-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kbl8qLGjgNNRN0oGVmtlQL1BUA0k+fMLPWVlE5xV6pWXmpHGW3FPdTp4aFml8r3D diXMVNaDD7KrViSAheMcfg== 0001021408-02-005310.txt : 20020416 0001021408-02-005310.hdr.sgml : 20020416 ACCESSION NUMBER: 0001021408-02-005310 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YOUBET COM INC CENTRAL INDEX KEY: 0000814055 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 870422246 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26015 FILM NUMBER: 02611347 BUSINESS ADDRESS: STREET 1: 1950 SAWTELLE BLVD STREET 2: STE 180 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104443300 MAIL ADDRESS: STREET 1: 1950 SAWTELLE BLVD STREET 2: STE 180 CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: YOU BET INTERNATIONAL INC DATE OF NAME CHANGE: 19960104 10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K [X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal Year Ended December 31, 2001 [ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from to ------------ ------------ Commission File Number: 33-13789LA ----------- YOUBET.COM, INC. (Exact Name of Registrant as specified in its charter) Delaware 95-4627253 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 5901 De Soto Ave., Los Angeles, California 91367 (Address of principal executive offices, including zip code) (818) 668-2100 (Registrant's telephone number, including area code) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, par value, $.001 per share ----------- Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 28, 2002 the issuer had 19,537,950 shares of common stock issued and outstanding. The aggregate market value of the issuer's common stock held by non-affiliates (assuming that the Registrant's only affiliates are its officers, directors and 10% or greater stockholders) of the issuer as of March 28, 2002 was approximately $11,997,369, based upon the closing market price of $0.65 on that date of a share of common stock as reported on the Nasdaq National Market. ================================================================================ Youbet.com, Inc.
Page ---- PART I. Item 1. Description of Business.................................................................... 3 Item 2. Description of Property.................................................................... 17 Item 3. Legal Proceedings.......................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders........................................ 18 PART II. Item 5. Market for Common Equity and Related Stockholder Matters................................... 18 Item 6. Selected Financial Data.................................................................... 20 Item 7. Management's Discussion and Analysis....................................................... 20 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 27 Item 8. Financial Statements....................................................................... 28 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure........ 28 PART III. Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of Exchange.......................................................................... 28 Item 11. Executive Compensation..................................................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 35 Item 13. Certain Relationships and Related Transactions............................................. 37 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 39 (a) 1. Index to Financial Statements........................................................... 39 2. Exhibits................................................................................ 39 (b) Reports on Form 8-K........................................................................ 40 Signatures.............................................................................................. 41
2 PART I. ITEM 1. DESCRIPTION OF BUSINESS Overview Youbet.com, Inc. ("Youbet.com" or the "Company") has established itself as one of the leading global brand name for online live event sports entertainment and wagering. Wagering on live events, such as horse racing, car racing, soccer, football, etc, is a large global industry which adapts well to the Internet space. The Company has initially focused on the United States horse wagering market and its principal product, the You Bet Network, a PC-based system which allows a customer to transmit information and thereby process wagers. The Company is working to expand the Youbet.com brand, product and services in the United States and overseas market. The Company currently provides its United States network members the ability to watch, access a comprehensive database of handicapping information and, in most states, the ability to wager on a wide selection of coast-to-coast thoroughbred, quarter horse, and harness horse racing, via its exclusive virtual private network. The You Bet Network is completely interactive and provides a real-time interactive audio video environment. The Company believes it is an innovator in the online live event wagering industry and intends to exploit the opportunities available to it in the United States and to pursue international markets aggressively. Future developments include enhancement and improvement of its existing products and technologies, development of new products and international expansion. To enhance and improve the You Bet Network, the Company has developed a web-based application "Youbet Express" which was launched in March 2001, and a state of the art phone wagering system which was launched in September 2001. Additionally, the Company is looking into improving its web content management and exploring other revenue streams. On August 2, 2001, the Company received a multi-jurisdictional license from the State of Oregon horse racing authorities for the acceptance and placement of wagers. The acceptance and placement of wagers is processed through Youbet Oregon, Inc., a wholly owned subsidiary of the Company. The Company commenced operations in Oregon during the third quarter of 2001. On February 21, 2002, Youbet.com received a license from the California Horse Racing Board authorizing the acceptance by the Company of online and telephone horse racing pari-muteul wagering from California residents. The acceptance and placement of wagers will be processed through Youbet Oregon, Inc. The Company also accepts and process wagers through another licensed account-wagering entity (see "Strategic Relationships - Magna"). The Company believes that wagering on most forms of live sporting events is legal in many parts of Europe, Asia, Australia and Latin America. The amount wagered on horse racing, which is the Company's initial target market, is substantially larger overseas. For example, Youbet.com believes that, in Japan and Hong Kong, per capita wagering levels are significantly higher than in the United States. Sports wagering includes not only horse wagering, but also sporting events such as football, basketball, baseball, hockey, soccer, boxing, golf, car racing, dog racing and jai alai. Aside from horse racing, dog racing and jai alai ("pari-mutuel wagering") in the United States, other sports wagering is currently legal only in a few states. Overseas sports event wagering is estimated to be significantly greater than in the United States. In 2001 approximately 84% of United States horse wagering came from off-track betting. This movement to off-track betting began after off-track betting was introduced in the 1970s. Off-track wagering currently includes inter-track simulcasts, off-track betting facilities, telephone account wagering and with the introduction of the You 3 Bet Network and other similar companies, online wagering. This dramatic shift from on-track to off-track betting was driven by the public's desire to have convenient access to racing, the racing industry's ability to provide a service that met this need and the development of a system called "account wagering." Account wagering is accomplished by establishing an account with a state licensed account wagering entity and depositing funds into that account for purposes of wagering. Once these funds have cleared, the bettor is free to use the funds and any resulting winnings for wagering. Many entities in the United States and worldwide are in the business of establishing such accounts and placing wagers at the request of bettors. Growth Strategy Youbet.com's strategy is to continue establishing itself as one of the leading global brand name and technology for online live event entertainment, sports, horse racing, and other forms of online gaming. The principal elements of Youbet.com's strategy are as follows: Make legal wagering convenient The Company believes that legal wagering on live events is an exciting activity which appeals to bettors of widely varying sophistication. The wagering opportunity enhances the experience of a sporting event. By making wagering more convenient for all types of bettors, Youbet.com hopes to increase the number of participants. For example, in horse racing, the Company hopes to increase the number and frequency of off-track bettors using the You Bet Network, and also increase the overall number of racing fans. For example, the Company intends to make wagering easier for sophisticated bettors by providing, in one easy-to-access and highly flexible format, all the data and analytical tools that existing bettors routinely assemble manually from a variety of sources. Newcomers to the sport are assisted by tutorials and introductory tools, together with a friendly and dedicated customer support staff. And, for all bettors, convenience and immediacy is greatly enhanced by allowing these activities to take place in familiar locations such as the home or office as opposed to the horse track, off-track betting locations or other simulcast venues. Additionally, the Company intends to enrich the experience by having creative contests and games for prizes and points. The Company believes all these activities will have a positive impact on the overall horse racing industry. Increase legal wagering opportunities Live event wagering, like other forms of gaming, is most enjoyable when there is a wide variety of wagering options available, and when the stream of wagering decisions and wagering outcomes is as robust as possible. Online communications technology allows players to make more wagers on more events in a given time period than is possible through any other live event wagering alternative. For example, patrons at a horse track are limited to the races offered at that horse track only (or to the limited simulcast selection offered in addition). This provides fewer wagering opportunities than the You Bet Network, which offers racing content from more than 90 horse tracks (and growing). The You Bet Network provides as many as 25 races per hour, thus affording customers more opportunities than are available via other methods. Online technology also allows the execution of wagers to happen much faster than in person or over the phone (a very important advantage), and wins are instantly credited to the bettor's account and available to be wagered again. Finally, in addition to the number of races, online technology allows for a greater ease of wagering (including exotic wagers such as exactas, trifectas and quinellas) than can be accomplished by other means. Youbet.com intends to transport the technological and participatory innovations that are developed to other legal gaming venues. Make legal wagering opportunities accessible to a broader audience The convenience of in-home wagering has encouraged the new bettor to become more active. In addition, 4 the Company believes that its marketing activities have attracted consumers who have rarely or never wagered and that its easy-to-use product will allow them to realize the fun of wagering with a minimum of difficulty or intimidation. In this way, the Company hopes to expand the total wagering activity in the events it presents by lowering the challenges to participation by newcomers. Pursue international markets aggressively The Company intends to preserve a global brand name for Youbet.com, operating worldwide in live event wagering and other forms of online gaming. The Company intends to leverage its position as a leading online live event horse racing and wagering company in the United States to expand internationally. Youbet.com's overseas strategy envisions utilizing Youbet.com's technology and experience to form business relationships with partners in Latin America, Europe, Australia and Asia with the goal of creating robust sports information and other types of legal gaming websites for gaming aficionados. The sports websites will provide information, statistics and live event coverage of popular sports throughout the targeted region. The initial international activities will serve to develop a template for international operations which can be replicated in other countries with significant sports wagering markets. Additionally, while wagering on horse racing is the only service currently offered by the You Bet Network, the Company expects its overseas networks will include other types of sports wagering and online gaming. Build strategic relationships The Company believes that it can enter into mutually beneficial agreements with other companies and organizations, and it will pursue relationships selectively. Youbet.com will most likely pursue those relationships in areas outside its core technical, regulatory or geographic competencies. The Company also intends to develop relationships in international wagering markets as part of its international expansion. Exploit developments in technology Youbet.com's strategy is based upon being the first to bring a new technology in online communications to the horse racing market and other live event markets. The Company will continue to enhance and improve its existing products and technologies, and will carefully monitor developments in technology, which will make online live event wagering easier, faster and more entertaining. Youbet.com introduced a web-based product to simplify the process in addition to improving its web content management. The web based application "Youbet Express" was launched to the public in March 2001, and a state of the art phone wagering system was launched in September 2001. In addition, the Company continues to improve the quality and quantity of content provided to its customers as bandwidth to individual Internet users increases. Horse Racing Industry Trends The Company believes that horse racing fans enjoy the sport not only because it is entertaining to watch but also because wagering adds significant excitement to the experience. Online communication provides convenience and has the opportunity to seamlessly integrate the viewing and transaction processing aspects of wagering in one medium. Youbet.com believes this will significantly enhance the entertainment value of online horse racing systems as compared to the traditional on-track and off-track systems that are in use today. The Company also believes that online solutions are likely to appeal to both new fans and the more serious handicappers for a number of reasons including the following: 5 The Internet is an Entertainment and Commerce Medium-The Internet has become an important medium for communication, news, entertainment and commerce. The two fundamental growth drivers are the Internet's ability to deliver information in ways that are not possible using traditional media sources such as broadcast or print media and the Internet has become a powerful and credible new commerce channel. Many Handicappers are already heavy PC users-The Company believes that the fact that handicappers use computers to access horse racing information is an indicator of the high likelihood that handicappers will be interested in utilizing advanced online wagering and information systems. Off-track wagering is the norm-Since the introduction of simulcasting in 1978 and the passage of the Interstate Horse Wagering Act, horse wagering has migrated away from the horse track. Handicappers prefer to place wagers at either remote sites or by phone because it is more convenient. This trend is expected to continue for the foreseeable future. Currently approximately 84% of all horse racing wagers are from remote locations. Handicappers value efficient execution-Fast execution of wagers as close to race start times as possible is imperative because it allows handicappers to place wagers based on the most up-to-date information. Consequently, systems that facilitate fast execution are of significant value to handicappers. Handicappers want entertainment and variety-The widespread popularity of closed circuit television coverage of horse racing at both on-track and off-track wagering facilities is a strong indicator of the high entertainment value that handicappers associate with watching horse racing. It is also important to note that one of the main benefits of multiple television coverage is the ability to watch and wager on races from a wide variety of horse tracks from a single location. Handicappers need data-The ability to interpret a wide range of both historical and current data about jockeys, horses, weather, the condition of the horse tracks and many other factors improves the handicapper's chance of winning. Consequently, handicappers, especially those with experience, will go to great lengths to acquire the most up-to-date data and will routinely draw from a wide variety of sources. Worldwide online wagering laws-The Company believes many countries have or are in the process of enacting laws and procedures for operating online wagering systems. Youbet.com believes that many horse racing fans would be interested, particularly if these online systems are perceived as reliable and legal, to view and wager on international horse racing and sporting events using an interactive online system. Due to these primary factors, the Company believes that online communication is an ideal medium for live event wagering offering significant enhancements relative to traditional choices. Current off-track options available to handicappers, while significantly more convenient than physically going to a particular horse track, are still very inefficient and not well integrated. For example, handicappers spend a significant amount of time collecting and organizing handicapping information from a broad range of sources. Once this step is accomplished, they must either travel to a horse track or off-track wagering facility to watch races. Handicappers have the option of placing wagers at the horse track, at off-track facilities or via phone but must often wait in lines or on the telephone to actually place wagers. The Company believes an online system that integrates the features of gathering handicapping information, providing live event audio and video feeds and automating the wagering process will be of great value to handicappers and could significantly enhance their enjoyment and ultimately draw new fans to the sport as well. Youbet.com also believes that the fans of many other live wagering events will be attracted to online systems with the same basic features, but customized in terms of content and performance. 6 The Youbet.com Solution Horse race wagering, as an industry, has evolved from predominantly on-track based to off-track betting and telephone wagering. The Company believes that its service is not only unique but also has the potential to revolutionize how handicappers and enthusiasts wager and watch horse racing events by offering significant advantages over traditional on-track and off-track options. Moreover, the underlying technology of the You Bet Network has been designed to be highly flexible and able to fully leverage the broad access and information distribution capabilities of an online environment. The Company's technology enables it to continue to add features to its network, to rapidly expand from its current coverage of United States based horse racing to the much larger international markets and into other live event wagering markets such as Europe, Asia, Australia and Latin America. Key benefits of the You Bet Network include: . Convenience, Ease of Use-Members can access the You Bet Network using a standard modem or high speed connection from home, the office or virtually any location where a computer has online access and it is legal to wager. . Efficient Execution-Handicappers can use the You Bet Network to transmit wagering instructions and receive confirmation in as little as three seconds and they will always know their account balance in addition to having full access to their account balance when making future wagers. . The Information Edge-The You Bet Network provides real time information from several leading companies and up to the minute odds on all wagers (see "Strategic Relationships"). . Entertainment Value-Youbet.com believes its ability to seamlessly combine broadcast-quality graphics, live audio and video feeds, a broad range of tools to view handicapping information and analyze wagering odds as well as extensive handicapping information in an easy and flexible browser based interface is the key to providing this high degree of entertainment value. The Company currently provides this information on a real time basis from more than 90 horse tracks, and is actively expanding its relationship with additional horse tracks. . Benefits to Horse Tracks and Wagering Facilities-The Company believes that the You Bet Network will increase the number of handicappers involved in wagering on horse races and increase the frequency of play of current fans, and therefore prove beneficial to and grow the horse racing industry as a whole. Since mid-1995, Youbet.com has been engaged in developing the You Bet Network, its first service being offered to customers. The Company has incurred substantial software development costs since inception, which have been charged to operations as research and development costs. The You Bet Network In July 1998, the You Bet Network became fully operational and has processed over $250 million in handle (wagering). Availability of the You Bet Network The You Bet Network is normally available to customers 23 hours a day, seven days a week and offers customers support 15 hours a day, seven days a week. Live horse racing is available on the You Bet Network approximately 15 hours per day, depending on which horse tracks are running on a particular day. Access to handicapping information such as past performances, is available 23 hours a day and the availability to place 7 wagers is subject, in most cases, to the actual horse tracks' time schedule of accepting wagers. If for any reason the You Bet Network is unavailable for a particular race or for any other reason whatsoever, Youbet.com customers can place wagers over the telephone by calling directly via a toll free number. Setting Up a You Bet Network Account To subscribe to the You Bet Network, a potential customer contacts Youbet.com, either on its website or its toll free number and opens an account. This account is used for the monthly subscription fee, if any, and for the purchasing of handicapping information. In order to access the You Bet Network, a customer can install CD-ROM software which Youbet.com provides at no additional charge. However, during March 2001, Youbet.com launched its web-based application "Youbet Express" which does not require the use of a CD-Rom. Once the customer installs the software and activates the service, the customer has access to simulcasts from the horse tracks and handicapping information. Wagering through the You Bet Network requires that a customer open a separate wagering account with Youbet Oregon, Inc., or with Magna (see "Strategic Relationships - Magna"). Setting Up a Wagering Account In order to set up a wagering account, the Company requires that new customers provide a driver's license number, social security number, proof of age and state of residence. Once this information is verified, funds can be transferred by the customer into his or her wagering account. Youbet.com processes the opening of this account through a simple web interface. Several fund transfer methods are available to fund a customer's account. From this wagering account, the customer can have wagers processed by Youbet Oregon, Inc., the telephone or by Magna. Features of the You Bet Network The You Bet Network is provided through a secure, proprietary, closed-loop private online network which a customer can access via his or her Internet service provider. The high performance level of the You Bet Network in terms of audio, video, transaction processing and information delivery, improved reliability, and higher levels of security are made possible by the installation of Youbet.com's proprietary software. Specific features of the You Bet Network include: . Wagering directly into horse track pools; . Immediate access to wager results, payouts and account status; . Over 90 horse tracks to choose from, many running simultaneously; . Ability to play multiple horse tracks simultaneously; . Up-to-the-minute odds, probable payouts and late changes on the horse track; . Access to a vast database of handicapping and past performance information; . Real time streaming handicapping information from track correspondents; . Live audio and video feed from the horse tracks; . Official programs and data on past performances including races, tracks, jockeys and horses; . Simple graphical user interfaces which simulate wagering at the horse track; 8 . Summary of previous wagers placed by the customer and previous wagering results; and . Sophisticated encryption technology. Youbet.com continues to negotiate contracts with numerous horse tracks and content and information providers to allow additional features and content to be added to the You Bet Network. How a Wager is Processed by the You Bet Network Customers can use the You Bet Network to process wagers, using the system's icon-driven menus to fill out an electronic wagering information ticket similar to a wagering ticket at a horse track. The wager is then transmitted electronically to a licensed account wagering entity. The customer's account is debited, the wager is placed at the host horse track and an electronic confirmation is sent to the customer through the You Bet Network. This entire process usually takes less than three seconds. The subsequent adjustment to the customer's account for winnings also usually takes less than three seconds after official winnings are posted at the horse track. Customer Service for the You Bet Network Youbet.com maintains and provides a high level of customer service and support for its customers. Customer service representatives are available from 7:00 a.m. to 10:00 p.m. Pacific Time, seven days a week, to provide assistance via email or toll free number. Customer service representatives handle all questions relating to the You Bet Network, including how to install Youbet.com's software, how to place a wager and how to find desired features or information on the You Bet Network. Customer service will also process a customer's credit card information over the telephone to initially set up an account. Customer service hours have been set by the Company according to the hours when it is likely that online activity will take place. The Company intends to continue to devote the resources necessary to maintain this high level of customer service. Pricing for the You Bet Network Youbet.com charged a monthly service subscription fee of $5.95 for access to the You Bet Network until September 1, 2001, when the Company eliminated its $5.95 subscription fee and instead started charging a transaction fee of $0.25 per bet placed. Beginning November 2001, the transaction fee was waived. The Company also charges for additional handicapping information such as past performances, tip sheets and horse racing analysis, which are billed separately on a monthly basis. Revenue Sources from the You Bet Network Pari-mutuel operators typically take a percentage as a commission prior to distributing payoffs to the winners. Pari-mutuel operators also bring additional wagers into a horse track pool from off-track sources. Youbet.com receives a commission fee for wagers placed through Youbet Oregon, Inc., based on a percentage of wagers placed. The Company also receives from Magna's Pennsylvania hub a commission equal to fifty percent (50%) of the net commissions to Magna derived from wagers placed by the Company's customers who have wagers placed through Magna. This fee from Magna includes not only a percentage of net commissions for wagers facilitated by the You Bet Network, but also each wager by a Youbet.com customer which is placed by phone with Magna. These commissions comprise Youbet.com's primary revenue stream. Additional revenues are generated from monthly subscription fees (which have been waived since September 1, 2001), transaction fees (which have been waived since November 2001), and the sale of handicapping information and other value added services such as past performances of various tracks, jockeys or horses. 9 The Company expects to continue to derive a majority of its future revenues through commissions from amounts wagered with licensed wagering facilities through the You Bet Network. However, the Company anticipates that additional revenue will be generated from sources such as, advertising on the You Bet Network, including web banners, and advertising on the live simulcasts as well as sales of other sports information and sports and logo merchandise. Marketing Existing bettors require less time to learn to use the You Bet Network and provide a very profitable segment of players. The existing bettor is likely to be targeted by competitors. New bettors will need more education regarding horse racing, but represent a larger market and possible greater revenues. The Company intends to attract the existing bettor with superior information content and technology as well as value-added promotions such as complimentary monthly service charges. The Company also believes that significant wagering activity can be produced by existing and new bettors who may be significant sports enthusiasts, but who have not traditionally been large players due to a perceived lack of time and convenience regarding horse wagering. The convenience and ease of use of the Youbet Network, as well as the immediate excitement of online wagering and wagering results will be marketed to attract these new players. Youbet.com has been marketing to the horse racing enthusiast audience for over three years through various media channels. Youbet.com takes an integrated marketing approach to reach its audience through radio, direct mail, print and online efforts. An integrated approach allows the company to capitalize on these efforts to reach its target market. Horseracing radio programs provide a message into the market that than can be re-enforced through Youbet.com's other media efforts. Direct mail consists of various correspondences with prospective customers who fit into Youbet.com's target audience. Print supports direct mail efforts and provides Youbet.com the opportunity to rotate various messages to it's target market, such as product benefits, contests and promotions. Print efforts include horse racing enthusiast magazines and newspapers. Online efforts (including email, banners, Youbet.com's website and promotional devises) provide campaign support through the Internet to existing and potential customers. In addition, strategic alliances with other horse racing related websites have enabled Youbet.com to reach additional customers. The Youbet.com website has been a key vehicle to promote various marketing efforts and campaigns. Youbet.com's current marketing goal is to provide a strong focus on the web-based product that was introduced in March 2001. The Company has positioned itself as a leader in online horse racing entertainment by offering online tournaments and contests for a variety of prizes (including everything from cash to computers). Additionally, Youbet.com develops internal marketing programs to increase its customer base. For example, the "Tell-A-Friend" program allows current customers to earn cash by referring new customers. Research and customer analysis has enabled Youbet.com to learn key information which leads to better efforts in reaching and retaining its customers. The development of a comprehensive retention strategy is the key to a successful marketing program. Youbet.com's contact strategies are both "Customer Driven" and "Calendar Driven". These two communication channels travel down parallel paths and are keys to strengthening the customer's relationship with Youbet.com. Maintaining consistency in both the messages and the design of company's brochures, welcome kits and all communications to it's customers allow Youbet.com to maintain a certain "look and feel" that reflect the personality of the Company to it's customers. The "Customer Driven" strategy is based on tailoring communications to the customers throughout their experience with Youbet.com. From the first communication with the customer at sign-up, Youbet.com's efforts are to ensure a successful relationship with its customers through ongoing benefits and perks. The "Calendar Driven" strategy is based on utilizing key events throughout the year in the horse racing industry to promote contests, tournaments and promotions designed to enhance the 10 customer's experience. Strategic Relationships The Company has domestic agreements with ODS Technologies, L.P., a subsidiary of Gemstar-TV Guide International, doing business as TVG ("TVG"), Magna (who owns a wagering hub in Pennsylvania, owns and/or operates several racetracks in the United States including Santa Anita Park and Gulfstream Park, and owns a competitive service, XpressBet), Daily Racing Form, Equibase (the industry's leading source of racing information), The United States Trotting Association (the industry's leading source of standardbred racing information), AT&T and Axcis Information Network, Inc. (the industry's leading provider of harness racing handicapping information). TVG In May 2001, Youbet.com entered into a track content and patent license agreement (the "License Agreement") and a warrant issuance agreement (the "Warrant Agreement") with TVG. These agreements relate to the grant by TVG to Youbet.com of a non-exclusive license to use telephones and certain simulcast audio, video and data content for the purpose of streaming such content online and the agreement of race tracks to accept wagers based on such content, and to use TVG's patented systems for making pari-mutuel wagers on horse races online. Among other things, the agreements call for Youbet.com, to issue to TVG two warrants to purchase common stock of the Company as described below. The License Agreement remains in effect until the later of (i) May 18, 2011, (ii) the date of expiration of the last to expire of the TVG patents licensed to Youbet.com under the agreement, or (iii) the date on which the last of TVG's agreements with the TVG Exclusive Tracks expires (unless extended, TVG's agreements with the TVG Exclusive Tracks expire before May 18, 2011). The License Agreement may be terminated before the expiration of its term (a) by TVG, if Youbet.com ceases to operate its Oregon account wagering hub or another account wagering facility approved by TVG at any time thereafter during the term; (b) by TVG, in the event that Youbet.com brings any legal action against TVG or any of TVG's affiliates, including Gemstar-TV Guide International, unless it is finally determined in such action that TVG (or its affiliate) acted in bad faith with respect to any claim that is the subject of the legal action; and (c) by either Youbet.com or TVG, in the event that the other party materially breaches the License Agreement without cure upon notice. In consideration of the rights granted to Youbet.com under the License Agreement, Youbet.com has agreed to pay to TVG fees based on the handle generated by Youbet.com from wagering activity and to issue to TVG the warrants to purchase Youbet.com common stock on the terms and conditions set forth in the Warrant Issuance Agreement, as described below (see "Competition"). The TVG fees are as follows: . With respect to wagers processed through an account wagering facility other than Magna, 5.5% of the total handle on races conducted at the TVG Exclusive Tracks only. For purposes of determining these and other fees payable under the License Agreement with respect to the TVG Exclusive Tracks, tracks owned, controlled or operated by Magna will be deemed to be TVG Exclusive Tracks to the extent that TVG enters into any agreement with any such track which provides for TVG to have simulcast and account wagering rights on races from such track. These Magna tracks include nine tracks currently available on the Youbet.com network. . With respect to wagers processed through Magna on races conducted at the TVG Exclusive Tracks, the entire commission or other consideration paid to Youbet.com with respect to such wagers. . With respect to wagers conducted at four designated non-TVG Exclusive Tracks, 3.0% of the total 11 handle (including wagers processed through Magna). The License Agreement also provides that Youbet.com will pay to TVG the following fees: . At such time as Youbet.com opens its own account wagering facility, with respect to wagers accepted or processed through an account wagering facility other than Magna, Youbet.com will charge customers a transaction fee of 25 cents per wager, with the first $3.00 of such fees per customer per month being retained by Youbet.com, the next $3.00 per customer per month being paid to TVG, and any remaining amounts per customer per month being split equally between the parties. . Commencing with the opening of Youbet.com's own account wagering facility, with respect to account wagers processed through Magna, Youbet.com will, at its election, charge customers either a transaction fee per wager of 25 cents or a monthly subscription fee of not less than $5.95 and will split such fees equally with TVG. Youbet.com is permitted to defer payment of these fees until such time as it achieves positive cash flow sufficient to pay the deferred fees. Also, Youbet.com is permitted to modify or waive transaction fees for certain customers, provided that it shares any such fees from such customers equally with TVG. . Commencing with the first calendar quarter in which Youbet.com achieves positive cash flow, as defined in the License Agreement, and then and thereafter only to the extent of positive cash flow, 50% of gross advertising revenues and 50% of the amount by which gross operating margin (revenues less direct costs) from monthly e-commerce revenues exceeds the gross operating margin from e-commerce revenues for the calendar month of April 2001. . With respect to account wagers on races conducted at the TVG Exclusive Tracks from Youbet.com customers in the states where the TVG exclusive tracks are located, (i) pay source market fees and host track fees in accordance with the agreements between TVG and the applicable racing associations and other participants in the horse racing industry and (ii) pay applicable state taxes and fees to the National Thoroughbred Racing Association, subject to a cap of one percent of the total handle. . With respect to account wagers on races conducted at the TVG Exclusive Tracks from Youbet.com customers in other states other, (i) pay host track fees in accordance with the agreements between TVG and the applicable racing associations and other participants in the horse racing industry and (ii) pay applicable state taxes. . With respect to account wagers on races conducted at non-TVG Exclusive Tracks from Youbet.com customers with an account address within a 25-mile radius of any TVG Exclusive Track, Youbet.com will pay to TVG 10% of all such account wagers, and TVG will retain 50% of such amount and divide the remaining 50% between the TVG Exclusive Tracks and Youbet.com's partner tracks located within the 25-mile radius. The Company issued to TVG an initial warrant (the "Initial TVG Warrant"), on May 18, 2001 (the time the Warrant Agreement was executed) entitling TVG to purchase an aggregate of up to 3,884,650 shares of Youbet.com common stock (the "Initial Warrant Shares") at an exercise price of $0.001 per share exercisable for a period of three years. The Company recorded the fair value of the Initial TVG Warrant ($2,910,000), using the Black-Scholes method, as a deferred asset captioned "Licensing Rights" and is being amortized over three years. 12 The Company issued to TVG the Additional TVG Warrant on September 20, 2001 (the time the Warrant Agreement was approved by the stockholders) entitling TVG to purchase for an aggregate exercise price of $41,082,422 (subject to adjustment as provided in the Additional TVG Warrant) a number of shares of common stock which, when aggregated with the Initial Warrant Shares, is equal to 51% of the sum of (i) the total number of shares of Youbet.com common stock outstanding on the date the Additional TVG Warrant is exercised, plus (ii) the total number of shares of common stock issuable upon exercise of the Additional TVG Warrant, plus (iii) the total number of Initial Warrant Shares then issuable upon exercise of the Initial TVG Warrant. The Company recorded the fair value of the Additional TVG Warrant ($7,054,000), using the Black-Scholes method, as a deferred asset captioned "Licensing Rights" and is being amortized over three years. The Company is obligated to issue additional warrants to TVG (in order to maintain TVG's rights in acquiring 51% of the Company) upon the exercise of any stock options or warrants, or if the Company issues any additional securities. The number of warrants to be issued to TVG would be equivalent to the number of stock options or warrants exercised or the number of additional securities issued. In addition, the Additional TVG Warrant contains provisions for adjusting the exercise price in the event that (i) Youbet.com makes certain additional issuances of common stock or securities exercisable for or convertible into common stock at a price less than the defined reference price per share ($2.50 per share) on which the aggregate exercise price of the Additional TVG Warrant is based, or (ii) engages in certain issuer tender offers for the repurchase of shares of its common stock. Magna In June 1997, the Company entered into a Telecommunication Facilitation Agreement with Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc., both of which were subsidiaries of Ladbroke USA (collectively, "Ladbroke"), which expires in January 2003. During 2001, Ladbroke was acquired by Magna Entertainment, Corp., ("Magna"). Under the agreement, the Company provides Magna with an interactive graphics interface to the You Bet Network through which Youbet.com's customers who have established accounts with Magna's Call-A-Bet System in Pennsylvania are able to communicate interactively with Magna using their PCs to transmit wagering information to Magna. Magna provides simulcast signals and pari-mutuel wagering from more than 60 horse racing venues throughout the United States, including most major horse tracks. Since 1983, Magna has offered telephone wagering through Magna's Call-A-Bet System, one of the nation's largest account wagering systems. Youbet.com's agreement with Magna enables the Company's customers to place wagers through Magna's Call-A-Bet System. The agreement also provides for the Company to receive a fee from Magna equal to fifty percent (50%) of the net commissions to Magna derived from wagers placed by Youbet.com customers who use the Call-A-Bet System either through the computer graphics interface provided by Youbet.com or more traditional telephone communication. Magna, one of the largest operators of premier horse racetracks in the United States, acquires, develops and operates horse racetracks and related pari-mutuel wagering operations. These racetrack, include Santa Anita Park, Golden Gate Fields and Bay Meadows Racecourse in California, Gulfstream Park in Florida, Remington Park in Oklahoma, Thistledown in Ohio and Great Lakes Downs in Michigan (see "Competition"). Other Strategic Relationships In March 1996, Equibase Company signed a five-year license agreement, terminable upon 30 days written notice, with Youbet.com which allows the Company to produce products and services from Equibase's data and sell programs, past performances and a wide variety of horse racing information products to Youbet.com's customers. Equibase is the official "thoroughbred industry owned" database of racing information. Established in 1990, Equibase is a general partnership between The Jockey Club and the Thoroughbred Racing Associations of 13 North America. The agreement provides that the Company will pay Equibase fees for individual product sales subject to a minimum monthly fee. This agreement has expired and is currently on month-to-month basis. In March 1998, the United States Trotting Association, USTA, entered into an agreement with the Company, terminable upon 30 days written notice, to provide past performance information related to horse racing. Youbet.com pays a monthly minimum fee as well as a separate fee for each downloaded horse track program. The USTA is now in its sixty second year of operations promoting the standardbred breed of horses. In September 1999, Axcis Information Network, Inc. ("Axcis") entered into a three-year agreement with the Company, terminable upon 90 days written notice. The agreement allows the Company to provide its customers with racing handicapping information. The agreement provides that the Company will pay Axcis fees for individual product sales subject to a minimum monthly fee. In May 2000, AT&T entered into an agreement with Youbet.com to provide Internet service, ATM (Asynchronous Transfer Mode) service and local and long distance telephone service. The Internet service delivers video, audio, data and Web pages to customers of the Youbet Network. The ATM service provides high-speed links to Youbet's information partners over AT&T private network. The agreement provides that the Company will pay a monthly fee for use of the AT&T services. The services are delivered on a fully redundant high speed fiber optic ACCURING. AT&T functions as the primary network provider for the Company. In January 2001, the Daily Racing Form ("DRF"), entered into a five-year agreement with Youbet.com allowing Youbet.com to place propriety links (links in non-traditional advertising space) to its website on DRF's website. The agreement provides that the Company will pay DRF a marketing fee for customers who are acquired from the DRF website. In return, DRF pays the Company a percentage of information purchases made on the DRF website by Youbet.com customers. In April 2002, Churchill Downs, Inc., ("Churchill"), entered into a one-year co-marketing agreement with Youbet.com whereby the Company will be the official online wagering platform of Churchill and the Kentucky Derby. Additional sponsorship benefits include the participation in direct mail programs targeting Churchill customers with Kentucky addresses; graphic links on Churchill's website(s) (which comprises Churchill Downs, Hollywood Park, Arlington Park, and the Kentucky Derby); the Company's right to promote the Youbet Network on the Churchill Downs race signal to approximately 1,000 nationwide outlets, and print advertising in official race programs at Churchill Downs. Competition The online and interactive wagering market is new and rapidly changing. The Company anticipates that competition will become more intense as new companies will enter the market. Worldwide, many Internet and interactive ventures of various kinds have been announced. The Company expects to compete with these entities, as well as other established gaming companies, which may enter the interactive pari-mutuel gaming market. Initially, the Company has focused its efforts primarily on the United States horse racing industry. Television Games Network ("TVG") is a competitor in the domestic interactive pari-mutuel gaming market, which is owned by Gemstar-TV Guide International, Inc. Television Games Network is a 24-hour national racing channel for distribution over cable and Satellite TV, along with an in-home pari-mutuel wagering system that requires a dedicated television set-top box. In June 2000, TVG launched an Internet based wagering product and accepts wagers from twelve states. The Television Games Network has announced that it has formed exclusive relationships with a number of major United States horse tracks (see "Strategic Relationships - TVG"). During January 2002, Magna announced the introduction of a new online wagering platform, XpressBet, 14 which allows customers to place wagers online throughout North America, where permitted by law (see "Strategic Relationships - Magna"). The Company is also aware of several other companies, such as Winticket, that the Company considers domestic competitors which offers live video and wagering services to U.S. residents. Winticket has formed non-exclusive relationships with many of the same tracks that Youbet.com offers on the You Bet Network, and allows wagering via the telephone and PC. The Company believes that potential new competitors include large interactive and online software companies, media companies and gaming companies, which may increase their focus on the interactive wagering market. Competition for the You Bet Network is influenced by the timing of competitive product releases and the similarity of such products to those of Youbet.com, which may result in significant price competition or reduced profit margins. The Company also anticipates that significant overseas competition will emerge. This may eventually result in additional competition as these overseas competitors expand into the United States or as Youbet.com expands internationally. Government Regulation and Legislation Gaming activities are subject to extensive statutory and regulatory control by both state and federal authorities, and are likely to be significantly affected by any changes in the political climate and economic and regulatory policies. These changes may impact the operations of the Company in a materially adverse way. To the extent that Youbet.com's facilities are used by customers to place intrastate or interstate wagers or the Company receives commissions derived from such wagers, various statutes and regulations could have a direct and material effect on the business, and indirectly could have a material effect on the public demand for the You Bet Network. All 50 states currently have statutes or regulations restricting gaming activities, and three states have no gaming at all. In most states it is illegal for anyone either to accept or make a wager, with specific state-by-state statutory exceptions. The Federal Interstate Wire Act contains provisions which make it a crime for anyone in the business of gaming to use an interstate or international telephone line to transmit information assisting in the placing of wagers, unless the wagering is legal in the jurisdictions from which and into which the transmission is made. Other federal laws impacting gaming activities include The Interstate Horse Racing Act, the Interstate Wagering Paraphernalia Act, the Travel Act and the Organized Crime Control Act. Certain legislation is currently being considered in Congress and individual states in this regard. In addition, the United States Justice Department is in the process of taking action against selected companies that it deems to be operating without proper licensing and regulatory approval. The Company believes that its activities conform to those gaming laws and regulations as currently applied which are applicable to its activities. However, because there is very little clear statutory and case law authority, this conclusion is not free from doubt. The Company faces the risk of either civil or criminal proceedings brought by governmental or private litigants who disagree with Youbet.com's interpretation of the applicable laws. Because there is little guiding authority, there is a risk that the Company could lose such lawsuits or actions and be subject to significant damages or civil or criminal penalties. In 1998, a bill sponsored by U.S. Senator Jon Kyl of Arizona and adopted by a wide margin in the Senate (but ultimately not enacted) would have prohibited on-line and Internet gaming with specified exceptions, including exceptions for certain horse race wagering and certain "closed-loop" on-line systems. However, the latter exceptions were narrow. Senator Kyl reintroduced a new version of his on-line and Internet Gambling Prohibition Act of 1999. This 1999 Kyl bill (S. 692) contained more broadly drafted exceptions than the 1998 Kyl bill. If it 15 were enacted in the form in which it was approved by the Senate on November 11, 1999, the Company does not believe that the bill would have had a material adverse effect on Youbet.com's business. Specifically, the bill provided for federal prohibition on Internet gambling but permitted interstate wagering on horse racing in a closed-loop, customer-based system. The bet or wager must be (1) regulated by the state where the wager is received, (2) placed in a closed-loop, customer based system, (3) initiated from a state allowing pari-mutual wagers, (4) received in a state where such betting is lawful, (5) in accordance with the Interstate Horse Racing Act, and (6) in accordance with other regulations in the state where originated. On October 21, 1999, Representative Goodlatte introduced a bill in the House of Representatives (H.R. 3125) with similar language as the Kyl bill. On April 6, 2000, the House Judiciary Committee passed the Goodlatte bill. On July 18, 2000 the full House of Representatives failed to pass a version of the Goodlatte bill under a "suspension of rules" procedure. Although a majority of the members of the House of Representatives voted in favor of the bill, it failed to receive the two-thirds vote necessary to pass the bill using this procedure. The version of the bill considered by the house would have allowed the states to regulate or prohibit on-line pari-mutuel wagering. Other proposals similar to the Kyl bill and the Goodlatte bill could emerge in Congress; many states have considered and are considering interactive and Internet gaming legislations and regulations which may not be worded so as to permit Youbet.com's business to continue in such states; and anti-gaming conclusions and recommendations of other governmental or quasi-governmental bodies could form the basis for new laws, regulations, or enforcement policies that could have a material adverse effect on Youbet.com's business. In December 2000 the Interstate Horseracing Act was amended to make clear that legal pari-mutuel wagers transmitted by an individual in one state via telephone or another electronic media and accepted by an off-track betting system in the same or another state are within the protections provided by the Act where such wagers are lawful in each state. As a result of an investigation that commenced in 1999, the Company reached a civil resolution with the Los Angeles County District Attorney and the Los Angeles Police Department. The Company entered into a stipulation with the District Attorney resulting in the entry of a civil judgment and injunction in which the Company admitted no wrongdoing and no factual or legal findings were made. As part of the settlement, the Company agreed that until California law is clarified, California customers would not be allowed to place wagers on the You Bet Network. On February 21, 2002, Youbet.com received a license from the California Horse Racing Board authorizing the Company to accept online and telephone horse racing pari-muteul wagering from California residents. From time to time the Company receives correspondence from various state governmental agencies inquiring into the legality of the Company's activities. During 2001, the Company recently received such an inquiry from the Attorney General of the State of Michigan. The Company believes that its activities are in full compliance with applicable law. Also, during October 2000, the Company was notified by Magna that, at the request of the Attorney General of New Jersey, Magna would no longer accept wagers from New Jersey residents. International expansion of the You Bet Network may be subject to regulation in those countries in which it is made available. The Company believes that it can operate, or license technology, in numerous jurisdictions that allow telephone and account wagering, such as South America, Australia, Asia and Europe. However, the Company may not be able to obtain the approvals necessary to market its services in such jurisdictions. We May Face Interruption Of Production And Services Due To Increased Security Measures In Response To Terrorism. The Company's business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorists' activities and threats aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, and financial or other services could have a material adverse effect on our business, results 16 of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation, insurance and security as a result of the activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business. Employees As of March 29, 2002, the Company had 76 employees. The Company has never had a work stoppage, and no employees are represented by a union. Youbet.com considers its relations with its employees to be good. The Company believes that its future success will depend in part on its continued ability to attract, integrate, retain and motivate highly qualified technical and managerial personnel, and upon the continued service of its senior management and key technical personnel. ITEM 2. DESCRIPTION OF PROPERTY Youbet.com's executive and operating offices occupy approximately 30,000 square feet and are located at 5901 De Soto Avenue, Los Angeles, California under a lease that expires March 15, 2010. The base term of the lease is ten years with an option to extend an additional five years. Base rent payments are $60,078 per month with annual increases as specified in the lease agreement. In conjunction with this lease agreement, the Company obtained a one-year $1,029,000 letter of credit, which was secured by cash. The Company is obligated for the next ten years to obtain a letter of credit equal to the original amount of $1,029,000 less $107,867 per year for every year elapsed during the first five years and less $97,867 per year for every year elapsed thereafter. As of December 31, 2001, Youbet.com had obtained a letter of credit in the amount of $920,805, which is classified as restricted cash in the Company's accompanying audited consolidated financial statements. The Company did not renew the letter of credit when it expired on March 28, 2002 and as such the landlord drew $920,805 against the letter of credit and is holding the monies as a deposit. Management intends to obtain a new letter of credit to replace the prior one. Upon replacement of the letter of credit, the landlord will refund the aforementioned deposit to the Company. On July 1, 2001 the Company entered into a lease agreement for its Oregon facility. The base term of the lease is three years. Base rent payments are $2,103 per month with annual increases as specified in the lease agreement. ITEM 3. LEGAL PROCEEDINGS On June 4, 1999, a complaint was filed against the Company in the Court of Chancery of the State of Delaware in and for New Castle County entitled George Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel alleges that the Company breached its contractual obligation pursuant to a Private Placement Memorandum by failing to register the shares of common stock underlying 400,000 warrants issued by the Company to an affiliate of Mr. Von Opel. The complaint seeks specific performance of the alleged obligation to register such shares and damages for alleged breach of contract in the amount of $8.7 million. The Company has answered the complaint and intends to defend itself vigorously in the action. On August 19, 1999, Mr. Von Opel moved for summary judgment on the issue of liability, which on June 2, 2000, the court denied. The Company is proceeding with discovery and has noticed the deposition of Mr. Von Opel. As the litigation is at an initial stage, an outcome cannot be predicted at this time. The Company received correspondence from the Business Software Alliance ("BSA") alleging the Company had used or installed unauthorized copies of software products on its computers. In their 17 correspondence, BSA proposed to settle their claims against the Company for a settlement amount of $824,000, based on twice the alleged value of the unauthorized software installed. Management believes that the BSA claims are substantially overstated. Management cannot predict the outcome of this claim. The Company was served with a lawsuit from a vendor claiming nonpayment of services in the amount of approximately $300,000. The Company filed a counter claim against the vendor. The Company has entered into negotiations with the vendor, and management cannot predict the outcome of these negotiations The Company is also a party to certain other claims, actions, and proceedings incidental to its business, none of which is expected to have a material adverse effect on the business, financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Youbet.com's stockholders during the fourth quarter of the fiscal year ended December 31, 2001. PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Commencing June 18, 1999, the common stock of Youbet.com began trading on the Nasdaq National Market under the symbol "UBET". During February 2002, Youbet.com received notification from The Nasdaq Stock Market that it is not in compliance with the National Market's listing maintenance standard regarding minimum bid prices. This standard requires that the Company's common stock maintain a minimum bid price of at least $1.00 per share. In order to comply with this standard, the Company's common stock must have a minimum bid price of at least $1.00 for 10 consecutive trading days prior to May 15, 2002. If the Company is unable to demonstrate compliance with this standard on or before May 15, 2002 the Nasdaq Stock Market will seek to delist the company's common stock from the Nasdaq National Market. At that time the company may appeal the delisting to the Listing Qualifications Panel of The Nasdaq Stock Market. If the Company is not in compliance by May 15, 2002, the Company may apply to transfer its securities to the Nasdaq SmallCap Market. If the transfer application is approved, the Company will have until August 13, 2002, to comply with the minimum bid requirement. In addition, the Company may be eligible to transfer back to the Nasdaq National Market, if it achieves compliance with the minimum bid price and other continued listing requirements of the Nasdaq National Market. There can be no assurance that the Company will be able to maintain its listing on the Nasdaq National Market or on the Nasdaq SmallCap Market. High Low ----- ----- Year Ended December 31, 2001: Three months ended- March 31, 2001 ............................................. $1.06 $ .41 June 30, 2001 .............................................. 1.36 .38 September 30, 2001 ......................................... 1.69 .87 December 31, 2001 .......................................... 1.12 .45 Year Ended December 31, 2000: Three months ended- March 31, 2000 ............................................. $7.38 $3.75 18 June 30, 2000 .............................................. 4.69 1.69 September 30, 2000 ......................................... 4.62 1.44 December 31, 2000 .......................................... 2.00 .38 As of February 27, 2002, the Company had 333 stockholders of record, excluding shares held in street name by brokerage firms and other nominees who hold shares for multiple investors. Holders of common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefore, subject to the dividend and liquidation rights of any preferred stock that may be issued and outstanding. Presently no preferred outstanding. The Company has never declared or paid any dividends on its common stock. The Company intends to retain any future earnings for use in the operation and expansion of its business. Consequently, the Company does not anticipate paying any cash dividends on its common stock to its stockholders for the foreseeable future. The Company's ability to declare or pay dividends in the future may be further limited by the terms of any then-existing credit facilities which may contain covenants restricting the payment of cash dividends. Recent Sales of Unregistered Securities The Company issued TVG an initial warrant (the "Initial TVG Warrant"), on May 18, 2001 (the time the Warrant Agreement was executed) entitling TVG to purchase an aggregate of up to 3,884,650 shares of Youbet.com common stock (the "Initial Warrant Shares") at an exercise price of $0.001 per share expiring on May 18, 2004. The Company recorded the fair value of the Initial TVG Warrant ($2,910,000), using the Black-Scholes method, as a deferred asset captioned "Licensing Rights" and it is being amortized over three years. The Company issued TVG the additional warrant on September 20, 2001 (the time the Warrant Agreement was approved by the stockholders) entitling TVG to purchase for an aggregate exercise price of $41,082,422 (subject to adjustment as provided in the Additional TVG Warrant) a number of shares of common stock which, when aggregated with the Initial Warrant Shares, is equal to 51% of the sum of (i) the total number of shares of Youbet.com common stock outstanding on the date the Additional TVG Warrant is exercised, plus (ii) the total number of shares of common stock issuable upon exercise of the Additional TVG Warrant, plus (iii) the total number of Initial Warrant Shares then issuable upon exercise of the Initial TVG Warrant. The Company recorded the fair value of the Additional TVG Warrant ($7,054,000), using the Black-Scholes method, as a deferred asset captioned "Licensing Rights" and it is being amortized over three years. The Company is obligated to issue additional warrants to TVG (in order to maintain TVG's rights in acquiring 51% of the Company) upon the exercise of any stock options or warrants, or if the Company issues any additional securities. The number of warrants to be issued to TVG would be equivalent to the number of stock options or warrants exercised or the number of additional securities issued. In addition, the Additional TVG Warrant contains provisions for adjusting the exercise price in the event that (i) Youbet.com makes certain additional issuances of common stock or securities exercisable for or convertible into common stock at a price less than the defined reference price per share ($2.50 per share) on which the aggregate exercise price of the Additional TVG Warrant is based, or (ii) engages in certain issuer tender offers for the repurchase of shares of its common stock. During 2001, the Company issued 17,100 shares of common stock on the exercise of stock options with an exercise price of $0.69, generating proceeds to the Company of $11,799. On March 21, 2002, and in connection with the Company's Security Purchase Agreement (see "Liquidity and Capital Resources"), the Company issued 750,000 warrants to eight investors to purchase up to 750,000 shares of the Company's common stock at $0.50 per share. The warrants expire five years from the issuance date and contain certain registration rights and cashless exercise feature. 19 ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended December 31, ---------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ----------- ----------- ----------- ----------- (in thousands, except per share data) Income Statement Data: Revenue ............................ $ 0 $ 264 $ 3,774 $ 5,992 $ 6,324 Operating Loss ..................... (6,918) (11,096) (23,027) (16,210) (15,144) Interest income (expense), net ..... (389) (261) (686) (435) 348 Other .............................. (12,100) (2,502) (771) (92) (3) ---------- ----------- ----------- ----------- ----------- Loss before income taxes and extraordinary item .............. (19,407) (13,859) (24,484) (16,737) (14,798) Income taxes ....................... (10) (2) (2) (1) (1) ---------- ----------- ----------- ----------- ----------- Loss before extraordinary item ..... (19,417) (13,862) (24,486) (16,737) (14,799) Extraordinary item ................. 0 0 0 14,996 0 ---------- ----------- ----------- ----------- ----------- Net loss ........................... $ (19,417) $ (13,862) $ (24,486) $ (1,741) $ (14,799) ========== =========== =========== =========== =========== Per Share Data: Loss before extraordinary item ..... $ (3.06) $ (1.32) $ (1.45) $ (0.86) $ (0.76) Extraordinary item ................. 0 0 0 $ 0.77 0 ---------- ----------- ----------- ----------- ----------- Net loss ........................... $ (3.06) $ (1.32) $ (1.45) $ (0.09) $ (0.76) ========== =========== =========== =========== =========== Weighted average shares outstanding ..................... 6,355,352 10,534,905 16,937,700 19,471,175 19,525,582 Balance Sheet Data: Working capital .................... $ (2,739) $ 1,925 $ 56,848 $ 9,743 $ 806 Total assets ....................... 1,004 4,653 66,858 24,271 19,886 Long-term debt ..................... 0 60 39,822 0 0 Shareholders equity ................ (1,848) 2,793 20,915 20,660 16,251
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements The following discussion and analysis of Youbet.com's financial condition and results of operations should be read in conjunction with Youbet.com's Consolidated Financial Statements and other financial information included herein. This Management's Discussion and Analysis of Financial Condition and Result of Operations and other sections of this report contain forward-looking statements that are based on the current beliefs and expectations of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. Such statements include those regarding general economic and e-gaming industry trends. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and expected results thereof may differ materially from those expressed or implied by such forward-looking statements, and the Company's future results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Future events and actual results could differ materially from those set forth in or underlying the forward-looking statements. This Annual Report on Form 10-K for the year ended December 31, 2001 contains "forward-looking" statements within the meaning of the Federal securities laws. These forward-looking statements involve a number of risks and uncertainties, including the timely development and market acceptance of products and technologies, 20 successful integration of acquisitions, the ability to secure additional sources of financing, the ability to reduce operating expense and other factors described in the Company's filing with the Securities and Exchange Commission. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The forward-looking statements in this Annual Report on Form 10-K for the fiscal year ended December 31, 2001 are subject to risks and uncertainties that could cause actual results to differ materially from those results expressed in or implied by the statements contained herein. Going Concern The accompanying consolidated financial statements for the year ended December 31, 2001 have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's certified public accountants have included an explanatory paragraph in their report which indicates there is substantial doubt about the Company's ability to continue as a going concern (see Note 1 to the consolidated financial statements for additional information). The Company has suffered significant recurring operating losses and needs to raise additional funds to accomplish its objectives. The Company believes that its previous efforts to reduce costs and operate more efficiently, combined with the opening of the Oregon wagering hub in September 2001, and the Company receipt of licensing from California in February 2002, will improve cash flows. However, the Company will require additional capital to fund operations and pay down its liabilities, as well as to fund its expansion plans consistent with Youbet.com's anticipated changes in operations and infrastructure. During March 2002, the Company successfully raised $750,000 in debt financing. The Company is exploring various alternatives to raise this additional capital, but there can be no assurances that the Company will be successful in this regard. To the extent that the Company is unable to secure the capital necessary to fund its future cash requirements on a timely basis and/or under acceptable terms and conditions, the Company may not have sufficient cash resources to maintain operations. In such event, the Company may be required to consider a formal or informal restructuring or reorganization. No adjustments have been made to the consolidated financial statements that might result from the outcome of this uncertainty. Overview Youbet.com intends to establish itself as one of the leading global brand name for online live event sports entertainment wagering and other forms of online gaming. The Company has initially focused its efforts primarily on the United States horse racing industry. Youbet.com believes that online communication is an ideal medium for live event wagering. First, online communication allows bettors instant access to vast amounts of historical performance data used in assessing potential wagers. Second, online communication offers the ability to sort and analyze such data in ways and at speeds that are unachievable manually. Third, online communication technology allows wagers to be placed from virtually any location within a jurisdiction where wagering is legal, thus freeing bettors from traditional site-specific wagering locations. In addition, the speed of electronic communication allows wagers to be placed and acknowledged in seconds. Youbet.com's initial product, the You Bet Network, is a PC-based system, which utilizes the infrastructure of the Internet and a virtual private network with Internet access to provide up-to-the minute detailed information on races taking place at horse tracks nationwide. The Company also delivers a live simulcast of most of these races directly to the customer's computer. In addition, customers can use the You Bet Network to process wagers, using the system's icon-driven menus to fill out an electronic betting ticket with a brief series of mouse-clicks. The wager is then transmitted electronically to a licensed account wagering entity. The customer's account is debited, the wager is placed at the host horse track and an electronic confirmation is sent to the customer through the You Bet Network. This entire process usually takes less than three seconds. The subsequent adjustment to the customer's account for winnings also usually takes less than three seconds after official winnings are posted at the race track. 21 Youbet.com derives revenue from the You Bet Network in three ways. First, it charged a monthly subscription fee of $5.95 per month until September 1, 2001 when the Company eliminated its $5.95 subscription fee and instead started charging a transaction fee of $0.25 per bet placed. Beginning November 2001, the transaction fee was waived. Second, it receives commissions derived from wagers placed by Youbet.com customers. Third, it receives revenue from the sale of handicapping information. The Company had 75 employees as of December 31, 2001. Management also implemented a cost reduction program throughout the Company in 2001 which management believes will continue to reduce operating expenses in fiscal 2002 as compared to fiscal 2001. The Company also receives commission revenues from its subsidiary Youbet Oregon, Inc. The Company records gross commission proceeds as revenues and records the related costs to the tracks, TVG, taxes and fees as Sales and Marketing expenses. Youbet.com has incurred significant losses since inception, and as of December 31, 2001 had an accumulated deficit of $78,853,000. Included in this accumulated deficit is $24,713,000 in non-cash expenses related to the recording of the fair value of warrants and stock options charged to operations, discount on conversion of bridge loans, accounts payable and employee deferred salaries into common stock and warrants, and the release of forfeiture provisions on certain shares of common stock. The recognition of these non-cash expenses did not affect working capital, net stockholders' equity (deficiency) or cash flows. The Company does not expect that these types of costs will continue at the previous levels. In June 1997, the Company and Magna (formerly Ladbroke - see "Strategic Relationships") entered into a Telecommunication Facilitation Agreement which expires in January 2003. Under the agreement, Youbet.com provides Magna with an interactive graphics interface to the You Bet Network whereby Youbet.com's customers who have established accounts with Magna's Call-A-Bet System in Pennsylvania are able to communicate interactively with Magna using their PCs to transmit wagering information to Magna. The agreement provides for the Company to receive a fee from Magna equal to fifty percent (50%) of the net commissions to Magna derived from wagers placed by Youbet.com customers who use the Call-A-Bet System either through the computer graphics interface provided by the Company or more traditional telephone communication. On August 2, 2001, the Company received a multi-jurisdictional license from the State of Oregon horse racing authorities for the acceptance and placement of wagers. The acceptance and placement of wagers will be processed through Youbet Oregon, Inc., a wholly owned subsidiary of the Company. The Company commenced operations in Oregon during the third quarter of 2001. All of Youbet Oregon, Inc.'s operations are presented on consolidated basis. All intercompany transactions have been eliminated. On February 21, 2002, Youbet.com received a license from the California Horse Racing Board authorizing the Company to accept online and telephone horse racing pari-mutuel wagering from California residents. The acceptance and placement of wagers will be processed through Youbet Oregon, Inc. Critical Accounting Policies Revenues The Company receives commission revenues through its subsidiary Youbet Oregon, Inc. The Company records gross commission proceeds as revenues and records the related costs as Sales and Marketing expenses. In addition, the Company recognizes net commissions earned on wagers as revenue as wagers are placed at third party wagering facilities. The Company also recognizes revenue from subscription fees as earned on a monthly 22 basis, transaction fees as incurred, and from the sale of handicapping information as purchased by customers. Licensing Rights The company recorded deferred licensing rights based on the fair value of the warrants issued, using the Black-Scholes option pricing model (see Note-3). The licensing rights are being amortized over a three year period. At December 31, 2001, the accumulated amortization of the warrants totaled $1,326,144. We periodically review the carrying value of these rights based upon our estimates of future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluation. Consolidated Results of Operations-Years Ended December 31, 2001, 2000, and 1999. Revenues Revenues for the year ended December 31, 2001 were $6,324,000, an increase of $332,000 from $5,992,000 in 2000. Revenues increased in 2000 by 59% from $3,774,000 during 1999. Commission revenue, which represents the Company's share of the commission on the gross amount of each wager placed by its customers for 2001, 2000 and 1999 were $5,493,000, $4,934,000, and $3,239,000, respectively. The increase in commission revenue in 2001 was partially offset by decreases in subscription fees due to the Company's waiver of such fees since September 1, 2001. Operating Expenses Network Operations-Network operations costs consist primarily of salaries, data center management and telecommunications costs. Network operations costs decreased by $896,000 or 27% to $2,371,000 in 2001 from $3,267,000 in 2000, and increased by $1,162,000 or 55% in 2000 from $2,105,000 in 1999 reflecting the development and expansion of the You Bet Network during 2000. Research and Development-Research and development costs consist primarily of salaries. Research and development costs decreased by $1,252,000 or 33% to $2,525,000 in 2001 from $3,777,000 in 2000, and increased by $1,404,000 or 59% in 2000 from $2,373,000 in 1999. The decrease in 2001 resulted from lower costs of developers and consultants. The increase in 2000 resulted mainly from increased costs of developers and consultants, the continued development of the You Bet Network, and the development of Youbet Express which was launched in March 2001. The Company will continue to invest in the development of the You Bet Network and other projects, which it believes are of value and critical to achieving its strategic objectives. Sales and Marketing-Sales and marketing expenses consist primarily of marketing program expense, commissions, and salaries. Sales and marketing expenses decreased by $1,302,000 or 21% to $4,925,000 in 2001 from $6,227,000 in 2000, and decreased by $8,235,000 or 57% in 2000 from $14,462,000 in 1999. The decrease in sales and marketing reflects a reduction in marketing programs. The decrease in 2001 was partially offset by increased costs relating to the Oregon hub, track related commissions, and commissions paid to TVG. Marketing activities during 1999 included the rollout of direct marketing, television and radio advertising campaigns. In addition, Youbet.com incurred greater direct mailing costs and media advertising during 1999. Sales and marketing expenses include non-cash compensation of $256,000, $446,000 and $401,000 in 2001, 2000 and 1999, respectively, the result of issuance of warrants and options to third-party consultants or the repricing of stock options to employees. General and Administrative-General and administrative expenses consist principally of salaries, facilities expenses, legal and accounting, investor relations and the write-off of capitalized software. General and 23 administrative expenses increased by $529,000 or 7% to $8,317,000 in 2001 from $7,788,000 in 2000, and increased by $407,000 or 6% in 2000 from $7,381,000 in 1999. The increase in 2001 resulted primarily from the write-off of $2,543,000 in capitalized software costs and severance costs which were partially offset by lower legal and professional fees. The Company developed an on-line sports event wagering platform and has been seeking a strategic partner. During the forth quarter of 2001, management decided to focus the Company's resources on the horse wagering market and its principal product, the Youbet Network. Accordingly, management cannot determine the future economic value of the capitalized software and has written-off previously capitalized costs of $2,543,000 as of December 31, 2001. The increase in 2000 resulted primarily from the write-off of expenditures relating to the Argentina agreement with Ladbroke which was not consummated, higher compensation, legal and professional fees. General and administrative expenses include non-cash compensation of $121,000, $221,000 and $1,567,000 in 2001, 2000 and 1999, respectively, the result of issuance of warrants and options to third-party consultants or the repricing of stock options to employees. Depreciation and Amortization-Depreciation and amortization increased by $2,187,000 or 191% to $3,330,000 in 2001 from $1,143,000 in 2000, and increased by $664,000 or 138% in 2000 from $480,000 in 1999. The increase in depreciation and amortization was due to additional assets being placed in service relating to the You Bet Network in, the amortization of leasehold improvement relating to the Los Angeles facility in 2001, and the amortization of licensing rights in 2001. Loss from Operations As described above, Youbet.com has made a significant investment in developing The You Bet Network to maintain its technological advantage and to brand and market the service. The loss from operations for the year ended December 31, 2001 decreased by $1,066,000 or 7% to $15,144,000 in 2001 from $16,210,000 in 2000, and decreased by $6,817,000 or 30% in 2000 from $23,027,000 in 1999. The decrease in 2001 is mainly due to higher revenues and decrease in sales and marketing, research and development, and network operations. These decreases were partially offset by the write-off of $2,543,000 in capitalized software costs. The decrease in 2000 is mainly due to higher revenues and decrease in sales and marketing which was partially offset by increases in network operations and research and development. The Company expects to incur significant losses at least through 2002. However, management implemented a cost reduction program throughout the Company in 2001 which management believes will continue to reduce operating expenses in fiscal 2002 as compared to fiscal 2001 (see "Going Concern"above). Other Income (Expense) Non-Cash Equity Transactions-Non-cash equity transactions consist of the recording of the discount on conversion of bridge loans, accounts payable and employee deferred salaries into common stock and warrants, and release of forfeiture provisions on common stock. Non-cash equity transactions decreased to $0 in 2001 from $46,000 in 2000, and decreased by $445,000 or 91% in 2000 from $491,000 in 1999. During the year ended December 31, 1999, these costs consisted solely of $491,000 for financing costs. Net Interest Income (Expense)-Net interest income in 2001 was $348,000 as compared to net interest expense of $435,000 in 2000. Interest expense decreased by $251,000 or 37% to $435,000 in 2000 from $686,000 in 1999. The decrease in interest expense is the result of the repurchase of the 11% Senior Convertible Discount Notes in 2000 which was partially offset by lower cash available due to the utilization of cash to support the Company's operations. Extraordinary Item During the year ended December 31, 2000, Youbet.com repurchased all of its $45,500,000 notes for 24 $26,409,000 which represented a discount to the accreted value of the notes at the date of repurchase, therefore, a gain was realized on the difference between the amount paid and the accreted value of the notes on the date of repurchase. The amount of the gain, net of the proportionate write-off of unamortized deferred financing costs of $1,237,000, was approximately $14,996,000. Income Taxes At December 31, 2001, Youbet.com has available federal and state net operating loss carryforwards of $56,077,000 and $35,818,000, respectively, for income tax purposes, which expire in varying amounts through 2021 for federal and 2006 for state purposes. The net operating loss carryforwards generated a deferred tax asset of approximately $22,232,000 as of December 31, 2001. The deferred tax asset has not been recognized since management is unable to determine it is more likely than not that it will be realized. Accordingly, a 100% valuation allowance has been provided. Under the Federal Tax Law Internal Revenue Code Section 382, the exercise of warrants issued in 2001 may create certain significant changes in ownership that may restrict the future utilization of these tax loss carryforwards. Selected Unaudited Quarterly Results of Operations In the opinion of management, the accompanying unaudited quarterly financial statements presented below include all adjustments (consisting of normal recurring accruals) which management considers necessary to present fairly the results of its operations for the periods presented below in conformity with generally accepted accounting principles. These quarterly financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report for Form 10-K for the year ended December 31, 2001. 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, ------------------------------------------------------------------------------- 2000 2001 -------------------------------------- -------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 ------- ------- -------- ------- ------- ------- -------- ------- (in thousands) Revenues............................... $ 1,705 $ 1,504 $ 1,387 $ 1,396 $ 1,648 $ 1,717 $ 1,130 $ 1,829 Operating expenses: Network operations.................. 737 808 892 830 714 665 633 359 Research and Development............ 620 732 949 1,476 714 709 710 393 Sales and marketing................. 1,634 1,696 1,260 1,637 1,064 1,558 1,112 1,191 General and administrative.......... 1,564 1,506 1,852 2,866 1,186 1,505 1,640 3,986 Depreciation and amortization....... 209 265 301 368 493 624 816 1,396 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............... 4,764 5,007 5,254 7,177 4,171 5,061 4,911 7,325 ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations................... (3,059) (3,503) (3,867) (5,781) (2,523) (3,344) (3,781) (5,496) Net interest income (expense).......... (233) (53) 34 (183) 172 98 53 24 Other income (expense)................. (126) 219 (145) (40) (2) -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Loss before extraordinary item......... (3,418) (3,337) (3,978) (6,004) (2,353) (3,246) (3,728) (5,472) Extraordinary item..................... 430 6,858 -- 7,708 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss)...................... $(2,988) $ 3,521 $(3,978) $ 1,704 $(2,353) $(3,246) $(3,728) $(5,472) ======= ======= ======= ======= ======= ======= ======= ======= Loss per common share-basic and diluted before extraordinary item... $ (0.18) $ (0.17) $ (0.20) $ (0.31) $ (0.12) $ (0.17) $ (0.19) $ (0.28) Extraordinary item..................... 0.03 0.35 -- 0.40 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) per common Share-basic and diluted............. $ (0.15) $ 0.18 $ (0.20) $ 0.09 $ (0.12) $ (0.17) $ (0.19) $ (0.28) ======= ======= ======= ======= ======= ======= ======= =======
During the quarter ended December 31, 2001, management decided to focus the Company's resources on the horse wagering market and its principal product, the Youbet Network. Accordingly, management cannot 25 determine the future economic value of the capitalized software and has written-off previously capitalized costs of $2,543,000 as of December 31, 2001. During the quarter ended December 31, 2000, the Company wrote-off capitalized expenditures relating to the Argentina agreement with Ladbroke which was not consummated. During the quarters ended December 31, 2000, June 30, 2000, and March 31, 2000, the Company's quarterly results presented above include extraordinary gain from the Company's re-purchase of its 11% Senior Convertible Discount Notes. Liquidity and Capital Resources The Company has financed its operations primarily through the sale of its securities and convertible debt as Youbet.com has generated only negative cash flow from operations since inception. At December 31, 2001 Youbet.com had $3,561,000 in cash and cash equivalents. Youbet.com's principal commitments consist of obligations under operating leases. At December 31, 2001, the Company had net working capital of $806,000 compared to net working capital of $9,743,000 at December 31, 2000. The Company incurred net losses from operations for the years ended December 31, 2001, 2000 and 1999, and needs to raise additional funds to accomplish its objectives. The Company's independent certified public accountants have included an explanatory paragraph in their report, which indicates there is substantial doubt about the Company's ability to continue as a going concern. (See Going Concern and Note 1 to the Consolidated Financial Statements for additional information). The Company is attempting to raise additional capital to meet future working capital requirements, but may not be able to do so. Should the Company not be able to raise additional capital, it may have to severely curtail operations. The Company entered into a Securities Purchase Agreement on March 21, 2002, whereby the Company issued a series of one-year secured notes (the "Notes") in the aggregate principal amount of $750,000 at an interest rate of 12% to the Company's Chairman of the Board and Chief Executive Officer and seven other investors. Both principal and all interest accrued on these Notes will be payable at the earlier of a) one-year from the date of issuance, or b) upon the Company's completion of funding in an amount greater than two million dollars ($2,000,000), excluding the Notes, in any ninety-day period prior to the maturity of the Note. In connection with issuance of the Notes, the Company issued five-year warrants to purchase 750,000 shares of the Company's common stock at an exercise price of $0.50 per share. Net cash used in operating activities was $8,027,000, $14,389,000, and $14,077,000 for the years ended December 31, 2001, 2000, and 1999, respectively. The principal use of cash for all periods was to fund losses from operations. The decreases in the net cash used in operating activities in 2001 reflected a general decrease in all levels of expenses as Youbet.com completed the majority of the developments of the You Bet Network and Youbet Express, the web based application, mainly during 2000 and prior. Net cash used in investing activities was $510,000, $9,710,000, and $1,978,000, for the years ended December 31, 2001, 2000, and 1999, respectively, mainly for purchases of property and equipment, and for leasehold improvements for its Los Angeles facility in 2000 and 2001. During 2000 the Company incurred $2,543,000 in capitalized software costs relating to the Company's sports' platform, which was subsequently written off during the quarter ended December 31, 2001. Net cash provided by financing activities for the year ended December 31, 2001 was $3,000 as compared to cash used in financing activities of $26,081,000 in 2000 and to net cash provided by financing activities of $76,789,000 in 1999. Net cash provided by financing activities in 2001 was mainly due to the exercise of stock options. Net cash used in financing activities in 2000 is due to Youbet.com's repurchase of its notes during the year ended December 31, 2000. Net cash provided by financing activities in 1999 consisted principally of proceeds from the June, 1999 secondary offering, the 11% Senior Convertible notes, and the exercise of stock options and 26 warrants. During 1999, Youbet.com received net proceeds from the issuance of 11% Senior Convertible notes of $36,729,000, net proceeds from the June secondary offering of $38,332,000, proceeds from exercises of options and warrants of $3,641,000 and $2,100,000 from a stock subscription receivable. Recent Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The majority of the Company's cash equivalents are bank accounts and money markets, and the Company does not believe it has significant market risk exposure with regard to its investments. 27 ITEM 8. FINANCIAL STATEMENTS The consolidated financial statements are listed at the "Index to Financial Statements" found at Page F-1 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no family relationships among directors and executive officers. Executive Officers and Directors The following tables set forth certain information regarding the directors and executive officers of Youbet.com:
Name Age Position - ---- --- ------------------------------------------------- David M. Marshall .............................. 39 Chairman of the Board and Chief Executive Officer Charles F. Champion ............................ 48 Director, President and Chief Operating Officer Phillip C. Hermann ............................. 52 Chief Financial Officer. Lawrence R. Lucas .............................. 47 Director
Biographies of Directors and Executive Officers: DAVID M. MARSHALL Mr. Marshall has served as Chairman of the Board and Chief Executive Officer of Youbet.com since March 21, 2002. Mr. Marshall has served as Vice Chairman of the Board of Youbet.com from June 1998 through December 1999, and as President of Youbet.com from June 1998 through January 1999. Subsequent to resigning as Vice Chairman of the Board during December 1999 and through March 2002, Mr. Marshall has been a consultant to a number of companies including Youbet.com. Mr. Marshall has been a senior executive and director of Youbet.com or its predecessors since its founding in 1987 and served as Chairman of the Board and Chief Executive Officer of Youbet.com or its predecessors from 1989 to June 1998. Mr. Marshall was also the co-founder of Middle Ware Telecom Corporation and PC-Totes, Inc. Both entities were merged into Youbet.com. CHARLES F. CHAMPION Mr. Champion has served as Director, President and Chief Operating Officer of Youbet.com since March 21, 2002. From January 1999 to June 2001 Mr. Champion occupied the position of President and 28 Publisher of Access Magazine. From 1995 through 1999 Mr. Champion served as Senior Vice President of Circulation and Marketing for Philadelphia Newspapers Inc., a Knight Ridder Company, which includes The Philadelphia Inquirer and Daily News. From October 1990 to June 1995 Mr. Champion held various executive positions including Executive Vice-President of Sun-Times Company in Chicago and served as the President of the Chicago Sun-Times Charity Trust. Mr. Champion held a number of management and executive positions from 1973 to 1990 with both the Daily News of Los Angeles and Freedom Newspapers the publisher of the Orange County Register. PHILLIP C. HERMANN Mr. Hermann has served as a director since November 8, 2001, and as Executive Vice President and Chief Financial Officer of Youbet.com since May 1998. Mr. Hermann also served as Co-Chief Executive Officer from November 8, 2001 through March 21, 2002. From August 1997 to April 1998, Mr. Hermann was Chief Operating Officer and Chief Financial Officer of Cloud 9 Interactive, a diversified entertainment company. Previously, from 1992 to August 1997, Mr. Hermann was Executive Vice President and Chief Financial Officer of Strawberry Industries, a consumer products company. From 1982 to 1986 Mr. Hermann was Vice President and Chief Financial Officer of the Walt Disney Telecommunications Group. On April 11, 2002, Mr. Hermann resigned as an Executive Officer and as a Director. LAWRENCE R. LUCAS Mr. Lucas joined the Board of Directors on January 11, 2002. Mr. Lucas is a seasoned executive with an extensive and diverse background in the fields of gaming and public safety as well as political affairs and social services. Presently, Mr. Lucas serves as president of Conor Communications Company, the nation's largest provider of emergency services support to the cellular and wireless communications industry. Mr. Lucas also counsels development stage companies in the telecommunications, Internet commerce and wireless industries on strategic planning, financing and governmental affairs issues. Mr. Lucas is an investor in Ark Capital Management, a Chicago-based venture capital fund active in new venture and capital development primarily focused on African American enterprises. Mr. Lucas played an integral role in obtaining gaming licenses and building casinos for some of the world's most successful gaming enterprises including one of the first U.S. casino riverboats and the most profitable casino in Europe. Additionally, Mr. Lucas played a pivotal role in Youbet's legislative efforts including the amendment to the Interstate Horseracing Act that became law in December 2000. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership (Forms 3,4 and 5) of Common Stock with the Securities and Exchange Commission and the National Association of Securities Dealers. Officers, directors and greater-than-ten percent holders are required to furnish the Company with copies of all such forms, which they file. To the Company's knowledge, based solely on the Company's review of copies of such reports or written representations from certain reporting persons that no Forms 5 were required to be filed by those persons, the Company believes that for fiscal 2001 all filing requirements applicable to its officers, directors, greater-than-ten-percent beneficial owners and other persons subject to Section 16(a) of the Exchange Act were complied with. 29 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation paid by Youbet.com for the years ended December 31, 2001, 2000 and 1999 to the Chief Executive Officer and other executive officers of Youbet.com whose total salary and bonus for 2001 exceeded $100,000.
Long Term Annual Compensation Compensation ------------------------------------------------- Awards Securities Other Underlying Annual Options Name and Principal Position Year Salary Bonus Compensation SARs - --------------------------- ---- ---------- -------- ------------ ------------ Robert M. Fell................................. 2001 $1,286,047(2) $ -- $187,895(3) -- Chairman of the Board (1) 2000 234,436 -- 80,626(4) 300,000 1999 217,033 420,000(5) * -- Ron W. Luniewski............................... 2001 162,125 80,000 * 206,300 Co-Chief Executive Officer and Chief 2000 168,899 -- * 245,100(6) Operating Officer (9) 1999 153,125 12,500 281,600(7) 100,000 Phillip C. Hermann............................. 2001 162,897 80,000 89,812(8) 206,300 Co-Chief Executive Officer and Chief 2000 162,947 -- 87,832(8) 230,100(10) Financial Officer (11) 1999 153,125 12,500 87,247(8) 50,000
- ---------- * Amounts in aggregate do not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for the named executive. (1) Represents compensation paid to Fell & Company, Inc. for the services of Robert M. Fell (see "Employment and Service Agreements" below.) Mr. Fell served as Chief Executive Officer until November 8, 2001, when he resigned. Mr. Fell resigned as a Director on March 21, 2002. (2) Includes a lump sum payment of two times the base fee per the Fell Service Agreement due to Mr. Fell upon his termination of the service agreement in November 2001, and includes $113,745 paid in 2001 representing retroactive increase in pay relating to services in 2000. (3) Represents $177,279 in disability and life insurance reimbursements, and $10,616 in auto expenses. (4) Represents $69,457 in disability and life insurance reimbursements, and $11,169 in auto expenses. (5) Represents a bonus which was applied against amounts owned to the Company by Mr. Fell. (See "Certain Relationships and Related Transactions" below.) (6) Represents 245,100 stock options repriced from various prices to $0.69 in December 2000. (7) Represents automobile allowance of $6,600 and income of $275,000 resulting from the exercise of options. (8) Represents automobile allowance of $9,000 in 2001, $7,020 in 2000 and $6,435 in 1999 and income of $80,812 for all years shown relating to a stock option awarded in 1998. (9) Mr. Luniewski was appointed Chief Operating Officer in November 2000, and Director and Co-Chief Executive Officer in November 2001 through March 14, 2002, when he resigned as a Director and Co-Chief Executive Officer. Mr. Luniewski served as a non-officer employee until April 5, 2002. (10) Represents 50,000 stock options issued in March 2000, and 180,100 stock options (including the 50,000 30 stock options issued to Mr. Hermann in March 2000) repriced from various prices to $0.69 in December 2000. (11) Mr. Hermann was appointed Director and Co-Chief Executive Officer in November 2001. Mr. Hermann relinquished his Co-Chief Executive Officer position on March 21, 2002 and became President and Chief Operating Officer through March 28, 2002. Mr. Hermann has been the Company's Chief Financial Officer and Executive Vice President since May 1998. On April 11, 2002, Mr. Hermann resigned as an Executive Officer and as a Director. Board of Directors Non-employee directors receive no annual retainer or meeting fees, but are reimbursed for travel costs and other out-of-pocket expenses incurred in attending board of directors and committee meetings. As additional compensation for the non-employee members of the board of directors, Youbet.com issued the following stock options: . In April 2001, Youbet.com granted to Caesar Kimmel, Chris McCarron, and William Roedy options to acquire 40,000 shares of common stock each, pursuant to the 1998 Stock Plan at an exercise price of $0.44. The shares vest monthly over one year and are exercisable for a period of ten years. Employment and Services Agreements Effective March 11, 2002 Charles Champion and Youbet.com entered into an employment agreement pursuant to which Mr. Champion serves as a Director, President and Chief Operating Officer of Youbet.com through March 2005. This employment agreement provides for Mr. Champion to receive an annual salary of $200,000 during the first year and subject to annual increases. Mr. Champion received $25,000 as a signing bonus and is also eligible to receive an annual bonus during the first year to be determined by the Board in its discretion and based on attaining certain profitability goals thereafter. Mr. Champion was issued 400,000 in stock options at $0.50 per share. The Company entered into a Services Agreement with Fell & Company, Inc., which expired on June 30, 2001. This agreement called for Robert Fell to be compensated at $237,000 per annum. In May 2001, subject to the execution of the agreements with TVG referred to under "Issuance of Warrants to TVG," the Fell Services Agreement and related option and warrant agreements were amended as follows: (a) the base fee was increased by $150,000 retroactive to March 8, 2000; (b) the exercise price for 750,000 of the Fell Warrants was reduced from $2.50 per share to $0.45 per share, the exercise price of the remaining Fell Warrants was reduced to $0.97 per share, based upon the price of Youbet.com's common stock after the announcement of the TVG transaction, and the exercise price of the 300,000 stock options held by Mr. Fell was reduced from $4.88 per share to $0.97 per share; (c) for a 90-day period after the Company's stockholders meeting on September 20, 2001, Fell & Company, Inc. could terminate the Fell Services Agreement; and (d) if the Fell Services Agreement was so terminated, (i) Fell & Company, Inc. would receive a lump sum payment of two times the base fee (increased as provided above), (ii) Youbet.com must continue to provide the nonsalary benefits provided for in the Fell Services Agreement for two years, including premium payments on a life insurance policy, (iii) the 150,000 unvested stock options held by Mr. Fell would vest, (iv) if Mr. Fell is not then serving as a director, he would render consulting services (up to ten hours per month) through May 9, 2003 without any additional compensation and (v) if so requested by the Board, Mr. Fell would serve as Chairman of the Board through May 9, 2002. In June 2001 the Board approved further amendments to the Fell Services Agreement extending the period of time during which Mr. Fell could terminate the Fell Services Agreement to one year after the Company's stockholders meeting on September 20, 2001. Also, in June 2001, in recognition of Youbet.com's strategic initiatives with respect to the agreements with TVG and the opening of Youbet.com's Oregon wagering facility, Mr. Fell agreed to increase the 31 exercise price of the Fell Warrants and the 300,000 stock options held by Mr. Fell to $1.09 per share, the closing trading price of Youbet.com's common stock on June 29, 2001. Effective November 8, 2001, Mr. Fell resigned as the Company's Chief Executive Officer. In accordance with the Fell Services Agreement described above, Mr. Fell received a lump sum payment of two times the base fee, net of amounts due to Youbet.com (consisting principally of the $140,000 note receivable plus accrued interest). Mr. Fell continued to render services to Youbet.com receiving compensation under the Fell Services Agreement through February 8, 2002. Pursuant to Mr. Fell's resignation agreement on March 21, 2002, the Company agreed to pay Fell & Company, Inc., $55,000 (which included $38,000 in accrued vacation) in lieu of any future benefits (including whole life insurance, health/dental/vision/disability insurance, auto allowance and related auto expenses) that Mr. Fell would have been entitled to under the amended Services Agreement. Mr. Fell continued as Chairman of the Board of Directors through March 21, 2002 when he resigned as Chairman of the Board. In March 2001 Ron Luniewski and Youbet.com entered into an employment agreement pursuant to which Mr. Luniewski would serve as Executive Vice President and Chief Operating Officer of Youbet.com through April 2002. This employment agreement provided for Mr. Luniewski to receive an annual salary of $157,500, however, effective May 1, 2001, the salary was increased to $175,000. Mr. Luniewski was also eligible to receive an annual bonus determined by the Board in its discretion. This employment agreement replaced an employment agreement entered into between Mr. Luniewski and Youbet.com in February 2000, expiring on April 2001 which had substantially the same terms. Mr. Luniewski resigned as Co-Chief Executive Officer and Director effective March 14, 2002. Mr. Luniewski served as a non-officer employee until April 5, 2002. On April 5, 2002, the Company entered into a Mutual Release agreement ("Release") with Ron Luniewski whereby the Company agreed to extend the term of the employee stock options granted to Mr. Luniewski and which were vested as of the date of the Release until April 8, 2005. Under the terms of the Release, Mr. Luniewski may only sell or transfer up to half of the shares acquired upon the exercise of these stock options during the next twelve-month period commencing as of the date of the Release. The remaining half of Mr. Luniewski's shares can be sold after one year. Effective November 8, 2001 Phillip Hermann and Youbet.com entered into an employment agreement pursuant to which Mr. Hermann would serve as Co-Chief Executive Officer and Chief Financial Officer of Youbet.com through April 2003. This employment agreement provided for Mr. Hermann to receive an annual salary of $175,000. Mr. Hermann was also eligible to receive an annual bonus determined by the Board in its discretion. Mr. Hermann was issued 100,000 in stock options at $1.00, the fair market value at the date of the grant. This employment agreement replaced an employment agreement entered into between Mr. Hermann and Youbet.com in March 2001 expiring in April 2002 which had substantially the same terms. On March 21, 2002, Mr. Hermann and Youbet.com entered into an employment agreement pursuant to which Mr. Hermann serves as President, Chief Operating Officer, and Chief Financial Officer of Youbet.com through April 2004. This employment agreement provides for Mr. Hermann to receive an annual salary of $225,000. Mr. Hermann is also eligible to receive an annual bonus determined by the Board in its discretion. Mr. Hermann was issued 200,000 in stock options at $0.64, the fair market value at the date of the grant. In addition, on October 27, 2001, Mr. Hermann and Youbet.com entered into a one year severance agreement pursuant to which upon a change of control as defined in the severance agreement, and at Mr. Hermann's election, Mr. Hermann can terminate his employment agreement and receive a lump sum payment equal to one year salary plus benefits. In addition, if Mr. Hermann elects to terminate his employment agreement, all options held by Mr. Hermann become vested immediately and Mr. Hermann will have three years to exercise his options from the date of termination. On March 28, 2002, Mr. Hermann resigned as President and Chief Operations Officer. On April 11, 2002, the Company entered into a Separation Agreement (the "Agreement") with Mr. Hermann whereby, effective immediately, Mr. Hermann resigned as an executive officer of the Company and as a member of the Board of Directors. Mr. Hermann will continue to serve as Chief Financial Officer for up to 90 days or until he is replaced. Under the terms of the 32 Agreement, Mr. Hermann will provide services to Youbet.com until December 31, 2003. For making his services available, Mr. Hermann will receive his annual salary and other benefits. As part of the Agreement, Mr. Hermann's stock options became fully vested and as consideration, Mr. Hermann agreed to certain restrictions on the sale of shares underlying his stock options and to relinquish 130,000 of his stock options. In June 1998 Russell Fine and Youbet.com entered into an employment agreement pursuant to which Mr. Fine served as Executive Vice President and Chief Technology Officer. Mr. Fine received a base salary of $150,000 in 1999, and other miscellaneous benefits. Effective December 31, 1999 Mr. Fine's base salary was increased to $165,000. Mr. Fine was also entitled to receive an annual bonus determined by the Board of Directors. The employment agreement permitted Mr. Fine to terminate the agreement after December 31, 1999 and receive the compensation and benefits provided under the agreement for the lesser of two years or the remaining portion of the term, but at least one year. Mr. Fine's agreement was terminated on May 3, 2000 and he resigned as a member of the Board of Directors and as Executive Vice President and Chief Technology Officer. Effective May 3, 2000 Mr. Fine and Youbet.com entered into a consulting agreement pursuant to which Mr. Fine will provide consulting services to Youbet.com for a period of three years. For making his services available, Mr. Fine receives a base fee of $182,500 per year and other miscellaneous benefits. 1995 Stock Option Plans In November 1995, Youbet.com's board of directors approved the 1995 Stock Option Plan and the 1995 Stock Option Plan for Non-Employee Directors (collectively, the "1995 Stock Plans"). The 1995 Stock Plans provide for the granting of awards of incentive stock options, non-qualified stock options, and stock appreciation rights. The aggregate number of shares of common stock available for issuance under the 1995 Stock Plans as amended were 15% of the total number of shares of common stock outstanding. The 1995 Stock Plans are closed and no additional options will be granted under these Plans. 1998 Stock Option Plan In February 1998, Youbet.com's board of directors approved the 1998 Stock Option Plan and reserved 1,000,000 shares of common stock for options granted thereunder. Effective September 23, 1999, shareholders approved an increase of 1,500,000 shares for a total of 2,500,000 shares. Effective September 21, 2000, shareholders approved an additional increase of 1,000,000 shares for a total of 3,500,000 shares. The 1998 Stock Plan provides for the granting of incentive stock options within the meaning of Section 422A of the Internal Revenue Code of 1986 and non-qualified stock options. Non-qualified stock options may be granted to employees, directors, officers and consultants of Youbet.com, while incentive stock options may be granted only to employees and its affiliates. The 1998 Stock Plan is currently administered by the board of directors, which determines the terms and conditions of the options granted under the 1998 Stock Plan, including the exercise price, number of shares subject to options and the vesting and exercisability of options granted under the 1998 Plan. The exercise price of the incentive stock options granted under the 1998 Stock Plan must be at least equal to the fair market value of the common stock of Youbet.com on the date of grant, and must be 110% of fair market value when granted to a 10% or more stockholder. The exercise price of non-qualified stock options will be determined by the board of directors. The term of all options granted under the 1998 Stock Plan may not exceed ten years, except the term of incentive options granted to a 10% or more stockholder may not exceed five years. The board of directors may suspend or terminate and may amend the 1998 Plan from time to time, except that certain types of amendments will require approval of the stockholders. Upon termination of a participant's employment or consulting relationship with Youbet.com, all unvested options terminate and are no longer exercisable unless extended by the Board of Directors. Vested qualified options remain exercisable for a period not to exceed three months following the termination date, unless the participant was terminated for cause or voluntarily resigned in which all vested options will also terminate. The 1998 Plan also permits Youbet.com to assist a participant to exercise options granted under the 1998 Plan, including paying any tax obligations arising therefrom by making a 33 loan to the participant, permitting the participant to pay the exercise price of the stock option over a term of years or guaranteeing a loan. In a registration statement filed with the SEC effective September 29, 1999, the underlying shares of common stock the 1995 and 1998 Stock Option Plans were registered. Option Grants in 2001 The following table sets forth certain information regarding option grants to each of Youbet.com's named executive officers during the year ended December 31, 2001.
Rates of Stock Price Appreciation Individual Grants (1) for Option Term ------------------------------------------- ------------------------- Number of Percent of Securities Total Underlying Options Options Granted to Exercise Name Granted (1) Employees Price Expiration 5% 10% ---- in 2001 Per Share Date ----------- ---------- --------- ---------- ------------------- Robert M. Fell (2)............................ 300,000 20.09% $1.09 3/14/2010 $205,649 $521,154 Phillip C. Hermann............................ 106,300 7.12% $0.97 5/21/2011 64,846 164,332 Phillip C. Hermann............................ 100,000 6.70% $1.00 11/18/11 62,889 159,374 Ron W. Luniewski.............................. 106,300 7.12% $0.97 5/21/2011 64,846 164,332 Ron W. Luniewski.............................. 100,000 6.70% $1.00 11/18/11 62,889 159,374
- ---------- (1) Options were granted under the 1998 Stock Option Plan and are exercisable for common stock. (2) Represents options issued in 2000 repriced to $1.09 on June 29, 2001, the current market price on the date of the repricing. Option Exercises and Fiscal Year-End Values The following table sets forth the number of shares acquired upon the exercise of stock options during the year ended December 31, 2001 and the number of shares covered by both exercisable and unexercisable stock options held by each of the named executive officers at December 31, 2001.
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Year-End (1) Options at Year-End (2) --------------------------- --------------------------- Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Robert M. Fell............... -- $-- 300,100 -- $-- $-- Ron W. Luniewski............. -- -- 273,250 178,150 -- -- Phillip C. Hermann........... -- -- 248,900 137,500 -- -- -- --- ------- ------- --- --- Total........................ -- $-- 822,250 315,650 $-- $-- == === ======= ======= === ===
- ---------- (1) Options shown were granted under the 1995 and 1998 Stock Option Plans and are exercisable for common stock. See "1995 Stock Option Plans" and "1998 Stock Option Plans" for a description of the material terms of these options. (2) The dollar values are calculated by determining the difference between the weighted average exercise price of the options and the closing market price for the common stock of $0.51 on December 31, 2001. 34 Option Repricing
Ten-Year Option/SAR Repricing -------------------------------------------------------------------- Length of Original Number of Option Term Securities Market Price Exercise Remaining at Underlying of Stock at Price at Date of Options/SARs Time of Time of New Repricing or Repriced or Repricing or Repricing or Exercise Amendment Name Date Amended Amendment Amendment Price (Months) - ---- --------- ------------ ------------ ------------ -------- ------------ Robert M. Fell............... June 2001 300,000 $1.09 $4.88 $1.09 98 Chairman of the Board
Report on Option Repricing In May 2001, subject to the execution of the agreements with TVG referred to under "Issuance of Warrants to TVG," the Fell Services Agreement and related option and warrant agreements were amended such that the exercise price of the 300,000 stock options held by Mr. Fell was reduced from $4.88 per share to $0.97 per share. In June 2001, in recognition of Youbet.com's strategic initiatives with respect to the agreements with TVG and the opening of Youbet.com's Oregon wagering facility, Mr. Fell agreed to increase the exercise price of the Fell Warrants and the 300,000 stock options held by Mr. Fell to $1.09 per share, the closing trading price of Youbet.com's common stock on June 29, 2001. On August 1, 2001, the Board of Directors approved an option repricing plan whereby each current non-executive employees' previously issued stock options at a strike price above $1.00, were repriced to the then current market price of the common stock ($1.00). The Board believed that many of the stock options previously granted by the Company no longer provided the performance incentive intended by the option because the exercise price of many of the Company's outstanding stock options was well in excess of the market price of the common stock. Pursuant to the repricing plan, 378,774 options were repriced to $1.00. Each repriced option retained its expiration date and vesting schedule. Robert M. Fell Caesar P. Kimmel Chris J. McCarron William H. Roedy ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 27, 2002 (1) the names and addresses of each beneficial owner of more than five (5%) of Youbet.com's common stock known to Youbet.com, the number of shares of common stock beneficially owned by each such person, and the percent of Youbet.com's common stock so owned; and (2) the number of shares of common stock beneficially owned, and the percent of Youbet.com's common stock so owned, by each director, and by all directors and officers of Youbet.com as a group. Each person has sole voting and investment power with respect to such shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. 35
Amount and Nature Name of Beneficial Owner (1) (2) Of Beneficial Owner Percent of Class - -------------------------------- ------------------- ---------------- David M. Marshall.............................................. 973,826(3) 4.95 Robert M. Fell................................................. 1,704,600(4) 8.10 Sid Marshal Enterprises 773,490(5) 3.89 1170-M Pacific Coast Highway Malibu, CA 90265l........................................... Memorial Gift Trust 1,178,917(6) 6.02 1700 Bank of America Plaza 300 South Fourth Street Las Vegas, NV 80101......................................... Russell M. Fine 1,247,942(7) 6.37 1953 Fairburn Avenue Los Angeles, CA 90025...................................... Charles. F Champion............................................ 25,000(8) * Phillip C. Hermann............................................. 248,900(9) 1.26 Lawrence R. Lucas ............................................. 173,605(10) * Ron W. Luniewski............................................... 273,250(11) 1.38 ODS Technologies, LP........................................... 20,334,719(12) 51.00 All directors and executive officers as a group (4 persons).... 1,421,331(13) 7.08
- ---------- * Less than one percent (1) The address of the above beneficial owners is Youbet.com, Inc., 5901 De Soto Avenue, Los Angeles, California 91367 unless otherwise noted. (2) Beneficial ownership is determined according to the rules of the Securities and Exchange Commission, and generally includes all voting or investment power with respect to securities. Except as noted, and subject to community property laws, the persons named in the table above have sole voting power of their Youbet.com common stock. (3) Includes 100 shares of common stock represented by a fully vested stock option and 127,939 shares of common stock represented by currently exercisable common stock purchase warrants. Excludes shares of common stock and common stock purchase warrants owned by Sid Marshall and the Sid Marshall Trust. David M. Marshall is the son of Sid Marshall. (4) Includes 300,100 shares of common stock represented by a fully vested stock option and 1,200,000 shares of common stock represented by the Fell Warrant which are exercisable. Includes 204,450 shares of common stock owned by Robert M. Fell Living Trust. (5) Includes 356,668 shares of common stock represented by currently exercisable common stock purchase warrants. Does not include shares of common stock and common stock purchase warrants owned by the Memorial Gift Trust, of which Sid Marshall is the trustee. Sid Marshall is the father of David M. Marshall. (6) Includes 30,000 shares of common stock subject to currently exercisable common stock purchase warrants. Sid Marshall is the trustee. 36 (7) Includes 100 shares of common stock represented by a fully vested stock option and 40,342 shares of common stock subject to currently exercisable common stock purchase warrants. Also includes 7,500 held by Mrs. Debra Fine, the wife of Mr. Fine. (8) Consists solely of 25,000 shares of common stock represented by stock options exercisable within 60 days of March 28, 2002. (9) Consists solely of 248,900 shares of common stock represented by stock options exercisable within 60 days of March 28, 2002. On April 11, 2002, Mr. Hermann resigned as an Executive Officer of the Company and as a Director. (10) Includes 43,433 shares of common stock represented by a stock option exercisable within 60 days of March 28, 2002 and 100,000 shares of common stock represented by currently exercisable common stock purchase warrants. (11) Consists solely of 273,250 shares of common stock represented by stock options exercisable within 60 days of March 28, 2002. Mr. Luniewski left the Company on April 5, 2002. (12) Represents warrants issued to TVG (see Strategic Relationships) computed based on the outstanding common stock as of March 28, 2002. (13) Includes 317,433 shares of common stock represented by fully vested stock options and stock options exercisable within 60 days of March 28, 2002, and 227,939 shares of common stock represented by warrants. Changes in Control: Youbet.com is unaware of any contract or other arrangement, other than the TVG warrants (see "Strategic Relationships"), the operation of which may at a subsequent date result in a change in control of Youbet.com. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In June 1998, Youbet.com entered into a Securities Purchase Agreement with the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares of Series A Convertible Preferred Stock and a warrant to purchase 1,200,000 shares of Youbet.com's common stock (the "Fell Warrant"). The purchase price for the Series A Convertible Preferred Stock acquired by the Fell Trust was $25.00 per share, of which $10,000 was paid in cash and $490,000 was paid in the form of a promissory note (the "$490,000 Note"). The purchase price for the Fell Warrant was $75,000, of which $5,000 was paid in cash and $70,000 was paid in the form of a promissory note (the "$70,000 Note"). The Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to purchase 1,200,000 shares of common stock at $2.50 per share. The Fell Warrant is exercisable one-sixth commencing on June 29, 1998, and one-sixth thereafter on each six-month anniversary date. The Fell Warrant also provides that, with certain exceptions, the common stock received upon the exercise of the Fell Warrant may not be sold until one year following the date the shares were first able to be purchased. The $490,000 Note bears interest at the rate of 8% per annum, which may, at the option of the Fell Trust, be paid currently or added to the principal amount of the note. The $490,000 Note is due June 29, 2002, provided that the Fell Trust is required to prepay the note, without penalty, as soon as possible consistent with its other cash requirements. The $70,000 Note bears interest at the rate of 6% per annum, which may, at the option of the Fell Trust, be paid currently or added to the principal amount of the note. The $70,000 Note is due on June 29, 2008. The Fell Trust has pledged the Fell Warrant and the Series A Convertible Preferred Stock acquired pursuant to the Securities Purchase Agreement to secure its obligations under the $490,000 Note and the $70,000 Note. In 37 December 1998 the Fell Trust converted the Series A Preferred Stock into common stock. On July 8, 1999, the Board approved the recommendation of the Compensation Committee to grant Fell & Company, Inc. a performance-based bonus as a result of the services of Robert M. Fell which has been credited against the Notes, consisting of a $280,000 (plus accrued interest), credited in recognition of the completion of the placement of 11% Senior Convertible Discounts Notes, $140,000 (plus accrued interest) credited in recognition of the completion of Youbet.com's secondary offering, $70,000 (plus accrued interest) to be credited at such time as Youbet.com achieves 15,000 customers and $70,000 (plus accrued interest) to be credited at such time as Youbet.com achieves 25,000 customers. As result of the bonuses described above, the $70,000 Note has been satisfied and the outstanding principal balance on the $490,000 Note has been reduced to $140,000. The Fell Trust has agreed that the $140,000 Note will be with full recourse to the Fell Trust and Youbet.com has released to the Fell Trust all of the collateral pledged in connection with the Note. The $140,000 note plus accrued interest was netted against amounts owed to Mr. Fell due to his cancellation of the Service Agreement in November 2001. In January 1999 David Marshall, Inc. and Youbet.com entered into a services agreement pursuant to which David M. Marshall served as Vice-Chairman of the Board of Youbet.com until December 31, 1999. For making Mr. Marshall's services available, David Marshall, Inc. received a base fee of $150,000 per year plus the amount of payroll taxes Youbet.com would have paid if Mr. Marshall were an employee of Youbet.com and other miscellaneous benefits. David Marshall, Inc. was also entitled to receive an annual bonus determined by the Board in its discretion. David Marshall, Inc. terminated the agreement pursuant to a provision which permitted David Marshall, Inc. to terminate the agreement at anytime after December 31, 1999 and receive the compensation and benefits provided under the agreement for two years. The services agreement replaced an employment agreement entered into between Mr. Marshall and Youbet.com in June 1998, which had substantially the same terms. Mr. Marshall resigned his position as Vice Chairman and officer effective December 31, 1999. Mr. Marshall was re-appointed Chairman of the Board and Chief Executive Officer on March 21, 2002. In June 1998 Russell Fine and Youbet.com entered into an employment agreement pursuant to which Mr. Fine served as Executive Vice President and Chief Technology Officer. Mr. Fine received a base salary of $150,000 in 1999, and other miscellaneous benefits. Effective December 31, 1999 Mr. Fine's base salary was increased to $165,000. Mr. Fine was also entitled to receive an annual bonus determined by the Board of Directors. The employment agreement permitted Mr. Fine to terminate the agreement after December 31, 1999 and receive the compensation and benefits provided under the agreement for the lesser of two years or the remaining portion of the term, but at least one year. Mr. Fine's agreement was terminated on May 3, 2000 and he resigned as a member of the Board of Directors and as Executive Vice President and Chief Technology Officer. Effective May 3, 2000 Mr. Fine and Youbet.com entered into a consulting agreement pursuant to which Mr. Fine will provide consulting services to Youbet.com for a period of three years. For making his services available, Mr. Fine will receive a base fee of $182,500 per year and other miscellaneous benefits. The Company entered into a Securities Purchase Agreement on March 21, 2002, whereby the Company issued two one-year secured note in the principal amount of $100,000 each at an interest rate of 12% to a corporation owned by David Marshall, the Company's Chairman of the Board and Chief Executive Officer, and to a Director of the Company. In consideration of the purchase note, each of Mr. Marshall's corporation and the Director also received five-year warrants to purchase 100,000 share of the Company's common stock at an exercise price of $0.50 per share. The sale of the note and the issuance of the warrants was part of a financing in the aggregate amount of $750,000. Both principal and all interest accrued on this note will be payable at the earlier of a) one-year from the date of issuance, or b) upon the Company's completion of funding in an amount greater than two million dollars ($2,000,000), excluding the Note, in any ninety-day period prior to the maturity of this note. See Employment and Services Agreements 38 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report.
Page 1. Index to Financial Statements: See Consolidated Financial Statements included as part of this Form 10-K......... F-1 2. Exhibits:
Exhibit Number Description of Exhibit - ------ ---------------------- 3.1 Restated Certificate of Incorporation (Incorporated herein by reference to Youbet.com's Form 10-K for the year ended December 31, 1995). 3.1(a) Amended and restated Certificate of Incorporation (Incorporated herein by reference to Youbet.com's Form 10-Q for the quarter ended September 30, 2001). 3.2 By-Laws of Youbet.com (Incorporated herein by reference to Youbet.com's Form 10-K for the year December 31, 1995). 3.3 Certificate of Designation for Series A Convertible Preferred dated June 18, 1998 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 4.1 Form of Note Purchase Agreement by and among Youbet.com and the Purchasers as defined therein, dated April 5, 1999 (Incorporated herein by reference to Youbet.com's Registration Statement on Form S-3 (No. 333-85675) dated September 29, 1999). 4.1A Form of First Amendment of Note Purchase Agreement dated February 29, 2000. 4.2 Form of Warrant to purchase Youbet.com common stock, issued in connection with the Note Purchase Agreement dated April 5, 1999 (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.3 Registration Rights Agreement by and among Youbet.com (formerly You Bet International, Inc.) and the other parties listed therein, dated June 29, 1998 (Incorporated herein by reference by reference to Youbet.com's Form 8-K dated June 29, 1998). 4.4 Form of Series A Warrant to purchase Youbet.com common stock (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.5 Form of Series B Warrant to purchase Youbet.com common stock (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.6 Form of Series C Warrant to purchase Youbet.com common stock (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.7 Form of Series D Warrant to purchase Youbet.com common stock (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.8 Form of Series E Warrant to purchase Youbet.com common stock (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.9 Form of Series M Warrant to purchase Youbet.com common stock at $3.125 per share (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.10 Form of Series M Warrant to purchase Youbet.com common stock at $5.25 per share (Incorporated herein by reference to Youbet.com's Prospectus Filed Pursuant to Rule 424 dated October 4, 1999). 4.11 Warrant to purchase Youbet.com common stock issued to Robert M. Fell, dated June 29, 1998 (Incorporated herein by reference by reference to Youbet.com's Form 8-K dated June 29, 1998). 39 4.12 Form of warrant to purchase Youbet.com common stock at $2.50 per share, issued to Lorne Goldberg and Elizabeth Edlich dated August 12, 1999 (Incorporated herein by reference to Youbet.com's Registration Statement on Form S-3 (No. 333-85675) dated September 29, 1999). 10.1 1995 Stock Option Plan (Incorporated herein by reference to Youbet.com's Form 10-K dated December 31, 1996). 10.2 1995 Stock Option Plan for Non-Employee Directors (Incorporated herein by reference to Youbet.com's Form 10-K dated December 31, 1996). 10.10 1998 Stock Option Plan (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.12 Services Agreement between Youbet.com and Fell & Company, Inc. dated June 29, 1998, amended and restated as of March 1, 1999 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.13 Employment Agreement between Youbet.com and Ronald W. Luniewski dated May 1 1998, superceded by an Employment Agreement dated February 23, 1999 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.14 Employment Agreement between Youbet.com and Phillip C. Hermann dated May 1, 1998, superceded by an Employment Agreement dated February 23, 1999 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.15 Telecommunications Facilitation System Agreement between Youbet.com and Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc. dated June 23, 1997(Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.16 Agreement between Youbet.com and Netixs Communications dated March 3, 1999 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.21 Form of 11% Senior Convertible Discount Note (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1998). 10.22 Civil Resolution with the Los Angeles County District Attorney and Los Angeles Police Department (Incorporated herein by reference to Youbet.com's Form 8-K dated January 19, 2000). 10.23 Agreement between Youbet.com and Axcis dated September 1, 1999 (Incorporated herein by reference to Youbet.com's Form 10-KSB for the year ended December 31, 1999). 10.24 Employment Agreement between Youbet.com and Ron Luniewski dated March 22, 2001. 10.25 Employment Agreement between Youbet.com and Phillip C. Hermann dated March 22, 2001. 10.26 Form of lease agreement for the Los Angeles Facility dated March 11, 2000. 10.27 License and Content Agreement, dated May 18, 2001, by and between the TVG Parties and Youbet.com, Inc., (Incorporated herein by reference to Youbet.com's Form 10-Q for the quarter ended June 30, 2001). 10.28 Warrant Issuance Agreement, dated May 18, 2001, by and between Youbet.com and TVG (Incorporated herein by reference to Youbet.com's Form 10-Q for the quarter ended June 30, 2001). 10.29 Letter agreements between Youbet.com and Fell & Company, Inc., dated May 9, 2001 and June 29, 2001 (Incorporated herein by reference to Youbet.com's Form 10-Q for the quarter ended June 30, 2001). 10.30 Employment Agreement between Youbet.com and Phillip C. Hermann dated March 21, 2002. 10.31 Securities Purchase Agreement between Youbet.com and David Marshall, Inc., dated March 21, 2002. 10.32 Employment Agreement between Youbet.com and Charles F. Champion dated March 11, 2002. 23 Consent of BDO Seidman, LLP. - -------------------------------------------------------------------------------- - ------------------------- (b) Reports on Form 8-K: There were no reports filed on Form 8-K for the quarter ended December 31, 2001. 40 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. YOUBET.COM, INC. Date: April 11, 2002 /s/ David M. Marshall Chairman of the Board and Chief Executive Officer In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. David M. Marshall Chairman of the Board and Chief Executive Officer Date: April 11, 2002 Charles F. Champion Director, President and Chief Operating Officer Date: April 11, 2002 Phillip C. Hermann Chief Financial Officer Date: April 11, 2002 Lawrence R. Lucas Director Date: April 11, 2002
41 Index to Financial Statements
Page ---- Report of Independent Certified Public Accountants............................................ F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000.................................. F-3 Consolidated Statements of Operations for the three years ended December 31, 2001............. F-4 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2001... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2001............. F-6 Notes to Consolidated Financial Statements.................................................... F-7
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Youbet.com, Inc.: We have audited the accompanying consolidated balance sheets of Youbet.com, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Unites States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Youbet.com, Inc. and subsidiaries as of December 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered significant recurring operating losses and needs to raise additional funds to accomplish its objectives. Management's plans are included in Note 1 to the consolidated financial statements. These matters raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Seidman, LLP - -------------------- Los Angeles, California February 21, 2002, except for Note 13 which is as of March 21, 2002 F-2 Youbet.com, Inc. Consolidated Balance Sheets
December 31, --------------------------- 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ............................................................ $ 3,560,740 $ 12,094,172 Restricted cash, current portion (Note 9) ............................................ 107,867 107,867 Receivables .......................................................................... 278,235 322,460 Interest and other receivables ....................................................... 59,468 490,692 Prepaid expenses ..................................................................... 433,636 338,886 ------------ ------------ Total current assets .............................................................. 4,439,946 13,354,077 ------------ ------------ Property and equipment (Notes 5 and 9) ............................................... 9,846,011 9,349,774 Less: Accumulated depreciation and amortization ...................................... (3,966,710) (2,077,275) ------------ ------------ Property and equipment, net ....................................................... 5,879,301 7,272,499 ------------ ------------ Licensing rights (net) (Note 3) ...................................................... 8,638,213 -- Capitalized software (Note 1) ........................................................ -- 2,542,506 Restricted cash, net of current portion (Note 9) ..................................... 812,938 920,805 Deposits and other ................................................................... 115,175 181,290 ------------ ------------ Total assets ...................................................................... $ 19,885,573 $ 24,271,177 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ..................................................................... $ 1,627,588 $ 1,604,137 Accrued expenses (Note 6) ............................................................ 1,302,106 1,587,042 Customer deposits .................................................................... 361,500 -- Accrued compensation and related items ............................................... 335,113 403,588 Deferred revenues .................................................................... 8,097 7,113 Capitalized lease obligation ......................................................... -- 8,909 ------------ ------------ Total current liabilities ......................................................... 3,634,404 3,610,789 ------------ ------------ Total liabilities ................................................................. 3,634,404 3,610,789 Commitments and contingencies (Notes 4, 9, 10 and 11) Stockholders' equity (Note 8): Preferred stock, $.001 par value- Authorized 1,000,000 shares, none outstanding ..................................... -- -- Common stock, $.001 par value-Authorized 100,000,000 shares, 19,537,950 and 19,520,850 shares outstanding as of December 31, 2001 and 2000, respectively ...................................................................... 19,538 19,521 Additional paid-in capital ........................................................... 95,084,423 84,834,477 Accumulated deficit .................................................................. (78,852,792) (64,053,610) Note receivable from stockholder ..................................................... -- (140,000) ------------ ------------ Total stockholders' equity ........................................................ 16,251,169 20,660,388 ------------ ------------ Total liabilities and stockholders' equity ........................................ $ 19,885,573 $ 24,271,177 ============ ============
See accompanying notes to consolidated financial statements. F-3 Youbet.com, Inc. Consolidated Statements of Operations
Year Ended December 31, -------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Revenues (Note 3 and 4) ............................... $ 6,324,286 $ 5,992,311 $ 3,773,577 Operating expenses: Network operations ................................. 2,371,152 3,267,371 2,105,312 Research and development ........................... 2,525,216 3,776,752 2,372,872 Sales and marketing ................................ 4,925,346 6,227,145 14,461,694 General and administrative ......................... 8,316,591 7,787,906 7,381,177 Depreciation and amortization ...................... 3,330,104 1,143,408 479,616 ------------ ------------ ------------ Total operating expenses ........................ 21,468,409 22,202,582 26,800,671 ------------ ------------ ------------ Loss from operations .................................. (15,144,123) (16,210,271) (23,027,094) Other income (expense): Interest income .................................... 375,356 2,679,001 2,419,896 Interest expense ................................... (26,865) (3,113,595) (3,106,111) Amortization of deferred financing costs ........... -- (203,915) (285,567) Fair value of warrants issued for financing costs (Note 8c) ............................................. -- (46,090) (490,791) Other .............................................. (2,750) 158,305 5,799 ------------ ------------ ------------ Total other expense ............................. 345,741 (526,294) (1,456,774) ------------ ------------ ------------ Loss before extraordinary item and state taxes ........ (14,798,382) (16,736,565) (24,483,868) State taxes (Note 12) ................................. (800) (800) (2,400) ------------ ------------ ------------ Loss before extraordinary item ........................ (14,799,182) (16,737,365) (24,486,268) Extraordinary item (Note 7) ........................ -- 14,995,964 -- ------------ ------------ ------------ Net loss .............................................. $(14,799,182) $ (1,741,401) $(24,486,268) ============ ============ ============ Basic and diluted: Loss before extraordinary item per common share ........................................... $ (0.76) $ (0.86) $ (1.45) Extraordinary item (Note 7) ........................ -- 0.77 -- ------------ ------------ ------------ Net loss per common share .......................... $ (0.76) $ (0.09) $ (1.45) ============ ============ ============ Weighted average number of common shares outstanding ..................................... 19,525,582 19,471,175 16,937,700 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 Youbet.com, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 31, 1999, 2000 and 2001
Preferred Stock Common Stock ------------------ -------------------- Additional Stock Paid-in Accumulated Notes Shares Amount Shares Amount Capital Deficit Receivable Total - --------------------------------------- ------- ---------- ------- ----------- ------------ ---------- ------------ Balance, January 1, 1999 ... 107,110 $ 107 13,970,268 $13,970 $41,165,025 $(37,825,941) $(560,000) $ 2,793,161 Warrants exercised and converted to stock (Note 8a) ............... -- -- 412,832 413 965,853 -- -- 966,266 Warrants exercised in conjunction with secondary public offering (Note 8a) ...... -- -- 654,275 654 2,162,899 -- -- 2,163,553 Stock options exercised and converted to stock (Note 8a) ............... -- -- 275,372 275 537,979 -- -- 538,254 Preferred stock converted to common shares (Note 8a) ............... (107,110) (107) 1,071,100 1,071 (964) -- -- 0 Shares issued in secondary public offering (Note 8a) ............... -- -- 2,863,582 2,864 37,280,974 -- -- 37,283,838 Secondary public offering related costs (Note 8a).. -- -- -- -- (1,660,142) -- -- (1,660,142) Shares issued as payment for amounts due to vendors (Note 8a) ....... -- -- 13,505 14 33,749 -- -- 33,763 Shares issued in a private placement (Note 8a) ..... -- -- 100,000 100 249,900 -- -- 250,000 Offset of notes receivable with bonus to officer (Note 8b) ............... -- -- -- -- -- -- 420,000 420,000 Fair value of stock options and warrants issued (Note 8c) ............... -- -- -- -- 1,031,593 -- -- 1,031,593 Non-cash compensation (Notes 8c and 8d) ....... -- -- -- -- 1,580,704 -- -- 1,580,704 Net loss for the year ...... -- -- -- -- -- (24,486,268) -- (24,486,268) -------- ----- ---------- ------- ----------- ------------ --------- ------------ Balance, December 31, 1999 -- -- 19,360,934 19,361 83,347,570 (62,312,209) (140,000) 20,914,722 Warrants exercised and converted to stock (Note 8a) ............... -- -- 12,191 13 4,676 -- -- 4,689 Stock options exercised and converted to stock (Note 8a) ............... -- -- 147,725 147 374,779 -- -- 374,926 Fair value of stock options and warrants issued (Note 8c) ............... -- -- -- -- 314,709 -- -- 314,709 Non-cash compensation (Notes 8c and 8d) ....... -- -- -- -- 792,743 -- -- 792,743 Net loss for the year ...... -- -- -- -- -- (1,741,401) -- (1,741,401) -------- ----- ---------- ------- ----------- ------------ --------- ------------ Balance, December 31, 2000.. -- -- 19,520,850 19,521 84,834,477 (64,053,610) (140,000) 20,660,388 Stock options exercised and converted to stock (Note 8a) ............... -- -- 17,100 17 11,782 -- -- 11,799 Fair value of stock options and warrants issued (Note 8c) ............... -- -- -- -- 9,964,357 -- -- 9,964,357 Non-cash compensation (Notes 8c and 8d) ....... -- -- -- -- 273,807 -- -- 273,807 Payment of notes receivable from officer ............ -- -- -- -- -- -- 140,000 140,000 Net loss for the year ...... -- -- -- -- -- (14,799,182) (14,799,182) -------- ----- ---------- ------- ----------- ------------ --------- ------------ Balance, December 31, 2001.. -- $ -- 19,537,950 $19,538 $95,084,423 $(78,852,792) $ -- $ 16,251,169 ======== ===== ========== ======= =========== ============ ========= ============
See accompanying notes to consolidated financial statements. F-5 Youbet.com, Inc. Consolidated Statements of Cash Flows
Year Ended December 31, ------------------------------------------ 2001 2000 1999 ------------ ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities: Net loss .................................................... $(14,799,182) $ (1,741,401) $(24,486,268) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................... 3,330,104 1,143,408 479,616 Write-off of capitalized software ........................... 2,542,506 -- -- Amortization of deferred financing .......................... -- 203,915 285,567 Extraordinary gain on repurchase of convertible notes ....... -- (14,995,964) -- Other losses ................................................ -- -- 1,237 Interest accreted on note payable ........................... -- 2,827,605 3,085,653 Settlement of accounts payable and accrued liabilities ...... -- 140,089 -- Non-cash compensation ....................................... 273,807 792,743 2,698,557 Repayment of note receivable ............................... 140,000 -- -- Fair value of warrants issued for financing costs ........... -- 46,090 -- Write-off of warrants upon repurchase of convertible notes... -- 268,619 -- Proceeds from sale of assets ................................ 3,281 -- -- Loss on disposal of assets .................................. 3,425 99,991 -- Change in operating assets and liabilities: Receivables ................................................. 44,225 (222,191) (247,359) Prepaid expenses ............................................ (94,750) (173,996) (142,545) Other current assets ........................................ 431,225 (60,321) (82,305) Deposits .................................................... 66,116 (110,201) (193,094) Accounts payable ............................................ 23,451 (1,664,339) 2,144,126 Accrued compensation and related items ...................... (68,475) 185,117 170,220 Customer deposits ........................................... 361,500 -- -- Other accrued expenses ...................................... (284,936) (607,467) 1,681,141 Deferred revenues ........................................... 984 (520,874) 527,986 ------------ ------------ ------------ Net cash used in operating activities .................... (8,026,719) (14,389,177) (14,077,468) ------------ ------------ ------------ Cash flows from investing activities: Restricted cash ............................................. 107,867 (1,028,672) -- Expenditures on capitalized software ........................ -- (2,542,506) -- Purchases of property and equipment ......................... (617,470) (6,139,124) (1,977,954) ------------ ------------ ------------ Net cash used in investing activities .................... (509,603) (9,710,302) (1,977,954) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from (repurchase of) convertible note .............. -- (26,408,975) 36,728,510 Proceeds from exercise of stock options and warrants ........ 11,799 379,615 3,640,734 Increase in deferred financing costs ........................ -- (167) (1,694,500) Proceeds from warrant purchase .............................. -- -- 2,438 Proceeds from sales of securities, net of offering costs .... -- -- 38,332,344 Payments on capitalized lease obligations ................... (8,909) (51,225) (220,317) ------------ ------------ ------------ Net cash provided by (used in) financing activities ...... 2,890 (26,080,752) 76,789,209 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ........... (8,533,432) (50,180,231) 60,733,787 Cash and cash equivalents at the beginning of the period ....... 12,094,172 62,274,403 1,540,616 ------------ ------------ ------------ Cash and cash equivalents at the end of the period ............. $ 3,560,740 $ 12,094,172 $ 62,274,403 ============ ============ ============ Supplemental disclosure of cash flow information Cash paid for: Interest .................................................... $ 26,865 $ 17,371 $ 22,624 State franchise tax ......................................... 800 800 3,757 ============ ============ ============ Non-cash investing and financing activities: Warrants issued for licensing rights ........................ $ 9,964,357 $ -- $ -- Conversion of accounts payable and accrued compensation into common stock ............................................. -- -- 33,763 ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 Youbet.com, Inc Notes to Consolidated Financial Statements NOTE 1-ORGANIZATION AND BASIS OF PRESENTATION Basis of Presentation Youbet.com, Inc., a Delaware corporation, and its wholly owned subsidiary, Youbet Oregon, Inc., are collectively referred to herein as the "Company". All intercompany accounts and transactions have been eliminated in consolidation. Business Since mid-1995, the Company has been engaged in developing PC-based proprietary communications software technology to be utilized by consumers for online live event wagering. The Company's first service being offered to customers is the You Bet Network, an interactive online horseracing network that is broadcast over the Company's virtual private network via the Internet. During the quarter ended June 30, 2001, the Company received a multi-jurisdictional license from the State of Oregon horse racing authorities for the acceptance and placement of wagers. The acceptance and placement of wagers is processed through Youbet Oregon, Inc. The Company commenced operations in Oregon during the third quarter of 2001. Going Concern The accompanying consolidated financial statements for the year ended December 31, 2001 have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has suffered significant recurring operating losses and needs to raise additional funds to accomplish its objectives. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company believes that its previous efforts to reduce costs and operate more efficiently, combined with the opening of the Oregon wagering hub in September 2001, and the Company receipt of licensing from California in February 2002, will improve cash flows. However, the Company will require additional capital to fund operations and pay down its liabilities, as well as to fund its expansion plans consistent with Youbet.com's anticipated changes in operations and infrastructure. During March 2002, the Company successfully raised $750,000 in debt financing (see Note 13). The Company is exploring various alternatives to raise this additional capital, but there can be no assurances that the Company will be successful in this regard. To the extent that the Company is unable to secure the capital necessary to fund its future cash requirements on a timely basis and/or under acceptable terms and conditions, the Company may not have sufficient cash resources to maintain operations. In such event, the Company may be required to consider a formal or informal restructuring or reorganization. No adjustments have been made to the consolidated financial statements that might result from the outcome of this uncertainty. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of F-7 revenues and expenses during the reporting period. Actual results could materially differ from these estimates. Revenue Recognition The Company recognizes net commissions earned on wagers as revenue as wagers are placed at third party wagering facilities. The Company also recognizes revenue from subscription fees as earned on a monthly basis and from the sale of handicapping information as purchased by customers. The Company's revenue recognition policies are in conformance with SAB 101. The Company also receives commission revenues through its subsidiary Youbet Oregon, Inc. The Company records gross commission proceeds as revenues and records the related costs to the tracks, TVG, taxes and fees as Sales and Marketing expenses. Licensing Rights The company recorded deferred licensing rights based on the fair value of the warrants issued, using the Black-Scholes option pricing model (see Note-3). The licensing rights are being amortized over a three year period. At December 31, 2001, the accumulated amortization of the warrants totaled $1,326,144. Software Development Costs The Company capitalizes internally generated software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company adopted EITF 00-2 "Accounting for Web Site Development Costs" during the year ending December 31, 2000. Capitalization of computer software development costs begins upon the establishment of technological feasibility for the product and continues until the product is available for sale or use. The Company's software includes the You Bet Network and CD Rom software product which customers install on their personal computers in order to access the You Bet Network, and a web-based application "Youbet Express" which does not require the use of a CD-Rom. Capitalized software costs are amortized on product-by-product basis based on the greater of a) the ratio of current gross revenues for a specific product bears to the total of current and anticipated future gross revenues for that product or b) over the expected economic life of that product. Amortization is recognized when the product is available for general release to the public. The Company developed an on-line sports event wagering platform and has been seeking a strategic partner. During the forth quarter of 2001, management decided to focus the Company's resources on the horse wagering market and its principal product. Accordingly, management cannot determine the future economic value of the capitalized software and has written-off previously capitalized costs of $2,543,000 as of December 31, 2001. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. Concentration of credit risk The Company maintains cash balances at various financial institutions. Deposits not to exceed $100,000 for each institution are insured by the Federal Deposit Insurance Corporation. At December 31, 2001, and December 31, 2000, the Company had uninsured cash and cash equivalents, and restricted cash of $4,228,757 and $12,708,905 respectively. F-8 Fair Value of Financial Instruments The carrying value of the Company's financial instruments, consisting primarily of receivables, accounts payable and notes payable, approximates fair value due to the maturity of these financial instruments and the borrowing costs to the Company. Reclassifications Certain prior years amounts have been reclassified to conform to the current year presentation. Property and Equipment Property and equipment are stated at cost. Equipment and furniture are depreciated using the straight-line method over their estimated useful life of three to five years. Leasehold improvements are amortized over the term of the lease. Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Impairment losses, if any, are recorded currently. Income Taxes The Company accounts for income taxes utilizing the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the basis of assets and liabilities for financial reporting purposes and tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when management cannot determine that it is more likely than not that the net deferred tax asset will be realized. Basic and Diluted Loss Per Share Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss by the basic shares outstanding and all dilutive securities, including stock options, warrants, convertible notes and preferred stock, but does not include the impact of potential common shares which would be antidilutive. As of December 31, 2001, potential dilutive securities representing 28,569,417 shares of common stock were not included in the earnings per share calculation since their effect would be anti-dilutive. Potential dilutive securities consisted of 3,151,135 outstanding stock options, and 25,418,282 outstanding common stock purchase warrants. As of December 31, 2000, potential dilutive securities representing 9,457,658 shares of common stock were not included in the earnings per share calculation since their effect would be anti-dilutive. Potential dilutive securities consisted of 2,602,321 outstanding stock options, and 6,855,337 outstanding common stock purchase warrants. As of December 31, 1999, potential dilutive securities representing 13,842,795 shares of common stock were not included in the earnings per share calculation since their effect would be anti-dilutive. Potential dilutive F-9 securities consisted of 2,435,231 outstanding stock options, 6,857,564 outstanding common stock purchase warrants, and $45,500,000 of 11% Senior Convertible Discount Notes convertible into 4,550,000 shares of common stock. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes a fair value method of accounting for stock-based compensation plans, allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), but to disclose the pro forma effect on net loss and diluted loss per share had the fair value of the stock options been expensed. The Company has elected to continue to account for stock-based compensation plans utilizing the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant above the amount an employee must pay to acquire the stock. The pro forma effect on net loss and per share data using the fair value method are disclosed. The Company has adopted FIN 44 and as a result recognized $129,527 in expense during the year ended December 31, 2000 due to variable accounting applied to stock option repricing. Due to the decline in the Company's stock price during 2001, the Company reversed the $129,527 in non-compensation during the year ended December 31, 2001. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes the adoption of this Statement will have no material impact on its financial statements. F-10 In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFASB 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFASB 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial statements. NOTE 3 - AGREEMENT WITH TVG In May 2001, Youbet.com entered into a warrant issuance agreement (the "Warrant Agreement") and a track content and patent license agreement (the "License Agreement") with ODS Technologies, L.P., a subsidiary of Gemstar-TV Guide International, doing business as TVG ("TVG"). These agreements relate to the grant by TVG to Youbet.com of a non-exclusive license to use telephones and certain simulcast audio, video and data content for the purpose of streaming such content online and the agreement of race tracks to accept wagers based on such content, and to use TVG's patented systems for making pari-mutuel wagers on horse races online. Among other things, the agreements call for Youbet.com, to issue to TVG two warrants to purchase up to 51% of the Company's outstanding common stock. The License Agreement remains in effect until the later of (i) May 18, 2011, (ii) the date of expiration of the last to expire of the TVG patents licensed to Youbet.com under the agreement, or (iii) the date on which the last of TVG's agreements with the TVG Exclusive Tracks expires (unless extended, TVG's agreements with the TVG Exclusive Tracks expire before May 18, 2011). The License Agreement may be terminated before the expiration of its term (a) by TVG, if Youbet.com ceases to operate its Oregon account wagering hub or another account wagering facility approved by TVG at any time thereafter during the term; (b) by TVG, in the event that Youbet.com brings any legal action against TVG or any of TVG's affiliates, including Gemstar-TV Guide International, unless it is finally determined in such action that TVG (or its affiliate) acted in bad faith with respect to any claim that is the subject of the legal action; and (c) by either Youbet.com or TVG, in the event that the other party materially breaches the License Agreement without cure upon notice. The Company issued TVG an initial warrant (the "Initial TVG Warrant"), on May 18, 2001 (the time the Warrant Agreement was executed) entitling TVG to purchase an aggregate of up to 3,884,650 shares of Youbet.com common stock (the "Initial Warrant Shares") at an exercise price of $0.001 per share exercisable for a period of three years. The Company recorded the fair value of the Initial TVG Warrant ($2,910,000), using the Black-Scholes option pricing model as additional paid in capital and the license agreement as a deferred asset captioned "Licensing Rights" and is being amortized over three years. The Company issued TVG the additional warrant on September 20, 2001 (the date the Warrant Agreement was approved by the stockholders) entitling TVG to purchase for an aggregate exercise price of $41,082,422 (subject to adjustment as provided in the Additional TVG Warrant) a number of shares of common stock which, when aggregated with the Initial Warrant Shares, is equal to 51% of the sum of (i) the total number of shares of Youbet.com common stock outstanding on the date the Additional TVG Warrant is exercised, plus (ii) the total number of shares of common stock issuable upon exercise of the Additional TVG Warrant, plus (iii) the total number of Initial Warrant Shares then issuable upon exercise of the Initial TVG Warrant. The Company recorded the fair value of the Additional TVG Warrant ($7,054,000), using Black-Scholes, as a deferred asset captioned "Licensing Rights" and it is being amortized over three years. The Company is obligated to issue additional warrants to TVG (in order to maintain TVG's rights in acquiring 51% of the Company) upon the exercise of any stock options or warrants, or if the Company issues any additional securities. The number of warrants to be issued to TVG would be equivalent to the number of stock options or warrants exercised or the number of additional F-11 securities issued. In addition, the Additional TVG Warrant contains provisions for adjusting the exercise price in the event that (i) Youbet.com makes certain additional issuances of common stock or securities exercisable for or convertible into common stock at a price less than the defined reference price per share on which the aggregate exercise price of the Additional TVG Warrant is based, or (ii) engages in certain issuer tender offers for the repurchase of shares of its common stock. In consideration of the rights granted to Youbet.com under the License Agreement, Youbet.com has agreed to pay to TVG fees based on the handle generated by Youbet.com from wagering activity and to issue to TVG the warrants to purchase Youbet.com common stock on the terms and conditions set forth in the Warrant Issuance Agreement, as described above. NOTE 4-AGREEMENT WITH MAGNA Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc. (collectively, "Ladbroke"), operate horseracing operations within the State of Pennsylvania. Effective June 23, 1997, the Company and Ladbroke entered into a Telecommunications Facilitation System Agreement which provides that the Company will facilitate interactive telecommunications between customers to the You Bet Network and Ladbroke's horseracing activities. During 2001, Ladbroke was acquired by Magna Entertainment, Corp., ("Magna"). The Magna Agreement contains certain exclusivity provisions during the first two years of the agreement, and also provides Magna with the right to receive the benefit of any more favorable terms should the Company enter into a subsequent agreement with another horseracing facility. The Magna Agreement provides for a term of five years subsequent to the first transmission of live wagering information over the You Bet Network to an end user. The initial transmissions of live wagering information over the You Bet Network commenced during January 1998. As a result, the term of the Magna Agreement is through January 2003. The Company is entitled to receive on a weekly basis one-half of the net commissions to Magna derived from wagers placed by Youbet.com customers. Net commissions are calculated as gross commissions generated from wagers, less state taxes and certain direct costs. The Magna Agreement contains provisions allowing the termination of the agreement by either party at any time prior to January 2003, in the event that net commissions are, or are projected in good faith by either party to the agreement, to be less than $1,000,000 for any full twelve month period during the term of the agreement subsequent to the initial eighteen month period. For the year ended December 31, 2001, 2000 and 1999, $4,481,461, $4,933,794 and $3,239,332 of the Company's revenues were generated from the Magna Agreement, respectively. The Company currently estimates that net commissions will exceed $1,000,000 for all twelve-month periods during the term of the agreement. However, should net commissions be less than $1,000,000 during such twelve month period, Magna could elect to terminate the agreement, which could have a material adverse effect on the Company's business. NOTE 5-PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of December 31, 2001 and 2000: 2001 2000 ----------- ----------- Computer equipment ............................... $ 5,213,737 $ 5,000,661 Software ......................................... 1,247,761 1,244,510 Office furniture and equipment ................... 531,458 237,225 Leasehold improvements ........................... 2,853,055 2,867,378 ----------- ----------- 9,846,011 9,349,774 F-12 Less: Accumulated depreciation and amortization .. (3,966,710) (2,077,275) ----------- ----------- Property and equipment, net ...................... $ 5,879,301 $ 7,272,499 =========== =========== NOTE 6-ACCRUED EXPENSES Accrued expenses consisted of the following as of December 31, 2001 and 2000: 2001 2000 ---------- ---------- Track commission ................................... $ 302,261 $ 50,216 Marketing expenses ................................. 291,395 221,331 Severance costs .................................... 274,093 720,613 Software licensing fee ............................. 203,859 203,859 Professional fees .................................. 26,884 201,640 Legislative fees ................................... -- 50,000 Other .............................................. 203,614 139,383 ---------- ---------- Total .............................................. $1,302,106 $1,587,042 ========== ========== NOTE 7-NOTES PAYABLE On April 5, 1999, the Company issued $45,500,000 principal amount of 11% Senior Convertible Discount Notes ("Notes") for cash proceeds of $36,728,510, which represents a discount of 11% per year, compounded semi-annually, to April 5, 2001. The Company incurred approximately $1,625,000 of costs related to this offering and issued 50,000 warrants exercisable at $10.00 per share as a finder's fee. These warrants had an aggregate fair value of $352,000. The notes began accruing interest on April 5, 2001 at 11% per year, payable semi-annually. Principal and unpaid interest were due and payable on April 5, 2004. The Notes plus accrued, unpaid interest were convertible at any time at the rate of $10 per common share. Based on a valuation report prepared by an investment and merchant banking firm dated April 28, 1999, the Company has determined that the Notes conversion price at $10.00 per share was at fair market value. Accordingly, the Company was expected to recognize a charge to operations of $352,000 over the five-year maturity period, with a corresponding credit to paid-in capital. The notes also contain covenants and restrictions limiting the ability of the Company to engage in certain financings, other transactions and dividend distributions. During the year ended December 31, 2000, the Company repurchased all of its $45,500,000 notes for $26,409,000 which represented a discount to the accreted value of the notes at the date of purchase, therefore, a gain was realized on the difference between the amount paid and the accreted value of the notes on the date of repurchase. The amount of the gain, net of the proportionate write-off of unamortized discount of $1,237,000, was approximately $14,996,000. NOTE 8-STOCKHOLDERS' EQUITY a. Issuance of Common Stock and Related Warrants During 1999, the Company issued 74,833 shares of common stock in conjunction with the exercise of stock options by certain employees. In order to affect a cashless exercise of such options, an additional 37,417 stock options were forfeited. This cashless exercise resulted in a charge to non-cash compensation of $300,000. During 1999, the Company issued 100,000 shares of common stock at a price of $2.50 per share, generating gross proceeds to the Company of $250,000. F-13 During 1999, the Company issued 13,505 shares of common stock in conjunction with the conversion of vendor debt of $33,763. During 1999, the Company issued 688,204 shares of common stock, in conjunction with the exercise of warrants and stock options with exercise prices ranging from $2.50 to $5.25 per share, generating gross proceeds to the Company of $1,504,520. During 1999, 107,110 shares of convertible preferred stock were converted into 1,071,100 shares of common stock. As final settlement for the finder's fee related to the preferred stock financing in June 1998, additional fees of $122,500 were paid to the finder. The fees are charged to additional paid-in capital at June 30, 1999. In addition, 13,000 warrants with an exercise price of $.01 and 26,000 warrants with an exercise price of $2.50 were issued to the finder. These warrants are exercisable through March 2004. In June 1999, the Company completed a public offering and issued 2,863,582 common stock shares at a price of $14.00 per share, generating gross proceeds of $37,283,838. The Company also issued 654,275 shares of common stock, in conjunction with the exercise of warrants, generating net proceeds to the Company of $2,153,553. The Company incurred $1,660,142 of fees and expenses in conjunction with the above transactions. During 1999, the company issued 3,500 warrants to a consultant. The fair value of the warrants of $25,685 is being charged to operations over a one-year period. The warrants have an exercise price of $2.50. The warrants expire in three years. During 1999, the Company issued 100,000 warrants to its joint venture partner which concurrently agreed to purchase 142,857 shares at an aggregate cost of $2,000,000 of the Company's common stock in the secondary public offering and agreed to contribute funds to the joint venture project. The total fair value of these warrants was $907,000 of which 50% was charged as financing costs and the remaining 50% was charged against paid-in capital. The warrants have an exercise price of $19.50 and a term of five years. During 1999, the Company issued 50,000 warrants in exchange for services. The fair value of these warrants of $405,000 is being charged to operations over the vesting period. The warrants have an exercise price of $11.50 and a term of five years. The warrants vest over three years. During 1999, the Company issued 25,000 warrants in exchange for services. The fair value of the warrants of $142,000 is being charged to operations over the vesting period. The warrants have an exercise price of $7.93 and a term of five years. The warrants vest over three years. During 1999, the Company issued 50,000 warrants to various finders in connection with the issuance of the 11% Senior Convertible Discount Notes. The warrants are exercisable at $10.00 per share and expire on April 5, 2004. The fair value of the warrants is $352,000. During 2000, the Company issued 159,916 shares of common stock, in conjunction with the exercise of warrants and stock options with exercise prices ranging from $0.01 to $4.00 per share, generating proceeds to the Company of $379,615. During 2001, the Company issued 17,100 shares of common stock, in conjunction with the exercise of stock options with an exercise price of $0.69 per share, generating proceeds to the Company of $11,799. F-14 b. Preferred Stock Financing On June 29, 1998, the Company entered into a Stock Purchase Agreement with certain private and institutional investors. Pursuant to the Stock Purchase Agreement, the Company sold 200,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") for a cash purchase price of $25.00 per share, resulting in gross proceeds to the Company of $5,000,000. Officers and directors purchased 15,890 shares of Preferred Stock. On July 31, 1998 and during December 1998, the Company sold an additional 20,000 shares and 22,500 shares, respectively, of Preferred Stock under the same terms for aggregate gross proceeds of $1,062,500 of which $100,000 was received in January 1999. During December 1998, 155,390 shares of Preferred Stock were converted into 1,553,900 shares of common stock. In conjunction with the Preferred Stock financing, the Company incurred direct costs related to such financing of $360,909. In addition, this firm purchased warrants for $.0625 per warrant to acquire 72,498 shares of common stock, consisting of 24,166 warrants exercisable at $.01 per share and 48,332 warrants exercisable at $2.50 per share. The warrants are exercisable through June 2003. The aggregate fair value of such warrants was $401,639. The Company also paid cash finder's fees to other parties aggregating $28,500. The Preferred Stock had a liquidation preference of $25.00 per share and ranked senior to all other series of preferred stock that could have been issued in the future. Each share of Preferred Stock was convertible into ten shares of common stock of the Company, and provided for the automatic conversion into common stock at the then prevailing conversion rate at such time as the Company completed a public offering which raised not less than $15,000,000 in gross proceeds and had its common stock listed on a major exchange or the NASDAQ National Market System. Based on a valuation report prepared by an investment and merchant banking firm dated July 31, 1998, the Company has determined that the Preferred Stock was sold at fair market value. In connection with the secondary public offering in June 1999, the remaining 107,110 shares of convertible preferred stock were converted into 1,071,110 shares of common stock. Robert M. Fell assisted the Company in its Preferred Stock financing during 1998 prior to his appointment as an officer and director of the Company. As a result of the completion of such financing on June 29, 1998, Mr. Fell acquired the right to designate four directors of the Company (which right has expired) and may therefore be deemed to have acquired control of the Company. In conjunction therewith, on June 29, 1998, the Company entered into a Securities Purchase Agreement with the Robert M. Fell Living Trust (the "Fell Trust"). Pursuant to the Securities Purchase Agreement, the Fell Trust acquired 20,000 shares of Preferred Stock and a warrant to purchase 1,200,000 shares of the Company's common stock (the "Fell Warrant"). The purchase price of the Preferred Stock acquired by the Fell Trust was $25.00 per share, or an aggregate of $500,000, of which $10,000 was paid in cash and $490,000 was paid in the form of a promissory note (the "$490,000 Note"). The purchase price of the Fell Warrant was $75,000, of which $5,000 was paid in cash and $70,000 was paid in the form of a promissory note (the "$70,000 Note"). Based on a valuation report prepared by an investment and merchant banking firm dated July 31, 1998, the Company has determined that the exercise price of the Fell Warrant was at not less than fair market value. The Fell Warrant had an aggregate fair value of $2,112,000. The Fell Warrant expires on June 29, 2008, and entitles the Fell Trust to purchase 1,200,000 shares of common stock at $2.50 per share. The Fell Warrant is exercisable one-sixth on June 29, 1998, and one-sixth thereafter on each six month anniversary date. The $490,000 Note bears interest at the rate of 8% per annum, which may, at the option of the Fell Trust, be paid currently or added to the principal amount of the note. The $490,000 Note is due June 29, 2002, provided that the Fell Trust is required to prepay the note, without penalty, as soon as possible consistent with its other cash requirements. The $70,000 Note bears interest at the rate of 6% per annum, which may, at the option of the Fell Trust, be paid currently or added to the principal amount of the note. The $70,000 Note is due on June 29, 2008. The Fell Trust has pledged the Fell Warrant and the Preferred Stock acquired pursuant to the Securities Purchase Agreement to secure its obligations under the $490,000 Note and the $70,000 Note. In December 1998, F-15 the Preferred Stock held by the Fell Trust was converted into common stock, which remained subject to the pledge to secure the Notes. On July 8, 1999, the board approved the recommendation of the Compensation Committee to grant Fell & Company, Inc. a performance-based bonus as a result of the services of Robert M. Fell which has been credited against the Notes, consisting of a $280,000 (plus accrued interest), credited in recognition of the completion of the placement of 11% Senior Convertible Discount Notes, $140,000 (plus accrued interest) credited in recognition of the completion of Youbet.com's secondary offering, $70,000 (plus accrued interest) credited at such time as Youbet.com achieves 15,000 customers and $70,000 (plus accrued interest) to be credited at such time as Youbet.com achieves 25,000 customers. As a result of the bonuses described above, the $70,000 Note has been satisfied and the outstanding principal balance on the $490,000 Note has been reduced to $140,000. The Fell Trust has agreed that the $140,000 Note will be with full recourse to the Fell Trust and Youbet.com has released to the Fell Trust all of the collateral pledged in connection with the Note. The $140,000 Note has been recorded as a reduction to stockholders' equity at December 31, 2000. The $140,000 Note was fully paid in November 2001. Effective June 29, 1998, in connection with the Preferred Stock financing, the Company entered into a Services Agreement with Fell & Company, Inc., pursuant to which Mr. Fell would serve as Chairman of the Board of Directors for a period of three years. The Services Agreement also provided that Mr. Fell would serve as interim Chief Executive Officer until a new Chief Executive Officer is appointed, provided that if an employment agreement is not entered into with a new Chief Executive Officer within six months from June 29, 1998, or such person does not commence employment within eight months of June 29, 1998, the position of Chief Executive Officer will become the Office of the Chief Executive and will consist of Mr. Fell, Mr. Marshall and Mr. Fine. For making Mr. Fell's services available to the Company, Fell & Company, Inc. would receive $150,000 per annum, subject to cost of living increases, plus the amount of payroll taxes the Company would pay if Mr. Fell were an employee of the Company, and standard benefits. Effective February 23, 1999, the Board of Directors approved the appointment of Mr. Fell as full-time Chief Executive Officer, and Mr. Marshall and Mr. Fine agreed to waive the requirement for formation of the Office of the Chief Executive. The Board of Directors also approved an increase in the amount payable to Fell & Company, Inc. for making Mr. Fell's services available to the Company, to $225,000 per annum effective March 1, 1999, subject to cost of living increases, plus the amount of payroll taxes the Company would pay if Mr. Fell were an employee of the Company, and standard benefits. The increase reflects the increase in Mr. Fell's involvement with the Company from 70% to 100% of his available time. During 2000, Robert M. Fell was granted an option to purchase 300,000 shares of common stock, pursuant to the 1998 Stock Plan at an exercise price of $4.875. The options have a ten-year term and vest in two annual installments beginning July 2001. In May 2001, subject to the execution of the agreements with TVG referred to under "Issuance of Warrants to TVG," the Fell Services Agreement and related option and warrant agreements were amended as follows: (a) the base fee was increased by $150,000 retroactive to March 8, 2000; (b) the exercise price for 750,000 of the Fell Warrants was reduced from $2.50 per share to $0.45 per share, the exercise price of the remaining Fell Warrants was reduced to $0.97 per share, based upon the price of Youbet.com's common stock after the announcement of the TVG transaction, and the exercise price of the 300,000 stock options held by Mr. Fell was reduced from $4.88 per share to $0.97 per share; (c) for a 90-day period after this stockholders meeting, Fell & Company, Inc. could terminate the Fell Services Agreement; and (d) if the Fell Services Agreement was so terminated, (i) Fell & Company, Inc. would receive a lump sum payment of two times the base fee (increased as provided above), (ii) Youbet.com must continue to provide the nonsalary benefits provided for in the Fell Services Agreement for two years, including premium payments on a life insurance policy, (iii) the 150,000 unvested stock options held by Mr. Fell would vest, (iv) if Mr. Fell is not then serving as a director, he would render consulting services (up to ten hours per month) through May 9, 2003 without any additional compensation and (v) if so requested by the Board, Mr. Fell would serve as Chairman of the Board through May 9, 2002. F-16 In June 2001 the Board approved further amendments to the Fell Services Agreement extending the period of time during which Mr. Fell could terminate the Fell Services Agreement to one year after this stockholders meeting. Also, in June 2001, in recognition of Youbet.com's strategic initiatives with respect to the agreements with TVG and the opening of Youbet.com's Oregon wagering facility, Mr. Fell agreed to increase the exercise price of all the Fell Warrants and the 300,000 stock options held by Mr. Fell to $1.09 per share, the closing trading price of Youbet.com's common stock on June 29, 2001. Effective November 8, 2001, Mr. Fell resigned as the Company's Chief Executive Officer. In accordance with the Fell Services Agreement described above, Mr. Fell received a lump sum payment of two times the base fee, net of amounts due to Youbet.com (consisting principally of the $140,000 note receivable plus accrued interest). Mr. Fell continued to render services to Youbet.com receiving compensation under the Fell Services Agreement through February 8, 2002. Pursuant to Mr. Fell's resignation agreement on March 21, 2002, the Company agreed to pay Fell and Company $55,000 (which included $38,000 in accrued vacation) in lieu of any future benefits (including whole life insurance, health/dental/vision/disability insurance, auto allowance and related auto expenses) that Mr. Fell would have been entitled to under the amended Services Agreement. Mr. Fell continued as Chairman of the Board of Directors through March 21, 2002 when he resigned as Chairman of the Board. c. Other Warrants The Company has issued various stock options and warrants in non-capital raising transactions for services rendered and to be rendered, and as financing costs. The Company accounts for stock options and warrants granted to non-employees in accordance with Statement of Financial Accounting Standards No. 123, which requires non-cash compensation expense be recognized over the expected period of benefit. The Company has calculated the fair value of such warrants and stock options according to the Black-Scholes pricing model. The resulting amount has been recorded as a charge to deferred compensation, with a corresponding credit to additional paid-in capital. In February 1999, the Company issued 3,500 warrants to a consultant. The fair value of the warrants of $25,685 is being charged to operations over a one-year period. The warrants have an exercise price of $2.50. The warrants expire in three years. In April 1999, the Company issued 50,000 warrants to various finders in connection with the issuance of the 11% Senior Convertible Discount Notes. The warrants are exercisable at $10.00 per share and expire on April 5, 2004. The fair value of the warrants of $352,000 is being charged to operations. In April 1999, the Company issued 50,000 warrants to a horseracing track for services rendered. The warrants are exercisable at $11.50 per share and expire on March 25, 2004. The fair value of the warrants is $405,000 and is being charged to operations over the service period of three years. In May 1999, the Company issued warrants as final settlement to a finder in connection with the issuance of Series A Convertible Preferred Stock in June 1998. The Company issued 13,000 warrants with an exercise price of $.01 and 26,000 warrants with an exercise price of $2.50. The warrants are exercisable through March 2004. The fair value of the warrants is $216,060 and was charged to operations as financing costs. In June 1999, the Company issued 100,000 warrants to its joint venture partner in connection with the sale of common stock at a total price of $2,000,000 and the formation of a joint venture project. The warrants are exercisable at $19.50 per share and expire on June 8, 2004. The fair value of the warrants is $907,000 of which 50% was charged as financing costs and the remaining 50% charged against paid-in-capital. In August 1999, the Company issued 25,000 warrants to a horse racing track for services rendered. The F-17 warrants are exercisable at $7.93 per share and expire on August 3, 2002. The fair value of the warrants is $141,861 and is being charged to operations over the service period of three years. In January 2000, the Company issued 10,000 warrants to a horse racing track for services to be rendered. The warrants are exercisable at $4.28 per share and expire on December 31, 2005. The warrants vest on the first anniversary of issuance. The fair value of the warrants is $43,100 and is being charged to operations over the service period of five years. During the year ended December 31, 2001, in connection with the TVG transaction, the Company issued two warrants to TVG to purchase up to 51% of the outstanding common stock. See Note-3 to the accompanying notes to the consolidated financial statements. Information with respect to common stock purchase warrants issued is summarized as follows: Weighted Warrants Exercise Price ---------- -------------- Balance, December 31, 1999........................ 6,857,564 $ 3.76 Warrants issued................................... 10,000 $ 4.28 Exercised......................................... (12,227) $ 0.39 ---------- Balance, December 31, 2000........................ 6,855,337 $ 3.76 Warrants issued................................... 3,884,650 $0.001 Warrants issued................................... 16,432,969 $ 2.50 Warrants expired.................................. (1,754,674) $ 4.05 ---------- Balance, December 31, 2001........................ 25,418,282 $ 2.29 ========== Warrants exercisable at December 31, 2001......... 25,418,282 $ 2.29 ========== The Company is obligated to issue additional warrants to TVG (in order to maintain TVG's rights in acquiring 51% of the Company) upon the exercise of any stock options or warrants, or if the Company issues any additional securities. The number of warrants to be issued to TVG would be equivalent to the number of stock options or warrants exercised or the number of additional securities issued. Additional information about outstanding warrants to purchase the Company's common stock at December 31, 2001 is as follows: Warrants Outstanding and Exercisable ------------------------------------------ Weighted Avg. Weighted Remaining Avg. Number Contractual Life Exercise of Shares (in years) Price ----------- ---------------- --------- Range of Exercise Prices: $0.001 - $0.01..................... 3,891,149 2.50 $0.001 $1.09.............................. 1,200,000 6.50 $ 1.09 $2.50.............................. 440,000 Not determinable $ 2.50 $2.50.............................. 17,781,789 2.38 $ 2.50 $2.51 - 5.51....................... 148,844 Not determinable $ 4.55 $2.51 - 5.51....................... 1,731,500 1.03 $ 4.15 $5.51 and over..................... 225,000 2.41 $14.33 ----------- ------ Total.............................. 25,418,2821 $2.29 =========== ====== F-18 d. Stock Options During 1999, the Company granted various stock options, as follows: (1) The Company issued stock options to four executives under the 1998 Stock Option Plan to purchase a total of 350,000 shares of common stock at an exercise price of $10.50 per share, the fair market price at the date of grant. The stock options vest at specified dates during a period of four years and are exercisable for a period of ten years. Subsequently, 156,250 of these options were canceled and 150,000 repriced to an exercise price of $5.31. (2) The Company issued stock options to employees to purchase 595,050 shares of common stock at exercise prices ranging from $3.72 to $12.59. Of these stock options issued, options representing 36,150 shares of common stock were issued below the fair market value on the date of grant. The aggregate difference between the exercise price and the fair market value at the date of grant was $171,629, which is being charged to operations over the options' vesting period. These options vest over four years and are exercisable for a period of five years. Subsequently, 19,600 options were repriced to an exercise price of $5.31. (3) Stock options were granted to a consultant to purchase 25,000 shares of common stock at an exercise price of $10.50. The fair value of these options was $257,750, and is being expensed over the vesting period. These options vest ratably over two years commencing on the grant date. These options are exercisable for a period of ten years. (4) Stock options were granted to a consultant to purchase 30,000 shares of common stock at an exercise price of $11.13. The fair value of these options was $238,927, and is being expensed over the vesting period. These options vest ratably over six months commencing on the grant date. These options are exercisable for a period of five years. Subsequently, the options were repriced to an exercise price of $5.31. (5) Stock options were granted to a Director to purchase 40,000 shares of common stock at an exercise price of $7.00, the fair market value on the date of grant. These options vest ratably over a 12 month period and are exercisable for a period of ten years. (6) Stock options were granted to a consultant to purchase 10,000 shares of common stock at an exercise price of $5.00, the fair market value on the date of grant. The fair value of these options was $47,287 which is being expensed over the vesting period. These options vest ratably over a ten month period are exercisable for a period of five years. (7) Stock options were granted to a consultant to purchase 2,500 shares of common stock at an exercise price of $6.13, the fair market value on the date of grant. The fair value of these options was $14,808 which is being expensed over the vesting period. These options vest ratably over a six-month period are exercisable for a period of five years. In December 2000, the Company offered all of its employees, except for the Chief Executive Officer, the opportunity to reprice their current stock options to the then current market price in exchange for a 10% reduction in their base pay. Employees holding 744,417 stock options (including two of the Company's executive officers holding 425,200 stock options) accepted the Company's offer, and as such the options are subject to variable plan accounting and the Company recognized $129,527 in non-cash compensation during the year ended December 31, 2000 (including $62,786 relating to stock options repriced by two executives). Due to the decline in the F-19 Company's stock price during 2001, the Company reversed the $129,527 in non-compensation during the year ended December 31, 2001. During 2000, the Company granted various stock options, as follows: (1) The Company issued stock options to three executives to purchase a total of 600,000 shares of common stock at an exercise price ranging from $4.88 to $4.94 per share, the fair market price at the date of grant. The stock options vest at specified dates during a period of four years and are exercisable for a period ranging from five of ten years. Subsequently, 200,000 of these options were canceled and 50,000 of these options were repriced to an exercise price of $0.69. As such, the repriced options are subject to variable plan accounting. (2) The Company issued stock options to employees to purchase 733,349 shares of common stock at exercise prices ranging from $0.63 to $5.88 per share, the fair market price at the date of grant. These options vest over four years and are exercisable for a period of five years. Subsequently, 68,203 of these options were repriced to an exercise price of $0.69. As such, the repriced options are subject to variable plan accounting. (3) Stock options were granted to various consultants to purchase 94,919 shares of common stock at an exercise price ranging from $0.63 to $5.88 per share, the fair market price at the date of grant. The fair value of these options was $272,829, and is being expensed over the vesting period. These options vest over various periods ranging from one month to four years. These options are exercisable for a period ranging from five to ten years. (4) Stock options were granted to five Directors to purchase 200,000 shares of common stock at an exercise price ranging from $4.78 to $4.94, the fair market value on the date of grant. These options vest ratably over a 12 month period and are exercisable for a period of ten years. Subsequently, 82,250 of these options were canceled. During 2001, the Company granted various stock options, as follows: (1) The Company issued stock options to two executives to purchase a total of 412,600 shares of common stock at an exercise price ranging from $0.97 to $1.00 per share, the fair market price at the date of grant. The stock options vest at specified dates during a period of four years and are exercisable for a period of ten years. In May 2001, the company repriced 300,000 options previously granted to an executive at an exercise price of $1.09, the fair market price at the date of repricing (2) The Company issued stock options to non-executive employees to purchase 645,307 shares of common stock at exercise prices ranging from $0.38 to $1.38 per share, the fair market price at the date of grant. These options vest over four years and are exercisable for a period of five years. On August 1, 2001, the company repriced 373,355 options previously granted to non-executive employees to an exercise price of $1.00, the fair market price at the date of repricing. (3) Stock options were granted to various consultants to purchase 15,629 shares of common stock at an exercise price ranging from $0.38 to $1.27 per share, the fair market price at the date of grant. The fair value of these options was $14,457, and is being expensed over the vesting period. These options vest over various periods ranging from one month to four years. These options are exercisable for five years. On August 1, 2001, the Company repriced 5,419 options previously granted to consultants to an exercise price of $1.00, the fair market price at the date of repricing. (4) Stock options were granted to three non-employee Directors to purchase 120,000 shares of common stock F-20 at an exercise price $0.44, the fair market value on the date of grant. These options vest ratably over a 12 month period and are exercisable for a period of ten years. On April 3, 2001, the Company repriced 130,000 options previously granted to two directors to an exercise price of $0.44, the fair market price at the date of repricing. Information with respect to activity under the Stock Option Plans is summarized as follows: Weighted Stock Exercise Options Price ---------- -------- Balance December 31, 1998............................... 1,914,212 $2.64 Options granted......................................... 1,057,550 $7.50 Options exercised....................................... (275,372) $2.53 Options terminated...................................... (261,159) $8.29 --------- Balance December 31, 1999............................... 2,435,231 $4.22 Options granted......................................... 1,648,268 $3.79 Options exercised....................................... (147,725) $2.52 Options terminated...................................... (1,333,453) $5.16 ---------- Balance December 31, 2000............................... 2,602,321 $2.75 Options granted......................................... 1,193,536 $1.03 Options exercised....................................... (17,100) $0.69 Options terminated...................................... (627,622) $2.74 ---------- Balance December 31, 2001............................... 3,151,135 $1.26 ========== Options exercisable (vested) at December 31, 2001....... 1,852,217 $1.49 ========== Additional information about outstanding options to purchase the Company's common stock at December 31, 2001 is as follows:
Options Outstanding Options Exercisable -------------------------------------------- -------------------------- Weighted Avg. Remaining Number Contractual Weighted Avg. Number Weighted Avg. of Shares Life (In Years) Exercise Price of Shares Exercise Price --------- --------------- -------------- --------- -------------- Range of Exercise Prices: $0.01 - 0.99.............. 1,754,962 5.04 $0.74 988,050 $0.70 $1.00 - 1.99.............. 900,484 4.78 $1.04 375,978 $1.04 $2.50..................... 334,200 3.73 $2.50 334,200 $2.50 $3.01 - $4.94............. 66,489 5.34 $3.75 66,489 $3.75 $5.51 - $10.50............ 95,000 5.45 $6.73 87,500 $6.81 --------- ---- ----- --------- ----- Total..................... 3,151,135 4.85 $1.26 1,852,217 $1.49 ========= ==== ===== ========= =====
On August 1, 2001, the Board of Directors approved an option repricing plan whereby each current non-executive employees' previously issued stock options at a strike price above $1.00, were repriced to the then current market price of the common stock ($1.00). The Board believed that many of the stock options F-21 previously granted by the Company no longer provided the performance incentive intended by the option because the exercise price of many of the Company's outstanding stock options was well in excess of the market price of the common stock. Pursuant to the repricing plan, 378,774 options were repriced to $1.00. Each repriced option retained its expiration date and vesting schedule. The Company accounts for stock options issued to officers and employees under Accounting Principles Board Opinion No. 25, under which no compensation cost is recognized. Options granted to outside directors are accounted for in accordance with Statement of Financial Accounting Standards No. 123. If compensation expense for stock options issued to officers and employees had been determined based upon the fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, the net loss and basic loss per share would have been as shown below. The fair value of stock options granted under the Company's Plans was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: 2001 2000 1999 ----- ----- ----- Expected life in years................................ 6.33 7.74 5 Risk free interest rate............................... 5.17% 6.00% 6.75% Dividend yield........................................ 0% 0% 0% Expected volatility................................... 135.8% 113.7% 101.7% The weighted average fair value at the date of grant for stock options and warrants granted during 2001, 2000, and 1999 was $1.03 per option and $2.02 per warrant in 2001, $3.79 per option and $4.28 per warrant in 2000, and $6.11 per option and $7.65 per warrant, respectively. Year Ended December 31, ----------------------------------------- 2001 2000 1999 ------------ ----------- ------------ Net loss As reported..................... $(14,799,182) $(1,741,401) $(24,486,268) Pro forma....................... $(17,324,216) $(4,309,989) $(25,825,592) Net loss per share As reported..................... $ (0.76) $ (0.09) $ (1.45) Pro forma....................... $ (0.89) $ (0.22) $ (1.52) NOTE 9-CAPITAL AND OPERATING LEASES On March 11, 2000, the Company entered into a lease agreement on an approximately 30,000 square foot facility in Los Angeles, California. The base term of the lease is ten years with an option to extend an additional five years. Base rent payments are $60,078 per month with annual increases as specified in the lease agreement. Lease payments commenced July 13, 2000. Rent expense under this lease was $720,936 and $300,390 for the years ended December 31, 2001, and 2000 respectively. In conjunction with this lease agreement, Youbet.com obtained a one-year $1,029,000 letter of credit, which was secured by cash. Youbet.com is obligated for the next ten years to obtain a letter of credit equal to the original amount of $1,029,000 less $107,867 per year for every year elapsed during the first five years and less $97,867 per year for every year elapsed thereafter. As of December 31, 2001, Youbet.com had obtained a letter of credit in the amount of $920,805, which is classified as restricted cash in the Company's accompanying audited consolidated financial statements. The Company did not renew the letter of credit when it expired on March 28, 2002 and as such the landlord drew $920,805 against the letter of credit and is holding the monies as a deposit. Management intends F-22 to obtain a new letter of credit to replace the prior one. Upon replacement of the letter of credit, the landlord will refund the aforementioned deposit to the Company. On July 1, 2001 the Company entered into a lease agreement for its Oregon facility. The base term of the lease is three years. Base rent payments are $2,103 per month with annual increases as specified in the lease agreement. Rent expense for 2001 was $12,618. Future obligations under these lease agreements are as follows: Year ending December 31, Amount - ------------------------ ---------- 2002.............................................................. $ 757,365 2003.............................................................. 780,085 2004.............................................................. 789,699 2005.............................................................. 799,603 2006.............................................................. 823,591 2007 and thereafter............................................... 3,078,637 ---------- $7,028,980 ========== NOTE 10-COMMITMENTS AND CONTINGENCIES Effective March 11, 2002 Charles Champion and Youbet.com entered into an employment agreement pursuant to which Mr. Champion serves as a Director, President and Chief Operating Officer of Youbet.com through March 2005. This employment agreement provides for Mr. Champion to receive an annual salary of $200,000 during the first year and subject to annual increases. Mr. Champion received $25,000 as a signing bonus and is also eligible to receive an annual bonus during the first year to be determined by the Board in its discretion and based on attaining certain profitability goals thereafter. Mr. Champion was issued 400,000 in stock options at $0.50 per share. The Company entered into employment agreements with Russell M. Fine which provided for a term of five years and compensation of $150,000 per annum, subject to cost of living increases. Mr. Fine's agreement was terminated on May 3, 2000 and he resigned as a member of the Board of Directors and as the Chief Technology Officer. Effective May 3, 2000 Mr. Fine and Youbet.com entered into a consulting agreement pursuant to which Mr. Fine will provide consulting services to Youbet.com for a period of three years. For making his services available, Mr. Fine receives a base fee of $182,500 per year and other miscellaneous benefits. In March 2001 Ron Luniewski and Youbet.com entered into an employment agreement pursuant to which Mr. Luniewski serves as Executive Vice President and Chief Operating Officer of Youbet.com through April 2002. This employment agreement provides for Mr. Luniewski to receive an annual salary of $157,500, however, effective May 1, 2001, the salary was increased to $175,000. Mr. Luniewski was also eligible to receive an annual bonus determined by the Board in its discretion. This employment agreement replaced an employment agreement entered into between Mr. Luniewski and Youbet.com in February 2000, expiring on April 2001 which had substantially the same terms. Mr. Luniewski resigned as Co-Chief Executive Officer and Director effective March 14, 2002. Mr. Luniewski served as a non-officer employee until April 5, 2002. Effective November 8, 2001 Phillip Hermann and Youbet.com entered into an employment agreement pursuant to which Mr. Hermann would serve as Co-Chief Executive Officer and Chief Financial Officer of Youbet.com through April 2003. This employment agreement provided for Mr. Hermann to receive an annual salary of $175,000. Mr. Hermann was also eligible to receive an annual bonus determined by the Board in its discretion. Mr. Hermann was F-23 issued 100,000 in stock options at $1.00, the fair market value at the date of the grant. This employment agreement replaced an employment agreement entered into between Mr. Hermann and Youbet.com in March 2001 expiring in April 2002 which had substantially the same terms. On March 21, 2002, Mr. Hermann and Youbet.com entered into an employment agreement pursuant to which Mr. Hermann serves as President, Chief Operating Officer, and Chief Financial Officer of Youbet.com through April 2004. This employment agreement provides for Mr. Hermann to receive an annual salary of $225,000. Mr. Hermann is also eligible to receive an annual bonus determined by the Board in its discretion. Mr. Hermann was issued 200,000 in stock options at $0.64, the fair market value at the date of the grant. In addition, on October 27, 2001, Mr. Hermann and Youbet.com entered into a one year severance agreement pursuant to which upon a change of control as defined in the severance agreement, and at Mr. Hermann's election, Mr. Hermann can terminate his employment agreement and receive a lump sum payment equal to one year salary plus benefits. In addition, if Mr. Hermann elects to terminate his employment agreement, all options held by Mr. Hermann become vested immediately and Mr. Hermann will have three years to exercise his options from the date of termination. On March 28, 2002, Mr. Hermann resigned as President and Chief Operating Officer. On April 11, 2002, the Company entered into a Seperation Agreement (the "Agreement") with Mr. Hermann whereby, effective immediately, Mr. Hermann resigned as an executive officer of the Company and as a member of the Board of Directors. Mr. Hermann will continue to serve as Chief Financial Officer for up to 90 days or until he is replaced. Under the terms of the Agreement, Mr. Hermann will provide services to Youbet.com until December 31, 2003. For making his services available, Mr. Hermann will receive his annual salary and other benefits. As part of the Agreement, Mr. Hermann's stock options became fully vested and as consideration, Mr. Hermann agreed to certain restrictions on the sale of shares underlying his stock options and to relinquish 130,000 of his stock options. NOTE 11-LEGAL PROCEEDINGS On June 4, 1999, a complaint was filed against Youbet.com in the Court of Chancery of the State of Delaware in and for New Castle County entitled George Von Opel v. Youbet.com Inc. (C.A. No. 17200 NC). In the complaint Mr. Von Opel alleges that Youbet.com breached its contractual obligation pursuant to a Private Placement Memorandum by failing to register the shares of common stock underlying 400,000 warrants issued by Youbet.com to an affiliate of Mr. Von Opel. The complaint seeks specific performance of the alleged obligation to register such shares and damages for alleged breach of contract in the amount of $8.7 million. The Company has answered the complaint and intends to defend itself vigorously in the action. On August 19, 1999, Mr. Von Opel moved for summary judgment on the issue of liability, which on June 2, 2000, the court denied. The Company is proceeding with discovery and has noticed the deposition of Mr. Von Opel. As the litigation is at an initial stage, an outcome cannot be predicted at this time. On October 13, 1999, a search warrant was served on the Company by the Los Angeles Police Department in connection with an investigation by the Los Angeles Police Department and the Los Angeles County District Attorney's Office. In cooperation with the investigation, effective November 10, 1999, the Company voluntarily suspended reception and transmission of wagering information from California residents and accelerated its implementation of a new data center outside the state of California. On January 14, 2000, the Company reached a civil resolution with the Los Angeles County District Attorney and the Los Angeles Police Department. The Company entered into a stipulation with the District Attorney resulting in the entry of a civil judgment and injunction in which the Company admitted no wrongdoing and no factual or legal findings were made. In connection with the settlement, the Company disbursed a total of $1,308,250, consisting of $208,250 in cost reimbursements, $600,000 in civil payments, $300,000 in contributions to the Los Angeles County Education F-24 Foundation in support of computer education and $200,000 to the California Council on Problem Gambling. The Company incurred approximately $150,000 of legal fees in connection with this investigation. As part of the settlement, the Company agreed that until California law is clarified, California customers would not be allowed to place wagers on the You Bet Network. As of December 31, 2001, approximately 16% of Youbet.com's customers were from California. On February 21, 2002, Youbet.com received a license from the California Horse Racing Board authorizing the Company to accept online and telephone horse racing pari-mutuel wagering from California residents. The acceptance and placement of wagers will be processed through Youbet Oregon, Inc. The Company received correspondence from the Business Software Alliance ("BSA") alleging the Company had used or installed unauthorized copies of software products on its computers. In their correspondence, BSA proposed to settle their claims against the Company for a settlement amount of $824,000, based on twice the alleged value of the unauthorized software installed. Management believes that the BSA claims are substantially overstated. Management cannot predict the outcome of this claim. The Company was served with a lawsuit from a vendor claiming nonpayment of services in the amount of approximately $300,000. The Company filed a counter claim against the vendor. The Company has entered into negotiations with the vendor, and management cannot predict the outcome of these negotiations. The Company is also a party to certain other claims, actions, and proceedings incidental to its business, none of which is expected to have a material adverse effect on the business, financial position or results of operations of the Company. NOTE 12-INCOME TAXES The Company has recorded a provision for current minimum state income taxes in the accompanying consolidated financial statements. At December 31, 2001, the Company has available Federal and State net operating loss carryforwards of approximately $56,077,000 and $35,818,000, respectively, for income tax purposes, which expire in varying amounts through 2021 for federal and 2006 for state purposes. The provision differs from the expense that would result from applying the Federal statutory rate of 34% to income before taxes primarily because of state income taxes and the valuation allowance on deferred tax assets. The net operating loss carryforward generated a deferred tax asset of approximately $22,232,000 as of December 31, 2001. The deferred tax asset has not been recognized since management is unable to determine it is more likely than not that it will be realized. Accordingly, a 100% valuation allowance has been provided. Under the Federal Tax Law Internal Revenue Code Section 382, the exercise of warrants issued in 2001 may create certain significant changes in ownership that may restrict the future utilization of these tax loss carryforwards. NOTE 13-SUBSEQUENT EVENT The Company entered into a Securities Purchase Agreement on March 21, 2002, whereby the Company issued a series of one-year secured notes (the "Notes") in the aggregate principal amount of $750,000 at an interest rate of 12% to the Company's Chairman of the Board and Chief Executive Officer and seven other investors. Both principal and all interest accrued on these Notes will be payable at the earlier of a) one-year from the date of issuance, or b) upon the Company's completion of funding in an amount greater than two million dollars ($2,000,000), excluding the Notes, in any ninety-day period prior to the maturity of the Note. In connection with issuance of the Notes, the Company issued five-year warrants to purchase 750,000 shares of the Company's common stock at an exercise price of $0.50 per share. F-25 EX-10.30 3 dex1030.txt EMPLOYMENT AGREEMENT EXHIBIT 10.30 HERMANN EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") dated as of March , 2002 is --- by and between Youbet.com, Inc., a Delaware corporation ("the Company") and Phillip Hermann ("Executive"), in connection with the Company's engagement of Executive for personal services and supersedes the prior employment agreement between the Company and Executive. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: Employment by Company. --------------------- The Company hereby engages Executive, and Executive hereby agrees to serve as President, Chief Operating Officer and Chief Financial Officer of the Company on the terms and conditions of this Agreement. Throughout the Term of this Agreement Executive shall, subject to the provisions contained herein, devote substantially all of his work time to the employment described hereunder. Executive shall report solely to the Chief Executive Officer and the Board of Directors. At his election, Executive shall be a member of the Executive Committee of the Board of Directors. Location of Employment. ---------------------- Executive shall render his services at the Company's offices at 5901 Desoto, Woodland Hills, CA; provided, however, that Executive agrees to render his services at such other locations from time-to-time as the proper performance of Executive's duties may reasonably require. Notwithstanding the foregoing, the Company's principal offices shall remain in Southern California, and Executive need not relocate to render his duties hereunder. 2. TERM: The term of Executive's employment hereunder shall commence concurrently with the consummation of the sale of the notes and warrants pursuant to the terms of the Securities Purchase Agreement between the Company and the purchasers named therein (the "Effective Time") and end on April 30, 2004 (the "Term") unless sooner terminated pursuant to Section 7 hereof. After the Term the employment of Executive shall be at will, and as such either party may terminate this Agreement upon 30 days prior written notice to the other party. 3. COMPENSATION AND BENEFITS: (a) Salary. ------ During the Term, Executive shall receive a salary (the "Annual Salary") at the rate of $225,000 per annum. All Salary shall be less such deductions as shall be required to be withheld by applicable law and regulations and shall be pro-rated for any period that does not constitute a full twelve (12) month period. (b) Bonus. ----- Executive shall participate in any formal Bonus plans instituted by the Company for the benefit of Employees. Cash and or stock bonuses based on performance may be offered from time to time at the discretion of the Board of Directors of the Company. (c) Stock Options. ------------- Executive shall participate in any formal Stock Option grant instituted by the Company for the benefit of Employees. At the Effective Time, Executive shall be granted 200,000 stock options pursuant to the Company's 1998 Stock Option Plan. The 200,000 stock options will have an exercise price equal to the closing price of the Company's Common Stock on the Effective Time. The stock options will vest 25% per year commencing on the first anniversary of the Effective Time. Any unvested options shall terminate as provided in the Company's 1998 Stock Option Plan or as otherwise agreed between the Executive and the Company. All unvested options will vest upon a "Change of Control" if the Executive is employed with the Company at the time of Change of Control. For purposes of this Agreement, the term "Change of Control" shall mean, (i) the acquisition by a single entity or group of affiliated entities of more than thirty-five percent (35%) of the outstanding capital stock of the Company and which is accompanied or followed by a change either in a majority of the members of the Board or of those members of the Board who are not full time employees of the Company, or (ii) the consummation of any merger of the Company or any sale, transfer or other disposition of all or substantially all of the Company's assets, directly or indirectly, if the shareholders of the Company immediately before the consummation of such a transaction own, immediately following the consummation of such transaction on a fully-diluted basis, equity securities (other than options, warrants, or rights to acquire securities) possessing less than sixty-five percent (65%) of the voting power of the surviving or acquiring corporation (or any corporation in control of the surviving or acquiring corporation whose equity securities are issued or transferred in such transaction). (d) Severance. If this Agreement shall be terminated for any --------- reason other than (i) a termination for disability pursuant to Section 7(a) hereof, (ii) for cause pursuant to Section 7(c) hereof, (iii) without cause pursuant to Section 7(d) hereof, or (iv) with Good Reason pursuant to Section 7(e), Executive shall be entitled to receive an amount equal to three (3) months of his Annual Salary. 4. PARTICIPATION IN EXECUTIVE BENEFIT PLANS: (a) Fringe Benefits. Executive shall be permitted during the Term --------------- to participate in any group life, medical, hospitalization, dental, health and accident and disability plans, supplemental health care plans and plans providing for life insurance coverage, and any other plans and benefits, generally maintained by Company for executives of the stature and rank of Executive during the Term hereof, each in accordance with the terms and conditions of such plans (collectively referred to herein as "Fringe Benefits"); provided, however, that Company shall not be required to establish or maintain any such Fringe Benefits. (b) Vacation. Executive shall accrue, in addition to sick days -------- and days on which Company is closed, paid vacation days at the rate of one and one-quarter (1-1/4) days per month up to a maximum of fifteen (15) work days. (c) Expenses. Company will reimburse Executive for actual and -------- necessary travel and accommodation costs, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder, subject to receipt of reasonable and appropriate documentation by Company and in accordance with Company policy. Company will also reimburse Executive $750 per month for all business related operating expenses of Executive's automobile. 5. CERTAIN COVENANTS OF EXECUTIVE: Without in any way limiting or waiving any right or remedy accorded to Company or any limitation placed upon Executive by law, Executive agrees as follows: (a) Confidential Information: Executive agrees that, neither ------------------------ during the Term nor at anytime thereafter shall Executive (i) disclose to any person, firm or corporation not employed by the Company or any affiliate of either (the "Protected Company") or not engaged to render services to any Protected Company or (ii) use for the benefit of himself, or others, any confidential information of any Protected Company obtained by the Executive prior to the execution of this Agreement, during the Term or any time thereafter, including, without limitation, "know-how," trade secrets, details of suppliers, pricing policies, financial data, operational methods, marketing and sales information or strategies, product development techniques or plans or any strategies relating thereto, technical processes, designs and design projects, and other proprietary information of any Protected Company; provided, however, that this provision shall not preclude the Executive from (x) upon advice of counsel and notice to the Company, making any disclosure required by any applicable law or (y) using or disclosing information known generally to the public (other than information known generally to the public as a result of any violation of this Section 5(a)). (b) Property of Company. Any interest in trademarks, ------------------- service-marks, copyrights, copyright applications, patents, patent applications, slogans, developments and processes which the Executive, during the Term, may develop relating to the business of the Company in which the Company may then be engaged and any memoranda, notes, lists, records and other documents (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the business of any Protected Company shall belong and remain in the possession of any Protected Company, and shall be delivered to the Company promptly upon the termination of the Executive's employment with Company or at any other time on request. (c) Non-Interference. Executive will not, during the Term hereof ---------------- and for a period of two (2) years after the Term induce any person who is an executive, officer or agent, customer or supplier of the Company to terminate his relationship with the Company. 6. OTHER PROVISIONS: (a) Rights and Remedies Upon Breach. If the Executive breaches, ------------------------------- or threatens to commit a breach of, any of the provisions of Section 5 hereof (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (b) Accounting. The right and remedy to require the Executive to ---------- account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as a result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Company. (c) Severability of Covenants. If any court determines that any ------------------------- of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, --- the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) Blue-Penciling. If any court construes any of the Restrictive -------------- Covenants, or any part thereof, to be unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision and, in its reduced form, such provision shall then be enforceable. (e) Enforceability in Jurisdictions. The parties intend to and ------------------------------- hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect Company's right to the relief provided in this Section 6 in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. (f) Injunctive Relief. Executive agrees and understands that the ----------------- remedy at law for any breach by Executive of the provisions of Section 5 hereof may be inadequate and that damages resulting from such breach may not be susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon Executive's breach of any provision of Section 5 hereof, the Company shall be entitled to seek to obtain from any court of competent jurisdiction injunctive relief to prevent the continuation of such breach. Nothing contained herein shall be deemed to limit the Company's remedies at law or in equity for any breach of the provisions of Section 5 hereof which may be available to the Company. 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, ------------------------------------ Executive should (i) die or (ii) become so physically or mentally disabled whether totally or partially, that Executive is unable to perform the duties, functions and responsibilities required hereunder for (aa) a period of three (3) consecutive months or (bb) shorter periods aggregating to four (4) months within any period of twelve (12) months ("Disability"), then in such event, Company may, at any time thereafter, by written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the request of Company. A reputable physician selected by Company who is experienced in the relevant field of medicine shall make the determination of whether a Disability exists. If Executive's services are terminated, as aforesaid, Executive or the designated beneficiary of Executive, shall be entitled to receive Executive's Annual Salary, accrued share of the Bonus for that Fiscal Year and unused vacation, if any, and Fringe Benefits earned through the date of Executive's termination and continuing thereafter through the end of the Term and shall also receive four (4) months' of his Annual Salary. The Company shall deduct any disability payments made to Executive from any insurance source from payments required to be made to Executive after the termination date. (b) Designation of Beneficiary. The parties hereto agree that the -------------------------- Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 7 in the event of his death and the Executive may change the designation of any such beneficiary from time to time by written notice to the Company. In the event the Executive fails to designate a beneficiary as herein provided, any payments which are to be made to the Executive's designated beneficiary under Section 7 shall be made to the Executive's widow, if any, during her lifetime. If the Executive has no designees or widow, such payments shall be paid to the Executive's estate. (c) Termination for Cause. The Company shall have the option to --------------------- terminate Executive upon the occurrence of any of the following: Executive shall have breached any of the terms of this Agreement and shall have failed to cure such breach (if such breach is curable) within 15 days of notice thereof by the Company; Executive shall have been convicted of a crime involving moral turpitude Executive shall materially breach any of the representations and warranties hereunder. If Executive's services are terminated as set forth in this subsection, Executive's services shall cease as of such effective date of termination and all compensation shall cease as of such effective date. (d) Termination Without Cause. If the Executive is terminated by ------------------------- the Company without cause the Executive shall be entitled to receive his Annual Salary, health benefits, accrued share of any bonus for that year and unused vacation, if any, earned through the date of Executive's termination. Executive shall also receive his Annual Salary and additional compensation equal to the current health benefits until the end of the Term, and for an additional four (4) months thereafter. Notwithstanding the above, if the Company sells, transfers, or otherwise divests itself to of a majority interest of the Domestic horse racing business to an independent party and the Executive is offered comparable employment terms with the acquiring entity, then no additional pay or benefits shall be due except as accrued through normal service. (e) Termination With Good Reason. If during the Term the Company ---------------------------- retains another President or Chief Operating Officer or person performing the duties normally attendant to such officers, Executive may, by notice to the Company within three (3) months of the retention of such person, terminate this Agreement. In such case Executive shall continue to receive all compensation and other benefits provided hereunder for twelve (12) months following the termination of this Agreement. Payments due to Executive pursuant to this Section 7(e) shall not be offset or reduced by payments received from other employers. (f) Executive Stock Options. If the Executive is terminated ----------------------- without cause by the Company during the Term or Executive terminates this Agreement for Good Reason, the period within which Executive must exercise stock options granted under the 1995 Stock Option Plan or the 1998 Stock Option Plan shall be changed to three years and all options granted to Executive which would have vested during the Term shall vest. 8. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES: (a) Right to Enter Into Agreement. Executive has the unfettered ----------------------------- right to enter into this entire Agreement on all of the terms, covenants and conditions hereof; and Executive has not done or permitted to be done anything, which may curtail or impair any of the rights granted to Company herein. (b) Breach Under Other Agreement or Arrangement. Neither the ------------------------------------------- execution and delivery of this Agreement nor the performance by Executive of any of his obligations hereunder will constitute a violation or breach of, or a default under, any agreement, arrangement or understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. (c) Services Rendered Deemed Special, Etc. Executive acknowledges ------------------------------------- and agrees that the services to be rendered by him hereunder are of a special, unique, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be adequately compensated for in an action at law and that a breach of any term, condition or covenant hereof will cause irreparable harm and injury to the Company and in addition to any other available remedy the Company will be entitled to seek injunctive relief. 9. USE OF NAME: The Company shall have the right during the Term hereof to use Executive's name, biography and approved likenesses in connection with Company's business, including advertising their products and services; and the Company may grant such rights to others, but not for use as a direct endorsement. 10. ARBITRATION: Any dispute whatsoever arising out of or referable to this Agreement, including, without limitation, any dispute as to the rights and entitlements and performance of the parties under this Agreement or concerning the termination of Executive's employment or of this Agreement or its construction or its validity or enforcement, or as to the arbitrator's jurisdiction, or as to the ability to arbitrate any such dispute, shall be submitted to final and binding arbitration in Los Angeles, California by and pursuant to the Labor Arbitration Rules of the American Arbitration Association with discovery proceedings pursuant to Section 1283.05 of the California Code of Civil Procedure. The arbitrator shall be entitled to award any relief, which might be available at law or in equity, including that of a provisional, permanent or injunctive nature. The prevailing party in such arbitration as determined by the arbitrator, or in any proceedings in respect thereof as determined by the person presiding, shall be entitled to receive its or his reasonable attorneys' fees incurred in connection therewith. 11. NOTICES: (a) Delivery. Any notice, consent or other communication under -------- this Agreement shall be in writing and shall be delivered personally, telexed, sent by facsimile transmission or overnight courier (regularly providing proof of delivery) or sent by registered, certified, or express mail and shall be deemed given when so delivered personally, telexed, sent by facsimile transmission or overnight courier, or if mailed two (2) days after the date of deposit in the United States mail as follows: to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): If to Phillip Hermann, to his address at: 10809 Eton Avenue Chatsworth, CA 91311 If to Company, to its address at: Youbet.com, Inc. 5901 Desoto Avenue Woodland Hills, CA 91367 Attention: Chief Executive Officer Fax (818) 668-2121 Copy to: Christensen, Miller, Fink, Jacobs Glaser, Weil & Shapiro, LLP 2121 Avenue of the Stars, 18th Floor Los Angeles, CA, 90067 Attention: Steve Silbert (b) Change of Address. Either party may change its address for ----------------- notice hereunder by notice to the other party in accordance with this Section 11. 12. COMPLETE AGREEMENT; MODIFICATION AND TERMINATION: This Agreement together with the Agreement of even date herewith between the Company and Executive, a copy of which is attached hereto, contains a complete statement of all the arrangements between the parties with respect to the matters covered hereby and, supersedes all existing agreements between the parties concerning the subject matter hereof, including that certain Employment Agreement dated as of February 23, 1999 between the Company and Executive and that certain Employment Agreement dated November 8, 2001 between the Company and the Executive (the "Previous Agreement"); provided that until the Effective Time the Previous Agreement shall remain in full force and effect. This Agreement may be amended, modified, superseded or canceled, and the terms and conditions hereof may be waiver, by the party waiving compliance. No delay on the part of any party in exercising any shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right or remedy, nor any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 13. GOVERNING LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements entered into and performed entirely within such State. 14. HEADINGS: The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. 15. INDEMNIFICATION: The Company will indemnify, defend, and hold Executive harmless from any costs, claims, causes of action, or liabilities (including reasonable attorney's fees) arising out of: (i) any breach of the Company's covenants, warranties, or representations; and (ii) any other matter relating to or arising out of Executive's employment hereunder which does not arise from Executive's gross negligence, willful misconduct, or a breach of Executive's covenants, warranties, or representations hereunder. WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. By: ------------------------------ Phillip Hermann Agreed to and Accepted: Youbet.com, Inc., a Delaware corporation By: ---------------------------- Its: --------------------------- EX-10.31 4 dex1031.txt SECURITIES PURCHASE AGREEMENT Exhibit 10.31 SECURITIES PURCHASE AGREEMENT By and Between David Marshall, Inc. as the Purchaser and Youbet.com, Inc. as the Company Dated: March 14, 2002 EXECUTION COPY THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made as of March 14, 2002 by and between Youbet.com, Inc. a Delaware corporation (the "Company") and David Marshall, Inc., a California corporation (the "Purchaser"). RECITALS A. The Purchaser desires to purchase from the Company, and the Company desires to issue to the Purchaser, or its designee, a note in the aggregate principal amount of $750,000 (the "Notes"); B. In partial consideration of the Purchaser purchasing the Note, the Company has agreed to issue to the Purchaser, or its designee, a five year Warrant (the "Warrant") to purchase up to 750,000 shares of common stock, of the Company (the "Warrant Shares"). The exercise price of the Warrant shall be $.50 per share. C. The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Regulation D ("Regulation D") or as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"); and D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering (a) a Registration Rights Agreement (the "Registration Rights Agreement") substantially in the form of Exhibit B attached hereto pursuant to which the Company has agreed to provide certain piggyback registration rights under the Securities Act and the rules and regulations promulgated thereunder and applicable state securities laws with respect to the Warrant Shares; (b) the Note, substantially in the form of Exhibit C attached hereto; (c) the Warrant, substantially in the form of Exhibit D; and (d) the Security Agreement, substantially in the form of Exhibit E attached hereto. This Agreement, the Registration Rights Agreement, the Security Agreement, the Note and the Warrant are sometimes hereinafter collectively referred to as the "Transaction Documents." AGREEMENTS NOW, THEREFORE, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Company and the Purchaser hereby agree as follows: 1. ISSUANCE SALE AND DELIVERY OF SECURITIES. a. Issuance of the Note. Subject to the terms and conditions set -------------------- forth in this Agreement and in reliance upon the representations and warranties contained herein, the Company agrees to issue and sell to Purchaser, or its designees, and Purchaser hereby agrees to purchase from the Company the Note. The Note shall be (a) for a term of 12 months, with interest at the rate of 12% per annum and no amortization payable during the term, and (b) substantially in the form attached hereto as Exhibit C. The purchase and issuance of the Note shall be effected at a Closing (the "Closing"). b. Warrant. The Company will issue and deliver to the Purchaser, ------- or to such other persons as the Purchaser shall otherwise designate, a Warrant to purchase shares of common stock in the amounts designated on Exhibit A hereto. The per share "Purchase Price" of common stock as defined in the Warrant shall be $.50 per share. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of the Purchaser 2 is hereby also made and granted to the holders of the Warrant in respect of the Warrant and shares of the Warrant Shares. c. Signing. Concurrently with the execution of this Agreement ------- (the "Signing"), the Purchaser shall deposit into escrow a check in the amount of $50,000 (the "Deposit"). The escrow shall be with the law firm of Loeb & Loeb LLP, counsel to the Purchaser. In the event that the Closing does not occur on or before March 28, 2002, through no fault of the Company, the Deposit shall be delivered to the Company as liquidated damages. d. Closing. The closing of the purchase and sale of the Note and ------- the Warrant (the "Closing") shall be held at the offices of Loeb & Loeb in Los Angeles, California, or at such other location as shall be agreed upon by the parties hereto. At the Closing, the Company shall deliver the Note and a Warrant to the Purchaser, or such other persons as the Purchaser shall otherwise designate, and the Purchaser shall pay an aggregate of $750,000 to the Company by cashiers' check, certified funds or wire transfer. 2. PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Purchaser understands, agrees with, and represents and warrants to the Company with respect to its purchase hereunder, that: a. Investment Purposes; Compliance With Securities Act. The --------------------------------------------------- Purchaser is purchasing the Note and the Warrant for its own account for investment only and not with a view towards, or in connection with, the public sale or distribution thereof, except pursuant to sales registered under or exempt from the Securities Act. b. Accredited Investor Status. The Purchaser is an "accredited -------------------------- investor" as that term is defined in Rule 501 (a) of Regulation D. The Purchaser is a sophisticated investor and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment made pursuant to this Agreement. The Purchaser is aware that it may be required to bear the economic risk of an investment made pursuant to this Agreement for an indefinite period of time, and is able to bear such risk for an indefinite period. c. Reliance on Exemptions. The Purchaser understands the Note and ---------------------- the Warrant is being offered and sold to it in reliance on specific exemptions from the registration requirements of the applicable United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser's compliance with, the representations, warranties, acknowledgments, understandings, agreements and covenants of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Note and the Warrant. d. Information. The Purchaser and its advisors, if any, have been ----------- furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Note and the Warrant that have been requested by the Purchaser. The Purchaser and its advisors, if any, have been afforded the opportunity to ask all such questions of the Company as they have in their discretion deemed advisable. The Purchaser understands that its investment in the Note and the Warrant involves a high degree of risk. The Purchaser has sought such accounting, legal and tax advice as it has considered necessary to an informed investment decision with respect to the investment made pursuant to this Agreement. 3 e. Transfer or Resale. Except as provided in Section 2(e), the ------------------ Purchaser understands that: (i) except as provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless either (a) subsequently registered thereunder or (b) the Purchaser shall have delivered to the Company an opinion by counsel reasonably satisfactory to the Company, in form, scope and substance reasonably satisfactory to the Company, to the effect that the Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, (ii) any sale of such Securities made in reliance on Rule 144 (as hereafter defined) may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of such Securities under circumstances in which the Company (or the person though whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission, (the "SEC") thereunder, and (iii) neither the Company nor any other person is under any obligation to register such Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to this Agreement or the Registration Rights Agreement). f. Legends. The Note shall bear the following legend: ------- "THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. EXCEPT AS PROVIDED IN SECTION 2(E) OF THE SECURITIES PURCHASE AGREMENT, DATAED AS OF AN EVEN DATE HEREWITH, THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENSE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO YOUBET.COM, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (a) The Warrant Shares shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES LAWS, THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO YOUBET.COM, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (b) The Warrant shall bear the following legend: "THIS WARRANT AND THE COMMON SHARED ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. EXCEPT AS PROVIDED IN SECTION 2(E) OF THE SECURITIES PURCHASE AGREMENT, DATAED AS OF AN EVEN DATE HEREWITH, THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENSE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONBALY SATISFACTORY TO THAT SUCH REGISTRATION IS NOT REQUIRED." 4 The Legend shall be removed and the Company will issue certificates without the Legend in accordance with Section 5(b). g. Authorization; Enforcement. The Transaction Documents have -------------------------- been duly and validly authorized, executed and delivered by the Purchaser and are each and collectively valid and binding agreements of the Purchaser enforceable in accordance with their terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. h. Brokers. The Purchaser has taken no action that would give ------- rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement and the transactions contemplated hereby. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company understands, agrees with, and represents and warrants to the Purchaser that: a. Organization and Qualification. The Company and its ------------------------------ subsidiaries are duly organized and existing in good standing under the laws of the respective jurisdictions in which they are incorporated and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiary is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. "Material Adverse Effect" as used herein means any material adverse effect on the operations, properties or financial condition of the Company and its subsidiaries taken as a whole. The Company has complied with all requirements of the SEC, the National Association of Securities Dealers applicable blue sky laws and the Nasdaq with respect to the issuance of the Securities. b. Authorization; Enforcement. (i) the Company has the requisite -------------------------- corporate power and authority to enter into and perform the Transaction Documents to issue and sell the Note and the Warrant in accordance with the terms hereof, and to perform its obligations under the Note and the Warrant in accordance with the requirements of the same, (ii) the execution, delivery and performance of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) the Transaction Documents, have been duly and validly authorized, executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting, generally, the enforcement of creditors' rights and remedies or by other equitable principles of general application. c. Capitalization. As of the date hereof, the authorized capital -------------- stock of the Company consists of 100,000,000 shares of Common Stock of which 19,537,950 shares were issued and outstanding; and 1,000,000 shares of preferred stock, par value $.001, of which there are no shares outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. No shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances. Except as disclosed in Schedule 3(c) attached, as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or arrangements by which the Company or any 5 of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities, and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of its or their securities under the Securities Act (except as disclosed in Schedule 3(c) attached and as provided herein and in the Registration Rights Agreement). d. Acknowledgment Regarding Purchaser's Purchase of the ----------------------------------------------------- Securities. The Company acknowledges and agrees that the Purchaser is not acting - ---------- as financial advisor to or fiduciary of the Company (or in any similar capacity with respect to this Agreement or the transactions contemplated hereby), that this Agreement and the transactions contemplated hereby, and the relationship between the Purchaser and the Company, are and will be considered "arms-length" notwithstanding any other or prior agreements or nexus between the Purchaser and the Company, whether or not disclosed, and that any statement made by the Purchaser, or any of its representatives or agents, in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation, is merely incidental to The Purchaser' purchase of the Securities and has not been relied upon in any way by the Company, its officers or directors. The Company further represents to the Purchaser that the Company's decision to enter into this Agreement and the transactions contemplated hereby have been based solely upon an independent evaluation by the Company, its officers and directors. e. Investment Company Act. Neither the Company nor any of its ---------------------- subsidiaries is subject to regulation under The Investment Company Act of 1940, as amended. f. No Integrated Offering. Neither the Company, nor any of its ---------------------- affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any Securities or solicited any offers to buy any Securities under circumstances which would prevent the parties hereto from consummating the transactions contemplated hereby pursuant to an exemption from registration under the Securities Act and specifically in accordance with the provisions of Regulation D. The transactions contemplated hereby are exempt from the registration requirements of the Securities Act and all state securities laws, assuming the accuracy of the representations and warranties contained herein of the Purchaser. g. No Conflicts. The execution, delivery and performance of this ------------ Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). h. Consents. Except as set forth in Schedule 3(h) and the filing -------- of a Form D with the United States Securities and Exchange Commission, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents. i. SEC Reports. The Company has filed all proxy statements, ----------- reports and other documents required to be filed by it under the Exchange Act. The Company has furnished the 6 Purchaser with copies of (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and a draft of its Annual Report on Form 10-K for the fiscal year ended December 31, 2001; and (ii) its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2001, June 30, 2001 and September 30, 2001 (collectively, the "SEC Reports"). Each SEC Report was in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. j. Listing. The Company's Common Stock is listed for trading on ------- The Nasdaq National Market. The Company has received notice that its Common Stock will be delisted from the Nasdaq National Market on the grounds that the Common Stock does not meet all requirements for the continuation of such listing. k. Absence of Certain Changes. Since the date of the financial -------------------------- statements, there has been no material adverse change and no material adverse development in the business, properties, operation, financial condition, results of operations or prospects of the Company; provided that the Company must raise additional cash to continue its operations and expects that its auditor will express doubt regarding the Company's ability to continue as a going concern in its report on the Company's financial statements for the year ended December 31, 2001. l. Absence of Litigation. Except as set forth in Schedule 3(l) --------------------- and in the Company's filings with the United States Securities and Exchange Commission, which Purchaser has reviewed, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein. m. Brokers; No General Solicitation. The Company has taken no -------------------------------- action that would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement and the transactions contemplated hereby. Neither the Company nor any distributor participating on the Company's behalf in the transactions contemplated hereby nor any person acting for the Company, or any such distributor, has conducted any "general solicitation," as described in Rule 502(c) under Regulation D, with respect to the securities being offered hereby. n. Title to Assets and Liens. Except as set forth on Schedule ------------------------- 3(n), the Company has good and marketable title to the Assets owned by it and the valid and enforceable right to receive and/or use each of the Assets in which the Company has any other interest, free and clear of all Liens. As used herein (i) "Liens" shall mean any lien, encumbrance, pledge, mortgage, security interest, lease, charge, conditional sales contract, option, restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever; and (ii) "Assets" shall mean all of the goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Company, which are owned by the Company or in which the Company has any interest (including the right to use). 4. COVENANTS. a. Best Efforts. Each party shall use its best efforts timely to ------------ satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. 7 b. Securities Laws. The Company agrees to timely file all reports --------------- and other documents required to be filed with the SEC, specifically, a Form D (or equivalent form required by applicable state law) with respect to the Securities if and as required under Regulation D and applicable state securities laws and to provide a copy thereof to the Purchaser promptly after such filing. c. Reporting Status. As of the date of this Agreement, the ---------------- Company is subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). So long as the Purchaser beneficially owns any of the Securities, the Company shall file all reports required to be filed by the Company with the SEC pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations hereunder would permit such termination. d. Expenses. Except as set forth in Section 8(m), each party -------- shall pay their own respective expenses in connection with the transactions contemplated by the Agreement. e. Resignation. Concurrently with the signing of this Agreement, ----------- Mr. Robert Fell shall execute the Resignation Agreement in the form of Exhibit F attached hereto, pursuant to which he agrees to resign as a director and Chairman of the Board of Directors of the Company at the Closing. f. Board Appointments. The Company agrees that for ninety (90) ------------------ days from the date of the Closing, David Marshall may appoint up to three (3) members to the Board of Directors of the Company, subject to reasonable due diligence of each such appointee. g. Hermann Employment Agreement. Upon consummation of the ---------------------------- purchase and sale of the Note and Warrant the Company shall enter into an Employment Agreement with Philip Hermann in the form attached hereto as Exhibit G. 5. LEGEND AND TRANSFER INSTRUCTIONS. a. Transfer Agent Instructions. All certificates shall bear the --------------------------- restrictive legend specified in Section 2(f) of this Agreement only to the extent required by applicable law and as specified in the Transaction Documents. The Company warrants that no instruction other than such instructions referred to in this Section 5 will be given by the Company to its transfer agent and that the Warrant Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent permitted by applicable law and provided by this Agreement and the Registration Rights Agreement. Nothing in this Section shall affect in any way any Purchaser's obligations and agreement to comply with all applicable securities laws upon resale of the Warrant Shares. If the Purchaser (x) provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration by the Purchaser of the Warrant Shares is not required under the Securities Act, or (y) transfers Securities to an affiliate which is an accredited investor (in accordance with the provisions of this Agreement) or in compliance with Rule 144, then in either instance the Company shall permit the said transfer, and if applicable promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Purchaser. b. Removal of Legends. The Legend shall be removed and the ------------------ Company shall issue a certificate without such Legend to the holder of any Warrant Share upon which it is stamped, and a certificate for a Share shall be originally issued without the Legend, if, unless otherwise required by state securities laws, (x) the sale of such Warrant Share is registered under the Securities Act, or (y) such 8 holder provides the Company with an opinion by counsel reasonably satisfactory to the Company, that is in form, substance and scope reasonably satisfactory to the Company, to the effect that a public sale or transfer of such Warrant Share may be made without registration under the Securities Act or (z) such holder provides the Company with assurances reasonably satisfactory to the Company and its counsel, that such Share can be sold pursuant to Rule 144. The Purchaser agrees that its sale of all Securities, including those represented by a certificate(s) from which the Legend has been removed, or which were originally issued without the Legend, shall be made only pursuant to an effective registration statement (and to deliver a prospectus in connection with such sale) or in compliance with an exemption from the registration requirements of the Securities Act. In the event the Legend is removed from any Warrant Share or any Warrant Share is issued without the Legend and thereafter the effectiveness of a registration statement covering the sales of such Warrant Share is suspended or the Company determines that a supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance notice to the holder of such Warrant Share, the Company shall be entitled to require that the Legend be placed upon any such Warrant Share which cannot then be sold pursuant to an effective registration statement or Rule 144 or with respect to which the opinion referred to in clause (y) next above has not been rendered, which Legend shall be removed when such Warrant Share may be sold pursuant to an effective registration statement or Rule 144 (or such holder provides the opinion with respect thereto described in clause (y) next above. c. Injunctive Relief for Breach. The Company acknowledges that ---------------------------- the remedy at law for a breach of its obligations under Sections 5(a) and 5(b) above will cause irreparable harm to the Purchaser by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly the Company agrees that the remedy at law for a breach of its obligations under such Sections would be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of such Sections, the Purchaser shall be entitled, in addition to all other remedies at law or in equity, to an injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other Warrant Share being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligations of the Company hereunder are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. The parties shall have executed this Agreement, the Security Agreement and the Registration Rights Agreement. b. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the Closing as though made at that time (except for representations and warranties that speak as of a specific date). The Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by The Purchaser at or prior to the Closing. c. The Purchaser shall have provided a schedule of its designees, if any. d. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. 9 e. All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made. 7. CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE. The obligations of the Purchaser are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the sole benefit of the Purchaser and may be waived by the Purchaser at any time in its sole discretion: a. The Company shall have executed this Agreement, the Security Agreement and the Registration Rights Agreement and shall have issued and delivered the Note and the Warrant. b. The representations and warranties of the Company shall be true and correct in all material respects as of the Closing (except for representations and warranties that speak as of a specific date). The Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing. The Purchaser may require a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing, to the foregoing effect and as to such other matters as may be reasonably requested by the Purchaser. c. The Common Stock shall not have been suspended by the SEC or other relevant regulatory agency. d. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. e. David Marshall shall have been elected Chairman of the Board of Directors and appointed the sole Chief Executive Officer of the Company. f. All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made. 8. GOVERNING LAW; MISCELLANEOUS. a. Governing Law and Venue. This Agreement shall be governed by ----------------------- and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Agreement, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement (including also all Exhibits or Schedules hereto) or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 10 b. Counterparts. This Agreement may be executed in two or more ------------ identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and signature pages from such counterparts have been delivered. c. Headings; Gender, Etc. The headings of this Agreement are for --------------------- convenience of reference and shall not form a part of, or affect the interpretation of this Agreement. As used herein, the masculine shall refer to the feminine and neuter, the feminine to the masculine and neuter, and the neuter to the masculine and feminine, as the context may require. As used herein, unless the context clearly requires otherwise, the words "herein," "hereunder" and "hereby," shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears. If any date specified herein falls upon a Saturday, Sunday or public or legal holidays, the date shall be construed to mean the next business day following such Saturday, Sunday or public or legal holiday. For purposes of this Agreement, a "business day" is any day other than a Saturday, Sunday or public or legal holiday. d. Severability. If any provision of this Agreement shall be ------------ invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement and the ---------------------------- instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. f. Notices. Any notices required or permitted to be given under ------- the terms of this Agreement shall be sent by U.S. Mail or delivered personally or by courier or via facsimile (if via facsimile, to be followed within three (3) business days by an original of the notice document via U.S. Mail or courier) and shall be effective five (5) days after being placed in the mail, if mailed, certified or registered, return receipt requested, or upon receipt, if delivered personally or by courier or by facsimile, in each case properly addressed to the party to receive the same. The addresses for such communications shall be: If to the Company: Youbet.com, Inc. 5901 DeSoto Avenue Woodland Hills, CA 91367 Telephone: (818) 668-2100 Facsimile: (818) 668-2101 If to the Purchaser, at the address on Exhibit A of this Agreement. Each party shall provide written notice to the other party of any change in address. g. Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of the parties and their respective successors and assigns. Neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent shall not be unreasonably withheld), and in any event any assignee of the Purchaser shall be an accredited investor (as defined in Regulation D), in the written opinion of counsel who is reasonably satisfactory to Company and in form, substance and scope reasonably satisfactory to the Company. Notwithstanding anything herein to the contrary, Purchaser may pledge the 11 Securities as collateral for a bona fide loan with a third party lender, and such pledge shall not be considered an assignment in violation of this Agreement so long as it is made in compliance with all applicable law. h. No Third Party Beneficiaries. This Agreement is intended for ---------------------------- the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. Unless this Agreement is terminated under Section -------- 8(1), the representations and warranties of the Company and the Purchaser contained in Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and 8 shall survive the final Closing of the purchase and sale of Securities purchased and sold hereby. j. Publicity. The Company and the Purchaser shall have the right --------- to review before issuance by the other, any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without prior consultation with or approval of the Purchaser, to make any press release or other public disclosure with respect to such transactions as is required by applicable law and regulations. k. Further Assurance. Each party shall do and perform, or cause ----------------- to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. l. Remedies. No provision of this Agreement providing for any -------- specific remedy to a party shall be construed to limit such party to the specific remedy described, and any other remedy that would otherwise be available to such party at law or in equity shall be so available. Nothing in this Agreement shall limit any rights a party may have with any applicable federal or state securities laws with respect to the transactions contemplated hereby. m. Purchaser's Legal Fees. At the Closing, the Purchaser shall be ---------------------- entitled to deduct from the amount advanced to the Company at the Closing the amount of legal fees and expenses incurred by the Purchaser's legal counsel, Loeb & Loeb LLP in connection with the preparation and negotiation of this Agreement and the other collateral documents and the transactions provided for herein up to $10,000. n. Termination. Either party may terminate this Agreement upon ----------- written notice to the other party. Except for the obligation to deliver the Deposit as provided herein, upon termination of this Agreement, this Agreement will forthwith become null and void and there will be no liability or obligation on the part of the parties hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the Purchaser and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. YOUBET.COM, INC. By: ----------------------------------- Name: Title: DAVID MARSHALL, INC.: By: ----------------------------------- Name: Title: 13 Schedule 3(c) - -------------------------------------------------------------------------------- Capitalization March 12, 2002 - -------------------------------------------------------------------------------- Common stock outstanding 19,537,950 - -------------------------------------------------------------------------------- Stock options and warrants - -------------------------------------------------------------------------------- Stock options 3,195,286 - -------------------------------------------------------------------------------- Warrants 33,202,022 - -------------------------------------------------------------------------------- Total 55,935,258 - ----------------------------------------------------------------------========== Warrants - -------------------------------------------------------------------------------- TVG (1) - -------------------------------------------------------------------------------- First warrant 3,884,650 - -------------------------------------------------------------------------------- Second warrant 24,081,312 - -------------------------------------------------------------------------------- Total 27,965,962 - -------------------------------------------------------------------------------- Others 5,236,060 - -------------------------------------------------------------------------------- Total 33,202,022 - ----------------------------------------------------------------------========== (1) The number of TVG warrants will increase if the company issues additional securities. - -------------------------------------------------------------------------------- 14 Schedule 3(h) Consents . The Company may have to file a transaction notice under Section 25102 of the California Corporations Code. The Company may be required to make additional filings under applicable state securities laws. . The Company may have to file a Form D with the Securities and Exchange Commission and comply with certain Blue Sky requirements. 15 Schedule 3(l) Litigation . The Company was served with a complaint by SRC Advertising, Inc. (SRC Advertising, Inc. v. Youbet.com, Los Angles Superior Court BC 268486). The Complaint seeks damages arising from an alledged breach of an agreement between the parties. . The Company received a letter from counsel to the Financial Relations Board seeking payment of outstanding invoices in the amount of $89,308 . Thorougbred Sports Network, Inc. 16 EXHIBIT A PURCHASER/DESIGNEE To be provided by the Purchaser prior to the Closing 17 EXHIBIT B REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of the day of March , 2002 by and among Youbet.com, Inc. a ----- -- Delaware corporation, (the "Company") and persons listed in Exhibit A (collectively the "Investor"). RECITALS A. Reference is made to that certain Securities Purchase Agreement dated as of March , 2002 (the "Purchase Agreement") by and between the -- Company and the Investor. B. To induce Investor to consent to the execution of the Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by all parties hereto, the Company and the Investor hereby agree as follows: 1. CERTAIN DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. "Company's Common Stock" or "Common Stock" shall mean the Common Stock ---------------------- ------------ of the Company. A "Controlling Person" of a particular entity shall mean a person that ------------------ controls such entity within the meaning of Section 15 of the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. "Holder" shall mean Investor and any other person holding Registrable ------ Securities to whom the rights under the Agreement have been transferred in accordance with Section 9. "Registrable Securities" shall mean any Common Stock of the Company ---------------------- issued or issuable upon exercise of the Warrant or in respect of such common stock upon any stock split, stock dividend, recapitalization, or similar event; provided, however, that shares of Common Stock or other securities shall only be - -------- ------- treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker, dealer or underwriter in a public distribution or a public securities transaction, or (B) sold, or are otherwise available for sale in the opinion of counsel to the Company, in a transaction (including, without limitation a Rule 144 transaction) exempt from Exhibit 10.31 registration and prospectus delivery requirements, and any restrictive legends with respect thereto are removed upon the consummation of such sale, or (C) sold by a Holder without compliance with Section 8 hereof. The terms "register," "registered" and "registration" shall refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses, except as otherwise --------------------- stated below, incurred by the Company in complying with Section 3 including, without limitation all registration, qualification and filing fees, printing expenses, escrow fees, messenger and delivery expenses, fees and disbursements of counsel, accountants, investment bankers and other person retained by the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Securities Act" means the Securities Act of 1933, as amended. -------------- "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders. "Warrant Shares" means the shares of Common Stock issuable upon -------------- exercise of the Warrant issued in connection with the Purchase Agreement. Any other capitalized terms used herein that are not otherwise defined above shall have the meaning set forth in the Purchase Agreement. 2. SECURITIES SUBJECT TO THIS AGREEMENT a. Registrable Securities. The securities entitled to the ---------------------- benefits of this Agreement are the Registrable Note Securities (collectively, the "Registrable Securities"). b. Holders of Registrable Securities. A Person is deemed to be a --------------------------------- holder of Registrable Securities whenever such Person owns Registrable Securities or has the right to acquire such Registrable Securities, whether or not such acquisition has actually been effected and disregarding any legal restrictions upon the exercise of such right. 3. PIGGYBACK REGISTRATIONS a. Notice and Request to Piggyback. Whenever the Company files ------------------------------- any Registration Statement with the Securities and Exchange Commission, other than (i) a registration statement on Form S-8 or otherwise relating solely to employee benefit plans or (ii) a registration statement on any other form which does not permit secondary sales, the Company will give written notice to all holders of Registrable Securities of its intention to effect such a registration not later than Fifteen (15) days prior to the anticipated filing date and offer to such holders of Registrable Securities the opportunity to register the number of Registrable Securities as each such holder may request (a "Piggyback Registration"). Subject to the provisions of the Section 3, the Company will include in such Piggyback Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten (10) business days after the receipt by the applicable holder of the Company's notice. 2 Exhibit 10.31 All Persons whose securities are included in the Piggyback Registration shall be obligated to sell their securities on the same terms and conditions as apply to the securities being issued and sold by the Company. b. Priority on Primary Registration. In the case of any -------------------------------- underwritten offering, if the managing underwriters advise the Company in writing that in their opinion the total number of shares of Common Stock requested to be included in such registration exceeds the number of shares of Common Stock which can be sold in such offering, the Company will include in such registration: (a) first, all shares of Common Stock the Company proposes to sell; (b) second, all shares of Common Stock of holders (including holders of options and warrants to purchase common stock) who have superior registration rights in such underwriting; and (c) third, the Registrable Securities and such other shares of Common Stock requested to be included in such registration in excess of the number of shares of Common Stock the Company or such holders of superior registration rights propose to sell which, in the opinion of such underwriters, can be sold. c. Selection of Underwriters. The Company, in its sole ------------------------- discretion, will have the right to select the investment banker or investment bankers and manager or managers to administer the offering. d. Underwriting Agreement. If Holders elect to participate in an ---------------------- underwritten public offering pursuant to this Section 3, all Holders proposing to distribute their Registrable Securities through the applicable Piggyback Registration shall enter into, and perform such obligations set forth in an underwriting agreement in customary form, including, without limitation, indemnification and contribution obligations, with the managing underwriter(s) selected by the Company for such underwritten public offering. 4. EXPENSES OF REGISTRATION All Selling Expenses relating to securities registered on behalf of the Holders in connection with registrations pursuant to Section 3 shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered, and all Registration Expenses in connection with registrations pursuant to the Agreement shall be borne by the Company, provided that the fees and expenses of counsel, accountants, advisers and other persons retained by the Holders to represent them in connection with any registrations pursuant to Section 3, and the expenses of special audits, if any, required exclusively by the inclusion of the Registrable Securities in any registration pursuant to Section 3, shall be borne by the Holders in proportion to the aggregate selling price of the Registrable Securities of each Holder to be so registered. 5. REGISTRATION PROCEDURES In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Additionally, the Company will furnish to the Holders participating in such registration and to the 3 Exhibit 10.31 underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such Holders and underwriters may reasonably request in order to facilitate the public offering of such securities. 6. INDEMNIFICATION a. Indemnification. To the extent permitted by law, each party --------------- will indemnify the other party and each of its respective officers, directors, Investors, employees, representatives and partners, and each Controlling Person, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each Controlling Person of any underwriter, against all reasonable expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in any investigation or inquiry or in any settlement of any litigation commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by of the Securities Act, the Exchange Act, or any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law applicable in connection with any such registration, qualification or compliance, and each party will reimburse the other party and each of its respective officers, directors, Investors, employees, representatives and partners, and each such Controlling Person, each such underwriter and each such Controlling Person of any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 6 shall not (i) apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the other party (which consent shall not be unreasonably withheld); (ii) apply to any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished to the other party expressly for use in connection with such registration, underwriter, or controlling person; or (iii) inure to the benefit of any underwriter from whom the person asserting any such loss, claim, damage or liability purchased the Registrable Securities which are the subject thereof (or to the benefit of any person controlling such underwriter) with respect to a preliminary prospectus or final prospectus if such underwriter (if required by the Act) failed to send or give a copy of the most recent prospectus, if the most recent prospectus furnished by the Company shall correct the untrue statement or alleged untrue statement or omission or alleged omission which is the basis of the loss, claim, damage, liability, or action for which indemnification is sought, to such person at or prior to the written confirmation of the sale of such Registrable Securities to such person. Notwithstanding the foregoing, in the case of a registration under Section 3 the liability of any selling Holder of Registrable Securities under this Section 6 shall be limited to an amount equal to the net proceeds received by such Holder for securities sold by it in such offering, unless such liability arises out of or is based on willful conduct of the Holder or its officers, directors, agents or employees. Furthermore, the Company shall only be obligated under this Section 6 to pay the legal expenses of one law firm which has been chosen to represent all of the Holders. 4 Exhibit 10.31 b. Defense of Claims. Each party entitled to indemnification ----------------- under Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under the Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action. Notwithstanding the foregoing, however, (i) if the Indemnified Party reasonably determines that there may be a conflict between the positions of the Indemnifying Party and of the Indemnified Party in connection with the defense of such action, suit, investigation, inquiry or other proceeding or that there may be legal defenses available to such Indemnified Party different from or in addition to those available to the Indemnifying Party, then, at the sole cost and expense of such Indemnified Party, counsel for the Indemnified Party shall be entitled to conduct a defense to the extent reasonably determined by such counsel to be necessary to protect the interest of the Indemnified Party, and (ii) in any event, the Indemnified Party shall be entitled to have counsel chosen by such Indemnified Party participate in, but not to conduct, the defense. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as a unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 7. INFORMATION FROM HOLDERS The Holder or Holders of Registrable Securities included in any registration shall, as a condition precedent to the Company's obligation to register the securities of such Holder or Holders, furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. At the request of the Company, each Holder who is including any Registrable Securities in the registration shall deposit in escrow with an escrow agent chosen by the Company those Registrable Securities which such Holder proposes to sell, accompanied by an irrevocable power of attorney authorizing the escrow agent to, without limitation, sell such Registrable Securities to the underwriter upon the effectiveness of the registration statement. 8. TRANSFER OF REGISTRATION RIGHTS The rights to cause the Company to register securities granted to Holders under Section 3 may be assigned to a transferee or assignee in connection with any transfer or assignment of Registrable Securities by a Holder, provided that: (i) such transfer may otherwise be effected in accordance with applicable securities laws, and (ii) written notice thereof is promptly given to the Company. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned to any constituent partner or affiliate of a Holder, without compliance with item (ii) above, provided written notice thereof is promptly given to the Company. 5 Exhibit 10.31 9. COMPLIANCE WITH RULE 144 The Company covenants that it shall (a) file any reports required to be filed by it under the Exchange Act and (b) take such further action as each Holder of Registrable Securities may reasonably request (including providing any information necessary to comply with Rule 144 under the Securities Act), all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rules or regulations hereafter adopted by the SEC. The Company shall, upon the request of any Holder of Registrable Securities, deliver to such Holder a written statement as to whether it has complied with such requirements. 10. MISCELLANEOUS a. Remedies. Each Holder of Registrable Securities, in addition -------- to being entitled to exercise all rights provided herein and in the Purchase Agreement, or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. However, no Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration proposed to be undertaken by the Company as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. b. No Inconsistent Agreements. The Company will not on or after -------------------------- the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders of Registrable Securities hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any such agreements. c. Adjustments Affecting Registrable Securities. The Company will -------------------------------------------- not take any action, or permit any change to occur, with respect to the Registrable Securities which would adversely affect the ability of the Holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement. d. Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least 66-2/3% of the Registrable Securities. e. Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (a) if to a Holder of Registrable Securities, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 10, which address initially is set forth on Exhibit A. 6 Exhibit 10.31 and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 10. (b) if to the Company: Youbet.com, Inc. 5901 DeSoto Avenue Woodland Hills, CA 91367 Facsimile No.: (818) 668-2101 and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 10. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. f. Successors and Assigns. Subject to the provisions of Section 8 ---------------------- hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Registrable Securities. g. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. h. Headings. The headings of this Agreement are for convenience -------- of reference only and shall not limit or otherwise affect the meaning hereof. i. Governing Law and Venue. This Agreement shall be governed by ----------------------- and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Agreement, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement (including also all Exhibits or Schedules hereto) or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. j. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 7 Exhibit 10.31 k. Entire Agreement. This Agreement is intended by the parties as ---------------- a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understanding between the parties with respect to such subject matter. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. YOUBET.COM, INC. a Delaware Corporation By: ----------------------------- Name: Title "PURCHASER" By: ----------------------------- Name: Title: 9 EXHIBIT C THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR, IF APPLICABLE, STATE SECUIRITES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO YOUBET.COM, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. NOTE ---- FOR VALUE RECEIVED, Youbet.com, Inc. a Delaware corporation ("Borrower"), hereby promises to pay to (the "Holder") or ------------------- order, without demand, the sum of ($__________), with ------------------- interest at the rate of 12% per annum, on March , 2003 (the "Maturity Date"). -- The following terms shall apply to this Note: ARTICLE I PAYMENT 1.1 Acceleration. The entire principal amount and accrued interest, ------------ shall be due and payable if the Borrower raises more than $2,000,000, excluding the Note, in any ninety-day period prior to the Maturity Date. 1.2 Maturity. On the Maturity Date, the entire principal amount shall -------- be paid to the Holder without offset or deduction of any kind. 1.3 Prepayment. Any prepayment shall include all accrued interest to ---------- the date of such prepayment. This Note may be prepaid prior to the Maturity Date upon at least 15 days notice. ARTICLE II EVENTS OF DEFAULT 2.1 Events of Default. The occurrence of any of the following events ----------------- of default ("Event of Default") shall, at the option of the Holder hereof, make the principal balance then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, all without demand, presentment or notice, or grace period, all of which hereby are expressly waived, except as set forth below: (a) Failure to Pay Principal. The Borrower fails to pay any ------------------------ installment of principal hereon when due and such failure continues for a period of ten (10) days after the due date. (b) Breach of Covenant. The Borrower breaches any material covenant or ------------------ other term or condition of this Note, the Securities Purchase Agreement entered into by the Holder and Borrower in connection with this Note (the "Securities Purchase Agreement"), the Security Agreement, Registration Rights Agreement and the Warrant, each dated as of the date Exhibit 10.31 hereof, together with the Securities Purchase Agreement, (collectively, the "Transactional Documents") in any material respect and such breach, if subject to cure, continues for a period of ten (10) days after written notice to the Borrower from the Holder. (c) Breach of Representations and Warranties. Any material ---------------------------------------- representation or warranty of the Borrower made herein in any Transactional Document shall be false or misleading in any material respect. (d) Receiver or Trustee. The Borrower shall make an assignment for the ------------------- benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. (e) Judgments. Any money judgment, writ or similar final process, --------- other than the any such judgment arising from the SRC Advertising, Inc. matter, shall be entered or filed against Borrower or any of its property or other assets for more than $500,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. (f) Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation ---------- proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower and if instituted against Borrower are not dismissed within 60 days of initiation. (g) Cross Default. The Company shall default in any of its obligations ------------- under any mortgage, indenture or instrument, other than the lease for the premises located at 5901 DeSoto Avenue, Woodland Hills, California under which there may be issued any indebtedness of the Company in an amount exceeding $500,000 and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable. (h) Stop Trade. An SEC stop trade order or Principal Market trading ---------- suspension for a period of more than 10 business days. 2.2 Enforcement. The Holder may thereupon proceed to protect and ----------- enforce its rights either by suit in equity and/or by action at law or by other appropriate proceedings whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note, and proceed to enforce the payment of this Note held by it, and to enforce any other legal or equitable right of such Holder. 2.3 Waiver; Release. Except as expressly provided for herein, the --------------- Company specifically (i) waives all rights it may have (A) to notice of nonpayment, notice of default, demand, presentment, protest and notice of protest with respect to any of the obligations hereunder or the shares of Common Stock and (B) notice of acceptance hereof or of any other action taken in reliance hereon, notice and opportunity to be heard before the exercise by the Holder of the remedies of self-help, set-off, or other summary procedures and all other demands and notices of any type or description except for cure periods; and (ii) releases the Holder, its officers, directors, agents, employees and attorneys from all claims for loss or damage caused by any act or failure to act on the part of the Holder, its officers, attorneys, agents, directors and employees except for gross negligence or willful misconduct. 2 Exhibit 10.31 ARTICLE III MISCELLANEOUS 3.1 Failure or Indulgence Not Waiver. No failure or delay on the part -------------------------------- of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 3.2 Notices. Any notice herein required or permitted to be given shall ------- be in writing and may be personally served or sent by fax transmission (with copy sent by certified or registered mail or by overnight courier). For the purposes hereof, the address and fax number of the Holder is as set forth on the first page hereof. The address and fax number of the Borrower shall be 5901 DeSoto Avenue, Woodland Hills, California 91367, facsimile number: (818) 668-2101. Both Holder and Borrower may change the address and fax number for service by service of notice to the other as herein provided. 3.3 Amendment Provision. The term "Note" and all reference thereto, as ------------------- used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 3.4 Assignability. This Note shall be binding upon the Borrower and ------------- its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 3.5 Cost of Collection. If default is made in the payment of this ------------------ Note, Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys' fees. 3.6 Maximum Payments. Nothing contained herein shall be deemed to ---------------- establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 3.7 Governing Law and Venue. This Note shall be governed by and ----------------------- interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Note, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 3 Exhibit 10.31 IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its Chief Executive Officer on this day of March , 2002 ------ -- YOUBET.COM, INC. By: ------------------------ WITNESS: - ------------------------- 4 EXHIBIT D THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO YOUBET.COM, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase Shares of Common Stock of ------- Youbet.com,Inc.(subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 2002-1 Issue Date: March , 2002 -- YOUBET.COM, INC. a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, persons set forth on Exhibit A, or their assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., Los Angeles time, through five (5) years after such date (the "Expiration Date"), up to fully paid and nonassessable shares of Common Stock (as hereinafter --------- defined), of the Company, at a purchase price of $.50 (the "Purchase Price"). As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Youbet.com, Inc. and any corporation which shall succeed or assume the obligations of Youbet.com, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, as authorized on the date of the Securities Purchase Agreement referred to in Section 9 hereof, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even if the right so to vote has been suspended by the happening of such a contingency), (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise, and (d) shares of capital stock issued in lieu of cash dividends pursuant to the Certificate of Incorporation of the Company; (ii) shares of capital stock issued in connection with any stock split, reverse stock split, stock dividend or recapitalization of the Company. Exhibit 10.31 (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. 1. Exercise of Warrant. ------------------- 1.1. Number of Shares Issuable upon Exercise. From and after the date --------------------------------------- hereof through and including the Expiration Date, the holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. Exercise. This Warrant may be exercised in whole or in part by -------- the holder hereof by (a) delivery of an original or fax copy of the form of subscription attached as Exhibit A hereto (the "Subscription Form") duly executed by such Holder, to the Company at its principal office or at the office of its warrant agent (as provided hereinafter), accompanied by payment, in cash, wire transfer, or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price (as hereinafter defined) then in effect or (b) by delivery to the Company of a written notice of an election to effect a "Cashless Exercise" (as defined below) for the Warrant Shares. Certificates for the Warrant Shares so purchased shall be promptly delivered to the Holder within a reasonable time. The certificates so delivered shall be in such denominations as may be requested by the Holder and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall (subject to Section 1.5 below), at its expense, at the time of delivery of such certificates, deliver to the Holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. As used herein, "business day" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of Los Angeles, California are authorized or required by law or executive order to remain closed. 1.3. Cashless Exercise. To effect a "Cashless Exercise", the Holder ----------------- shall indicate on the notice of the holder's intention to do so, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof. In the event of a Cashless Exercise, in lieu of paying the Warrant Price in cash, the holder shall surrender this Warrant or the portion hereof being exercised for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the then current Fair Market Price per share of the Common Stock and the Warrant Price, and the denominator of which shall be the then current Fair Market Price per share of the Common Stock. For this purpose, the "Fair Market Price" of the Common Stock shall be the closing price of the Common Stock as reported by The Nasdaq National Market (or other exchange or market on which the Common Stock is principally traded) on the trading day immediately preceding the date of notice of exercise. 1.4. Book Entry. Notwithstanding anything to the contrary set forth ---------- herein, so long as any Notes remain outstanding, upon exercise of any portion of this Warrant in accordance with the terms 2 Exhibit 10.31 hereof, the Holder shall not be required to physically surrender this Warrant to the Company unless such holder is purchasing the full amount of Warrant Shares represented by this Warrant. The Holder and the Company shall maintain records showing the number of Warrant Shares so purchased hereunder and the dates of such purchases or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Warrant upon each such exercise. The Holder and any assignee, by acceptance of this Warrant or a new Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following exercise of any portion of this Warrant, the number of Warrant Shares which may be purchased upon exercise of this Warrant may be less than the number of Warrant Shares set forth on the face hereof. 1.5. Company Acknowledgment. The Company will, at the time of the ---------------------- exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.6. Trustee for Warrant Holders. In the event that a bank or trust --------------------------- company shall have been appointed as trustee for the holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 1.7. No Rights Prior to Exercise. This Warrant shall not entitle the --------------------------- Holder to any voting or other rights as a stockholder of the Company. 2. Delivery of Stock Certificates, etc. on Exercise. The Company agrees ------------------------------------------------ that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable Securities Laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. Adjustment for Reorganization, Consolidation, Merger, etc. --------------------------------------------------------- 3.1. Reorganization, Consolidation, Merger, etc. In case at any time ------------------------------------------ or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the 3 Exhibit 10.31 consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Dissolution. In the event of any dissolution of the Company ----------- following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrant after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company having its principal office in Los Angeles, CA, as trustee for the holder or holders of the Warrant. 3.3. Continuation of Terms. Upon any reorganization, consolidation, --------------------- merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transaction described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrant be delivered to the Trustee as contemplated by Section 3.2. 4. Extraordinary Events Regarding Common Stock. In the event that the ------------------------------------------- Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 4 Exhibit 10.31 5. Certificate as to Adjustments. In each case of any adjustment or ----------------------------- readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial ------------------------- Statements. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. Assignment; Exchange of Warrant. Subject to compliance with applicable ------------------------------- Securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable Securities Laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant or a Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. Replacement of Warrant. On receipt of evidence reasonably satisfactory ---------------------- to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. Registration Rights. The Holder of this Warrant has been granted certain ------------------- registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and the Holder at or prior to the issue date of this Warrant. The terms of the Securities Purchase Agreement are incorporated herein by reference. 11. Warrant Agent. The Company may, by written notice to the each holder of ------------- the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant 5 Exhibit 10.31 pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. Transfer on the Company's Books. Until this Warrant is transferred on ------------------------------- the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Notices, etc. All notices and other communications from the Company to ------------ the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 14. Miscellaneous. This Warrant and any term hereof may be changed, waived, ------------- discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of California without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of Los Angeles or in the federal courts located in the State of California. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant is for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 Exhibit 10.31 IN WITNESS WHEREOF, the Company has executed this Warrantunder seal as of the date first written above. YOUBET.COM, INC. By: ------------------------- Witness: - ----------------------- 7 Exhibit 10.31 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: Youbet.com, Inc. The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ), hereby irrevocably elects to purchase (check applicable box): ---- shares of the Common Stock covered by such Warrant; or - --- -------- The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $ . Such payment takes the form of (check applicable box or boxes): ----------- $ in lawful money of the United States; and/or - --- -------- the cancellation of such portion of the attached Warrant as is exercisable - --- for a total of shares of Common Stock (using a Fair Market Value of ------- $ per share for purposes of this calculation). ------- The undersigned requests that the certificates for such shares be issued in the name of, and delivered to whose address is --------------------- -------------- . - --------------------------------------------------------------------- The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated: ------------------ --------------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) ------------------------------------- (Address) Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Youbet.com, Inc. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Youbet.com, Inc. with full power of substitution in the premises. ================================================================================ Transferees Percentage Number ----------- Transferred Transferred ----------- ----------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================ Dated: , ----------------- ---- -------------------------------- (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: - ------------------------------- ------------------------------------------- (Name) (address) ------------------------------------------- ACCEPTED AND AGREED: (address) [TRANSFEREE] - ------------------------------- (Name) EXHIBIT E SECURITY AGREEMENT This Security Agreement (the "Agreement"), dated for identification purposes only March , 2002, is entered into by and between Youbet.com, Inc. a -- Delaware corporation ("Debtor"), and David Marshall, Inc., a California corporation or its designee (each a "Lender"). RECITALS -------- A. The Lender has made a loan to Debtor (the "Loan"). B. The Loan is evidenced by that certain Note described on Schedule A hereto (the "Note") and executed by Debtor as the "Borrower" thereof, for the benefit the Lender or its designee as the "Holder" thereof. C. In order to induce the Lender to make the Loan, and as security for Debtor's performance of its obligations under the Note and as security for the repayment of the Loan and any and all other sums due from Debtor to Lender whether arising under the Note issued pursuant to a Securities Purchase Agreement entered into between Debtor and the Lender relating to the Note (the "Securities Purchase Agreement"), or pursuant to other written instruments and agreements entered into by the Debtor and a Lender, whether before or after the date hereof, and further specifically including all of the Debtor's obligations arising under the Note and the Securities Purchase Agreement relating thereto (collectively, the "Obligations"), Debtor, for good and valuable consideration, receipt of which is acknowledged, has agreed to grant to the Lender, a security interest in the Collateral (as such term is hereinafter defined), on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for such other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree as follows: (a) Defined Terms. The following defined terms which are defined in ------------- the Uniform Commercial Code in effect in the State of California on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, General Intangibles, Instruments, Inventory and Proceeds. 1. Grant of General Security Interest in Collateral. ------------------------------------------------ (a) As security for the Obligations, Debtor hereby grants to the Lender, a security interest in the Collateral. (b) "Collateral" shall mean all of the following property of the Debtor: (c) All inventory, chattel paper, accounts, contract rights, equipment, all tangible and general intangibles and fixtures, whether presently held or acquired in the future; (d) All software, firmware, object codes, source codes and/or commented source codes with linking and compiling controls; (e) All trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held, including but not limited to all intellectual property; (f) All contracts arising out of the conduct of the business of Debtor; (g) All accounts receivable of Debtor; (h) Except as set forth on Schedule 1(h), all licenses or other rights to use any of the copyrights, patents or trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or right; (i) All proceeds and products of the foregoing, including without limitation, all payments under insurance or any indemnity or warranty payable in respect to any of the foregoing, and all general contract rights, intangibles and account proceeds, all goods, inventory, books and records and accounts receivable from any source; and (j) All other properties, tangible and intangible, not otherwise referred to above which are owned by Debtor or in which it has any interest and which relate primarily to the conduct of Debtor's business. 2. Perfection of Security Interest. ------------------------------- Debtor shall execute and deliver to the Lender UCC-1 Financing Statements ("Financing Statement") assigning to the Lender security interests in Debtor's rights, title and interest in and to the Collateral. 3. Distribution on Liquidation. --------------------------- If any sum is paid as a liquidating distribution on or with respect to the Collateral, Debtor shall accept same in trust for the Lender and shall deliver same to the Lender to be applied to the Obligations then due, in accordance with the terms of the Note. 4. Further Action By Debtor; Covenants and Warranties. -------------------------------------------------- (a) The Lender at all times shall have a perfected security interest in the Collateral which shall be prior to any other unperfected interest therein. Subject to the security interest described herein, Debtor has and will continue to have full title to the Collateral free from any liens, leases, encumbrances, judgments or other claims. Except as set forth on Schedule 15(a), the Lender's security interest in the Collateral constitutes and will continue to constitute a first, prior and indefeasible security interest in favor of the Lender. Debtor will do all acts and things, and will execute and file all instruments (including, but not limited to, security agreements, financing statements, continuation statements, etc.) reasonably requested by the Lender to establish, maintain and continue the perfected security interest of the Lender in the Collateral, and will promptly on demand, pay all costs and expenses of filing and recording, including the costs of any searches deemed necessary by the Lender from time to time to establish and determine the validity and the continuing priority of the security interest of the Lender. 2 (b) Debtor shall not sell, transfer, assign or pledge those items of Collateral (other than Collateral, not to exceed $50,000 in value, sold in the ordinary course of the Debtors business) and Debtor shall not allow any such items to be sold, transferred, assigned or pledged, without the prior written consent of the Lender (other than Collateral, not to exceed $50,000 in value, sold in the ordinary course of the Debtors business). Although Proceeds of Collateral are covered by this Security Agreement, this shall not be construed to mean that the Lender consent to any sale of the Collateral. (c) Debtor shall, at all reasonable times, allow the Lender or its representatives free and complete access to all of Debtor 's records which in any way relate to the Collateral, for such inspection and examination as the Lender deems necessary. (d) Debtor at their sole cost and expense, will protect and defend this Security Agreement, all of the rights of the Lender hereunder, and the Collateral against the claims and demands of all other parties. (e) Debtor shall promptly notify the Lender of any levy, distraint or other seizure by legal process or otherwise of any part of the Collateral, and of any threatened or filed claims or proceedings that might in any way affect or impair any of the rights of the Lender under this Security Agreement. (f) Upon the request of the Lender, Debtor will furnish within ten (10) days thereafter to the Lender, or to any proposed assignee of this Security Agreement, a written statement in form satisfactory to the Lender, duly acknowledged, certifying the amount of the principal and interest then owing under the Obligations, whether any claims, offsets or defenses exist against the Obligations or against this Security Agreement, or any of the terms and provisions of any other agreement of Debtor securing the Obligations. (g) The Debtor shall, at Debtor's expense, make, execute, endorse, acknowledge, file and/or deliver to the Lender from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, as the Lender may reasonable require. (h) Debtor represents and warrants that it is the true and lawful exclusive owner of the Collateral, free and clear of any liens and encumbrances except as set forth in Schedule 3(n) to the Securities Purchase Agreement. (i) Except as provided in Section 4(b), Debtor hereby agrees not to divest itself of any right under the Collateral absent prior written approval of the Lender. (j) Debtor will cooperate and provide such certificate, resolutions, representations, legal opinions and all other matters necessary to facilitate a transfer or sale of any part of the Collateral. 5. Event of Default. ---------------- (a) An event of default ("Event of Default") shall be deemed to have occurred hereunder upon the occurrence of any event of default as defined in the Note or Securities Purchase Agreement. Upon and after any Event of Default, after the applicable cure period, if any, any or 3 all of the Obligations shall become immediately due and payable at the option of the Lender, the Lender may dispose of Collateral as provided below. A default by Debtor of any of their obligations pursuant to this Agreement including but not limited to the obligations set forth in Section 5 of this Agreement, or a misrepresentation by Debtor of a material fact stated herein, shall be deemed an Event of Default hereunder and an event of default as defined in the Obligations. 6. Disposition of Collateral. ------------------------- (a) Upon and after any Event of Default which is then continuing, (b) The Lender may exercise their rights with respect to each and every component of the Collateral, without regard to the existence of any other security or source of payment for the Obligations or any other component of the Collateral. In addition to other rights and remedies provided for herein or otherwise available to it, the Lender shall have all of the rights and remedies of a lender on default under the Uniform Commercial Code then in effect in the State of California. (c) If any notice to Debtor of the sale or other disposition of Collateral is required by then applicable law, five (5) days' prior notice (or, if longer, the shortest period of time permitted by then applicable law) to Debtor of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made, shall constitute reasonable notification. (d) All cash proceeds received by the Lender in respect of any sale, collection or other enforcement or disposition of Collateral, shall be applied against the Obligations pro rata among the Lender in proportion --- ---- to the interest in the Obligations. Upon payment in full of all Obligations, Debtor shall be entitled to the return of all Collateral, including cash, which has not been used or applied toward the payment of Obligations or used or applied to any and all costs or expenses of the Lender incurred in connection with the liquidation of the Collateral (unless another person is legally entitled thereto). Each Lender may purchase the Collateral at fair market value and pay for such purchase by offsetting any sums owed to such Lender by Debtor arising under the Obligations or any other source. (e) No exercise by the Lender of any right hereby given them, no dealing by the Lender with Debtor, Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Lender shall in any way affect any of the obligations of Debtor hereunder or any Collateral furnished by Debtor or give Debtor any recourse against the Lender. 8. Collateral Agent. ---------------- If the Lender shall assign its interest in the Notes, such assignee shall have the right to designate a "Collateral Agent". The Collateral Agent shall take any and all action deemed necessary to provide for the orderly administration of the Collateral and the enforcement of the rights and remedies of the assignees hereto. 9. Miscellaneous. ------------- (a) Expenses. Debtor shall pay to the Lender, on demand, the -------- amount of any and all reasonable expenses, including, without limitation, attorneys' fees and legal expenses, which the Lender may incur in connection with (a) sale, collection or other enforcement or disposition of Collateral; (b) exercise or enforcement of any the rights, remedies or powers of the Lender hereunder or with respect 4 to any or all of the Obligations; or (c) failure by Debtor to perform and observe any agreements of Debtor contained herein which are performed by the Lender. (b) Waivers, Amendment and Remedies. No course of dealing by the ------------------------------- Lender and no failure by the Lender to exercise, or delay by the Lender in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right, remedy or power of the Lender. No amendment, modification or waiver of any provision of this Agreement and no consent to any departure by Debtor therefrom, shall, in any event, be effective unless contained in a writing signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The rights, remedies and powers of the Lender, not only hereunder, but also under any instruments and agreements evidencing or securing the Obligations and under applicable law are cumulative, and may be exercised by the Lender from time to time in such order as the Lender may elect. (c) Notices. Any notice or other communications under the ------- provisions of this Agreement shall be given in writing and delivered to the recipient in person, by reputable overnight courier or delivery service, by facsimile machine (receipt conformed) with a copy sent by first class mail on the date of transmission, or by registered or certified mail, return receipt requested, directed to its address set forth below (or to any new address of which a party hereto shall have informed the other by the giving of notice in the manner provided herein): To Debtor: Youbet.com, Inc. 5901 De Soto Avenue Woodland Hills, CA 91367 Fax: (818) 668-2101 To The Lender: David Marshall, Inc. 9229 Sunset Boulevard, Suite 505 Los Angeles, CA 90069 Fax (310) 573,9761 Any party may change its address by written notice in accordance with this paragraph. (d) Appointment of the Collateral Agent. The Lender hereby ----------------------------------- designates Russell Fine, or his designee, as "Collateral Agent" and Russell Fine hereby accepts such appointment. The Collateral Agent, shall take any and all action deemed necessary to provide for the orderly administration of the Collateral, as defined in the Security Agreement, and the enforcement of the rights and remedies thereunder. (e) Exculpation. The Lender hereby acknowledges that the ----------- Collateral Agent may be an officer, director or significant shareholder of the Company and hereby waive any conflict that may arise as a result thereof. Further, the Collateral Agent and its officers, employees, attorneys and agents shall not incur any liability whatsoever for (i) the holding or delivery of documents or the taking of any other action in accordance with the terms and provisions of this Agreement, (ii) any mistake or error in judgment, for compliance with any applicable law or any attachment, order or other directive of any court or other authority (irrespective of any conflicting term or provision of this Agreement), or (iii) for any act or omission of any other person engaged by the Collateral Agent in connection with this Agreement, 5 except where such actions are the result of the Collateral Agent's gross negligence or willful misconduct. The Lender hereby waives any and all claims and actions whatsoever against the Collateral Agent and its officers, employees, attorneys and agents, (i) arising out of or related directly or indirectly to any or all of the foregoing acts, omissions and circumstances; (ii) arising out of his duties. The Lender agrees that the Company shall not have any liability to the Lender for the acts or omissions of the Collateral Agent. (f) Term: Binding Effect. This Agreement shall (a) remain in full -------------------- force and effect until payment and satisfaction in full of all of the Obligations; (b) be binding upon Debtor and their successors and assigns; and (c) inure to the benefit of the Lender, for the benefit of the Lender and their respective heirs, legal representatives, successors in title and permitted assigns. (g) Captions. The captions of Paragraphs, Articles and Sections -------- in this Agreement have been included for convenience of reference only, and shall not define or limit the provisions hereof and have no legal or other significance whatsoever. (h) Governing Law; Venue; Severability. This Agreement shall be ---------------------------------- governed by and construed in accordance with the laws of the State of California without regard to principles of conflicts or choice of law, except to the extent that the perfection of the security interest granted hereby in respect of any item of Collateral may be governed by the law of another jurisdiction. Any legal action or proceeding against the Debtor with respect to this Agreement may be brought in the courts of the State of California, and, by execution and delivery of this Agreement, the Debtor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Debtor hereby irrevocably waives any objection which they may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the aforesaid courts and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. If any provision of this Agreement, or the application thereof to any person or circumstance, is held invalid, such invalidity shall not affect any other provisions which can be given effect without the invalid provision or application, and to this end the provisions hereof shall be severable and the remaining, valid provisions shall remain of full force and effect. (i) Counterparts/Execution. This Agreement may be executed in any ---------------------- number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. This Agreement may be executed by facsimile signature and delivered by facsimile transmission. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the undersigned have executed and delivered this Security Agreement, as of the date first written above. "DEBTOR" YOUBET.COM, INC. a Delaware corporation By: ----------------------------------- Its: ----------------------------------- APPROVED BY "LENDER": - ---------------------------------- Name: This Security Agreement may be executed by facsimile signature and delivered by confirmed facsimile transmission. 7 Schedule 3(n) Pledged Assets Operating leases:
- ---------------------------------------------------------------------------------------------- Number of Description Lease # Lessor Monthly Payments Purchase Option Payments Remaining at end of lease - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Toshiba 5560 - 6703893-002 Toshiba easy lease $ 694 4 Fair market value copier - ---------------------------------------------------------------------------------------------- Toshiba 6560 - 1482410 Citicorp $ 811 17 Fair market value copier - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Restricted cash $920,805 - ---------------------------------------------------------------------------------------------- Relates to the lease on the building at 5901 De Soto Ave., Woodland Hills, CA 91367. - ----------------------------------------------------------------------------------------------
8 Schedule 12(f) Excluded Licenses . Track content and patent license from ODS Technologies, L.P. a subsidiary of Gemstar-TV Guide International, doing business as TVG. This license is excluded from any lien hereunder. 9 EXHBIT F FORM OF RESIGNATION AGREEMENT RESIGNATION AGREEMENT This Resignation Agreement, entered into and effective as of March , 2002 -- (the "Agreement"), is by and between Youbet.com, Inc., a Delaware corporation (the "Company") and (" "). ------ ----- WHEREAS, the Company has entered into a Securities Purchase Agreement, dated March , 2002 (the "Securities Purchase Agreement") with David Marshall, -- Inc. pursuant to which the Company will issue notes in the principal amount of $750,000 and warrants to purchase 750,000 shares of common stock WHEREAS, in order to facilitate the performance of the Company's obligations under the Securities Purchase Agreement wishes to resign from ----- the Board of Directors of the Company. NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. hereby resigns as a Director of the Company, such resignation to ----- be effective concurrently with the consummation of the sale of the notes and warrants by the Company pursuant to the Securities Purchase Agreement. 2. All options and warrants to purchase common stock of the Company held by are hereby amended such that the expiration of such options and warrants - ----- shall occur on the later to occur of (i) the expiration date set forth in the applicable option or warrant agreement, and (ii) 5:00 p.m. (Los Angeles time) on the second anniversary of the date of this Agreement. 3. The Company, on its own behalf and on behalf of its parents, subsidiaries, officers, directors, employees, affiliates, assigns and successors and each of them, hereby releases and forever discharges and his trustees, ----- agents, attorneys, and representatives (the " Releasees") from and against ----- all claims, demands, rights, liens, agreements, contracts, covenants, actions, suits, losses, liabilities, causes of action, costs, expenses, attorneys' fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden, which it now owns or holds or it has at any time heretofore owned or held or may in the future hold as against the ----- Releasees arising out of or in any way connected with 's service as a ----- director of the Company, or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said ----- Releasees committed or omitted prior to the date hereof; provided, however, that the release and waiver by the Company contained in this paragraph 3 shall not extend to any claim against the Releases based on an act of fraud, theft, ----- conversion or embezzlement, by any of the Releasees. The Company ----- represents and warrants that it has not assigned any of the claims released pursuant to this paragraph 3. 10 4. It is the intention of the Company in executing this instrument that the same shall be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention, the Company hereby expressly waives any and all rights and benefits conferred upon it by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and expressly consent that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. SECTION 1542 provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITHTHE DEBTOR." 5. The Company acknowledges that it may hereafter discover claims or facts in addition to or different from those which the Company now knows or believes to exist with respect to the subject matter of this Agreement and which, if known or suspected at the time of executing this Agreement, may have materially affected this settlement. Nevertheless, the Company hereby waives any rights, claims or causes of action that might arise as a result of such different or additional claims or facts. The Company acknowledges that it understands the significance and consequence of such release and such specific waiver of Section 1542. 6. To the maximum extent permitted by applicable law, the Company shall indemnify the Releasees and hold them harmless from and against any and ----- all claims, liabilities, judgments, fines, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees, costs of investigation and experts, settlements and other amounts actually incurred by the Releasees in connection with the defense of any action, suit or ----- proceeding, and in connection with any appeal thereon) incurred by the ----- Releasees in any and all threatened, pending or completed actions, suits or proceedings, whether civil, criminal, administrative or investigative (including, without limitation, actions, suits or proceedings brought by or in the name of the Company), arising, directly or indirectly, by reason of the actions or inaction by as a director of the Company. The Company shall ----- promptly advance to the Releasees upon request any and all expenses ----- incurred by them in defending any and all such actions, suits, or proceedings to the maximum extent permitted by law. The Company shall maintain its current Officers' and Directors' insurance coverage for all periods during which ----- was a director of the Company. 7. No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach. 8. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto. 11 9. This Agreement hereby constitutes and contains the entire agreement and final understanding concerning the subject matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters hereof and thereof. Any representation, promise or agreement not specifically included in this Agreement shall not be binding upon or enforceable against either party. This is an integrated agreement. 10. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement which can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable. 11. This Agreement shall be deemed to have been executed and delivered within the State of California, and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with, and governed by, the laws of the State of California without regard to principles of conflict of laws. 12. Each party has cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. 13. This Agreement may be executed in counterparts, and each counterpart, when executed, shall have the efficacy of a signed original. Photographic copies of such signed counterparts may be used in lieu of the originals for any purpose. 14. Any controversy arising out of or relating to this Agreement, its enforcement or interpretation, or because of an alleged breach, default, or misrepresentation in connection with any of its provisions, shall be submitted to final and binding and non-appealable arbitration before a single JAMS/Endispute arbitrator. Such arbitration shall be held in Los Angeles County, California in accordance with California Civil Procedure Code Sectons 1280-1288.8. In the event either party institutes arbitration under this Agreement, the party prevailing in any such proceeding shall be entitled, in addition to all other relief, to reasonable attorneys' fees relating to such arbitration. The nonprevailing party shall be responsible for all costs of the arbitration, including but not limited to, the arbitration fees, court reporter fees, etc. 15. shall be entitled to approve any press releases issued by the ----- Company which include his name. [signature page follows] 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. YOUBET.COM, INC., a Delaware corporation By: ------------------------------------ Name: Title: ---------------------------------------- Acknowledged: - ------------------------------ David Marshall - ------------------------------ Caesar P. Kimmel - ------------------------------ Larry Lucas - ------------------------------ Robert M. Fell 13 EXHBIT G HERMANN EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") dated as of March , 2002 is --- by and between Youbet.com, Inc., a Delaware corporation ("the Company") and Phillip Hermann ("Executive"), in connection with the Company's engagement of Executive for personal services and supersedes the prior employment agreement between the Company and Executive. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: Employment by Company. --------------------- The Company hereby engages Executive, and Executive hereby agrees to serve as President, Chief Operating Officer and Chief Financial Officer of the Company on the terms and conditions of this Agreement. Throughout the Term of this Agreement Executive shall, subject to the provisions contained herein, devote substantially all of his work time to the employment described hereunder. Executive shall report solely to the Chief Executive Officer and the Board of Directors. At his election, Executive shall be a member of the Executive Committee of the Board of Directors. Location of Employment. ---------------------- Executive shall render his services at the Company's offices at 5901 Desoto, Woodland Hills, CA; provided, however, that Executive agrees to render his services at such other locations from time-to-time as the proper performance of Executive's duties may reasonably require. Notwithstanding the foregoing, the Company's principal offices shall remain in Southern California, and Executive need not relocate to render his duties hereunder. 2. TERM: The term of Executive's employment hereunder shall commence concurrently with the consummation of the sale of the notes and warrants pursuant to the terms of the Securities Purchase Agreement between the Company and the purchasers named therein (the "Effective Time") and end on April 30, 2004 (the "Term") unless sooner terminated pursuant to Section 7 hereof. After the Term the employment of Executive shall be at will, and as such either party may terminate this Agreement upon 30 days prior written notice to the other party. 3. COMPENSATION AND BENEFITS: (a) Salary. ------ During the Term, Executive shall receive a salary (the "Annual Salary") at the rate of $225,000 per annum. All Salary shall be less such deductions as shall be required to be withheld by applicable law and regulations and shall be pro-rated for any period that does not constitute a full twelve (12) month period. (b) Bonus. ----- 14 Executive shall participate in any formal Bonus plans instituted by the Company for the benefit of Employees. Cash and or stock bonuses based on performance may be offered from time to time at the discretion of the Board of Directors of the Company. (c) Stock Options. ------------- Executive shall participate in any formal Stock Option grant instituted by the Company for the benefit of Employees. At the Effective Time, Executive shall be granted 200,000 stock options pursuant to the Company's 1998 Stock Option Plan. The 200,000 stock options will have an exercise price equal to the closing price of the Company's Common Stock on the Effective Time. The stock options will vest 25% per year commencing on the first anniversary of the Effective Time. Any unvested options shall terminate as provided in the Company's 1998 Stock Option Plan or as otherwise agreed between the Executive and the Company. All unvested options will vest upon a "Change of Control" if the Executive is employed with the Company at the time of Change of Control. For purposes of this Agreement, the term "Change of Control" shall mean, (i) the acquisition by a single entity or group of affiliated entities of more than thirty-five percent (35%) of the outstanding capital stock of the Company and which is accompanied or followed by a change either in a majority of the members of the Board or of those members of the Board who are not full time employees of the Company, or (ii) the consummation of any merger of the Company or any sale, transfer or other disposition of all or substantially all of the Company's assets, directly or indirectly, if the shareholders of the Company immediately before the consummation of such a transaction own, immediately following the consummation of such transaction on a fully-diluted basis, equity securities (other than options, warrants, or rights to acquire securities) possessing less than sixty-five percent (65%) of the voting power of the surviving or acquiring corporation (or any corporation in control of the surviving or acquiring corporation whose equity securities are issued or transferred in such transaction). (d) Severance. If this Agreement shall be terminated for any --------- reason other than (i) a termination for disability pursuant to Section 7(a) hereof, (ii) for cause pursuant to Section 7(c) hereof, (iii) without cause pursuant to Section 7(d) hereof, or (iv) with Good Reason pursuant to Section 7(e), Executive shall be entitled to receive an amount equal to three (3) months of his Annual Salary. 4. PARTICIPATION IN EXECUTIVE BENEFIT PLANS: (a) Fringe Benefits. Executive shall be permitted during the Term --------------- to participate in any group life, medical, hospitalization, dental, health and accident and disability plans, supplemental health care plans and plans providing for life insurance coverage, and any other plans and benefits, generally maintained by Company for executives of the stature and rank of Executive during the Term hereof, each in accordance with the terms and conditions of such 15 plans (collectively referred to herein as "Fringe Benefits"); provided, however, that Company shall not be required to establish or maintain any such Fringe Benefits. (b) Vacation. Executive shall accrue, in addition to sick days -------- and days on which Company is closed, paid vacation days at the rate of one and one-quarter (1-1/4) days per month up to a maximum of fifteen (15) work days. (c) Expenses. Company will reimburse Executive for actual and -------- necessary travel and accommodation costs, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder, subject to receipt of reasonable and appropriate documentation by Company and in accordance with Company policy. Company will also reimburse Executive $750 per month for all business related operating expenses of Executive's automobile. 5. CERTAIN COVENANTS OF EXECUTIVE: Without in any way limiting or waiving any right or remedy accorded to Company or any limitation placed upon Executive by law, Executive agrees as follows: (a) Confidential Information: Executive agrees that, neither ------------------------ during the Term nor at anytime thereafter shall Executive (i) disclose to any person, firm or corporation not employed by the Company or any affiliate of either (the "Protected Company") or not engaged to render services to any Protected Company or (ii) use for the benefit of himself, or others, any confidential information of any Protected Company obtained by the Executive prior to the execution of this Agreement, during the Term or any time thereafter, including, without limitation, "know-how," trade secrets, details of suppliers, pricing policies, financial data, operational methods, marketing and sales information or strategies, product development techniques or plans or any strategies relating thereto, technical processes, designs and design projects, and other proprietary information of any Protected Company; provided, however, that this provision shall not preclude the Executive from (x) upon advice of counsel and notice to the Company, making any disclosure required by any applicable law or (y) using or disclosing information known generally to the public (other than information known generally to the public as a result of any violation of this Section 5(a)). (b) Property of Company. Any interest in trademarks, ------------------- service-marks, copyrights, copyright applications, patents, patent applications, slogans, developments and processes which the Executive, during the Term, may develop relating to the business of the Company in which the Company may then be engaged and any memoranda, notes, lists, records and other documents (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the business of any Protected Company shall belong and remain in the possession of any Protected Company, and shall be delivered to the Company promptly upon the termination of the Executive's employment with Company or at any other time on request. (c) Non-Interference. Executive will not, during the Term hereof ---------------- and for a period of two (2) years after the Term induce any person who is an executive, officer or agent, customer or supplier of the Company to terminate his relationship with the Company. 16 6. OTHER PROVISIONS: (a) Rights and Remedies Upon Breach. If the Executive breaches, ------------------------------- or threatens to commit a breach of, any of the provisions of Section 5 hereof (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (b) Accounting. The right and remedy to require the Executive to ---------- account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as a result of any transactions constituting a breach of any of the Restrictive Covenants, and the Executive shall account for and pay over such Benefits to the Company. (c) Severability of Covenants. If any court determines that any ------------------------- --- of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) Blue-Penciling. If any court construes any of the Restrictive -------------- Covenants, or any part thereof, to be unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision and, in its reduced form, such provision shall then be enforceable. (e) Enforceability in Jurisdictions. The parties intend to and ------------------------------- hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect Company's right to the relief provided in this Section 6 in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. (f) Injunctive Relief. Executive agrees and understands that the ----------------- remedy at law for any breach by Executive of the provisions of Section 5 hereof may be inadequate and that damages resulting from such breach may not be susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon Executive's breach of any provision of Section 5 hereof, the Company shall be entitled to seek to obtain from any court of competent jurisdiction injunctive relief to prevent the continuation of such breach. Nothing contained herein shall be deemed to limit the Company's remedies at law or in equity for any breach of the provisions of Section 5 hereof which may be available to the Company. 17 7. TERMINATION: (a) Termination Upon Death or Disability. If during the Term, ------------------------------------ Executive should (i) die or (ii) become so physically or mentally disabled whether totally or partially, that Executive is unable to perform the duties, functions and responsibilities required hereunder for (aa) a period of three (3) consecutive months or (bb) shorter periods aggregating to four (4) months within any period of twelve (12) months ("Disability"), then in such event, Company may, at any time thereafter, by written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the request of Company. A reputable physician selected by Company who is experienced in the relevant field of medicine shall make the determination of whether a Disability exists. If Executive's services are terminated, as aforesaid, Executive or the designated beneficiary of Executive, shall be entitled to receive Executive's Annual Salary, accrued share of the Bonus for that Fiscal Year and unused vacation, if any, and Fringe Benefits earned through the date of Executive's termination and continuing thereafter through the end of the Term and shall also receive four (4) months' of his Annual Salary. The Company shall deduct any disability payments made to Executive from any insurance source from payments required to be made to Executive after the termination date. (b) Designation of Beneficiary. The parties hereto agree that the -------------------------- Executive shall designate, by written notice to the Company, a beneficiary to receive the payments described in Section 7 in the event of his death and the Executive may change the designation of any such beneficiary from time to time by written notice to the Company. In the event the Executive fails to designate a beneficiary as herein provided, any payments which are to be made to the Executive's designated beneficiary under Section 7 shall be made to the Executive's widow, if any, during her lifetime. If the Executive has no designees or widow, such payments shall be paid to the Executive's estate. (c) Termination for Cause. The Company shall have the option to --------------------- terminate Executive upon the occurrence of any of the following: Executive shall have breached any of the terms of this Agreement and shall have failed to cure such breach (if such breach is curable) within 15 days of notice thereof by the Company; Executive shall have been convicted of a crime involving moral turpitude Executive shall materially breach any of the representations and warranties hereunder. If Executive's services are terminated as set forth in this subsection, Executive's services shall cease as of such effective date of termination and all compensation shall cease as of such effective date. (d) Termination Without Cause. If the Executive is terminated by ------------------------- the Company without cause the Executive shall be entitled to receive his Annual Salary, health benefits, accrued share of any bonus for that year and unused vacation, if any, earned through the date of Executive's termination. Executive shall also receive his Annual Salary and additional compensation equal to the current health benefits until the end of the Term, and for an additional 18 four (4) months thereafter. Notwithstanding the above, if the Company sells, transfers, or otherwise divests itself to of a majority interest of the Domestic horse racing business to an independent party and the Executive is offered comparable employment terms with the acquiring entity, then no additional pay or benefits shall be due except as accrued through normal service. (e) Termination With Good Reason. If during the Term the Company ---------------------------- retains another President or Chief Operating Officer or person performing the duties normally attendant to such officers, Executive may, by notice to the Company within three (3) months of the retention of such person, terminate this Agreement. In such case Executive shall continue to receive all compensation and other benefits provided hereunder for twelve (12) months following the termination of this Agreement. Payments due to Executive pursuant to this Section 7(e) shall not be offset or reduced by payments received from other employers. (f) Executive Stock Options. If the Executive is terminated ----------------------- without cause by the Company during the Term or Executive terminates this Agreement for Good Reason, the period within which Executive must exercise stock options granted under the 1995 Stock Option Plan or the 1998 Stock Option Plan shall be changed to three years and all options granted to Executive which would have vested during the Term shall vest. 8. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES: (a) Right to Enter Into Agreement. Executive has the unfettered ----------------------------- right to enter into this entire Agreement on all of the terms, covenants and conditions hereof; and Executive has not done or permitted to be done anything, which may curtail or impair any of the rights granted to Company herein. (b) Breach Under Other Agreement or Arrangement. Neither the ------------------------------------------- execution and delivery of this Agreement nor the performance by Executive of any of his obligations hereunder will constitute a violation or breach of, or a default under, any agreement, arrangement or understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. (c) Services Rendered Deemed Special, Etc. Executive acknowledges ------------------------------------- and agrees that the services to be rendered by him hereunder are of a special, unique, extraordinary and intellectual character which gives them peculiar value, the loss of which cannot be adequately compensated for in an action at law and that a breach of any term, condition or covenant hereof will cause irreparable harm and injury to the Company and in addition to any other available remedy the Company will be entitled to seek injunctive relief. 9. USE OF NAME: The Company shall have the right during the Term hereof to use Executive's name, biography and approved likenesses in connection with Company's business, including advertising their products and services; and the Company may grant such rights to others, but not for use as a direct endorsement. 19 10. ARBITRATION: Any dispute whatsoever arising out of or referable to this Agreement, including, without limitation, any dispute as to the rights and entitlements and performance of the parties under this Agreement or concerning the termination of Executive's employment or of this Agreement or its construction or its validity or enforcement, or as to the arbitrator's jurisdiction, or as to the ability to arbitrate any such dispute, shall be submitted to final and binding arbitration in Los Angeles, California by and pursuant to the Labor Arbitration Rules of the American Arbitration Association with discovery proceedings pursuant to Section 1283.05 of the California Code of Civil Procedure. The arbitrator shall be entitled to award any relief, which might be available at law or in equity, including that of a provisional, permanent or injunctive nature. The prevailing party in such arbitration as determined by the arbitrator, or in any proceedings in respect thereof as determined by the person presiding, shall be entitled to receive its or his reasonable attorneys' fees incurred in connection therewith. 11. NOTICES: (a) Delivery. Any notice, consent or other communication under -------- this Agreement shall be in writing and shall be delivered personally, telexed, sent by facsimile transmission or overnight courier (regularly providing proof of delivery) or sent by registered, certified, or express mail and shall be deemed given when so delivered personally, telexed, sent by facsimile transmission or overnight courier, or if mailed two (2) days after the date of deposit in the United States mail as follows: to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): If to Phillip Hermann, to his address at: 10809 Eton Avenue Chatsworth, CA 91311 If to Company, to its address at: Youbet.com, Inc. 5901 Desoto Avenue Woodland Hills, CA 91367 Attention: Chief Executive Officer Fax (818) 668-2121 Copy to: Christensen, Miller, Fink, Jacobs Glaser, Weil & Shapiro, LLP 2121 Avenue of the Stars, 18th Floor Los Angeles, CA, 90067 Attention: Steve Silbert 20 (b) Change of Address. Either party may change its address for ----------------- notice hereunder by notice to the other party in accordance with this Section 11. 12. COMPLETE AGREEMENT; MODIFICATION AND TERMINATION: This Agreement together with the Agreement of even date herewith between the Company and Executive, a copy of which is attached hereto, contains a complete statement of all the arrangements between the parties with respect to the matters covered hereby and, supersedes all existing agreements between the parties concerning the subject matter hereof, including that certain Employment Agreement dated as of February 23, 1999 between the Company and Executive and that certain Employment Agreement dated November 8, 2001 between the Company and the Executive (the "Previous Agreement"); provided that until the Effective Time the Previous Agreement shall remain in full force and effect. This Agreement may be amended, modified, superseded or canceled, and the terms and conditions hereof may be waiver, by the party waiving compliance. No delay on the part of any party in exercising any shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right or remedy, nor any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 13. GOVERNING LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements entered into and performed entirely within such State. 14. HEADINGS: The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. 15. INDEMNIFICATION: The Company will indemnify, defend, and hold Executive harmless from any costs, claims, causes of action, or liabilities (including reasonable attorney's fees) arising out of: (i) any breach of the Company's covenants, warranties, or representations; and (ii) any other matter relating to or arising out of Executive's employment hereunder which does not arise from Executive's gross negligence, willful misconduct, or a breach of Executive's covenants, warranties, or representations hereunder. 21 WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. By: ------------------------------------ Phillip Hermann Agreed to and Accepted: Youbet.com, Inc., a Delaware corporation By: -------------------------- Its: -------------------------- 22 EX-10.32 5 dex1032.txt EMPLOYMENT AGREEMENT Exhibit 10.32 CHAMPION EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") dated as of March 11, 2002 is by and between Youbet.com, Inc., a Delaware corporation ("the Company"), and Charles F. Champion ("Executive"), in connection with the Company's engagement of Executive for personal services. 1. EMPLOYMENT; DUTIES AND ACCEPTANCE: Employment by Company. --------------------- The Company hereby engages Executive, and Executive hereby agrees to serve as President and Chief Operating Officer of the Company, on the terms and conditions of this Agreement. Throughout the Term of this Agreement, Executive shall, subject to the provisions contained herein, devote substantially all of his work time to the employment described hereunder. Executive shall report solely to the Chief Executive Officer. All executive level officers other than the Chief Executive Officer and Chief Financial Officer (and those individuals reporting to such officers) shall report to the Executive. As long as Executive is acting as President and Chief Operating Officer, Executive shall be a member of the Board of Directors, but shall resign from the Board of Directors at such time as he is not acting in such capacity. Location of Employment. ---------------------- Executive shall be based in Philadelphia, Pennsylvania. However, Executive recognizes that from time to time Executive will need to travel to the Company's headquarters in Woodland Hills, California to fulfill his responsibilities. Duties. ------ Executive shall have the following duties: (a) Build a strong management and operating team, implementing effective motivational initiatives such as gain-sharing incentives, with a focus on building shareholder value. (b) Focus on operations and, as needed, take corrective actions to maintain EBITDA performance as the key benchmark. (c) Establish performance metrics beyond financial performance. (d) Work with Magna, Inc., which is a key ally of the Company and located in Pennsylvania, and work on racing and entertainment products that are in and around the eastern seaboard. (e) Evaluate a wide variety of initiatives and organization activities from an operations perspective (e.g. acquisitions, new clients, new ventures, etc.). (f) Establish and ensure effective execution of management/organization practices and processes that drive results and employee satisfaction. (g) Develop, monitor and adjust functional business plans based on financial targets and changing business environments. (h) Maintain close contact with key customers and local and state governments in order to be aware of and anticipate market trends, competitive actions or other requirements, and scrutinize activities of competitors. (i) Lead or assist, as appropriate, in the resolution of marketplace operation issues or field crises that may arise. (j) Support the Chief Executive Officer and Chairman of the Board in the management of investor relations activities such as working with Wall Street analysts, participating in quarterly conference calls, investor conferences, investment requirements and other related shareholder events. (k) Participate in mergers and acquisition projects and due diligence, and drive the integration of newly acquired operations. (l) Serve as functional consultant/advisor to marketing/sales efforts. (m) Perform such other executive duties as the Chief Executive Office may reasonably require. Outside Business Interests. -------------------------- Executive may serve, with the approval of the Chief Executive Officer which approval shall not be unreasonably withheld, on the boards of directors of, or in an advisory capacity to, other entities, charitable organizations and not-for-profit corporations; and may pursue passive investments, provided that such activities do not unreasonably interfere with Executive's duties and responsibilities to the Company or create a conflict of interest with the Company. 2. TERM: The term of Executive's employment hereunder shall commence as of the date hereof (the "Effective Time") and end on March 10, 2005 (the "Initial Term") unless sooner terminated pursuant to Section 7 hereof. The Initial Term will renew automatically for successive two-year terms unless a party delivers written notice to the other party terminating the Initial Term or a renewal term at least 180 days before the expiration of the Initial Term 2 or a renewal term, as the case may be. As used in this Agreement, the word the "Term" shall mean the Initial Term and any and all renewal terms. 3. COMPENSATION AND BENEFITS: (a) Salary. ------ During the first year of the Term, Executive shall receive a salary (the "Annual Salary") at the rate of $200,000 per annum. During the second year of the Term, Executive shall receive an Annual Salary of $225,000 or, if the Company is profitable for the first year of the Term, an Annual Salary of $250,000. During the third year of the Term, Executive shall receive an Annual Salary of $225,000 or, if the Company is profitable for the second year of the Term, an Annual Salary of $275,000. All Salary shall be less such deductions as shall be required to be withheld by applicable law and regulations and shall be pro-rated for any period that does not constitute a full twelve (12) month period. For purposes of determining profitability, the applicable period shall be April 1 to March 31 and shall be based on EBITDA, excluding any extraordinary items, as reflected in the Company's securities filings. (b) Bonuses. ------- Executive shall be entitled to bonuses as follows: (i) Executive shall receive $25,000 as a signing bonus upon execution of this Agreement. Any other bonus for the first year of the Term shall be at the Board's discretion with no guaranteed minimum. (ii) For the second year of the Term, a maximum bonus at the Board's discretion, but Executive shall receive not less than 40% of the Annual Salary based on mutually agreed upon business objectives, provided, that in any event Executive shall receive at least 20% of the Annual Salary if the Company is profitable for the second year of the Term. (iii) For the third year of the Term, a maximum bonus at the Board's discretion, but Executive shall receive not less than 45% of the Annual salary based on mutually agreed upon business objectives, provided, that in any event Executive shall receive at least 22.5% of the Annual Salary if the Company is profitable for the third year of the Term. (iv) The business objectives for years two and three of the Term shall be determined before the start of each year of the Term. Profitability shall be determined as set forth in subparagraph (a) above. (c) Stock Options. ------------- 3 Executive is hereby granted 400,000 stock options pursuant to the Company's 1998 Stock Option Plan. The 400,000 stock options will have an exercise price equal to the closing price of the Company's Common Stock on the Effective Time. The stock options will vest as follows: the first 100,000 options, ninety (90) days from the Effective Time, and the remaining options at the rate of 1/36 per month commencing with the Effective Time. During the second and third years of the Term, Executive shall be eligible to receive stock options at the discretion of the Board, provided, however that Executive shall be granted stock options in amounts and on terms no less favorable than those as may be granted to any other executive officer of the Company other than the Chief Executive Officer and Laurence Lucas. To the extent of any conflict between this Agreement and the Stock Option plan, this Agreement shall control. Any unvested options shall terminate as provided in the Company's 1998 Stock Option Plan or as otherwise set forth herein. All unvested options of the Executive shall immediately vest upon a "Change of Control" if the Executive is employed with the Company at the time of a Change of Control. For purposes of this Agreement, the term "Change of Control" shall mean, a merger, acquisition or other corporate transaction where (1) substantially all the Company's assets or fifty percent (50%) or more of the outstanding common stock of the Company is sold or acquired, or (2) upon the consummation of any transaction involving over fifty percent (50%) of the assets or outstanding stock of the Company, the Company's existing Board as of the date immediately preceding the consummation of the transaction no longer constitute a majority of the Board as of any date within the twelve (12) consecutive months subsequent to consummation of the transaction. 4. PARTICIPATION IN EXECUTIVE BENEFIT PLANS: (a) Fringe Benefits. Executive shall be permitted during the Term to --------------- participate in any group life, medical, hospitalization, dental, health and accident and disability plans, supplemental health care plans and plans providing for life insurance coverage, and any other plans and benefits, generally maintained by Company for executives of the stature and rank of Executive during the Term hereof, each in accordance with the terms and conditions of such plans (collectively referred to herein as "Fringe Benefits"); provided, however, that the Executive shall be eligible for 401(k) withdrawal, matching, and full-vesting commencing with the Effective Time and provided further that the Company shall not be required to establish or maintain any such Fringe Benefits. (b) Vacation. Executive shall be entitled, in addition to sick days -------- and days on which Company is closed, six weeks of paid vacation per year. (c) Expenses. The Company will reimburse Executive for reasonable and -------- customary travel and accommodation costs, entertainment and other business expenses incurred as a necessary part of discharging the Executive's duties hereunder, subject to 4 receipt of reasonable and appropriate documentation by the Company and in accordance with Company policy. The Company will also reimburse Executive $750 per month for all business related operating expenses of Executive's automobile. The Company will reimburse Executive for reasonable legal fees (not to exceed $3,500) incurred in connection with the negotiation and preparation of this Agreement. Additionally, Executive will receive or be reimbursed for a cellular phone and laptop computer, will be provided with an administrative assistant based at the Company headquarters in Woodland Hills, California, and, to the extent not covered by medical insurance, reimbursement for an annual physical. 5. CERTAIN COVENANTS OF EXECUTIVE: Without in any way limiting or waiving any right or remedy accorded to Company or any limitation placed upon Executive by law, Executive agrees as follows: (a) Confidential Information: Executive agrees that, neither during ------------------------ the Term nor at anytime thereafter shall Executive (i) disclose to any person, firm or corporation not employed by the Company or any affiliate of either (the "Protected Company") or not engaged to render services to any Protected Company or (ii) use for the benefit of himself, or others, any confidential information of any Protected Company obtained by the Executive prior to the execution of this Agreement, during the Term or any time thereafter, including, without limitation, "know-how," trade secrets, details of suppliers, pricing policies, financial data, operational methods, marketing and sales information or strategies, product development techniques or plans or any strategies relating thereto, technical processes, designs and design projects, and other proprietary information of any Protected Company; provided, however, that this provision shall not preclude the Executive from (x) upon advice of counsel and notice to the Company, making any disclosure required by any applicable law or (y) using or disclosing information known generally to the public (other than information known generally to the public as a result of any violation of this Section 5(a)). (b) Property of Company. Any interest in trademarks, service-marks, ------------------- copyrights, copyright applications, patents, patent applications, slogans, developments and processes which the Executive, during the Term, may develop relating to the business of the Company in which the Company may then be engaged and any memoranda, notes, lists, records and other documents (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the business of any Protected Company shall belong and remain in the possession of any Protected Company, and shall be delivered to the Company promptly upon the termination of the Executive's employment with Company or at any other time on request. (c) Non-Interference. Executive will not, during the Term hereof and ---------------- for a period of one (1) year after the Term induce any person who is an employee of the Company to terminate his relationship with the Company. (d) Non-Competition. Without the prior written consent of the Company, --------------- Employee shall not be employed by the Internet gaming divisions of Magna, Inc., TVG, Inc. 5 or by any other Internet gaming division of a direct competitor of the Company during, or for one year after the termination of, his employment with the Company. The parties agree that, as of the date this Agreement is being executed, the only existing competitors of the Company are the Internet gaming divisions of Magna, Inc. and TVG, Inc. 6. OTHER PROVISIONS: (a) Rights and Remedies Upon Breach. If the Executive breaches, or ------------------------------- threatens to commit a breach of, any of the provisions of Section 5 hereof (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. (b) Severability of Covenants. If any court determines that any of the ------------------------- Restrictive Covenants, or any part thereof, is invalid or unenforceable, the --- remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (c) Blue-Penciling. If any court construes any of the Restrictive -------------- Covenants, or any part thereof, to be unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision and, in its reduced form, such provision shall then be enforceable. (d) Enforceability in Jurisdictions. The parties intend to and hereby ------------------------------- confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect Company's right to the relief provided in this Section 6 in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants, as to breaches of such Restrictive Covenants in such other respective jurisdictions, such Restrictive Covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. (f) Injunctive Relief. Executive agrees and understands that the ----------------- remedy at law for any breach by Executive of the provisions of Section 5 hereof may be inadequate and that damages resulting from such breach may not be susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon Executive's breach of any provision of Section 5 hereof, the Company shall be entitled to seek to obtain from any court of competent jurisdiction injunctive relief to prevent the continuation of such breach. Nothing contained herein shall be deemed to limit the Company's remedies at law or in equity for any breach of the provisions of Section 5 hereof which may be available to the Company. 6 7. TERMINATION: (a) Termination Upon Death. If, during the Term, Executive dies, ----------------------------------------------------------- Executive shall be entitled to receive Executive's Annual Salary, any unpaid bonus for the prior year, accrued share of the Bonus for that Fiscal Year and unused vacation, if any, and Fringe Benefits earned through the date of Executive's death. In addition, Executive shall receive all vested options, and all unvested options of the Executive shall vest during the periods described in Section 3(c) of this Agreement. All such options shall be exercisable for up to five years from the date of vesting. (b) Termination Upon Disability. If, during the Term, Executive should --------------------------- become so physically or mentally disabled whether totally or partially, that Executive is unable to perform the duties, functions and responsibilities required hereunder for (i) a period of at least six (6) consecutive months or (ii) shorter periods aggregating at least twelve (12) months ("Disability"), then in such event, Company may, at any time thereafter, by written notice to Executive, terminate Executive's employment hereunder. Executive agrees to submit to reasonable medical examinations upon the request of Company to determine whether he has a Disability. The determination of whether or not Executive is subject to a Disability shall be made jointly by the Executive's doctor (the "Executive's Doctor") and by a board certified doctor selected by Company of the appropriate recognized field of medicine or psychiatric practice who has examined Executive (the "Company's Doctor"). If the Executive's Doctor and the Company's Doctor cannot agree on such determination, then they shall select a mutually agreeable board certified doctor or practitioner of the appropriate recognized field of medicine or psychiatric practice (the "Third Doctor") to make the determination. After the Third Doctor has examined the Executive and reviewed the findings of the Executive's Doctor and the Company's Doctor, the Third Doctor shall determine whether the Executive has a Disability, and his or her determination shall be final and binding. The Company and Executive shall pay for the cost and expense of their own doctors, and the Company shall pay for the cost of the Third Doctor, should the Third Doctor be required. If Executive's services or his employment with the Company are terminated, as aforesaid, Executive shall be entitled to receive Executive's Annual Salary, any unpaid bonus for the prior year, accrued share of the Bonus for that Fiscal Year and unused vacation, if any, and Fringe Benefits earned through the date of Executive's termination. In addition, Executive shall receive all vested options, and all unvested options of the Executive shall vest during the periods described in Section 3(c) of this Agreement. All such options shall be exercisable for up to five years from the date of vesting. (c) Designation of Beneficiary. The parties hereto agree that the -------------------------- Executive shall designate, by written notice to the Company, a beneficiary to receive the payments and options described in Section 7 in the event of his death and the Executive may change the designation of any such beneficiary from time to time by written notice to the Company. In the event the Executive fails to designate a beneficiary as herein provided, any payments which are to be made to the Executive's designated beneficiary under Section 7 shall be made to the Executive's widow, if any, during her lifetime. If the Executive has no designees or widow, such payments shall be paid to the Executive's estate. 7 (d) Termination for Cause. As used in this Agreement, the term "Cause" --------------------- means only any of the following: (i) the Executive's theft or embezzlement of the Company's money, equipment, or securities; (ii) the Executive's conviction of a felony (other than a traffic violation) which results in material injury to the Company; (iii) the Executive's willful act of disloyalty that is intended to and results in material injury to the Company; (iv) the failure of the Executive to be licensable in his capacity as Chief Operating Officer of the Company; (v) the Executive's chronic alcoholism or addiction to non-medically prescribed drugs; or (vi) breach by the Executive of his confidentiality, no solicitation, and non-competition covenants contained in his employment agreement with the Company. Any act or omission of the Executive based upon authority given pursuant to the Articles of Incorporation of the Company or Bylaws of the Company or a resolution duly adopted by the Company's Board of Directors or based upon the advice of counsel for the Company shall be conclusively deemed to be done by Executive in good faith and in the best interests of the Company. The Company shall have the option to terminate the services of Executive if there is "Cause" as defined above. If Executive's services are terminated as set forth in this subsection, Executive's services shall cease as of such effective date of termination and all compensation shall cease as of such effective date. (e) Termination With Good Reason or Without Cause. If during the Term --------------------------------------------- the Executive resigns for Good Reason (defined below) or his employment or services are terminated without Cause (as defined above): (i) The Company will pay Executive (a) his salary and unused vacation pay through the last day of his employment with the Company, (b) his unpaid reimbursable business expenses incurred by him through the last day of his employment with the Company, and (c) any earned but unpaid annual bonus compensation for the prior contract year, and the bonus he would have received had he remained in the employ of the Company for the contract year then in progress prorated. (ii) The Company will pay Executive the greater of (a) his Annual Salary at the time of such termination for one (1) year, or (b) the Annual Salary the Executive would have been paid had his employment not been terminated without Cause or for Good Reason. 8 (iii) For the remainder of the Term, the Company shall continue benefits, at its expense, to Executive and his immediate family at least equal to those which would have been provided to him and them in accordance with the plans, programs, practices and policies of the Company if his employment had not ended or, if more favorable to Executive, as in effect generally at any time thereafter with respect to other executives of the Company and their families, provided, however, that if Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits of the Company shall be secondary to those provided under such other plan during such applicable period of eligibility. (iv) All stock options of the Executive shall immediately vest and be exercisable for up to one (1) year following the date of the termination of the Executive's employment with the Company. (v) The Company will provide Executive with (a) first-class outplacement services for up to six months with an outplacement firm mutually agreed to by the Company and Executive; (b) a favorable reference; and (c) an agreed-upon designated contact for references. In addition, at Executive's option, and taking into account the Company's needs as a public company, an agreed upon statement will be issued to employees and an agreed-upon press release will be issued to the media concerning the departure of Executive. (vi) For the first year after the termination of his employment, Executive shall not be required to seek other employment or take other action in order to mitigate his damages or to be entitled to the benefits and payments above. During the first year after the termination of his employment, the Company shall not be entitled to set off against such benefits and payments due or any other amounts of money payable to Executive any amounts he earns in other employment or engagement after the termination of his employment with the Company without Cause or for Good Reason or any amounts that he might or could have earned in other employment had he sought such other employment. After the first year following the termination of his employment, Executive shall be required to seek other employment or take other action in order to mitigate his damages to be entitled to the benefits and payments after such first year. After the first year following the termination of his employment, Company may set off against such benefits and payments due or any other amounts of money payable to Executive amounts he earns in other employment or engagement after the first year following the termination of his employment with the Company without Cause or for Good Reason or any amounts that he might or could have earned in other employment had he not failed to seek such other employment. As used herein, Good Reason shall mean only: (i) withdrawal by the Company from Executive of any substantial part of his duties then being performed, or responsibility or authority then being carried, by him, or a material change in the Executive's reporting lines; 9 (ii) assignment by the Company to Executive of substantial additional duties or responsibilities which are inconsistent with the duties or responsibilities then being carried by Executive; (iii) material reduction in the level of Executive's responsibility, authority, autonomy, title, compensation, executive perquisites, or other employee benefits; (iv) failure to keep Executive in office as President and COO and/or on the Board of Directors of the Company; (v) the Company's material breach of Executive's employment agreement (or any other agreement between Executive and the Company); and the failure of the Company to cure such breach within thirty (30) days of notice thereof; (vi) material fraud on the part of the Company; or (vii) discontinuance of the active operation of business of the Company, or insolvency of the Company, or the filing by or against the Company of a petition in bankruptcy or for reorganization or restructuring pursuant to applicable insolvency or bankruptcy law. 8. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES: (a) Right to Enter Into Agreement. Executive has the unfettered right ----------------------------- to enter into this entire Agreement on all of the terms, covenants and conditions hereof; and Executive has not done or permitted to be done anything, which may curtail or impair any of the rights granted to Company herein. (b) Breach Under Other Agreement or Arrangement. Neither the execution ------------------------------------------- and delivery of this Agreement nor the performance by Executive of any of his obligations hereunder will constitute a violation or breach of, or a default under, any agreement, arrangement or understanding, or any other restriction of any kind, to which Executive is a party or by which Executive is bound. 9. USE OF NAME: The Company shall have the right during the Term hereof, , subject to the approval of the Executive, which approval Executive will not unreasonably withhold, to use Executive's name, biography and approved likenesses in connection with Company's business. 10. NOTICES: (a) Delivery. Any notice, consent or other communication under this -------- Agreement shall be in writing and shall be delivered personally, telexed, sent by facsimile transmission or overnight courier (regularly providing proof of delivery) or sent by 10 registered, certified, or express mail and shall be deemed given when so delivered personally, telexed, sent by facsimile transmission or overnight courier, or if mailed two (2) business days after the date of deposit in the United States mail as follows: to the parties at the following addresses (or at such other address as a party may specify by notice in accordance with the provisions hereof to the other): If to Executive, to his address at: 314 Heritage Place Devon, Pa. 19333 Copy to: Funkhouser Vegosen Liebman & Dunn Ltd. 55 West Monroe Street - Suite 2410 Chicago, Illinois 60603 Attention: Jonathan Vegosen, Esq. If to Company, to its address at: Youbet.com, Inc. 5901 Desoto Avenue Woodland Hills, CA 91367 Attention: Chief Executive Officer Fax (818) 668-2121 Copy to: Loeb & Loeb LLP 10100 Santa Monica Blvd. Suite 2200 Los Angeles, CA, 90067 Attention: David L. Ficksman, Esq. (b) Change of Address. Either party may change its address for notice ----------------- hereunder by notice to the other party in accordance with this Section 11. 11. COMPLETE AGREEMENT; MODIFICATION AND TERMINATION: This Agreement contains a complete statement of all the arrangements between the parties with respect to the matters covered hereby and, supersedes all existing agreements between the parties concerning the subject matter hereof. This Agreement may be amended, modified, superseded or canceled, and the terms and conditions hereof may be waived, by the party waiving compliance. No delay on the part of any party in exercising any right or 11 remedy shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right or remedy, nor any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 12. HEADINGS: The headings in this Agreement are solely for the convenience of reference and shall not affect its interpretation. 13. INDEMNIFICATION: The Company will indemnify, defend, and hold Executive harmless from and against any and all demands, actions, claims, suits, liabilities, losses, damages, fees (including reasonable attorneys' fees) and expenses relating to any acts or omissions to act in the course or scope of his duties he performs on behalf of the Company while employed by it and/or while serving as an officer and/or director of the Company, and to provide indemnification and officers and directors liability insurance to him at least to the same extent that it provides such indemnification and insurance to the officers and directors of the Company. Executive will have the option to select his own counsel or be represented by counsel for the Company. The Company shall pay for or reimburse Executive for any fees and expenses covered by this Section as and when incurred. The provisions herein shall survive the termination of Executive's employment with the Company for any reason. 14. ATTORNEYS' FEES: If either the Company or the Executive brings an action to enforce the Executive's employment agreement, the prevailing party will be entitled to recover its/his reasonable attorneys' fees. WHEREFORE, the parties hereto have executed this Agreement as of the day and year first above written. ------------------------------- Charles F. Champion Agreed to and Accepted: Youbet.com, Inc., a Delaware corporation By: --------------------------------------------- Its: ------------------------------------------- 12 EX-23 6 dex23.txt CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (file Numbers 333-76029, 333-39488 and 333-85675) and Forms S-8 (file numbers 333-88047 and 333-52105) of our report dated February 21, 2002, except for Note 13 which is as of March 21, 2002, relating to the audit of the consolidated financial statements of Youbet.com, Inc., as of December 31, 2001 and for the year then ended, which report is included in the Annual Report on Form 10-K. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. BDO Seidman, LLP Los Angeles, California April 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----