
etc.
) and inputs that are derived principally from or corroborated by observable market
data by correlation or other means (market corroborated inputs). Level 3 inputs — Unobservable
inputs that reflect management’s estimates about the assumptions that market participants would use
in pricing the asset or liability. Management develops these inputs based on the best available
information available, including internally-developed data. In estimating the fair value, the
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs to the extent possible.
Income taxes
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the amount and timing of scheduled reversals of deferred tax liabilities and projected
future taxable income over the periods for which the deferred tax assets are deductible.
Effective January 1, 2007, the Company adopted the provisions of ASC Topic 740
Income Taxes
derived
from FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement No. 109”). Based on management’s evaluation, the Company concluded that there
were no significant uncertain tax positions requiring recognition in its financial statements or
related disclosures. Accordingly, no adjustments to recorded tax liabilities or accumulated deficit
were required, and there was no effect on 2007 operations as a result of adopting these
requirements. As of December 31, 2009 the Company had not provided any liability for unrecognized
tax benefits.
The Company’s policy is to recognize interest and penalties related to income tax matters as part
of income tax expense (benefit) in its consolidated statements of operations.
Legal defense costs
Estimated legal defense costs are not accrued. Rather, such costs are accrued and expensed when
services are provided.
Stock-based compensation
Under the fair value recognition provisions of ASC Topic 718, stock-based compensation cost is
measured at the grant date based on the value of the award and is recognized on a straight-line
basis as expense over the vesting period. Additionally, the Company is required to use judgment in
estimating the amount of stock-based awards that are expected to be forfeited. If actual
forfeitures differ significantly from the original estimate, stock-based compensation expense and
the results of operations could be impacted. The company estimates forfeitures at the time of
grant based upon historical experience. The Company reviews the forfeiture rates periodically and
makes adjustments as necessary.
The Company’s determination of fair value of share-based payment awards to employees and directors
on the date of grant under ASC Topic 718, uses the Black-Scholes option pricing model, which is
affected by the Company’s stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, the expected stock price
volatility over the expected term of the awards, and actual and projected employee stock options
exercise behaviors. The Company estimates expected volatility using historical data.
F-10
The fair value of each option was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
|
|
3.7
|
%
|
|
Expected term (years)
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
Volatility
|
|
|
87.0
|
%
|
|
|
48.0
|
%
|
|
|
38.1
|
%
|
|
Expected annual dividend
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Discontinued Operations
The Company presents the results of operations, financial position and cash flows of operations
that met the criteria for “held for sale accounting” as discontinued operations if such operations
meet the required conditions. At the time an operation qualifies for held for sale accounting, the
operation is evaluated to determine whether or not the carrying value exceeds its fair value less
costs to sell. Any loss resulting from carrying value exceeding fair value less cost to sell is
recorded in the period the operation meets held for sale accounting. Management judgment is
required to (1) assess the criteria required to meet held for sale accounting, and (2) estimate
fair value. Changes to fair value could result in an increase or decrease to previously recorded
losses.
Earnings or net income (loss) per share
Basic earnings (loss) per share are calculated based on the weighted average number of shares of
common stock outstanding during the reporting period. Diluted earnings per share are calculated
giving effect to all potentially dilutive common shares, assuming such shares were outstanding
during the reporting period. In instances where the Company incurs a loss, however, diluting the
earnings would not be applicable as the effect would be anti-dilutive.
Following is a reconciliation of the numerators and denominators of the net income (loss) per share
computations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Per
|
|
|
|
|
Net Income (Loss)
|
|
|
Shares
|
|
|
Share
|
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
Amount
|
|
|
|
|
(in thousands except per share amounts)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share, basic
|
|
$
|
11,618
|
|
|
|
41,544
|
|
|
$
|
0.28
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
Income per share, dilutive
|
|
$
|
11,618
|
|
|
|
43,841
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share, basic
|
|
$
|
(4,451
|
)
|
|
|
41,463
|
|
|
$
|
(0.11
|
)
|
|
(4415 potentially dilutive securities were omitted from the calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
since the effect of including them would have been anti-dilutive)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(28,418
|
)
|
|
|
41,796
|
|
|
$
|
(0.68
|
)
|
|
(2797 potentially dilutive securities were omitted from the calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
since the effect of including them would have been anti-dilutive)
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3: RESTRICTED CASH
Facilities lease:
As required by a lease agreement (Note 11), the Company provided a standby
letter of credit in favor of the landlord secured by restricted cash deposits in like amount (which
are immaterial) through 2010.
Players Trust
SM
:
As of December 31, 2009 and 2008, customer deposits maintained in
Players Trust
SM
totaled $4.6 million in both years, all of which is reported as
restricted cash in current assets pursuant to our licensing agreements.
F-11
Note 4: RECEIVABLES
Accounts receivable consisted of the following as of the balance sheet dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Track receivables, net of allowance for doubtful collection of $578 and $541
|
|
$
|
3,273
|
|
|
$
|
2,904
|
|
|
Other
|
|
|
140
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,413
|
|
|
$
|
3,031
|
|
|
|
|
|
|
|
|
|
Note 5: INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out method) or market value.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Totalizator components
|
|
$
|
1,060
|
|
|
$
|
1,681
|
|
|
Ticket stock
|
|
|
218
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,278
|
|
|
$
|
1,937
|
|
|
|
|
|
|
|
|
|
Note 6: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of the balance sheet dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Computer equipment
|
|
$
|
22,312
|
|
|
$
|
19,441
|
|
|
Pari-mutuel equipment
|
|
|
21,745
|
|
|
|
21,634
|
|
|
Office furniture, fixtures and equipment
|
|
|
571
|
|
|
|
576
|
|
|
Leasehold improvements
|
|
|
3,190
|
|
|
|
3,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,818
|
|
|
|
44,841
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(34,928
|
)
|
|
|
(28,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,890
|
|
|
$
|
16,218
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization are recorded over the estimated lives of the following types of
property and equipment: computer and pari-mutuel equipment (3 to 5 years), furniture and fixtures
(5 years) and leasehold improvements (3 to 5 years, limited to the lease term). In connection with
our exploration of strategic alternatives for United Tote, the Company re-evaluated the carrying
value of United Tote. As part of this evaluation, the Company compared the current estimated fair
value to its carrying value and in February 2009, concluded that the United Tote carrying value was
impaired as of December 31, 2008 by $11.2 million. Goodwill of $6.9 million was eliminated and
based upon the estimated fair values of property and equipment and intangible assets as of December
31, 2008, the Company reduced the carrying value of property and equipment and intangible assets
$3.1 million and $1.2 million respectively. In 2009, the Company performed its annual asset
impairment evaluation and concluded that an additional impairment write-down was not deemed
necessary for the year ended December 31, 2009.
F-12
Note 7: INTANGIBLES, OTHER THAN GOODWILL
Intangibles, other than goodwill, consisted of the following as of the balance sheet dates
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Intangibles
|
|
$
|
6,750
|
|
|
$
|
6,750
|
|
|
Less: accumulated amortization
|
|
|
(2,802
|
)
|
|
|
(2,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,948
|
|
|
$
|
4,588
|
|
|
|
|
|
|
|
|
|
Amortizable intangibles consist of customer listings, non-competition agreements, trademarks, trade
names, technology and game content derived through acquisition of United Tote. Amortization expense
in 2009 and 2008 for these intangibles was $0.6 million and $0.7 million, respectively. Estimated
future amortization of intangibles for each of the next five years is $0.6 million, $0.6 million,
$0.6 million, $0.6 million, and $0.6 million, respectively.
Note 8: ACCRUED EXPENSES
Accrued expenses consisted of the following as of the balance sheet dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Legal fees
|
|
$
|
445
|
|
|
$
|
111
|
|
|
Employee compensation, related taxes and other benefits
|
|
|
2,172
|
|
|
|
3,908
|
|
|
Track fees
|
|
|
243
|
|
|
|
926
|
|
|
Accrued interest and taxes
|
|
|
837
|
|
|
|
2,037
|
|
|
Player incentives
|
|
|
637
|
|
|
|
450
|
|
|
Other
|
|
|
288
|
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,622
|
|
|
|
8,287
|
|
|
|
|
|
|
|
|
|
Note 9: DEBT
Debt consisted of the following as of the balance sheet dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
Capital lease obligations
|
|
$
|
246
|
|
|
$
|
750
|
|
|
Promissary notes
|
|
|
3,200
|
|
|
|
3,200
|
|
|
Bank term loan
|
|
|
3,750
|
|
|
|
8,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,196
|
|
|
|
12,700
|
|
|
Current portion of long-term debt
|
|
|
7,196
|
|
|
|
8,704
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
$
|
0
|
|
|
$
|
3,996
|
|
|
|
|
|
|
|
|
|
The cost of equipment covered by the capital lease obligations is $0.8 million and $2.1 million for
2009 and 2008, respectively.
In February 2006, the Company completed its acquisition of all of the outstanding stock of United
Tote (Note 16) for consideration valued at $31.9 million plus the assumption of approximately $14.7
million of debt (primarily related to the financing of equipment
placed with United Tote’s track customers). As part of this purchase, the Company issued three
unsecured promissory notes to United Tote’s former owners aggregating $10.2 million in principal
amount, with each promissory note bearing interest at a fixed rate of 5.02% per annum and with
their principal amounts due in full at their respective maturity dates. The Company repaid a $5.2
million principal amount promissory note in December 2006 and a $1.8 million principal amount
promissory note in March 2007. The remaining $3.2 million principal amount promissory note is
currently due but is subject to rights of indemnification and offset. The Company has four
outstanding claims for indemnification against the former owners of United Tote and will not pay
the net balance due until those matters are resolved.
F-13
In December 2008, the Company entered into a new credit agreement pursuant to which the lender
agreed to provide the Company with up to $15.0 million in total borrowing capacity. The credit
facility consists of a $5.0 million revolving line of credit and a $10.0 million term loan. The
revolving line of credit requires monthly interest payments and the outstanding principal, if any,
is due at maturity. The principal of the term loan is to be repaid in equal monthly installments
($1.25 million quarterly) plus interest, and payments commenced on December 31, 2008. At December
31, 2009, the Company owed $3.8 million under the term loan and no amount was outstanding under the
revolving credit facility. At December 31, 2009, the interest rate on this facility was 5.75% per
annum.
Proceeds of $4.6 million from the new credit agreement were used to repay principal and interest in
full amounts owed to the prior lender, as well as fees and expenses associated with the
refinancing. The remaining proceeds will be used for general corporate purposes. No amounts have
been borrowed under the revolving and letter of credit facility.
The credit agreement provides for mandatory prepayment upon the occurrence of certain specified
events. The credit facility is secured by certain assets of the Company and certain of its
subsidiaries are guarantors of the Company’s obligations under the credit facility. The credit
agreement contains customary covenants under the loan and security agreement, including
restrictions on our ability to incur indebtedness, make investments, pay dividends or engage in
mergers and acquisitions. The loan and security agreement also contains certain financial
covenants, including (i) a requirement to maintain a specified debt service coverage ratio, (ii) a
requirement to maintain a leverage ratio not to exceed 2:1, (iii) a requirement to maintain a
certain specified adjusted EBITDA and (iv) limitations on capital expenditures.
The bank debt, promissory notes and under capital leasing arrangements are collateralized by
certain equipment. The debt bears interest at rates ranging from 6.75% to 10.4%. These obligations
are payable in monthly installments through December 2010.
Capital leases
The Company has capital lease arrangements for networking equipment, computer equipment and
software. Future obligations under these non-cancelable capital leases are as follows:
|
|
|
|
|
|
|
Year
|
|
(in thousands)
|
|
|
2010
|
|
$
|
293
|
|
|
|
|
|
|
|
Total obligation
|
|
|
293
|
|
|
Less: interest portion
|
|
|
47
|
|
|
|
|
|
|
|
Total principal
|
|
$
|
246
|
|
|
|
|
|
|
F-14
Note 10: INCOME TAXES
Income tax expense (benefit) from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
50
|
|
|
$
|
127
|
|
|
$
|
|
|
|
State
|
|
|
80
|
|
|
|
417
|
|
|
|
4
|
|
|
Foreign
|
|
|
32
|
|
|
|
114
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
658
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,524
|
|
|
|
(99
|
)
|
|
|
(600
|
)
|
|
State
|
|
|
105
|
|
|
|
699
|
|
|
|
(735
|
)
|
|
Change in valuation allowance
|
|
|
(9,729
|
)
|
|
|
(600
|
)
|
|
|
3,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,100
|
)
|
|
|
0
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,938
|
)
|
|
$
|
658
|
|
|
$
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) from continuing operations for 2009, 2008 and 2007 differ from
“expected” income taxes (benefit) for those years computed by applying the U.S. federal statutory
rate of 34% to pre-tax income (loss) before taxes for those years as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Tax expense (benefit) at U.S. statutory rate
|
|
$
|
1,258
|
|
|
$
|
(1,758
|
)
|
|
$
|
(8,640
|
)
|
|
State tax (benefit) net of federal benefit
|
|
|
158
|
|
|
|
345
|
|
|
|
353
|
|
|
Foreign taxes
|
|
|
(3
|
)
|
|
|
(8
|
)
|
|
|
30
|
|
|
Amortization/impairment of intangibles
|
|
|
|
|
|
|
2,332
|
|
|
|
6,762
|
|
|
Stock based compensation
|
|
|
353
|
|
|
|
492
|
|
|
|
305
|
|
|
Other permanent differences
|
|
|
55
|
|
|
|
42
|
|
|
|
197
|
|
|
Net change in valuation allowance
|
|
|
(9,729
|
)
|
|
|
(601
|
)
|
|
|
3,691
|
|
|
Other, net
|
|
|
(30
|
)
|
|
|
(186
|
)
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,938
|
)
|
|
$
|
658
|
|
|
$
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not provide for deferred taxes on the excess of the financial reporting over
the tax basis in our investments in the foreign subsidiaries that are essentially permanent in
duration. Determination of such additional deferred taxes that have not been provided has not been
deemed by management to be practicable.
Except for 2007, income (loss) from discontinued operations principally was composed of
transactions with no tax effect.
F-15
The Company’s net deferred tax assets at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
26,230
|
|
|
$
|
23,999
|
|
|
$
|
23,142
|
|
|
Tax credit carryforwards
|
|
|
376
|
|
|
|
342
|
|
|
|
226
|
|
|
Depreciation
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
Inventory
|
|
|
228
|
|
|
|
113
|
|
|
|
|
|
|
Accrued expenses
|
|
|
|
|
|
|
564
|
|
|
|
234
|
|
|
Accounts receivable allowance
|
|
|
621
|
|
|
|
599
|
|
|
|
1,361
|
|
|
Other
|
|
|
|
|
|
|
143
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,455
|
|
|
|
25,911
|
|
|
|
25,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(4,602
|
)
|
|
|
|
|
|
|
(3,573
|
)
|
|
Intangibles
|
|
|
(772
|
)
|
|
|
(900
|
)
|
|
|
(1,717
|
)
|
|
Inventory
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,393
|
)
|
|
|
(900
|
)
|
|
|
(5,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
22,062
|
|
|
|
25,011
|
|
|
|
19,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(13,962
|
)
|
|
|
(25,011
|
)
|
|
|
(19,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,100
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has federal and state net operating loss carry forwards in the amount of $63.8
million and $70.0 million, respectively at December 31, 2009, which are expected to begin expiring
in 2012 and 2013, respectively. Due to the change of ownership provisions of the Tax Reform Act of
1986 (Internal Revenue Code Section 382), utilization of a portion of our net operating loss and
tax credit carry forwards may be limited in future periods. The Company does not have any known
limits under IRC Section 382 at this time. Further, a portion of the carry forwards may expire
before being applied to reduce future income tax liabilities. In addition, on September 30, 2008,
the State of California suspended the ability of corporations to offset taxable income with net
operating loss carry forwards for the tax years 2008 and 2009. The Company has tax credit carry
forwards totaling $376,000.
A valuation allowance is required when it is more likely than not that all or portion of a deferred
tax asset will not be realized. The Company has recorded valuation allowance against its net
deferred tax assets. As of December 31, 2009 and 2008, the valuation allowance recorded was $14.0
million and $25.0 million respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the amount and timing of scheduled reversals of deferred
tax liabilities and projected future taxable income over the periods for which the deferred tax
assets are deductible. Management believes the company will continue to be profitable for the
foreseeable future as necessary to realize the tax benefit. Therefore, based on current year and
forecasted taxable income, management determined that it was appropriate to reverse portion of this
valuation allowance. In 2009, tax benefit was recognized through reduction of valuation allowance
in the amount of $8.1 million.
The Company adopted the provisions of ASC Topic 740 as derived from FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes)
, on January 1, 2007. The Company did not recognize any
additional liability for unrecognized tax benefit as a result of the implementation. As of December
31, 2009, the Company did not increase or decrease its liability for unrecognized tax benefit
related to tax positions in prior period nor did the company increase its liability for any tax
positions in the current year. Furthermore, there were no adjustments to the liability or lapse of
statute of limitation or settlements with taxing authorities.
The Company expects resolution of any unrecognized tax benefits, if created, would occur while the
full valuation allowance of deferred tax assets is maintained, therefore, the Company does not
expect to have any unrecognized tax benefits that, if recognized, that would affect the effective
tax rate.
The Company will recognize interest and penalty related to unrecognized tax benefits and penalties
as income tax expense. As of December 31, 2009, the Company has not recognized liabilities for
penalty and interest as the Company does not have liability for unrecognized tax benefits.
The Company is subject to taxation in the US and various states and Canada. The Company’s tax years
for 2005 through 2008 are subject to examination by the taxing authorities. With few exceptions,
the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing
authorities for years before 2005. The Company’s federal return was selected for examination by the
Internal Revenue Service (IRS) for prior tax year ended December 31, 2006. As of December, 2009,
the IRS has not proposed any significant adjustments to the Company’s tax positions. Management
does not believe that the resolution of the ongoing income tax examinations will have a material
adverse impact on the financial position of the Company.
F-16
Note 11: COMMITMENTS
Operating leases
The Company leases office and production facilities in California, Oregon, Kentucky and Canada
under various operating leases. Approximate minimum rental payments under these non-cancelable
operating leases as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
Year
|
|
(in thousands)
|
|
|
2010
|
|
$
|
663
|
|
|
2011
|
|
|
102
|
|
|
2012
|
|
|
106
|
|
|
2013
|
|
|
85
|
|
|
Thereafter
|
|
|
293
|
|
|
|
|
|
|
|
|
|
$
|
1,249
|
|
|
|
|
|
|
Total rental expense was approximately $1.4 million, $1.3 million, and $1.7 million for 2009, 2008
and 2007, respectively.
Employee Benefit Plan
— The Company sponsors two defined contribution 401(k) plans. The
plans provide for voluntary contributions by eligible employees and matching contributions by the
Company depending on the respective plan. Matching contributions made by the Company included in
general and administrative expenses were $0.4 million, $0.5 million and $0.5 million for 2009, 2008
and 2007, respectively, excluding nominal administrative costs assumed by the Company.
Note 12: CONTINGENCIES
Litigation Related to Pending Merger with Churchill Downs Incorporated
On November 17, 2009, a putative class action lawsuit,
Wayne Witkowski v. Youbet.com, Inc., et al.
,
was filed in the Superior Court of Los Angeles, California against the Company, various of the
Company’s directors, Churchill Downs, Tomahawk Merger Corp. and Tomahawk Merger LLC. Subsequently,
five additional lawsuits were also filed in the Los Angeles Superior Court, two of which name the
Company and its directors as defendants and three of which also name Churchill Downs as a
defendant. All six lawsuits (the “Los Angeles Litigation”), are putative class actions brought on
behalf of the Company’s stockholders. Plaintiffs in the Los Angeles Litigation have since moved to
consolidate the Los Angeles Litigation, to file a single consolidated complaint and to appoint lead
counsel. That motion was granted on January 22, 2010.
The complaints in the Los Angeles Litigation all allege that the Company’s directors have breached
their fiduciary duties, including alleged duties of loyalty, due care and candor, in connection
with the proposed Merger. In that regard, the various complaints include, among other things,
allegations that the proposed Merger is the result of an inadequate sales process which has not
been designed to maximize stockholder value; that the consideration to be received by the Company’s
shareholders is unfair and inadequate; that the Merger Agreement includes inappropriate “no
solicitation,” “matching rights,” no standstill waiver, and termination fee provisions; that the
combined effect of these provisions, together with the waiver of the Company’s stockholder rights
agreement that the Company signed in connection with the Merger Agreement with respect to Churchill
Downs and the entry into voting agreements by defendants and certain others pursuant to which they
have agreed to vote in favor of the Merger, is to “lock up” the proposed Merger, foreclose
potential alternative bidders and illegally restrain the Company’s ability to solicit or engage in
negotiations with a third party; that various defendants acted for their own benefit in approving
the proposed Merger, including for the purpose of obtaining positions or pursuing opportunities at
Churchill Downs; and that material information has not been provided in connection with the
proposed Merger and was not provided at the time that the Company submitted its stockholder rights
agreement to a stockholder vote. Those lawsuits which name Churchill Downs or its affiliates as
defendants also allege that Churchill Downs has aided and abetted the alleged breaches of fiduciary
duty by the Company’s directors. The Company is also alleged to have aided and abetted the alleged
breaches of fiduciary duty by the Company’s directors. Among the relief sought by the complaints is
an enjoining of the proposed Merger, or unspecified damages if the transaction is consummated,
together with payment of attorneys’ fees and costs.
F-17
On December 23, 2009, a putative class action lawsuit,
Raymond Balch v. Youbet.com, Inc., et al.,
was filed in the Delaware Court of Chancery against the Company, various of the Company’s
directors, Churchill Downs, Tomahawk Merger Corp. and Tomahawk Merger LLC. The initial
Balch
complaint contained allegations similar to those made in the Los Angeles Litigation, including a
claim that Churchill Downs aided and abetted alleged breaches of fiduciary duty by the Company’s
directors. On January 8, 2010, an
amended complaint was filed in
Balch
, adding a claim against the Company’s directors for an alleged
breach of the fiduciary duty of disclosure, and adding allegations that the draft Registration
Statement on Form S-4 filed by Churchill Downs with the SEC in connection with the proposed Merger
omits material information and is materially misleading in various respects. Among the relief
sought by the
Balch
amended complaint is an enjoining of the proposed Merger, or unspecified
damages if the transaction is consummated, together with payment of attorneys’ fees and costs.
On March 2, 2010, Youbet, Youbet’s directors, Churchill Downs, Merger Corp, and Merger LLC entered
into a memorandum of understanding with the plaintiffs in the Los Angeles litigation and the
plaintiffs in the Balch litigation reflecting an agreement in principle to settle the cases based
on defendants’ agreement to include additional disclosures relating to the proposed Merger in
Youbet’s proxy statement/prospectus relating to the Merger that was mailed to Youbet stockholders
on March 4, 2010. Youbet, Youbet’s directors, Churchill Downs, Merger Corp, and Merger LLC each
deny that they have committed or aided and abetted in the commission of any violation of law or
engaged in any of the wrongful acts alleged in the complaints, and expressly maintain that they
diligently and scrupulously complied with any and all of their legal duties. Although Youbet,
Youbet’s directors, Churchill Downs, Merger Corp, and Merger LLC believe the lawsuits are without
merit, they entered into the memorandum of understanding to eliminate the burden and expense of
further litigation. The memorandum of understanding provides that the settlement is subject to
customary conditions including the completion of appropriate settlement documentation, completion
of confirmatory discovery, court approval of the settlement, dismissal of the Los Angeles
litigation with prejudice, dismissal of the Balch litigation with prejudice, and the consummation
of the proposed Merger by the Outside Date (as such term is defined in the Merger Agreement).
Additionally, plaintiffs’ counsel is entitled to void the memorandum of understanding if they
determine in good faith that, based upon facts learned subsequent to the execution of the
memorandum of understanding, the proposed settlement is not fair, reasonable and adequate.
If the settlement is consummated, the Los Angeles litigation and the Balch litigation will each be
dismissed with prejudice and the defendants and other released persons will receive from or on
behalf of all of Youbet’s non-affiliated public stockholders who held Youbet common stock at any
time from November 10, 2009 through the date of the consummation of the Merger a release of all
claims relating to the proposed Merger, the Merger Agreement and the transactions contemplated
therein, disclosures made relating to the proposed Merger, and any compensation or other payments
made to the defendants in connection with the proposed Merger; except that the settlement will not
include a release of claims by current and former Youbet stockholders to exercise their appraisal
rights under Delaware law. Likewise, the plaintiffs will receive a release from the defendants, on
the same or substantially equivalent terms as the release to be provided to the defendants. Members
of the purported plaintiff class will be sent notice of the proposed settlement, and a hearing date
before the Superior Court of California, County of Los Angeles, California will be scheduled
regarding, among other things, approval of the proposed settlement and any application by
plaintiffs’ counsel for an award of attorneys’ fees and expenses.
Management does not believe that the results of the litigation related to the pending merger will
have a material adverse effect on the financial statements of the Company.
Other matters.
The Company is also a party to proceedings that are ordinary and incidental to the
Company’s business. Management is unable to estimate any minimum losses from any of these legal
proceedings. Accordingly, no losses have been accrued.
The United States is currently experiencing a severe and widespread recession accompanied by, among
other things, reduced credit availability and highly curtailed gaming and other recreational
activities. The effects and duration of these developments and related risks and uncertainties on
the Company’s future operations and cash flows cannot be estimated at this time buy may likely be
significant.
The Company often carries cash on deposit with financial institutions substantially in excess of
federally-insured limits, and the risk of losses related to such concentrations may be increasing
as a result of recent economic developments. The extent of a future loss as a result of uninsured
deposits in the event of a future failure of a bank or other financial institutions, if any, is not
subject to estimation at this time.
F-18
Note 13: STOCKHOLDERS’ EQUITY
In June 2005, the Company’s stockholders approved the Youbet.com, Inc. Equity Incentive Plan (the
Equity Incentive Plan), which constitutes an amendment, restatement and continuation of the
Company’s 1998 Stock Option Plan. As of December 31, 2009, there were outstanding options for
6,794,594 shares of common stock issued under the Equity Incentive Plan, out of a total approved
pool of 13,750,000 shares.
During 2009, the Company granted various stock options to officers, other employees and directors,
under the Equity Incentive Plan as follows:
|
1)
|
|
Stock options were granted to the then executive officers of the Company to purchase a total
of 1,530,000 shares of common stock at exercise prices ranging from $1.26 to $2.23, the fair
market values at the dates of grant. These options vest ratably over four years and are
exercisable for ten years.
|
|
2)
|
|
Stock options were granted to other employees of the Company to purchase a total of 390,000
shares of common stock at exercise prices ranging from $0.95 to $1.26, the fair market values
at the dates of grant. These options vest ratably over four years and are exercisable for ten
years.
|
|
3)
|
|
Stock options were granted to directors of the Company to purchase a total of 290,000 shares
of common stock at an exercise prices ranging from $1.26 to $2.81, the fair market value at
the date of grant. These options vest ratably over twelve months and are exercisable for ten
years.
|
During 2008, the Company granted various stock options to officers, other employees and directors,
under the Equity Incentive Plan as follows:
|
1)
|
|
Stock options were granted to the then executive officers of the Company to purchase a total
of 950,000 shares of common stock at exercise prices ranging from $1.10 to $1.95, the fair
market values at the dates of grant. These options vest ratably over four years and are
exercisable for ten years.
|
|
2)
|
|
Stock options were granted to other employees of the Company to purchase a total of 710,500
shares of common stock at exercise prices ranging from $1.13 to $1.95, the fair market values
at the dates of grant. These options vest ratably over four years and are exercisable for ten
years.
|
|
3)
|
|
Stock options were granted to directors of the Company to purchase a total of 685,448 shares
of common stock at an exercise prices ranging from $1.22 to $1.44, the fair market value at
the date of grant. These options vest ratably over twelve months and are exercisable for ten
years.
|
During 2007, the Company granted various stock options to officers, other employees and directors,
under the Equity Incentive Plan as follows:
|
1)
|
|
Stock options were granted to the then executive officers of the Company to purchase a total
of 180,000 shares of common stock at exercise prices ranging from $2.35 to $2.72, the fair
market values at the dates of grant. These options vest ratably over four years and are
exercisable for ten years.
|
|
2)
|
|
Stock options were granted to other employees of the Company to purchase a total of 360,000
shares of common stock at exercise prices ranging from $2.72 to $3.69, the fair market values
at the dates of grant. These options vest ratably over four years and are exercisable for ten
years.
|
|
3)
|
|
Stock options were granted to directors of the Company to purchase a total of 185,500 shares
of common stock at an exercise price of $2.72, the fair market value at the date of grant.
These options vest ratably over twelve months and are exercisable for ten years.
|
Under all plans, the stock option price per share for options granted is generally based on the
market price of the Company’s common stock on the date of grant and no option can be exercised
later than ten years from the date it was granted. The stock options generally vest over four
years.
At December 31, 2009, there were options outstanding to acquire 6,794,594 shares at an average
exercise price of $1.72 per share. The estimated fair value of all awards granted during the year
ended December 31, 2009 was $2.9 million.
F-19
The following table summarizes the status of these plans as of December 31, 2009:
|
|
|
|
|
|
|
|
|
Equity Incentive Plan
|
|
|
Options available per the equity incentive plan
|
|
|
13,750,000
|
|
|
Stock options outstanding
|
|
|
6,794,594
|
|
|
Options available for grant
|
|
|
1,309,599
|
|
|
|
|
|
|
|
|
Transactions involving stock options are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at January 1, 2007
|
|
|
4,905,659
|
|
|
$
|
2.61
|
|
|
Granted
|
|
|
725,500
|
|
|
|
2.86
|
|
|
Exercised
|
|
|
(444,359
|
)
|
|
|
0.79
|
|
|
Cancelled
|
|
|
(469,389
|
)
|
|
|
3.81
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
4,717,411
|
|
|
$
|
2.70
|
|
|
Granted
|
|
|
2,345,948
|
|
|
|
1.43
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
Cancelled
|
|
|
(1,504,186
|
)
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
5,559,173
|
|
|
$
|
1.99
|
|
|
Granted
|
|
|
2,210,000
|
|
|
|
1.33
|
|
|
Exercised
|
|
|
(270,865
|
)
|
|
|
0.79
|
|
|
Cancelled
|
|
|
(703,714
|
)
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
6,794,594
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the total compensation costs related to non-vested awards yet to be
expensed was approximately $3.4 million to be amortized over the next four years.
The weighted average exercise prices for options granted and exercisable and the weighted average
remaining contractual life for options outstanding as of December 31, 2008 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees — Outstanding
|
|
|
5,559,173
|
|
|
$
|
1.99
|
|
|
|
7.19
|
|
|
$
|
11,061,856
|
|
|
Employees — Expected to Vest
|
|
|
1,512,054
|
|
|
|
2.15
|
|
|
|
9.15
|
|
|
|
3,250,916
|
|
|
Employees — Exercisable
|
|
|
4,047,119
|
|
|
|
1.93
|
|
|
|
6.45
|
|
|
|
7,810,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees — Outstanding
|
|
|
6,794,594
|
|
|
$
|
1.72
|
|
|
|
6.61
|
|
|
$
|
11,709,312
|
|
|
Employees — Expected to Vest
|
|
|
2,969,575
|
|
|
|
1.47
|
|
|
|
8.95
|
|
|
|
4,365,275
|
|
|
Employees — Exercisable
|
|
|
3,825,019
|
|
|
|
1.92
|
|
|
|
4.79
|
|
|
|
7,344,036
|
|
F-20
Additional information with respect to outstanding options as of December 31, 2009 is a follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Exercise
|
|
of
|
|
|
Remaining
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Price Range
|
|
Shares
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
$0.49-$0.99
|
|
|
669,135
|
|
|
|
2.74
|
|
|
$
|
0.56
|
|
|
|
644,135
|
|
|
$
|
0.54
|
|
|
$1.00-$1.99
|
|
|
4,153,384
|
|
|
|
7.84
|
|
|
|
1.32
|
|
|
|
1,443,009
|
|
|
|
1.31
|
|
|
$2.00-$2.99
|
|
|
1,296,000
|
|
|
|
4.93
|
|
|
|
2.36
|
|
|
|
1,178,500
|
|
|
|
2.33
|
|
|
$3.00-$3.99
|
|
|
374,400
|
|
|
|
6.49
|
|
|
|
3.63
|
|
|
|
258,925
|
|
|
|
3.59
|
|
|
$4.00-$4.99
|
|
|
179,775
|
|
|
|
5.83
|
|
|
|
4.43
|
|
|
|
178,650
|
|
|
|
4.43
|
|
|
$5.00-$6.19
|
|
|
121,900
|
|
|
|
5.38
|
|
|
|
5.15
|
|
|
|
121,800
|
|
|
|
5.15
|
|
Under the Merger Agreement described in Note 1, the Company has agreed not to grant any new
stock options or other stock-based awards while the Merger is pending.
Note 14: DISCONTINUED OPERATIONS
Effective December 31, 2007, the Company sold Bruen back to the original owner. The results of
Bruen Productions operations have been treated as discontinued operations in these financial
statements and are as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
$
|
772
|
|
|
Cost of revenues
|
|
|
408
|
|
|
|
|
|
|
|
Gross profit
|
|
|
364
|
|
|
Operating expenses
|
|
|
1,288
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on the Company’s income (loss) per share:
|
|
|
|
|
|
- Basic
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
- Diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
Effective February 15, 2008, the Company ceased operations at IRG in an orderly and businesslike
fashion and, accordingly, has accounted for such operations retroactively as discontinued. The
following results of IRG also have been retroactively treated as discontinued operations in these
financial statements and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
Revenues
|
|
$
|
0
|
|
|
$
|
46
|
|
|
$
|
16,347
|
|
|
Cost of revenues
|
|
|
|
|
|
|
84
|
|
|
|
12,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
0
|
|
|
|
(38
|
)
|
|
|
4,222
|
|
|
Operating expenses (recovery)
|
|
|
18
|
|
|
|
(1,410
|
)
|
|
|
17,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(18
|
)
|
|
$
|
1,372
|
|
|
$
|
(13,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on the Company’s income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
- Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Note 15: SEGMENT REPORTING
The Company operates as two reportable segments. The Company’s advance deposit wagering (ADW)
segment consists of the operations of Youbet Express and Youbet Services Corporation and its
totalizator services segment consists of the operations of
United Tote (Note 16). Each segment operates independently, under separate management and provides
distinctly separate services. The ADW segment provides internet wagering services and caters to the
general public, whereas the totalizator segment provides totalizator equipment and services to
racetracks, as well as off-track betting facilities and ADWs, including the company’s ADW segment.
Both segments are impacted by the amount of wagering handle processed, however, the ADW segment is
more immune to track closures due to inclement weather, etc. as players may shift their wagering
activities to other tracks. The revenue and expenses attributable to the services provided by the
company’s totalizator segment to the company’s ADW segment are eliminated in the Company’s
consolidated financial statements. Bruen and IRG were previously reported as part of the ADW
segment, but are now reported retroactively as discontinued operations (Note 14); therefore, the
amounts reported below for the ADW segment have been adjusted to exclude Bruen and IRG.
The reporting segments follow the same accounting policies used for the Company’s consolidated
financial statements and are described in the summary of significant accounting policies. Company
management evaluates a segment’s performance based upon its individual financial results of
operations. Sales to customers located outside the United States primarily relate to totalizator
services and are immaterial. Stated in thousands.
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
ADW segment
|
|
$
|
90,727
|
|
|
$
|
85,831
|
|
|
$
|
97,652
|
|
|
Totalizator segment
|
|
|
21,737
|
|
|
|
24,443
|
|
|
|
26,093
|
|
|
Intercompany eliminations
|
|
|
(1,084
|
)
|
|
|
(1,246
|
)
|
|
|
(1,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,380
|
|
|
$
|
109,028
|
|
|
$
|
122,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Geographic Area
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
109,339
|
|
|
$
|
106,846
|
|
|
$
|
120,225
|
|
|
International
|
|
|
2,041
|
|
|
|
2,182
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,380
|
|
|
$
|
109,028
|
|
|
$
|
122,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Income (loss) before Income Tax
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (loss) from operations before other income (expense) and income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- ADW
|
|
$
|
7,570
|
|
|
$
|
8,812
|
|
|
$
|
1,589
|
|
|
- Totalizator
|
|
|
(3,623
|
)
|
|
|
(13,140
|
)
|
|
|
(11,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,947
|
|
|
|
(4,328
|
)
|
|
|
(10,372
|
)
|
|
Interest income
|
|
|
44
|
|
|
|
233
|
|
|
|
642
|
|
|
Interest expense
|
|
|
(780
|
)
|
|
|
(1,244
|
)
|
|
|
(1,796
|
)
|
|
Other
|
|
|
487
|
|
|
|
174
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax from continuing operations
|
|
|
3,698
|
|
|
|
(5,165
|
)
|
|
|
(11,373
|
)
|
|
Income (loss) before income tax from discontinued operations
|
|
|
(18
|
)
|
|
|
1,372
|
|
|
|
(14,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
3,680
|
|
|
$
|
(3,793
|
)
|
|
$
|
(25,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Spending (including capital leases)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
ADW segment
|
|
$
|
2,615
|
|
|
$
|
1,667
|
|
|
$
|
287
|
|
|
Totalizator segment
|
|
|
665
|
|
|
|
527
|
|
|
|
2,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,280
|
|
|
$
|
2,194
|
|
|
$
|
2,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
ADW segment
|
|
$
|
2,302
|
|
|
$
|
1,722
|
|
|
$
|
2,464
|
|
|
Totalizator segment
|
|
|
4,915
|
|
|
|
6,352
|
|
|
|
6,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,217
|
|
|
$
|
8,074
|
|
|
$
|
9,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
2009
|
|
|
2008
|
|
|
ADW segment
|
|
$
|
34,253
|
|
|
$
|
25,431
|
|
|
Totalizator segment
|
|
|
17,391
|
|
|
|
23,449
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,644
|
|
|
$
|
48,880
|
|
|
|
|
|
|
|
|
|
F-23
Note 16: IMPAIRMENT OF INTANGIBLES AND GOODWILL
Intangibles and goodwill are reviewed for impairment annually during the third quarter or when
circumstances exist which indicate a possible impairment has occurred. The fair value of the
reporting unit associated with the intangibles and goodwill is typically estimated using the
expected present value of expected future cash flows. If the present value of expected future cash
flows is are less than the carrying value of an asset, an impairment charge is taken to reduce the
value on the Company’s balance sheet to fair value. The following table shows the Company’s
intangible assets and goodwill activity for the period ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
Goodwill
|
|
|
|
|
Advance
|
|
|
|
|
|
|
Advance
|
|
|
|
|
|
|
|
deposit
|
|
|
|
|
|
|
deposit
|
|
|
|
|
|
|
|
wagering
|
|
|
Totalizator
|
|
|
wagering
|
|
|
Totalizator
|
|
|
|
|
segment
|
|
|
segment
|
|
|
segment
|
|
|
segment
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Balance as of January 1, 2007
|
|
$
|
6,123
|
|
|
$
|
7,246
|
|
|
$
|
384
|
|
|
$
|
14,859
|
|
|
Additions
|
|
|
5,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(1,198
|
)
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
(10,923
|
)
|
|
|
|
|
|
|
(384
|
)
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
0
|
|
|
$
|
6,505
|
|
|
$
|
0
|
|
|
$
|
6,859
|
|
|
Amortization
|
|
|
|
|
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
(1,175
|
)
|
|
|
|
|
|
|
(6,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
0
|
|
|
$
|
4,588
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Amortization
|
|
|
|
|
|
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
0
|
|
|
$
|
3,948
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with our evaluation of strategic alternatives for United Tote, the Company
re-evaluated the goodwill related to United Tote as of December 31, 2007. The Company determined
that the carrying value of the net assets of United Tote, including goodwill, exceeded its
estimated fair value (based on level 3 inputs, as defined in ASC Topic 820) and concluded goodwill
was impaired as of December 31, 2007 by $8.0 million. As the Company is continuing its evaluation
of strategic alternatives for United Tote, including a possible sale, combined with the decline in
live track wagering and the deterioration in the economic environment, the Company again
re-evaluated the carrying value of United Tote as of December 31, 2008 using valuations by
interested third parties and discounted cash flow analyses (referred to level 3 inputs) and
concluded that the carrying value of net assets of United Tote exceeded the estimated fair value as
of December 31, 2008 by $11.2 million. The Company eliminated the remaining $6.9 million of
goodwill and reduced the carrying value of computer equipment and intangible assets by $3.1 million
and $1.2 million respectively.
IRG had $7.0 million in intangible assets and had a single player that accounted for over 50% of
IRG’s wagering handle during the first nine months of 2007 and the federal government seized $1.5
million from IRG’s three bank accounts. Additionally, IRG had lost or been denied content. After
adjusting assumptions for current facts and circumstances, management determined that an impairment
of IRG intangible assets was not required in the third quarter of 2007.
The Company continued to monitor the results of IRG and attempted to forecast future results. Due
to the loss of content and the reduced player base, wagering handle was not expected to recover.
In view of these facts, the Company performed a follow-up impairment test as of December 31, 2007
to ascertain the need for an impairment adjustment of the intangibles associated with IRG. The
intangibles reviewed include those relating to acquired customer lists and a non-compete agreement.
These intangibles have increased in amount since the acquisition of IRG due to the annual earn-outs
paid to the prior owners due the achievement of certain performance criteria as indicated in the
purchase agreement and total approximately $6.7 million (net of amortization). Through December 31,
2007, an additional $4.4 million was earned and was due to be paid as of August 31, 2008. Based on
these events, the cash flow forecast for IRG was revised downward resulting in an impairment of the
intangibles associated with IRG in the fourth quarter of 2007.
During the fourth quarter of 2008, the Company settled with the former owners of IRG, agreeing to
pay $2,252,000 in cash in settlement of all existing disputes and claims, including all claims
under the stock purchase agreement and the management agreement. Under the settlement agreement,
the former owners relinquished their rights to 55,554 shares of Youbet’s common stock acquired by
them in connection with their sale of the IRG business pursuant to the stock purchase agreement. As
a result of this settlement, the Company reduced the amortization and depreciation of IRG by $2.2
million, representing the difference between the accrued earn-out payment and the amount of the
settlement.
F-24
SCHEDULE II
YOUBET.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
beginning of
|
|
|
cost and
|
|
|
other
|
|
|
|
|
|
|
Balance at end of
|
|
|
Description
|
|
period
|
|
|
expenses
|
|
|
accounts
|
|
|
Deductions
|
|
|
period
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
$
|
541
|
|
|
|
508
|
|
|
|
|
|
|
|
(471
|
)
|
|
$
|
578
|
|
|
Allowance for doubtful notes receivable
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
25,011
|
|
|
|
|
|
|
|
|
|
|
|
(11,049
|
)
|
|
$
|
13,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
$
|
3,406
|
|
|
|
707
|
|
|
|
|
|
|
|
(3,572
|
)
|
|
$
|
541
|
|
|
Allowance for doubtful notes receivable
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
19,794
|
|
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
$
|
25,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
$
|
1,813
|
|
|
|
3,002
|
|
|
|
(7
|
)
|
|
|
(1,402
|
)
|
|
$
|
3,406
|
|
|
Allowance for doubtful notes receivable
|
|
$
|
76
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
$
|
0
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
16,629
|
|
|
|
3,165
|
|
|
|
|
|
|
|
|
|
|
$
|
19,794
|
|
F-25
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit Number
|
|
Description
|
|
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Piercy Bowler Taylor & Kern
|
|
|
|
|
|
|
|
|
31.1
|
|
|
Certification of President and Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended
|
|
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended
|
|
|
|
|
|
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934
|
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