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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 33-13789LA
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YOUBET.COM, INC.
(formerly You Bet International, Inc.)
(Name of small business issuer in its charter)
DELAWARE 95-4627253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1950 SAWTELLE BOULEVARD, SUITE 180, LOS ANGELES, CALIFORNIA 90025
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (310) 444-3300
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act: None.
Check whether the issuer (1) 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 / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. /X/
The issuer's revenues for the fiscal year ended December 31, 1998 were
$263,793.
The aggregate market value of the issuer's common stock held by
non-affiliates of Youbet.com as of March 25, 1999, computed by reference to the
average of the closing bid and ask prices on March 25, 1999, of $11.75 and
$10.75, respectively, was approximately $112,224,000.
As of March 25, 1999, the issuer had 14,309,731 shares of common stock
issued and outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes / / No /X/
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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998 contains "forward-looking" statements within the meaning of the Federal
securities laws. These forward-looking statements include, among others,
statements concerning Youbet.com's expectations regarding its financing
requirements and efforts to raise additional financing, its development and
marketing efforts, consumer reaction/ acceptance to Youbet.com's services, and
the development of operating revenues, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1998 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.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Wagering on live events, such as horse track racing,
car racing, soccer, football, etc, is a large industry. Youbet.com has initially
focused its efforts primarily on the United States horse track racing industry
and believes that its principal product, the You Bet Network, is currently the
only legal system available for online wagering in the United States.
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 communications
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 allows a subscriber to transmit information and thereby facilitate wagers.
YOUBET.COM DOES NOT ACTUALLY ACCEPT OR PLACE ANY WAGERS. Wagers are placed only
by a state licensed account wagering facility. Youbet.com currently has an
account wagering agreement with Mountain Laurel Racing, Inc., and Washington
Trotting Association Inc., both of which are subsidiaries of Ladbroke USA
("Ladbroke"), which facilitates wagers through pari-mutuel wagering pools at the
respective horse tracks.
INDUSTRY BACKGROUND
WORLDWIDE WAGERING
Youbet.com believes that wagering on most forms of live sporting events is
legal in most parts of Europe, Asia, Australia and Latin America. Youbet.com
believes there is substantial wagering worldwide of which in 1997, $639 billion
was wagered in the United States. The amount wagered on horse track racing,
which is Youbet.com's initial target market is also substantially larger
overseas, with Japan and Hong Kong bettors in particular wagering per capita
amounts significantly greater than in the United States. In 1997, of an
estimated $100 billion wagered on horse track racing worldwide, approximately
$15.4 billion was wagered in the United States.
Sports wagering includes not only horse track wagering, but sporting events
such as football, basketball, baseball, hockey, soccer, boxing, golf, car
racing, dog track racing and jai alai to name a few. Aside from horse track
racing, dog track racing and jai alai, in the United States other sports
wagering is currently legal only in the State of Nevada. Legal wagering on
sporting events in the United States is
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estimated in 1997 to have exceeded $20.4 billion and illegal domestic sports
event wagering is estimated to have exceeded $100 billion. Overseas legal and
illegal sports event wagering are estimated to be significantly greater than
wagering in the United States.
Sports wagering worldwide consists of a mixture of fixed-odds wagering and
pari-mutuel wagering (see box below). Pari-mutuel wagering is the dominant form
of legal sports wagering in the United States and most other countries. In
certain countries such as the United Kingdom, fixed-odds wagering is offered by
licensed book-makers and is the dominant form of wagering.
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PARI-MUTUEL WAGERING FIXED-ODDS WAGERING
No risk of loss to the house--Pari-mutuel Possible loss to the house--Fixed odds
wagering allows bettors to wager against one wagering allows bettors to wager against the
another, with a single entity or "house" entity holding the pool of wagers or "house".
holding the pool of wagers and distributing The house sets ratios of possible winnings on
it back to the winners. There is no risk of various wagers based on an educated guess as
loss to the house because the house retains a to the likely outcome of the event. The
percentage fee from the total amount wagered amount paid into the pool in excess of the
in the pool prior to paying out the remaining amount paid out is the house fee. There is a
amount of the pool to the winners. risk of loss to the house if winnings paid
out are greater than the total amount paid
into the pool.
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HORSE TRACK RACING OVERVIEW
Worldwide horse track wagering in 1997 exceeded $100 billion, 85% of which
came from Japan, Australia, Hong Kong, France, Great Britain and the United
States. In the United States, handicappers (horse track racing fans) wagered
approximately $15.4 billion on horse races in 1997.
UNITED STATES HORSE TRACK RACING MARKET
While many people associate horse track racing with horse track betting, in
1997 more than 77% of United States horse track wagering came from off-track
betting. This movement to off-track betting began after off-track betting was
introduced in the 1970s. During the past 15 years, off-track betting has grown
by more than 600% in the United States and wagering on domestic horse track
racing owes its current growth principally to off-track sources. Off-track
wagering currently includes inter-track simulcasts, off-track betting
facilities, telephone account wagering and with the introduction of the You Bet
Network, 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
legalization 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.
In the United States, 42 states have pari-mutuel wagering of some kind.
Eight of these 42 states have statutes which specifically provide for account
wagering, and five of these eight states allow out-of-state bettors with
accounts at licensed wagering facilities within any of these five states to
wager on any track carried by the account wagering facility.
It is under this current structure that interstate account wagering has been
operated in the United States for more than two decades by many large licensed
account wagering entities such as Ladbroke. For example, account wagering allows
a customer physically located in Virginia (where pari-mutuel wagering on horse
racing is legal) to place a wager at Ladbroke in Pennsylvania (which permits
interstate account
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wagering on pari-mutuel horse track racing) on a race run in Maryland (where
horse track racing and pari-mutuel wagering also are legal).
THE INTERNET AS A NEW ENTERTAINMENT AND COMMERCE MEDIUM
The Internet has become an important medium for communication, news,
entertainment and commerce. As a result, it is experiencing rapidly increasing
public awareness, substantial growth and acceptance on a global scale. A 1998
report issued by the United States Department of Commerce estimated that the
number of Internet users worldwide is expected to increase from approximately
100 million at year end 1997 to over 320 million by the year 2002. The same
report projects even higher growth rates for traffic and electronic commerce;
estimating that traffic is doubling approximately every 100 days. Electronic
commerce is expected to increase from an estimated $8.6 billion in 1998 to
approximately $23.3 billion in 2001. This growth is being enabled by rapid
technological advances such as the installation of more secure networks, the
introduction of better and higher performance Internet access options and the
improvement of PCs, as well as the increased penetration of PCs in both the home
and the workplace.
One of the fundamental growth drivers of the Internet is its ability to
deliver information in ways that are not possible using traditional media
sources such as broadcast or print media. Unlike these traditional sources the
Internet is capable of combining textual, graphical, streamed audio and streamed
video formats in a dynamic, interactive and real-time environment. This has
created new programming and content delivery opportunities that are not only
capturing the interest of the general public but also shifting user preferences
away from traditional news and entertainment sources.
A second fundamental growth driver of the Internet is the fact that it is
rapidly becoming a powerful and credible new commerce channel. To this end the
Internet has already significantly impacted consumers and businesses
transactions in a broad range of industries including financial services,
particularly online securities trading and numerous consumer product sectors.
Individuals are showing increasingly strong preferences to consummate
transactions online rather than via traditional means such as over the phone or
in person. Drivers of this trend include the perception that online purchasing
systems are simple, fast, secure, convenient, often able to offer goods at lower
prices and an unmatched source for information which can be used to make complex
purchasing or transaction decisions.
THE ONLINE WAGERING OPPORTUNITY
Youbet.com believes that horse track 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 based horse track racing systems as
compared to the traditional on-track and off-track systems that are in use
today. Youbet.com also believes that online solutions are likely to appeal to
both new fans and the most serious handicappers for a number of reasons
including the following:
- HANDICAPPERS ARE ALREADY HEAVY PC USERS. According to a study commissioned
by Youbet.com in 1996 by Yankelovich Partners, a leading consumer and
market research firm, 69% of the core group of 4.8 million highly active
handicappers in the United States had access to a computer, 37% used an
online service and 14% used a computer to access handicapping information.
These findings are significant because they indicate that PC and online
service usage among handicappers was significantly greater than the
general United States population even as early as 1996. Moreover,
Youbet.com believes the fact that 14% of handicappers were already using
their computers to access horse track 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 track
wagering has migrated away from the horse track. In 1997, for example, 77%
of all horse track racing wagers originated from off-track wagering
facilities.
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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.
- 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 tracks at both on-track and
off-track wagering facilities is a strong indicator of the high
entertainment value that handicappers associate with watching horse track
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. Youbet.com 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 track racing fans
would be interested, particularly if these online systems are perceived as
reliable and legal, to view and wager on international horse track racing
and sporting events.
Due to these primary factors, Youbet.com 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. Youbet.com believes an
online system able to integrate 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 event wagering events
will be attracted to online systems with the same basic features, but customized
in terms of content and performance.
THE YOUBET.COM SOLUTION
Youbet.com believes that the You Bet Network is the nation's first
interactive online horse track racing and wagering service. It enables
handicappers who installed Youbet.com's proprietary software to use their PC and
a standard online connection, to view horse track racing events, access a
comprehensive database of handicapping information and place wagers directly
through a state licensed wagering facility. The You Bet Network is completely
interactive and provides a real-time environment.
Horse track wagering, as an industry, has evolved from predominantly
on-track based to off-track betting and telephone wagering. Youbet.com believes
that its service is not only unique but also has the potential to revolutionize
how handicappers and enthusiasts wager and watch horse track 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. Youbet.com's technology
enables it to continue to add features to its network, to rapidly expand from
its current coverage of United
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States based horse track racing to the much larger international markets and
into other live event wagering markets such as the United Kingdom and Japan. Key
benefits of the Youbet.com solution include:
- CONVENIENCE, EASE OF USE. The You Bet Network is the only single source
provider of online live coverage of horse track racing events and
comprehensive handicapping information. Youbet.com provides this service
through an intuitive, easy-to-use PC based system in which users can
access the You Bet Network using a standard modem connection from home,
the office or virtually any location where a computer has online access
and it is legal to wager.
- EFFICIENT EXECUTION. The You Bet Network is able to be electronically tied
to licensed gaming agencies and is substantially faster and more efficient
than traditional on-track or off-track systems. Using the You Bet Network,
handicappers can place wagers and receive confirmation in as little as
three seconds, thus completely eliminating the hassle of waiting in lines
to place wagers or the frequent and frustrating delays associated with
phone-based systems. This faster and more efficient execution feature not
only gives handicappers the option to make more wagers but is also
critically important because it allows one to wait until the last possible
moment and to make use of the most recently available information before
making a wager. The You Bet Network also offers an important back-end
benefit because it automatically updates the user's account balances
immediately after final race results are posted. The handicappers receive
two important benefits from this feature. First, the handicappers always
know their account balance. And second, they always have access to their
full account balance when making future wagers.
- THE INFORMATION EDGE. Youbet.com believes that its system provides
handicappers with comprehensive and easy to use handicapping information
for the United States horse track racing industry. Youbet.com provides
real time information such as horse track conditions and jockey changes
and up to the minute odds on all wagers including exotic wagers such as
exactas, trifectas and quinellas. Youbet.com has also established
relationships with a broad range of information providers such as Equibase
and the Daily Racing Form. Youbet.com uses proprietary software to package
this information so that it is always available and easy for the
handicapper to use right on his or her PC.
- ENTERTAINMENT VALUE. Youbet.com believes that it provides a broad range of
users, from the most sophisticated handicapper to beginners, with a fun,
entertaining and feature rich wagering experience. 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. Youbet.com currently provides this
information on a real time basis for 24 horse tracks, and is actively
expanding its relationship with new horse tracks.
- BENEFITS TO HORSE TRACKS AND WAGERING FACILITIES. Youbet.com believes that
the You Bet Network will increase the number of handicappers involved in
wagering on horse track races and therefore prove beneficial to and grow
the horse track racing industry as a whole. When a subscriber places a
wager which is facilitated by the You Bet Network, that wager is
aggregated into the total pari-mutuel pool of wagers at each respective
horse track. The horse track receives a percentage of this wager and the
licensed account wagering facility also receives a percentage of this
wager as a commission. Youbet.com receives a fee from the licensed account
wagering facility expressed as a percentage of the licensed wagering
facility's commissions. Therefore, as Youbet.com grows the number of
subscribers, the industry as a whole should benefit.
YOUBET.COM'S STRATEGY
Youbet.com's strategy is to make Youbet.com the leading global brand name
for online live event wagering. It intends to do this by accomplishing the
following goals:
- MAKE WAGERING CONVENIENT. Youbet.com believes that wagering on live events
is an exciting activity which appeals to bettors of widely varying
sophistication. By making wagering more convenient for
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all types of bettors, Youbet.com hopes to increase the number of off-track
bettors using the You Bet Network and also increase the overall number of
bettors. For example, Youbet.com 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.
- INCREASE 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 full 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. The You Bet Network, which offers racing
content from 24 horse tracks (and growing), provides as many as 32 races
per hour, thus affording subscribers more opportunities than are available
via any other method. 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 bettors
account and available to be wagered again. Finally, in addition to the
numbers 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.
- MAKE WAGERING ACCESSIBLE TO A BROADER AUDIENCE. Youbet.com expects that
the convenience of in-home wagering will encourage the new bettor to
become more active. In addition, Youbet.com believes that its marketing
activities will attract 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,
Youbet.com hopes to expand the total wagering activity in the events it
presents by lowering the challenges to participation by newcomers.
- SIGNIFICANTLY INCREASE EXPENDITURES ON MARKETING TO MAKE THE YOUBET.COM
BRAND NAME AND THE YOU BET NETWORK UBIQUITOUS.Although Youbet.com's
competitors, domestic and overseas, may have greater financial resources,
Youbet.com believes that it has a lead time advantage. Youbet.com intends
to capitalize on that lead time by significantly increasing expenditures
on domestic and international marketing to add as many subscribers as
possible as rapidly as possible. Youbet.com believes that a large base of
satisfied subscribers should present a significant challenge for new
entrants to overcome. Youbet.com's ultimate goal is for the name
"Youbet.com" to become the household name for live event online wagering,
so that a consumer's first instinct when deciding to wager online is to do
so through Youbet.com.
- PURSUE INTERNATIONAL MARKETS AGGRESSIVELY. While Youbet.com intends to
fully exploit the opportunities available to it in the United States,
foreign markets represent a much more significant opportunity due to, the
relative size of wagering in these markets, cultural or other factors
resulting in a higher propensity to wager in some foreign markets, and
regulatory structures in certain foreign countries which facilitate online
wagering. Youbet.com will devote a significant portion of its resources in
the near term to establishing a presence in key international markets by
entering into arrangements with joint venture partners in countries with a
significant sports wagering market.
- BUILD STRATEGIC RELATIONSHIPS. Youbet.com 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
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or geographic competencies. In particular, Youbet.com expects to develop
such relationships in international wagering markets.
- 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 track racing market. Youbet.com will continue to enhance and improve
its existing products and technologies, and will carefully monitor
developments in technology and will adopt any new technologies which will
make online live event wagering easier, faster and more entertaining.
THE YOU BET NETWORK
In July 1998, the You Bet Network became fully operational. The You Bet
Network had undergone an extensive six month system-wide test ending in December
1997, and was launched in limited release in January 1998. The limited release,
with more than 400 subscribers, consisted mainly of computer-literate
handicappers, along with a small section of non-racing participants and was
intended to further research system features and functionality, as well as to
study marketing issues, such as pricing and packaging.
AVAILABILITY OF THE YOU BET NETWORK
The You Bet Network is normally available to subscribers 24 hours a day,
seven days a week and offers subscribers support 14 hours a day, seven days a
week. Live horse track racing is available on the You Bet Network approximately
10-14 hours per day, depending on which horse tracks are running on a particular
day. Access to handicapping information such as past performances, is available
24 hours a day and the availability to place wagers is subject 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 subscribers can place wagers over the telephone by calling Ladbroke
directly via a toll free number.
SETTING UP A YOU BET NETWORK ACCOUNT
To subscribe to the You Bet Network, a potential subscriber contacts
Youbet.com, either on its web site or its toll free number, opens an account and
chooses a payment method for charges to the account. This account is used for
the monthly subscription fee and for the purchasing of handicapping information.
In order to access the You Bet Network, a subscriber must install CD-ROM
software which Youbet.com provides at no additional charge. (Youbet.com
anticipates providing this software from its web site in the near future.) Once
the subscriber installs the software and activates the service, the subscriber
has access to simulcasts from the horse tracks and handicapping information.
Since YOUBET.COM DOES NOT ACTUALLY TAKE OR PLACE ANY WAGERS, wagering through
the You Bet Network requires that a subscriber open a separate wagering account
with a licensed wagering entity, currently Ladbroke.
SETTING UP A WAGERING ACCOUNT
In order to set up a wagering account, Ladbroke requires that new
subscribers provide a drivers license number, social security number, proof of
age and state of residence. Once this information is verified by Ladbroke, funds
can be transferred by the subscriber into his or her wagering account. Several
fund transfer methods are available to fund a subscriber's account. From this
wagering account the subscriber can have wagers facilitated by the You Bet
Network, the telephone or an off-track betting facility owned by Ladbroke.
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FEATURES OF THE YOU BET NETWORK
The You Bet Network is provided through a secure, proprietary, closed-loop
private online network which a subscriber 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;
- 24 horse tracks to chose 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;
- Live audio and video feed from the horse tracks or any other programming;
- Official programs and data on past performances including races, tracks,
jockeys and horses;
- Simple graphical user interfaces which simulate wagering at the horse
track;
- Summary of previous wagers placed by the subscriber and previous wagering
results; and
- Sophisticated encryption technology.
Youbet.com, with Ladbroke, continue 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 FACILITATED BY THE YOU BET NETWORK
Subscribers can use the You Bet Network to facilitate 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 Ladbroke, Youbet.com's licensed account wagering provider.
Ladbroke debits the subscriber's account, places the wager at the host horse
track and sends an electronic confirmation to the subscriber through the You Bet
Network. This entire process usually takes less than three seconds. The
subsequent adjustment to the subscriber's account for winnings and losses 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 subscribers. Customer service representatives are available from
7:00 a.m. to 9:00 p.m. Pacific Standard Time, seven days a week, to provide
assistance via email or toll free number. Customer service representatives can
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
subscriber's credit card information over the telephone to initially set up an
account. Customer service hours have been set by Youbet.com according to the
hours when it is likely that online activity will take place. To date,
Youbet.com has had no significant customer service issues and intends to
continue to devote the resources necessary to maintain this high level of
customer service.
PRICING FOR THE YOU BET NETWORK
Beginning in February 1999, Youbet.com implemented a monthly service
subscription fee for access to the You Bet Network which is currently $5.95.
This fee does not include the extra charges applicable for
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value added features and additional handicapping information such as past
performances, tip sheets and horse track racing analysis which are billed
separately on a monthly basis. New subscribers currently may access the You Bet
Network for an initial one month free trial period.
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 such as Ladbroke also
bring additional wagers into a horse track pool from off-track sources.
Youbet.com receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers who
have wagers placed through Ladbroke. This fee includes not only a percentage of
net commissions for wagers facilitated by the You Bet Network, but also each
wager by a Youbet.com subscriber which is placed by phone with Ladbroke. These
commissions comprise Youbet.com's primary revenue stream. Additional revenues
are generated from monthly subscription fees, the sale of information products
and other value added services such as past performances of various tracks,
jockeys or horses.
Youbet.com 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, Youbet.com 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. Youbet.com
intends, as part of its marketing plan, to extensively expand advertising on the
You Bet Network once its subscriber base reaches a certain threshold.
YOUBET.COM INTERNATIONAL INITIATIVES
Youbet.com is currently engaged in discussions with several large, overseas
companies with the objective of expanding the You Bet Network to include foreign
handicappers and enabling Youbet.com's subscribers to place wagers on world
class racing from foreign racing centers. Youbet.com's overseas strategy
envisions providing Youbet.com's technology and experience in developing the You
Bet Network to overseas partners who will develop the physical network
facilities under joint venture agreements. These joint ventures will develop
local networks as turn-key operations that can easily be replicated throughout
the world in countries with significant sports wagering markets. As in its
operation in the United States, Youbet.com does not plan to actually accept
wagers or take the risks associated therewith. Instead, the overseas networks
will enter into agreements with licensed wagering entities, for the actual
processing of each wager. Additionally, while wagering on horse track racing is
the only service currently offered by the You Bet Network, Youbet.com's overseas
networks may also include other types of sports wagering.
WAGERING SYSTEMS DEVELOPMENT EXPERIENCE
Youbet.com's predecessor, PC Totes, Inc. had more than eight years of
experience developing computer-based wagering systems, including development of
a PC-based "totalisator" system to operate and process all wagering at horse and
dog tracks at the time of its merger into Youbet.com. To Youbet.com's knowledge,
this was the first PC-based totalisator system to be operated by horse and dog
tracks.
MARKETING AND PROMOTION
In December 1998, the National Thoroughbred Racing Association, or NTRA,
published horse track racing customer market research. The NTRA identified a
U.S. thoroughbred racing wagering population of 10 million, who wagered $15.5
billion legally in 1998.
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TARGET MARKETS
Youbet.com has stratified the market into two distinct betting groups, as
follows:
- EXISTING BETTOR This type represents the "expert," "above average" and
"average" handicapper. The existing player is a regular bettor, who
currently uses remote betting facilities, often plays casino games and
follows sports.
- NEW BETTOR This type of bettor represents the mainstream online service
users who are sports fans, players of online "fantasy sports," and day
traders, but who do not presently wager on horse track racing. Youbet.com
will target on-line financial, business, sports, and gaming communities in
order to reach this player. Youbet.com believes that the new bettor
represents an extremely large market.
MARKETING STRATEGY
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
track racing, but represent a larger market and possibly even greater revenues.
Youbet.com intends to attract the existing bettor with superior information
and technology as well as value-added promotions such as complementary monthly
service charges. Youbet.com also believes that significant wagering activity can
be produced by existing and new bettors who may be significant gamblers or have
strong interest in the sports field, but who have not traditionally been large
players due to a perceived lack of time and convenience regarding horse track
wagering. The convenience and ease of use of the You Bet Network, as well as the
immediate excitement of online wagering and wagering results will be heavily
marketed to attract these new players. The Youbet.com brand will also be heavily
marketed to these two market segments to distinguish Youbet.com from its future
competitors and to create brand awareness, sampling of the You Bet Network and
loyalty.
DISTRIBUTION
Sales strategies are concentrated on direct mail campaigns, online marketing
(banners ads, co-marketing ventures, etc.), print advertising, on-track
promotion and bundling with software products and print media.
Youbet.com's website is a primary marketing vehicle and sales driver. In
addition, Youbet.com has entered into strategic relationships with mainstream
and niche online services to enhance its marketing and distribution efforts.
INTERNATIONAL MARKETING
As Youbet.com expands and develops wagering networks overseas, additional
marketing strategies will be implemented to target the players wagering on horse
track racing in their respected countries as well as bettors who may be
interested in wagering on Youbet.com's other live sports wagering products which
will be developed by country, as appropriate.
STRATEGIC RELATIONSHIPS
Youbet.com has domestic agreements with Ladbroke, one of the world's largest
licensed account wagering entities, Equibase, the industry's leading source of
racing information, Thoroughbred Sports Network, a leading Internet-based
publisher of horse track racing information, The United States Trotting
Association, the industry's leading source of standardbred racing information
and Netixs Communications, one of the leading Internet providers of networking
services.
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LADBROKE
In June 1997, Youbet.com entered into a Telecommunication Facilitation
Agreement with Mountain Laurel Racing, Inc. and Washington Trotting Association,
Inc., both of which are subsidiaries of Ladbroke USA (collectively, "Ladbroke"),
which expires in November 2002. Under the agreement, Youbet.com provides
Ladbroke with an interactive graphics interface to the You Bet Network through
which Youbet.com's subscribers who have established accounts with Ladbroke's
Call-A-Bet System in Pennsylvania are able to communicate interactively with
Ladbroke using their PCs to transmit wagering information to Ladbroke.
Ladbroke provides simulcast signals and pari-mutuel wagering from 32 horse
track racing venues throughout the United States, including most major horse
tracks. Since 1983, Ladbroke has offered telephone wagering through Ladbroke's
Call-A-Bet System, one of the nation's largest account wagering systems.
Youbet.com's agreement with Ladbroke enables Youbet.com's subscribers to place
wagers through Ladbroke's Call-A-Bet System. The agreement also provides for
Youbet.com to receive a fee from Ladbroke equal to fifty percent (50%) of the
net commissions to Ladbroke derived from wagers placed by Youbet.com subscribers
who use the Call-A-Bet System either through the computer graphics interface
provided by Youbet.com or more traditional telephone communication.
Ladbroke is a subsidiary of Ladbroke USA, a subsidiary of the worldwide
gaming and hospitality leader Ladbroke Group PLC. Ladbroke consists of the
Meadows horse track in Pennsylvania and six offtrack wagering facilities, all in
the state of Pennsylvania. Ladbroke USA owns and operates Golden Gate Fields in
California. Ladbroke Group PLC is a multi-national publicly traded corporation
headquartered in the United Kingdom, that owns and operates more than 2,000
wagering shops in the United Kingdom, and is the world's largest operator of
horse track racing and sports wagering properties. In addition, Ladbroke Group
PLC owns Hilton International, which controls more than 160 hotels and casinos
in 50 countries and Ladbroke is the second largest hotel operator in the United
Kingdom and recently acquired the Stakis Hotel and Casino Group.
Youbet.com's agreement with Ladbroke expires in November 2002, and provides
that through June, 1999, subject to certain exceptions, Ladbroke will be the
exclusive horse track wagering facility used by Youbet.com and Youbet.com will
be the exclusive interactive computer-based audio/video telecommunications
facilitator used by Ladbroke. This relationship becomes non-exclusive in June
1999. However, if Youbet.com enters into an arrangement with another account
wagering facility which is more favorable to such account wagering facility than
Youbet.com's agreement with Ladbroke on an overall basis, Ladbroke is entitled
to receive the benefit of such arrangement.
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 Youbet.com
to produce products and services from Equibase's data and sell programs, past
performances and a wide variety of horse track racing information products to
Youbet.com's subscribers. 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
North America. The agreement provides that Youbet.com will pay Equibase fees for
individual product sales subject to a minimum monthly fee.
In September 1997, Thoroughbred Sports Network, Inc., TSN, entered into a
five-year, marketing and distribution agreement, terminable upon 90 days written
notice, with Youbet.com, which allows Youbet.com to provide its subscribers with
access to a wide variety of handicapping past performance and sports information
products. The agreement provides that Youbet.com will pay TSN a percentage of
the set price per download for each information product sold. TSN is the leading
Internet-based publisher of horse track racing information products,
specializing in value-added handicapping services and daily reports, designed
especially for the avid handicapper.
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In March 1998, the United States Trotting Association, USTA, entered into an
agreement with Youbet.com, terminable upon 30 days written notice, to provide
past performance information related to horse track racing. Youbet.com agrees to
pay a monthly minimum fee as well as a separate fee for each downloaded horse
track program. The USTA is now in its sixtieth year of operations promoting the
standardbred breed of horses.
In March 1999, Netixs Communications entered into a two-year agreement with
Youbet.com to provide online network services that will deliver video, audio and
data to subscribers of the You Bet Network. The agreement provides that
Youbet.com will pay per an agreed fee on a monthly basis for use of Netixs'
network services. Netixs provides a high-speed fully redundant, nationwide loop
with DS-3 to OC-48 architecture and dedicated MAN rings (metropolitan area
network). Netixs functions as the primary network provider for Youbet.com.
COMPETITION
The online and interactive wagering market is new and rapidly changing.
Youbet.com anticipates that competition will become more intense and that new
companies will enter the market. Worldwide, several Internet and interactive
ventures of various kinds have been announced. Youbet.com expects to compete
with these entities, as well as other established gaming companies, which may
enter the interactive pari-mutuel gaming market. Presently, Youbet.com has
focused its efforts primarily on the United States horse track racing industry
and believes that its principal product, the You Bet Network, is currently the
only legal system available for online wagering in the United States.
Youbet.com believes that its principal domestic competitor in the
interactive pari-mutuel gaming market is the Television Games Network, which is
owned by TV Guide, Inc. The Television Games Network, yet to be nationally
launched, is a 24-hour national racing channel for distribution over cable and
DirecTV, along with an in-home pari-mutuel wagering system that requires a
dedicated television set-top box. The system has undergone limited testing in
Kentucky and has been available to the public in limited release since November
1998. The Televison Games Network has announced that it has formed exclusive
relationships with a number of major United States horse tracks. Further
expansion of the Televison Games Network's exclusive relationships may make it
difficult for Youbet.com to obtain racing audio and video content to supply the
You Bet Network. If such exclusive relationships account for a significant
number of horse tracks, the Televison Games Network may be able to secure
additional horse tracks on more favorable terms than Youbet.com.
Youbet.com 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.
Youbet.com 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. Specifically, several well-capitalized Australian media
companies and gaming companies are already developing Internet wagering systems.
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 Youbet.com in a materially
adverse way. To the extent that Youbet.com's facilities are used by subscribers
to place intrastate or interstate wagers or Youbet.com receives commissions from
such wagers, various statutes and regulations could have
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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.
Youbet.com 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. Youbet.com 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 Youbet.com 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 and this 1998 bill, had it been enacted, would
have had a material adverse effect on Youbet.com's business. Other on-line and
Internet gaming bills have been considered in recent years in both the Senate
and the House of Representatives. Senator Kyl has reintroduced a new version of
his on-line and Internet Gambling Prohibition Act of 1999. This 1999 Kyl bill
(S. 692) contains more broadly drafted exceptions than the 1998 Kyl bill and, if
it were enacted in the form in which it was introduced on March 23, 1999,
Youbet.com does not believe that the bill would have a material adverse effect
on Youbet.com's business. However, a proposal such as the 1998 Kyl bill could
emerge again in Congress; many states are considering Internet gaming
legislation and regulations which may or may not contain exceptions that would
permit Youbet.com's business to continue in such states; and the National
Gambling Impact Study Commission or other legislative or regulatory bodies may
reach influential anti-gaming conclusions which could form the basis for new
laws, regulations, or enforcement policies that could have a material adverse
effect on Youbet.com's business.
Youbet.com intends to comply with all applicable laws and regulations
including the proposed Kyl bill, if enacted. Youbet.com has designated executive
officers to oversee its legal compliance efforts in the United States and
abroad. Such officers, where appropriate, will consult with Youbet.com's counsel
and others regarding Youbet.com's activities and will monitor proposed
regulations and legislation that would affect Youbet.com's business.
International expansion of the You Bet Network may be subject to regulation
in those countries in which it is made available. Youbet.com believes that it
can operate, or license technology, in numerous jurisdictions that allow
telephone and account wagering, such as Canada, Mexico, the United Kingdom,
Australia, and Hong Kong. However, Youbet.com may not be able to obtain the
approvals necessary to market its services in such jurisdictions.
INTELLECTUAL PROPERTY
In developing the You Bet Network, Youbet.com has acquired and developed
software technologies which it believes give it a technological advantage over
potential competitors. Although Youbet.com's software and technology is not
currently protected by patents or copyrights, Youbet.com believes that its
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proprietary software could take time for a competitor to replicate. Youbet.com
also draws from an experienced team of software professionals with years in the
pari-mutuel wagering business. Among the technology which Youbet.com believes
potential competitors will find difficult to replicate or acquire, are the
following:
- A proprietary network design capable of handling the extreme peak loads of
interactive wagering;
- A national multicast network allowing for reliable and economical delivery
of audio, video, and information updates to a virtually unlimited
audience;
- Open architecture design capable of handling multi-currency and
multi-lingual games, including horse track racing and other high-level
participation games; and
- Proprietary encryption and security technologies and techniques.
EMPLOYEES
As of March 25, 1999, Youbet.com had 57 employees. Youbet.com 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. Youbet.com 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. Competition for qualified personnel in Youbet.com's
industry is intense, particularly for software development and other technical
staff and there can be no assurance that Youbet.com will be successful in
retaining a sufficient numbers of qualified personnel to conduct its business in
the future.
ITEM 2. DESCRIPTION OF PROPERTY
Youbet.com's executive and operating offices occupy 9,600 square feet and
are located at 1950 Sawtelle Boulevard, Suite 180, Los Angeles, California,
under a lease that expires October 31, 1999. The lease payment is $19,037 per
month. Youbet.com is exploring alternatives to expand its current space or to
secure a larger location. Youbet.com expects that suitable additional space will
be available on commercially reasonable terms. Youbet.com does not own any real
estate.
ITEM 3. LEGAL PROCEEDINGS
Youbet.com may from time to time become a party to various legal proceedings
arising in the ordinary course of business. Youbet.com is not currently subject
to any material legal proceedings. However, there can be no assurance that
Youbet.com will not be a party to legal proceedings at some future date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Youbet.com's security holders during
the fourth quarter of the fiscal year ended December 31, 1998.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Youbet.com, Inc. is traded on the over-the-counter
bulletin board under the symbol "UBET". The following table sets forth the range
of reported closing bid prices of Youbet.com's common stock during the periods
indicated. Such prices reflect prices between dealers in securities and do
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not include any retail markup, markdown or commission and may not necessarily
represent actual transactions. The information set forth below was obtained from
America Online.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Three months ended--
March 31, 1998.............................................................. $ 5.25 $ 3.87
June 30, 1998............................................................... 7.37 5.25
September 30, 1998.......................................................... 6.50 3.12
December 31, 1998........................................................... 6.50 3.06
FISCAL YEAR ENDED DECEMBER 31, 1997:
- ----------------------------------------------------------------------------
Three months ended--
March 31, 1997.............................................................. $ 5.75 $ 3.00
June 30, 1997............................................................... 5.00 1.00
September 30, 1997.......................................................... 4.75 3.25
December 31, 1997........................................................... 5.75 2.50
January 1, 1999 through March 25, 1999...................................... $ 20.50 $ 6.38
</TABLE>
As of March 25, 1999, Youbet.com had 375 shareholders of record with respect
to Youbet.com's common stock and 20 shareholders of record with respect to
Youbet.com's Series A Convertible Preferred Stock, 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 therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and outstanding. Youbet.com has never declared or paid any dividends
on its common stock. Youbet.com intends to retain any future earnings for use in
the operation and expansion of its business. Consequently, Youbet.com does not
anticipate paying any cash dividends on its common stock to its stockholders for
the foreseeable future. Furthermore, under the terms of the 11% Senior
Convertible Discount Notes, Youbet.com may not declare or pay dividends and the
ability to do so 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.
The holders of Series A Convertible Preferred Stock are not entitled to
dividends unless dividends are paid on the common stock, in which case the
Series A Convertible Preferred Stock will receive dividends at the same rate
payable on the common stock on the basis of the number of shares of common stock
into which the Series A Convertible Preferred Stock is convertible. The holders
of Series A Convertible Preferred Stock vote together with the holders of common
stock, on the basis of the number of shares of common stock into which the
Series A Convertible Preferred Stock is convertible, on all matters presented to
the stockholders of Youbet.com to vote. The Series A Convertible Preferred Stock
will vote separately as a class on matters which affect its rights and
preferences.
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RECENT SALES OF UNREGISTERED SECURITIES.
In March 1998, in conjunction with the restructuring of a capital lease
obligation, Youbet.com issued 20,000 shares of common stock to a lessor with an
approximate fair market value of $79,000.
In May 1998, Youbet.com issued 2,500 shares of common stock to a former
employee for services rendered which were valued at $15,469.
In June and July 1998, Youbet.com issued 1,513,551 shares of common stock
(and 105,117 Series D common stock purchase warrants exercisable at $5.25 per
share) to the bridge noteholders in conjunction with the conversion of bridge
financing notes with a principal balance of $2,715,000 and accrued interest of
$285,870.
In June 1998, Youbet.com issued 11,200 shares of common stock (and 5,600
Series D common stock purchase warrants exercisable at $5.25 per share) in
conjunction with the conversion of vendor debt of $28,000 into common stock.
In December 1998, Youbet.com entered into a stock subscription agreements
with foreign investors for the sale of 800,000 shares of common stock for
$2,000,000. Youbet.com received the proceeds during January and February 1999.
The finder received 40,000 Series C common stock purchase warrants exercisable
at $2.50 per share for gross proceeds of $2,000,000.
In March 1998, Youbet.com issued warrants to a financial and marketing
consulting firm to purchase an aggregate of 300,000 shares of common stock, of
which 200,000 warrants are exercisable at $3.125 per share and 100,000 warrants
are exercisable at $5.25 per share, for additional services rendered during
January through June 1998. The warrants are exercisable through March 2003. The
300,000 warrants were valued at $1,444,000.
In April 1998, Youbet.com issued warrants to purchase 25,000 shares of
common stock exercisable at $3.00 per share to Youbet.com's Chief Financial
Officer at that time for services rendered during 1998. The warrants are
exercisable through April 1999. The fair value of the warrants are approximately
$75,000. The warrant have been exercised.
In June 1998, Youbet.com issued Series C common stock purchase warrants for
254,593 shares of common stock to various parties. The Series C common stock
purchase warrants are exercisable at $2.50 per share through June 2003.
Youbet.com issued 5,000 warrants to a vendor which deferred an amount due it,
55,063 warrants (including 48,110 warrants to David M. Marshall and Russell M.
Fine) in conjunction with the conversion into common stock of employee deferred
compensation of $206,483, and 177,000 warrants (including 134,000 warrants to
related parties) as additional consideration for short-term advances of
$440,000, all of which were considered financing costs. Youbet.com also issued
17,530 warrants for legal fees. The warrants issued for financing costs were
valued at $1,019,444. The warrant issued for legal fees were valued at $100,447.
In June and July 1998, Youbet.com issued Series D common stock purchase
warrants in conjunction with 165,780 shares of common stock to various parties.
The Series D common stock purchase warrants are exercisable at $5.25 per share
through September 2000. Youbet.com issued 105,117 warrants in conjunction with
the conversion into common stock of 1997 bridge financing notes with a principal
balance of $300,000, 5,600 warrants in conjunction with the conversion into
common stock of vendor debt of $28,000, and 55,063 warrants (including 48,110
warrants to David M. Marshall and Russell M. Fine) in conjunction with the
conversion into common stock of employee deferred compensation of $206,483, all
of which were considered financing costs. The warrants were valued at $386,240.
In April 1998, Youbet.com issued a Series E common stock purchase warrant
for 50,000 shares of common stock to a consulting firm exercisable through April
2001. The warrants were valued at $251,000.
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In September 1998, in conjunction with the 1997 private placement and the
conversion of the 1998 bridge financing into common stock, Youbet.com issued
87,844 Series E common stock purchase warrants to the finder exercisable through
2001. The warrants were valued at $243,251.
In February 1998, Youbet.com issued options to purchase 500,000 shares of
common stock at $2.50 per share of such amount, 205,000 options were issued to
officers. Such options were fully vested upon issuance, but are not exercisable
until February 1999, and expire on February 6, 2003. Youbet.com valued the
aggregate difference between the fair market value of Youbet.com's common stock
on the issuance date and the $2.50 exercise price at $828,151.
In February and July 1998, stock options were granted to employees to
purchase 13,000 shares of common stock at $5.50 per share, the fair value on the
date of grant. These options vest over four years and are exercisable for a
period of ten years.
In November 1998, stock options were granted to employees to purchase 15,600
shares of common stock at $4.00 per share, the fair value at the date of the
grant. These options vest over 4 years and are exercisable for a period of five
years.
In July 1998, stock options were granted to non-employees to purchase
224,000 shares of common stock (165,000 to directors), 204,000 shares at $2.50
per share, and 20,000 shares averaging $5.46 per share, the fair value at the
date of grant. The director options generally vest over one year and the other
options generally vest over one to two years. The options were valued at
$1,148,860 ($888,150 allocated to the director options).
In January 1998, Youbet.com commenced a bridge financing, consisting of a
secured note with interest at 12% due December 1998, secured by a junior lien on
substantially all the assets of Youbet.com and an option to convert into
securities offered in any subsequent private placement (or the equivalent amount
of common stock, if such financing did not consist of common stock), at 75% to
80% of the private placement offering price. Youbet.com issued a total of
$2,415,000 of bridge notes of which $1,247,000 were issued to related parties.
In July 1998, as a result of the sale of Series A Convertible Preferred Stock,
the holders of the bridge notes payable converted such notes into 1,303,319
shares of common stock.
In June 1998, David M. Marshall converted $104,773 of his employee deferred
compensation into 55,879 shares of common stock (and 27,939 Series C and 27,939
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998, Russell M. Fine converted $75,640 of his employee deferred
compensation into 40,341 shares of common stock (and 20,171 Series C and 20,171
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998 Youbet.com entered into a Stock Purchase Agreement with certain
investors. Pursuant to this agreement, in June, July and December 1998
Youbet.com sold 200,000 shares, 20,000 shares and 22,500 shares, respectively,
of Series A Convertible Preferred Stock for $25.00 per share. During December
1998, 155,390 shares of Series A Convertible Preferred Stock were converted into
1,553,900 shares of common stock.
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 fair value of this warrant
was $2,112,000. 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.
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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 December the Series A
Convertible Preferred Stock was converted into common stock and remained subject
to the pledge.
In April 1999, Youbet.com consummated a private placement of $45,500,000
principal amount of its 11% Senior Convertible Discount Notes due 2004 to a
group of institutional investors. The 11% Senior Convertible Discount Notes were
issued and sold pursuant to note purchase agreements which provided for an
aggregate purchase price of $36,728,510. The 11% Senior Convertible Discount
Notes bear interest on the purchase price at the rate of 11% per annum, which
for the first two years is added to principal to yield the face principal amount
of $45,500,000. Thereafter, interest is paid in cash semi-annually in April and
October of each year, until April 2004, when all principal and accrued interest
is due and payable. The principal amount of the 11% Senior Convertible Discount
Notes together with any accrued and unpaid interest, is convertible into
Youbet.com common stock at a price of $10.00 per share. The conversion price
will be reset on the earlier to occur of (1) Youbet.com issuing common stock or
securities convertible or exchangeable into common stock for aggregate gross
proceeds of at least $15,000,000, or (2) April 2000. The reset conversion price
in the case of the former event will be the lesser of $10.00 per share or the
lowest price at which Youbet.com issues and sells common stock or securities
convertible or exchangeable into common stock between April 1999 and the reset
date. The reset conversion price in the case of the latter event will be the
lesser of $10.00 per share or the average daily closing price of Youbet.com
common stock for the ten trading days prior to the reset date, but not below
$5.00 per share.
The note purchase agreements also require Youbet.com to use its best efforts
to file, have declared effective by the Securities and Exchange Commission and
keep effective for a period of up to five years a registration statement with
respect to all of the shares of common stock into which the 11% Senior
Convertible Discount Notes may be converted (approximately 4,550,000 shares at
the present conversion rate, assuming conversion on April 5, 2001). If
Youbet.com fails to do so it shall pay to each holder for each 30-day period or
portion thereof that a registration statement is not effective, (1) a cash
payment equal to 3% of the principal amount of 11% Senior Convertible Discount
Notes held by such holder, and (2) for each share of common stock held by such
holder which was acquired upon conversion of the 11% Senior Convertible Discount
Notes, a cash payment equal to 3% of the principal amount of the 11% Senior
Convertible Discount Notes from which such common stock was converted, up to a
maximum penalty of 18% of the face principal amount of the 11% Senior
Convertible Discount Notes. The purchasers of the 11% Senior Convertible
Discount Notes are subject to lock-up periods of not more than 180 days
following the date of this prospectus or any subsequent prospectus.
Additional stock options were granted to the officers and directors as
provided in ITEM 10 EXECUTIVE COMPENSATION--Option Grants in 1998.
Certain warrants issued by Youbet.com have or may have various registration
rights with respect to the warrants or shares of common stock issuable on
exercise of such warrants. Youbet.com has not registered any of the warrants or
such shares of common stock. In March 1999, Youbet.com sent a proposal to
holders of approximately 6,100,000 warrants, certain of which warrants have or
may have certain registration rights. Among other things, the proposal requested
a release of claims, if any, which may arise from
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such warrants and shares of common stock not having been registered in
consideration of Youbet.com's agreeing to register such shares of common stock
in 1999 and 2000. As of April 8, 1999, the holders of an aggregate of 4,968,651
warrants (81%) have accepted such proposal and executed such releases.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Youbet.com intends to establish itself as the leading global brand name for
online live event wagering. Youbet.com has initially focused its efforts
primarily on the United States horse track racing industry and believes that its
principal product, the You Bet Network, is currently the only legal system
available for online wagering in the United States. Youbet.com believes that
online communication is an ideal medium for live event wagering. First, online
communication allows bettors instant access to vast amounts of historical
performance data used in assessing potential wagers. Second, online
communication offers the ability to sort and analyze such data in ways and at
speeds that are unachievable manually. Third, online communication technology
allows wagers to be placed from virtually any location within a jurisdiction
where wagering is legal, thus freeing bettors from traditional site-specific
wagering locations. In addition, the speed of electronic communication allows
wagers to be placed and acknowledged in seconds.
Youbet.com's initial product, the You Bet Network, is a PC-based system
which utilizes the infrastructure of the Internet and a closed-loop private
network with Internet access to provide up-to-the minute detailed information on
races taking place at horse tracks nationwide. Youbet.com also delivers a live
simulcast of most of these races directly to the subscriber's computer. In
addition, subscribers can use the You Bet Network to transmit information and
thereby facilitate wagers, using the system's icon-driven menus to fill out an
electronic betting ticket with a brief series of mouse-clicks. The information
is then transmitted electronically to a licensed account wagering entity,
currently Ladbroke. Ladbroke accepts and processes the wager from its hub in
Pennsylvania. After processing the wager, Ladbroke sends an electronic
confirmation to the bettor through the You Bet Network. The round-trip time from
information submission to acknowledgment is usually less than three seconds.
Youbet.com currently derives revenue from the You Bet Network in three ways.
First, it charges a monthly subscription fee, currently $5.95 per month. Second,
it receives a fee from Ladbroke equal to fifty percent (50%) of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers.
Third, it receives revenue from the sale of handicapping information.
Since mid-1995, Youbet.com has been engaged in developing the You Bet
Network, its first service being offered to subscribers. Youbet.com has incurred
substantial software development costs since inception, which have been charged
to operations as research and development costs. Management believes that the
technological feasibility of Youbet.com's proprietary software technology was
established during the year ended December 31, 1998.
As of December 31, 1998 Youbet.com was considered to be a development stage
entity as it had not realized a significant amount of revenues from planned
principal operations. During 1995, Youbet.com shifted its business strategy by
de-emphasizing consulting services and software licensing, as a result of which
Youbet.com became a development stage company.
Youbet.com has expanded its operations in recent years and has grown from 38
employees at December 31, 1996 and 1997 to 51 employees at December 31, 1998.
Youbet.com expects to add additional personnel in the United States and plans to
commence operations and add personnel internationally as operations expand.
Youbet.com currently expects to significantly increase its operating expenses in
order to grow its sales and marketing operations, expand in international
markets and upgrade and enhance its service and technologies. As a result of
these and other factors, Youbet.com expects to incur significant losses at least
through 1999.
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Youbet.com has incurred significant losses since inception, and as of
December 31, 1998 had an accumulated net loss of $37,546,000. Included in this
accumulated deficit is $20,940,000 in non-cash expenses related to the recording
of the fair value of warrants and stock options charged to operations over the
period of benefit, 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 expenses did not affect working capital, net stockholders' equity
(deficiency) or cash flows. The remaining deferred compensation at December 31,
1998 of $1,161,000 is expected to be amortized as compensation during 1999
($930,000) and subsequent years. Youbet.com does not expect that these types of
costs will continue at the previous levels.
On January 22, 1999 Youbet.com became the successor to You Bet
International, Inc. through a merger transaction. The subsidiaries of You Bet
International, Inc. (You Bet!, Inc., a Delaware corporation, and Middleware
Telecom Corporation, a California corporation) were also merged into Youbet.com.
On December 6, 1995, Continental Embassy Acquisition, Inc. ("CEA"), which
was organized in the State of Utah in 1987 for the purpose of raising capital
and acquiring a suitable business opportunity through a merger with, or
acquisition of, a private business enterprise, acquired 100% of the outstanding
capital stock of You Bet!, Inc., a Delaware corporation (formerly know as PC
Totes, Inc.), in exchange for the issuance of 5,800,000 shares of common stock,
including 5,710,000 shares of common stock to David M. Marshall and Russell M.
Fine (who were the founders of Youbet.com's predecessor entity), their nominees
and a stockholder related to one of the officers. Concurrent with this
transaction, CEA reincorporated in the State of Delaware and changed its name to
You Bet International, Inc., and the management of You Bet!, Inc. became the
management of You Bet International, Inc. For accounting purposes, the
acquisition of You Bet!, Inc. by You Bet International, Inc. has been treated as
a reverse acquisition of You Bet!, Inc. with You Bet!, Inc. considered the
acquirer. Concurrent with this transaction, 100% of the capital stock of
Middleware Telecom Corporation was contributed by its stockholders, who were
substantially the same as the stockholders of You Bet!, Inc. to You Bet!, Inc.
for no additional consideration. Youbet.com also effected a 1 for 1.5 reverse
stock split of its common stock in December 1995.
At the time of the reverse merger in December 1995, PC Totes, Inc. had over
eight years of experience developing computer-based wagering systems. In 1987,
PC Totes, Inc. developed a PC-based "totalisator" system that is used to operate
the wagering systems at horse and dog racing tracks. The totalisator system is
called the "PC Tote" and includes facilities for infield scoreboards, closed
circuit television and numerous types of customer ticket issuing machines.
CONSOLIDATED RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Youbet.com commenced recognizing revenues from operations during the year
ended December 31, 1998. Revenues during 1998 were $264,000, representing
Youbet.com's commission on the gross amount of each wager placed by its
subscribers. Youbet.com did not charge monthly subscription fees for its service
in 1998.
In June 1997, Youbet.com and Ladbroke entered into a Telecommunication
Facilitation Agreement which expires in November 2002. Under the agreement,
Youbet.com provides Ladbroke with an interactive graphics interface to the You
Bet Network whereby Youbet.com's subscribers who have established accounts with
Ladbroke's Call-A-Bet System in Pennsylvania are able to communicate
interactively with Ladbroke using their PCs to transmit wagering information to
Ladbroke. The agreement provides for Youbet.com to receive a fee from Ladbroke
equal to fifty percent (50%) of the net commissions to Ladbroke derived from
wagers placed by Youbet.com subscribers who use the Call-A-Bet System either
through the computer graphics interface provided by Youbet.com or more
traditional telephone communication. The Ladbroke agreement contains provisions
allowing the termination of the agreement by either
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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 either the initial eighteen month period beginning January 1998
and ending June 1999, or for any full twelve month period during the term of the
agreement subsequent to the initial eighteen month period.
During the year ended December 31, 1998, 100% of Youbet.com's revenues were
generated from the Ladbroke agreement, and Youbet.com expects that approximately
60% of its revenues during the year ending December 31, 1999 will also be
generated from the Ladbroke agreement. Youbet.com currently estimates that net
commissions will exceed $1,000,000 during the initial eighteen month period
beginning January 1998 and ending June 1999. However, should net commissions be
less than $1,000,000 during such eighteen month period, Ladbroke could elect to
terminate the agreement, which could have a material adverse effect on
Youbet.com.
OPERATING EXPENSES
NETWORK OPERATIONS. Network operations costs consist primarily of salaries
and costs to support the closed-loop private network. Network operations costs
increased by $622,000 or 93.5% to $1,287,000 in 1998 from $665,000 in 1997 and
increased by $444,000 or 200.9% in 1997 from $221,000 in 1996 reflecting the
continued development and expansion of the You Bet Network. Youbet.com expects
network operations costs to increase significantly as the You Bet Network
expands to support the growth in subscribers.
RESEARCH AND DEVELOPMENT. Research and development costs consist primarily
of salaries. Research and development costs increased slightly to $1,267,000 in
1998 from $1,254,000 in 1997 and decreased by $136,000 or 9.8% from $1,390,000
in 1996 reflecting the continued development of the You Bet Network. Youbet.com
will continue to invest in the development of the You Bet Network, which
Youbet.com believes is critical to achieving its strategic objectives and, as a
result, expects research and development costs to increase significantly in
future periods.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
marketing program expenses and salaries. Sales and marketing expenses increased
by $694,000 or 97.6% to $1,405,000 in 1998 from $711,000 in 1997 and increased
7.1% from $664,000 in 1996. The increase in sales and marketing reflects the
expansion of Youbet.com's marketing activities and the launch of the You Bet
Network in 1998. Youbet.com expects sales and marketing expense to increase
significantly in order to brand the You Bet Network, grow its subscriber base,
hire additional sales and marketing personnel and expand internationally.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries, facilities expenses, legal and accounting and investor
relations. General and administrative expenses increased by $937,000 or 51.9%,
to $2,741,000 in 1998 from $1,804,000 in 1997 an increase of $363,000 or 25.2%
from $1,441,000 in 1996. The increases reflect a general increase in personnel
related costs, legal and accounting fees, general operating activity, and the
expansion of the investor relations program in 1998. During 1998, Youbet.com
entered into an agreement with a financial and marketing consulting firm to
develop and manage an expanded investor relations program aimed at Youbet.com's
stockholders, investors, brokerage firms and industry professionals during 1998.
During the year ended December 31, 1998, Youbet.com incurred $489,000 in costs
related to this program. Youbet.com does not expect this program to continue.
Youbet.com expects that general and administrative expenses will increase in
future periods as it hires additional personnel to provide for the growth of the
business.
NON-CASH COMPENSATION. Non-cash compensation relates to the recording of
the fair value of warrants and stock options charged to the period of benefit.
Non-cash compensation increased $2,087,000 or 95.9% to $4,263,000 from
$2,176,000 in 1997 and increased by $2,074,000 from $102,000 in 1996. The
increases are due to Youbet.com issuing a greater number of warrants and stock
options in each subsequent year. As previously discussed, the deferred
compensation at December 31, 1998 of $1,161,000
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will be amortized during 1999 and subsequent years. Youbet.com does not expect
that these costs will continue at the previous levels.
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
begin to brand and market the service. The loss from operations for the year
ended December 31, 1998 increased $4,178,000 or 60.4% to $11,096,000 from
$6,918,000 in 1997 and increased by $2,977,000 or 75.5% from $3,941,000 in 1996.
Youbet.com expects to incur significant losses at least through 1999.
OTHER INCOME (EXPENSE)
NET INTEREST INCOME (EXPENSE). Net Interest expense of $261,000 in 1998
decreased by $128,000 or 32.9% from $389,000 in 1997 an increase of $452,000
from net interest income of $63,000 in 1996. Net interest expense in 1998 and
1997 are the result of advances and bridge loans being outstanding during both
years. Youbet.com expects interest expense to increase significantly in 1999 as
a result of the issuance in April 1999 of its 11% Senior Convertible Discount
Notes. However, Youbet.com will not pay cash interest thereon until October
2001.
NON-CASH EQUITY TRANSACTIONS. Non-cash equity transactions relate to the
recording of the 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. These transactions
decreased $9,849,000 or 81.4% to $2,256,000 in 1998 from $12,105,000 in 1997.
Youbet.com did not incur this cost in 1996. During the year ended December 31,
1998, these costs consisted of $1,406,000 for financing costs and $850,000 to
reflect a discount on conversion of bridge loans, accounts payable and employee
deferred salaries into common stock and warrants. During the year ended December
31, 1997, Youbet.com incurred $3,656,000 for financing costs, $573,000 to
reflect a discount on conversion of bridge loans, accounts payable and employee
deferred salaries into common stock and warrants, and $7,875,000 to reflect the
accounting for the release of forfeiture provisions on certain shares of common
stock owned by Russell M. Fine and David M. Marshall and a shareholder related
to one of the officers. In conjunction with the 1995 private placement offering,
2,500,000 shares of common stock were subject to forfeiture under certain
conditions if Youbet.com did not achieve certain subscriber levels by December
5, 1999. However, as a result of a change in the marketing strategy in 1997 to
focus on building a brand and becoming the market leader to maximize long-term
profitability, the forfeiture restrictions on the 2,500,000 shares of common
stock were released in exchange for the return to Youbet.com and cancellation of
750,000 of such shares. Youbet.com does not expect that these types of costs
will continue at the previous levels.
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INCOME TAXES
At December 31, 1998, Youbet.com has available federal and state net
operating loss carryforwards of $16,896,000 and $16,659,000, respectively, for
income tax purposes, which expire in varying amounts through 2018 for federal
and 2005 for state purposes. The net operating loss carryforward generated a
deferred tax asset of approximately $7,200,000 as of December 31, 1998. The
deferred tax asset has not been recognized since management is unable to
determine whether it is more likely than not that it will be realized.
Accordingly, a 100% valuation allowance has been provided.
SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly consolidated statements
of operations data for each of the eight quarters ended December 31, 1998. In
the opinion of management, the unaudited financial results include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of Youbet.com's consolidated results of operations for those
periods. The consolidated quarterly data should be read in conjunction with the
audited Consolidated Financial Statements and the notes thereto appearing
elsewhere in this form 10-KSB. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- --------- ---------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 20 $ 76 $ 168
Operating expenses:
Network operations................... 118 197 168 182 149 182 405 551
Research and development............. 335 330 296 293 230 348 349 340
Sales and marketing.................. 171 151 143 246 156 535 500 214
General and administrative........... 364 412 513 515 443 783 819 696
Depreciation and amortization........ 74 76 80 78 76 82 86 153
Non-cash compensation................ 25 25 1,169 957 1,223 1,522 707 811
--------- --------- --------- ---------- --------- --------- --------- ---------
Total operating expenses............. 1,087 1,191 2,369 2,271 2,277 3,452 2,866 2,765
--------- --------- --------- ---------- --------- --------- --------- ---------
Loss from operations................... (1,087) (1,191) (2,369) (2,271) (2,277) (3,432) (2,790) (2,597)
Net interest income (expense).......... (34) (92) (198) (65) (69) (174) (30) 12
Other income (expense)................. 1 2 (2,800) (9,313) (484) (1,759) (235) (27)
--------- --------- --------- ---------- --------- --------- --------- ---------
Net loss............................... $ (1,120) $ (1,281) $ (5,367) $ (11,649) $ (2,830) $ (5,365) $ (3,055) $ (2,612)
--------- --------- --------- ---------- --------- --------- --------- ---------
--------- --------- --------- ---------- --------- --------- --------- ---------
</TABLE>
Revenues commenced, with the testing of the You Bet Network, during the
second quarter of 1998 and increased steadily in all subsequent quarters with
the launch of the service in the third quarter. Operating expenses in the
second, third and fourth quarters of 1998 have increased significantly over the
corresponding quarters of the prior year, due to the launch of the You Bet
Network. Correspondingly, network operations costs increased significantly in
the third and fourth quarters of 1998 due to an increase in personnel and costs
to support the closed-loop private network. Sales and marketing expenses
increased in the second and third quarters of 1998 due to the launch of the
service and the commencement of the marketing programs to acquire subscribers.
The fourth quarter decrease in sales and marketing expense is due to a reduction
is marketing programs during this period. General and administrative expenses
increased during the second, third and fourth quarters due to increases in
personnel, legal and accounting fees, and expansion of the investor relations
program.
Youbet.com's quarterly revenues, operating costs and expenses and results of
operations have fluctuated significantly in the past and are expected to
continue to fluctuate significantly in the future.
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Causes of these fluctuations have included and may include, among other factors,
Youbet.com's ability to retain and attract new subscribers to the You Bet
Network; maintaining good relations with the horse tracks and other content and
information providers; introduction of competing wagering services; success of
brand-building and marketing campaigns; price competition from competing
services; the level of use of online and Internet interactive services;
increasing consumer confidence in and acceptance of the online and interactive
services for leisure and wagering; volume, size, timing and completion rates for
wagers transmitted through the You Bet Network; technical difficulties or
interruptions in the You Bet Network; Youbet.com's ability to update and upgrade
the You Bet Network with technological innovations and infrastructure to
accommodate growth; Federal or local governmental controls and regulation; and
general economic conditions and economic conditions specific to online and
Internet interactive activity. Any one or more of these factors could have a
material and adverse effect on Youbet.com's business, results of operations and
financial condition, and makes the prediction of results of operations on a
quarterly basis unreliable.
LIQUIDITY AND CAPITAL RESOURCES
Youbet.com has financed its operations primarily through the sale of its
securities and short-term debt as Youbet.com has generated only negative cash
flow from operations since inception. Between December 5, 1995 and December 31,
1998, Youbet.com has received an aggregate of $16,290,000 in net proceeds from
the sale of common stock, Series A Convertible Preferred Stock and the exercise
of stock options, warrants and short term debt. At December 31, 1998 Youbet.com
had $1,541,000 in cash and $2,100,000 in stock subscription receivables, which
was received in January and February 1999. Youbet.com's principal commitments
consists of obligations under capital leases.
Net cash used in operating activities was $6,538,000, $3,862,000 and
$2,832,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The principal use of cash for all periods was to fund losses from operations.
The increases in the net cash used in operating activities reflected a general
increase in all levels of activity as Youbet.com developed the You Bet Network
and commenced marketing activities during 1998.
Net cash used in investing activities was $360,000, $132,000 and $790,000
for the years ended December 31, 1998, 1997 and 1996, respectively, for
purchases of property and equipment. During 1998 Youbet.com, in conjunction with
the restructuring of a capital lease obligation, increased the outstanding lease
obligation by $80,000 to reflect the acquisition of office and computer
equipment. During 1997 the purchases of property and equipment were funded by
the proceeds of a capital lease aggregating $150,000.
Net cash provided by financing activities was $8,385,000, $3,960,000 and
$412,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Net
cash provided by and used by financing activities consisted principally of
proceeds from short-term loans, primarily from related parties, bridge loans
from both related and unrelated parties, the exercise of stock options and
warrants, and the private placement of common stock, Series A Convertible
Preferred Stock and stock purchase warrants offset by the repayment of a portion
of the short term debt. During 1998, Youbet.com received net advances of
$560,000 and bridge financing of $1,465,000, as well as the net proceeds from
preferred and common stock financings of $5,501,000 and $1,069,000 from the
exercise of stock options and warrants to fund its cash requirements. In
addition, during December 1998 Youbet.com completed the sale of common stock and
Series A Convertible Preferred Stock generating net proceeds of $1,980,000,
which was received in January and February 1999.
In April 1999, Youbet.com issued $45,500,000 principal amount of 11% Senior
Convertible Discount Notes for cash proceeds of $36,728,510, which represents a
discount of 11% per year, compounded semi-annually to April 2001. The notes
begin accruing interest in April 2001 at 11% per year, payable semi-annually.
Principal and unpaid interest are due and payable on April 5, 2004. The notes
plus accrued, unpaid interest are convertible at any time at the rate of $10 per
common share, subject to reset provisions
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as defined in the notes. The conversion price resets one time at the earlier of
(1) a placement, after April 1999, of common stock and any securities
convertible into common stock which raises at least $15 million gross proceeds
to Youbet.com or (2) April 5, 2000. In the event that a placement of common
stock or convertible securities occurs first, the conversion price will be reset
to the lesser of $10 per share or the lowest price per share at which Youbet.com
sells common stock after the date of the placement of common stock or
convertible securities (excluding options, warrants and other convertible
securities existing prior to April 1999). In the event that the reset occurs on
April 5, 2000, the the conversion price will be reset to the lower of $10 per
share or the average daily closing price for the ten-day period ending on April
5, 2000, but in no event less than $5 per share.
During November 1997, Youbet.com completed a private placement offering of
securities to investors. Youbet.com sold 89.78 units at $25,000 per unit,
resulting in net proceeds of $1,953,380. Each unit consisted of 10,000 shares of
common stock and 5,000 Series D common stock purchase warrants exercisable at
$5.25. As a result of the sale of 89.78 units under this private placement in
1997, Youbet.com issued a total of 897,760 shares of common stock and 448,880
Series D common stock purchase warrants.
In conjunction with the closing of the private placement offering in
November 1997, bridge loans payable aggregating $1,679,000, representing a
principal balance of $1,460,000 and accrued interest of $219,000, were exchanged
for 89.55 units of common stock and Series D common stock purchase warrants.
Included in the $1,679,000 was $632,500, representing a principal balance of
$550,000 and accrued interest of $82,500, from related parties. As a result of
the issuance of 89.55 units in 1997, Youbet.com issued 895,468 shares of common
stock and 447,734 Series D common stock purchase warrants, including 337,335
shares of common stock and 168,667 Series D common stock purchase warrants to
related parties. During the year ended December 31, 1997, $209,000 of advances,
including $104,000 to related parties, were repaid. As of December 31, 1997,
bridge loans payable aggregating $300,000 to unrelated parties remained
outstanding.
The holders of the 1997 bridge loans had the option of converting such
loans, including accrued interest, into the lesser of units, consisting of
10,000 shares of common stock and 5,000 Series D warrants, at the rate of
$18,750 per unit, or 75% of the next private placement offering price of an
offering over $5,000,000. During the year ended December 31, 1998, as a result
of the completion of the Series A Convertible Preferred Stock financing, the
holders of the bridge loans converted such loans, plus accrued interest of
$94,188, at the rate of $1.875 per unit, into common stock and Series D common
stock purchase warrants. Accordingly, during the year ended December 31, 1998,
Youbet.com issued 210,232 shares of common stock and 105,117 Series D common
stock purchase warrants.
In January 1998, Youbet.com commenced a new bridge financing, consisting of
a secured note with interest at 12% per annum due December 1998, secured by a
junior lien on substantially all the assets of Youbet.com. Youbet.com issued a
total of $2,415,000 of bridge notes (including $950,000 converted from
advances), of which $1,247,000 were issued to related parties. At the option of
the holder, each note was convertible into the securities of a subsequent
private placement (or the equivalent amount of common stock, if such financing
was not a common stock financing) at the lower of $2.75 or 80% of the private
placement price. During the year ended December 31, 1998, as a result of the
completion of the Series A Convertible Preferred Stock financing, the holders of
the $2,415,000 principal amount of bridge notes converted such notes, plus
accrued interest of $191,682, at the rate of $2.00 per share, into 1,303,319
shares of common stock, including 683,176 shares attributable to related
parties. During the year ended December 31, 1998, as a result of the conversion
of the 1998 bridge financing into common stock, Youbet.com issued 79,312 Series
E common stock purchase warrants, which had an aggregate fair value of $210,915,
to certain finders with respect to such bridge financing. These warrants are
exercisable at $3.125 per share for a period of three years. Finders fees paid
in cash with respect to such bridge notes aggregating $96,000 were recorded as
deferred financing costs and were being amortized through the earlier of
December 31, 1998 or the conversion of the bridge notes into common stock.
Accordingly, the
26
<PAGE>
unamortized portion of such deferred financing costs of $56,391 was charged to
operations as financing costs during the year ended December 31, 1998.
Advances payable, all to related parties, were $390,000 at December 31,
1997. During the year ended December 31, 1998, Youbet.com received additional
advances of $613,875, including $508,875 from related parties, of which $53,875
was repaid in 1998. The holders of the advances had the right to convert such
amounts into the 1998 bridge financing until such time as the bridge notes were
either called or repaid. During the year ended December 31, 1998, all of the
advances aggregating $950,000 converted into the 1998 bridge financing.
During the year ended December 31, 1998, Youbet.com issued 355,000 shares of
common stock to four individuals in conjunction with the exercise of warrants
and stock options with exercise prices ranging from $2.50 to $3.125 per share,
generating gross proceeds to Youbet.com of $1,069,000.
On June 29, 1998, Youbet.com entered into a Stock Purchase Agreement with
certain private and institutional investors. Pursuant to the Stock Purchase
Agreement, Youbet.com sold 200,000 shares of Series A Convertible Preferred
Stock for a cash purchase price of $25.00 per share, resulting in gross proceeds
to Youbet.com of $5,010,000. Officers and directors purchased 35,890 shares of
Series A Convertible Preferred Stock.
During July 1998 and December 1998, Youbet.com sold an additional 20,000
shares and 22,500 shares, respectively, of Series A Convertible Preferred Stock
under the same terms for aggregate gross proceeds of $1,062,500, $100,000 of
which was received in January 1999. During December 1998, 155,390 shares of
Series A Convertible Preferred Stock were converted into 1,553,900 shares of
common stock.
The Series A Convertible Preferred Stock has a liquidation preference of
$25.00 per share and will rank senior to all other series of preferred stock
that may be issued in the future. Each share of Series A Convertible Preferred
Stock is convertible into ten shares of common stock of Youbet.com, and will be
automatically converted into common stock at then prevailing conversion rate at
such time as Youbet.com has completed a secondary public offering which raises
not less than $15,000,000 in gross proceeds and has its common stock listed on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market. The holders of the Series A Convertible Preferred Stock are not entitled
to dividends, except that if dividends are paid on Youbet.com's common stock,
holders of Series A Convertible Preferred Stock will be entitled to dividends on
the basis of the number of shares of common stock into which the Series A
Convertible Preferred Stock is then convertible. The Series A Convertible
Preferred Stock will vote together with the holders of common stock on all
matters presented to stockholders for a vote on the basis of the number of
shares of common stock into which the Series A Convertible Preferred Stock is
then convertible. The holders of the Series A Convertible Preferred Stock have
unlimited piggyback registration rights and certain demand registration rights.
Based on a valuation report prepared by an investment and merchant banking firm
dated July 31, 1998, Youbet.com has determined that the Series A Convertible
Preferred Stock was sold at fair market value. As of December 31, 1998 155,390
shares of Series A Convertible Preferred Stock had converted into 1,553,900
shares of common stock.
In conjunction with the Series A Convertible Preferred Stock financing,
Youbet.com incurred direct costs related to such financing of $360,909, which
were charged to additional paid-in capital. Of such amount, $217,493 was paid to
a firm for investment advisory services. 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,
and have certain piggyback registration rights. The aggregate fair value of such
warrants was $401,639. Youbet.com also paid cash finder's fees to other parties
aggregating $28,500.
During December 1998, Youbet.com entered into stock subscription agreement
for the sale of 800,000 shares of common stock for net proceeds of $1,880,000
which were received during January and February 1999.
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<PAGE>
As a result of the sale of Series A Convertible Preferred Stock, common
stock and the conversion of advances and bridge loans into common stock during
1998, Youbet.com had net working capital of $1,924,687 at December 31, 1998, as
compared to a working capital deficit of $2,739,184 at December 31, 1997.
Youbet.com does not currently have any material commitments for capital
expenditures. However, Youbet.com anticipates that it will experience a
substantial increase in capital expenditures and lease commitments consistent
with Youbet.com's anticipated growth in operations and infrastructure, including
various capital expenditures associated with the expansion of operations into
foreign markets. Youbet.com anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and that
these expenses will be a material use of cash resources. Youbet.com believes
that its existing cash and the proceeds from the sale of the 11% Senior
Convertible Discount Notes will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures at least for the next twelve
months.
IMPACT OF THE YEAR 2000
The year 2000 risk is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS
Based on an internal assessment, Youbet.com believes that its software
programs, both those developed internally and purchased from material outside
vendors, are year 2000 compliant or will be by December 31, 1999. Youbet.com
began assessing its state of year 2000 readiness during October 1998. This
included reviewing the year 2000 compliance of the following:
- Youbet.com's internally developed proprietary software incorporated in the
You Bet Network;
- Ladbroke's pool wagering and other software;
- Third party handicapping information suppliers;
- Third-party software vendors;
Youbet.com will continue to require its vendors of material hardware and
software to provide assurances of their year 2000 compliance.
COSTS
To date, Youbet.com has incurred approximately $25,000 of costs in
identifying and evaluating year 2000 compliance issues. Most of Youbet.com's
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation year
2000 compliance matters. At this time, Youbet.com does not possess the
information necessary to estimate the potential costs of future revisions to
software relating to the You Bet Network should revisions be required or the
replacement of third-party software, hardware or services, if any, that are
determined to not be year 2000 compliant. Although Youbet.com believes that its
software programs, both developed internally and purchased from outside vendors
are either already year 2000 compliant or will be by December 31, 1999, failure
to identify non year 2000 compliant software could have a material and adverse
effect on Youbet.com's business, results of operations and financial condition.
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<PAGE>
RISKS
Youbet.com is not currently aware of any significant year 2000 compliance
problems relating to the You Bet Network or other software systems that would
have a material and adverse effect on business, results of operations and
financial condition. However, there can be no assurance that Youbet.com will not
discover year 2000 compliance problems in its proprietary software or other
third party software that will require a substantial investment to correct.
Youbet.com's inability to fix such hardware or software on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on
Youbet.com's business, results of operations and financial condition.
Failure to adequately address year 2000 compliance issues in Youbet.com's
proprietary software or third party software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that utility companies, Internet network companies, Internet access
companies, third-party service providers and others outside Youbet.com's control
will be year 2000 compliant. The failure by these entities to be year 2000
compliant could result in a systemic failure beyond Youbet.com's control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent Youbet.com from providing subscribers access
to the You Bet Network or other value added handicapping services any of which
would have a material and adverse effect on Youbet.com's business, results of
operations and financial condition.
CONTINGENCY PLAN
Although Youbet.com continues to evaluate its software for possible year
2000 compliance issues, Youbet.com believes that its software programs, both
those developed internally and purchased from material outside vendors, are
already year 2000 compliant or will be by December 31, 1999. Therefore,
Youbet.com does not have a formal contingency plan for a major year 2000
problem. Youbet.com's inability to locate or correct a significant year 2000
problem, if one exists, could result in an interruption in, or a failure of,
certain normal business activities or operations. In addition, year 2000
problems may affect sub-systems of the You Bet Network, such as the ability to
provide value added handicapping information. Any such failure could cause
Youbet.com's subscribers to seek alternate providers for online wagering. This
could require Youbet.com to incur significant unanticipated expenses to remedy
and could divert Youbet.com's management's time and attention, either of which
could have a material and adverse effect on business, results of operation and
financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS:
Youbet.com adopted the Financial Accounting Standards Board Issued Statement
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), during the year ended
December 31, 1998. This Statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income but are excluded from net income. Adoption
of this statement did not have an impact on Youbet.com's current disclosures and
presentation.
Youbet.com adopted the Financial Accounting Standards Board Issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS No. 131) during the year ended December 31, 1998. This Statement requires
that public companies report certain information about their major customers,
operating segments, products and services, and the geographic areas in which
they operate. Because Youbet.com operates within a single operating segment,
adoption of this statement did not have an impact on Youbet.com's current
disclosures and presentation.
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<PAGE>
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (SFAS No. 132), which is effective for financial statements issued for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
requires comparative information for earlier years to be restated. Youbet.com
adopted SFAS No. 132 for its fiscal year beginning January 1, 1998. Adoption of
SFAS No. 132 did not have an effect on Youbet.com's financial statement
presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No.
133) which is effective for financial statements issued for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Historically, Youbet.com has not entered into derivative contracts to
hedge existing risks or for speculative purposes. Accordingly, Youbet.com does
not expect adoption of the new standard on January 1, 2000 to have any effect on
its financial statements.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements are listed at the "Index to Financial
Statements" elsewhere in this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective November 3, 1997, Deloitte & Touche LLP ("Deloitte & Touche")
resigned as Youbet.com's independent accountants. Deloitte & Touche audited
Youbet.com's consolidated financial statements for the years ended December 31,
1995 and 1996. Deloitte & Touche's reports for the years ended December 31, 1995
and 1996 contained an explanatory paragraph raising substantial doubt about
Youbet.com's ability to continue as a going concern. Other than the foregoing
explanatory paragraph, Deloitte & Touche's reports on Youbet.com's financial
statements for the years ended December 31, 1995 and 1996 did not contain an
adverse opinion or a disclaimer of opinion, nor were the reports modified as to
audit scope or uncertainty. During the years ended December 31, 1995 and 1996,
and the period from January 1, 1997 through November 3, 1997, there were no
disagreements with Deloitte & Touche on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche, would
have caused such firm to make reference to the subject matter of the
disagreements in connection with its reports on Youbet.com's consolidated
financial statements.
Effective March 3, 1998, Youbet.com engaged BDO Seidman, LLP ("BDO Seidman")
as Youbet.com's new independent accountants. The engagement of BDO Seidman was
approved by Youbet.com's Board of Directors. Prior to the engagement of BDO
Seidman, Youbet.com did not consult with such firm regarding the application of
accounting principles to a specific completed or contemplated transaction, or
any matter that was either the subject of a disagreement or a reportable event.
However, prior to the engagement of BDO Seidman, Youbet.com consulted with such
firm in order to confirm Youbet.com's expectation that the auditor's opinion
with respect to Youbet.com's 1997 consolidated financial statements would
contain a modification paragraph reflecting uncertainty with respect to
Youbet.com's ability to continue as a going concern.
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<PAGE>
PART III.
ITEM 9. 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. Also provided is a brief description of the business
experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject
to the reporting requirements under the Federal securities laws.
Effective June 29, 1998, in conjunction with the Series A Convertible
Preferred Stock financing Mr. Fell acquired the right to designate four
directors pursuant to the Stockholders Agreement, which expires in June, 2000.
The remaining three directors are to be designated by David Marshall and Russell
Fine. On June 29, 1998, the number of directors of Youbet.com was increased to
seven and Robert M. Fell, Alan W. Landsburg, William H. Roedy and Caesar P.
Kimmel were elected to the Board of Directors of Youbet.com. Such persons were
designated by Mr. Fell pursuant to the Stockholders Agreement. David M.
Marshall, Russell M. Fine and Jess Rifkind remained as directors of Youbet.com,
as the designees of Mr. Marshall and Mr. Fine. As a result of the ability to
designate four directors as provided in the Stockholders Agreement, Mr. Fell may
be deemed to have acquired control of Youbet.com.
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth certain information regarding the directors,
executive officers and certain key employees of Youbet.com:
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE DATE ELECTED AS DIRECTOR
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Robert M. Fell...................... 56 June 29, 1998
David M. Marshall................... 36 December 6, 1995
Russell M. Fine..................... 35 December 6, 1995
Caesar P. Kimmel.................... 73 June 29, 1998
Alan W. Landsburg................... 66 June 29, 1998
Jess Rifkind........................ 68 December 6, 1995
William H. Roedy.................... 51 June 29, 1998
</TABLE>
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<PAGE>
EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Robert M. Fell...................... 56 Chairman of the Board and Chief Executive Officer
David M. Marshall................... 36 Vice Chairman of the Board and President
Russell M. Fine..................... 35 Director, Executive Vice President and Chief Technology Officer
Ron W. Luniewski.................... 35 Executive Vice President and Chief Operating Officer
Phillip C. Hermann.................. 49 Executive Vice President and Chief Financial Officer
Jean M. Prewitt..................... 50 Executive Vice President, International
Steve A. Molnar..................... 55 Executive Vice President, Racing
Gary N. Jacobs...................... 53 Secretary
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS:
ROBERT M. FELL
Mr. Fell has served as Chairman of the Board and Chief Executive Officer of
Youbet.com since June 1998. From 1994 to 1997 prior to joining Youbet.com, Mr.
Fell was chairman of the board and chief executive officer of Archon
Communications, Inc. ("ACI"). ACI acquired control of Premiere Radio Networks,
Inc., which it later sold to Jacor Communications, Inc. Mr. Fell was also the
founder of Silicon Gaming, Inc. and served as its initial President in 1993. Mr.
Fell resigned from the board of Silicon Gaming in early 1998. From 1977 to 1995,
as a consultant in the entertainment and communications industry, Mr. Fell,
through Fell & Company, Inc., played a major role in restructuring and the
augmenting management of Columbia Pictures Industries, Twentieth Century Fox and
other major media companies.
DAVID M. MARSHALL
Mr. Marshall has served as Vice Chairman of the Board and President of
Youbet.com since June 1998. 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
MiddleWare Telecom Corporation and PC-Totes, Inc. Both entities have since been
merged into Youbet.com.
RUSSELL M. FINE
Mr. Fine has served as Executive Vice President and Chief Technology Officer
of Youbet.com since June 1998. Mr. Fine has been a senior executive and director
of Youbet.com or its predecessors since its founding in 1987. Mr. Fine was also
the chief technology officer and co-founder of MiddleWare Telecom Corporation
and vice-president of research and development of PC-Totes. Both entities have
since been merged into Youbet.com.
RON W. LUNIEWSKI
Mr. Luniewski has served as Executive Vice President and Chief Operating
Officer of Youbet.com since February 1999, and was President of You Bet!, Inc. a
subsidiary of Youbet.com or its predecessor since March 1997. For more than the
five years prior to joining Youbet.com or its predecessor Mr. Luniewski was with
Electronic Data Systems as a System Engineer and held a variety of positions in
software development, project management and business development.
PHILLIP C. HERMANN
Mr. Hermann has served Executive Vice President and Chief Financial Officer
of Youbet.com since May 1998. From August 1997 to April 1998, Mr. Hermann was
chief operating officer and chief financial
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<PAGE>
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.
JEAN M. PREWITT
Ms. Prewitt has served as Executive Vice President, International of
Youbet.com since April 1999. From July 1994 to January 1999 Ms. Prewitt was with
podesta.com, a governmental affairs/public relations firm specializing in media
and technology clients. Previously, from 1989 to 1994 Ms. Prewitt was with the
National Telecommunications and Information Administration where she advised and
represented the United States in communications and information policies. She
also served as senior vice president and general counsel of United International
Pictures, from 1982 to 1989.
STEVE A. MOLNAR
Mr. Molnar has served as Executive Vice President, Racing of Youbet.com
since February 1999 and was chief executive officer of You Bet!, Inc. a
subsidiary of Youbet.com or its predecessor from April 1997 to April 1998. From
May 1994 through December 1995 Mr. Molnar was a consultant to the horse racing
industry including Youbet.com. Mr. Molnar's involvement in the horse racing
industry spans 12 years prior to joining Youbet.com. From November 1988 to April
1994 he held the position of president and chief operating officer of McKinnie
Systems.
GARY N. JACOBS
Mr. Jacobs has served as Secretary of Youbet.com since July 1998. He has
been a senior partner at Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP, or its predecessors since May 1988. Mr. Jacobs is counsel for
Youbet.com, and a director of The InterGroup Corporation, which owns and
operates rental properties and invests in other companies.
CAESAR P. KIMMEL
Mr. Kimmel has served as a Director of Youbet.com since June 1998. Mr.
Kimmel has been a private investor for more than five years. Mr. Kimmel is one
of the original founders of Warner Communications, Inc. the predecessor to Time
Warner Inc. and served as Executive Vice President for twenty five years. Mr
Kimmel is also currently a director of the National Museum of Racing.
ALAN LANDSBURG
Mr. Landsburg has served as a Director of Youbet.com since June 1998. Mr.
Landsburg is the founder and has been the chief executive officer of The
Landsburg Company and Alan Landsburg Productions since 1970. As an executive
producer, director and writer he is responsible for more than 2,000 hours of
television production which include seven hit series and more than 50 movies. He
is a founding board member of the Thoroughbred Owners of California. Mr.
Landsburg also serves on Advisory Committees for the California Horse Racing
Board.
JESS RIFKIND
Mr. Rifkind has served as a Director of Youbet.com since December 1995. Mr.
Rifkind is an independent management consultant providing counsel to clients in
the areas of management, finance, and high technology. Prior to establishing his
current practice in 1982, Mr. Rifkind held operating and research executive
positions with Xerox Corporation from May 1968 to December 1981; including vice
president, Field Engineering, and founder and manager of the Advanced
Development Labs of the Xerox Palo Alto
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<PAGE>
Research Center. Mr. Rifkind is also currently a director of Gemstone Systems
Inc, a computer software company that produces application server and object
database software.
WILLIAM H. ROEDY
Mr. Roedy has served as a Director of Youbet.com since June 1998. Mr. Roedy
has been employed by MTV Networks since 1989 and is president of MTV Networks
International and chairman of MTV Networks Europe. Prior to joining MTV, Mr.
Roedy was at Home Box Office from 1979 to 1989, as manager for national accounts
and affiliate operations and vice president.
STOCKHOLDERS AGREEMENT
Effective June 29, 1998, in conjunction with the Series A Convertible
Preferred Stock financing (see "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION--Liquidity and Capital Resources--December 31, 1998"), the
parties to such agreements and David M. Marshall and Russell M. Fine entered
into a Stockholders Agreement, pursuant to which the parties agreed to vote all
shares of preferred stock and common stock owned by them (including any stock
acquired in the future) for election to the Board of Directors of four persons
designated by Robert M. Fell and three persons designated by David M. Marshall
and Russell M. Fine. The Stockholders Agreement terminates on June 29, 2000.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
During the year ended December 31, 1998, Youbet.com did not have any class
of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, and accordingly, was not subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934, as
amended.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by Youbet.com for the
years ended December 31, 1998, 1997 and 1996 to the Chief Executive Officer, the
executive officers of Youbet.com whose total salary and bonus for 1998 exceeded
$100,000 and certain other key employees.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
<S> <C> <C> <C> <C>
OTHER ANNUAL
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------ --------- ---------- ----------- -------------
Robert M. Fell(1)................................................. 1998 $ 81,136(4) $ 363(5) $ 4,500(6)
Chairman of the Board and Chief Executive Officer 1997 -- -- --
1996 -- -- --
David M. Marshall(2).............................................. 1998 140,000 363(5) 52,279(7)
Vice Chairman of the Board and President 1997 130,000 -- 17,185(8)
1996 130,000 -- --
Russell M. Fine................................................... 1998 138,333 363(5) 39,898(9)
Executive Vice President and Chief Technology Officer 1997 120,000 -- 14,825(10)
1996 120,000 -- --
Ron W. Luniewski.................................................. 1998 138,333 363(5) 2,991(11)
Executive Vice President and Chief Operating Officer 1997 120,000 -- 10,306(12)
1996 101,385 -- --
Phillip C. Hermann(3)............................................. 1998 96,667 363(5) 75,456(5)
Executive Vice President and Chief Financial Officer 1997 -- -- --
1996 -- -- --
Steve A. Molnar................................................... 1998 119,375 363(5) 3,158(11)
Executive Vice President, Racing 1997 121,460 -- 10,812(13)
1996 78,750 -- --
</TABLE>
- ---------
(1) Joined Youbet.com's management in June 1998.
(2) Served as chief executive officer of Youbet.com until June 1998.
(3) Joined Youbet.com's management in May 1998.
(4) Represents compensation paid to Fell & Company, Inc. for the services of
Robert M. Fell (see "Employment and Service Agreements" below).
(5) See "Option Grants in 1998" below.
(6) Represents automobile allowance.
(7) Represents interest on deferred compensation of $9,854, an automobile
allowance of $7,500, and a discount of $34,925 on the conversion of deferred
compensation into 55,879 shares of common stock.
(8) Represents an automobile allowance of $6,000, and interest on deferred
compensation of $11,185.
(9) Represents interest on deferred compensation in of $7,185, automobile
allowance of $7,500 and a discount of $25,213 on the conversion of deferred
compensation into 40,342 shares of common stock.
(10) Represents an automobile allowance of $6,000 and interest on deferred
compensation of $8,825.
(11) Represents interest on deferred compensation.
(12) Represents interest on deferred compensation of $3,743 and a 25% bonus on
deferred compensation of $6,563.
(13) Represents interest on deferred compensation of $3,921 and a 25% bonus on
deferred compensation of $6,891.
35
<PAGE>
BOARD OF DIRECTORS:
During the year ended December 31, 1998, Youbet.com had seven meetings of
the Board of Directors. All directors attended at least 75% of all board
meetings for which they were eligible to attend.
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. Jess Rifkind, a
non-employee member of the board of directors, was also paid a consulting fee of
$2,400 per month from January through June 1998. As additional compensation for
the non-employee members of the board of directors, Youbet.com issued the
following stock options:
- In April 1998, Youbet.com issued a stock option to Jess Rifkind, the only
non-employee director of Youbet.com at that time, under the 1995 Stock
Plans to purchase 5,000 shares of common stock at an exercise price of
$5.50 per share. The stock option was fully vested upon issuance, and is
exercisable for a period of ten years.
- In July 1998, Youbet.com granted to each of its non-employee directors
options to acquire 40,000 shares of common stock, pursuant to the 1998
Stock Plan at an exercise price of $2.50 per share. These options vest
monthly over the one year period beginning July 1998 and are exercisable
for a period of ten years after vesting.
As of March 25, 1999, options to acquire 180,300 shares of common stock held
in the aggregate by such directors are outstanding, and 153,632 of such options
are vested or will be vested within the next 60 days.
During the period from January 1, 1998 through June 28, 1998, the
Compensation Committee of the Board of Directors, which administers Youbet.com's
stock option plans, consisted of David M. Marshall and Russell M. Fine.
Effective June 29, 1998, the committees of the Board of Directors were
established or restructured. Youbet.com, currently has three committees: the
Executive Committee, the Compensation Committee and the Audit Committee.
Messrs. Fell, Marshall and Fine are the members of the Executive Committee.
The Executive Committee has full authority to exercise all the powers of the
board of directors to the fullest extent permitted by Delaware law. Actions of
the Executive Committee are taken by a majority vote.
Messrs. Kimmel and Landsburg are the members of the Compensation Committee.
The Compensation Committee administers, reviews and approves, subject to the
board of directors, Youbet.com's stock option plans, and make recommendations to
the board of directors regarding compensation, including payment of salaries,
bonuses and incentive compensation and other benefit programs, including those
relating to Youbet.com's senior management.
Messrs. Rifkind and Roedy are the members of the Audit Committee. The Audit
Committee interacts with Youbet.com's Chief Financial Officer and outside
auditors concerning Youbet.com's independent public accountants and the
establishment and oversight of such systems of internal accounting and auditing
control as it deems appropriate.
The board of directors does not have a nominating committee. However, the
board of directors will consider nomination recommendations from stockholders,
which should be addressed to Youbet.com's secretary at its principal executive
offices.
EMPLOYMENT AND SERVICES AGREEMENTS:
In June 1998 Youbet.com and Fell & Company, Inc. entered into a services
agreement which was amended in March 1999 pursuant to which Mr. Fell serves as
Chairman of the Board and as the Chief Executive Officer. For making Mr. Fell's
services available, Fell & Company, Inc. receives a base fee of $225,000 per
year, subject to cost of living increases, plus the amount of payroll taxes
Youbet.com would
36
<PAGE>
pay if Mr. Fell were an employee of Youbet.com and other miscellaneous benefits.
While Mr. Fell is serving as Chief Executive Officer he will devote 100% of his
business time to the affairs of Youbet.com. At such time as Mr. Fell is no
longer serving as Chief Executive Officer, he will be required to devote 70% of
his business time to the affairs of Youbet.com and the base fee will be reduced
to $150,000 per year. The services agreement expires in June 2001. If Fell &
Company, Inc. is willing to renew the agreement and Youbet.com does not do so,
Fell & Company, Inc. will receive a termination fee equal to the amount paid to
Fell & Company, Inc. by Youbet.com during the 12 months preceding the expiration
of the agreement.
In January 1999 David Marshall, Inc. and Youbet.com entered into a services
agreement pursuant to which Mr. Marshall serves as Vice-Chairman of the Board
and President of Youbet.com. For making Mr. Marshall's services available, David
Marshall, Inc. receives a base fee of $150,000 per year, subject to cost of
living increases, plus the amount of payroll taxes Youbet.com would pay if Mr.
Marshall were an employee of Youbet.com and other miscellaneous benefits. David
Marshall, Inc. is also entitled to receive an annual bonus determined by the
board of directors in its discretion. The services agreement also provides that
the compensation and benefits paid by Youbet.com for Mr. Marshall's services
will be no less favorable than the compensation and benefits received by any
employee of Youbet.com, other than the Chief Executive Officer. The services
agreement expires in June 2003. The services agreement permits David Marshall,
Inc. to terminate the agreement at anytime 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. The services
agreement replaced an employment agreement entered into between Mr. Marshall and
Youbet.com in June 1998, which had substantially the same terms.
In June 1998 Russell Fine and Youbet.com entered into an employment
agreement pursuant to which Mr. Fine will serve as Chief Technology Officer. Mr.
Fine will receive a base salary of $150,000, subject to cost of living
increases, and other miscellaneous benefits. Mr. Fine is also entitled to
receive an annual bonus determined by the board of directors. The employment
agreement also provides that the compensation and benefits paid to Mr. Fine will
be no less favorable than the compensation and benefits provided to any employee
of Youbet.com, other than the Chief Executive Officer. The employment agreement
expires in June 2003. The employment agreement permits Mr. Fine to terminate the
agreement at anytime after December 29, 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.
In February 1999 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 2000. This employment
agreement provides for Mr. Luniewski to receive an annual salary of $150,000,
options to purchase 100,000 shares of common stock and other miscellaneous
benefits. The options have a 10 year term, vest in four equal annual
installments beginning in May 2000 and are exercisable for $10.50 per share. All
options will vest upon a change of control of Youbet.com. Mr. Luniewski is also
entitled to receive an annual bonus determined by the board of directors in its
discretion. The agreement also permits Mr. Luniewski to terminate his employment
with Youbet.com under certain circumstances and receive two months salary and
benefits. This employment agreement replaced an employment agreement entered
into between Mr. Luniewski and Youbet.com in May 1998, expiring on April 1999
which had substantially the same terms.
In February 1999 Phillip Hermann and Youbet.com entered into an employment
agreement pursuant to which Mr. Hermann serves as Executive Vice President and
Chief Financial Officer of Youbet.com through April 2000. This employment
agreement provides for Mr. Hermann to receive an annual salary of $150,000,
options to purchase 50,000 shares of common stock and other miscellaneous
benefits. The options have a 10 year term, vest in four equal annual
installments beginning in May 2000 and are exercisable for $10.50 per share. All
options will vest upon a change of control of Youbet.com. Mr. Hermann is also
entitled to receive an annual bonus determined by the board of directors in its
discretion. This employment agreement replaced an employment agreement entered
into between Mr. Hermann and Youbet.com in May 1998 expiring on April 1999 which
had substantially the same terms.
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<PAGE>
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 are 15% of the
total number of shares of common stock outstanding, allocated 13.5% to the 1995
Stock Option Plan and 1.5% to the 1995 Stock Option Plan for Non-Employee
Directors. The options generally vest in four equal annual installments, and
have a term of ten years. The 1995 Stock Plans provide 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 and consultants of Youbet.com,
while incentive stock options may be granted only to employees. The 1995 Stock
Plans are currently administered by the compensation committee of the board of
directors, which determines the terms and conditions of the options granted
under the 1995 Stock Plans, including the exercise price, number of shares
subject to options and the exercisability thereof. The exercise price of all
Incentive Stock Options granted under the 1995 Stock Plans 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 all non-qualified stock options granted under
the 1995 Stock Plans shall be not less than the par value per share of the
common stock. The term of all options granted under the 1995 Stock Plans may not
exceed ten years, except for incentive options granted to a 10% or more
shareholder which may not exceed five years. The 1995 Stock Plans may be amended
or terminated by the board of directors or the compensation committee, but no
such action may be taken which would materially increase the aggregate number of
shares as to which options may be granted, materially increase the benefits
accruing to the optionees, or materially modify the requirements as to
eligibility for participation under the 1995 Stock Plans. The 1995 Stock Plans
provide the board of directors or the compensation committee with the discretion
to determine when options granted thereunder shall become exercisable and the
vesting period of such options. Upon termination of a participant's employment
or consulting relationship with Youbet.com, all unvested options terminate and
are no longer exercisable. Vested non-qualified options remain exercisable for a
period not to exceed three months following the termination date. However,
because the shares underlying these options have not been registered, the
Compensation Committee has extended the exercise period for these options until
three months after employment is terminated or the underlying shares are
registered, whichever is later (but no later than the expiration of the
options).
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. 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 Compensation Committee of 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 Compensation Committee.
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 shareholder
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
38
<PAGE>
consulting relationship with Youbet.com, all unvested options terminate and are
no longer exercisable. 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. However, because the shares underlying these
options have not been registered, the Compensation Committee has extended the
exercise period for these options until three months after employment is
terminated or the underlying shares are registered, whichever is later (but no
later than the expiration of the options). 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 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.
OPTION GRANTS IN 1998
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, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) 1998 PER SHARE DATE
- ------------------------------------------------------------ ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Ron W. Luniewski............................................ 100,000 12.0% $ 2.50 02/05/2003
100 (2) 2.50 12/11/2003
Phillip C. Hermann.......................................... 75,000 9.0 2.50 04/30/2008
5,000 0.6 2.50 04/30/2003
100 (2) 2.50 12/11/2003
Steve A. Molnar............................................. 50,000 6.0 2.50 02/05/2003
100 (2) 2.50 12/11/2003
David M. Marshall........................................... 100 (2) 2.50 12/11/2003
Russell M. Fine............................................. 100 (2) 2.50 12/11/2003
Robert M. Fell.............................................. 100 (2) 2.50 12/11/2003
</TABLE>
- ---------
(1) Options were granted under the 1995 and 1998 Stock Option Plans and are
exercisable for common stock of Youbet.com.
(2) Less than .1%.
39
<PAGE>
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, 1998 and the number
of shares covered by both exercisable and unexercisable stock options held by
each of the named executive officers at December 31, 1998.
<TABLE>
<CAPTION>
VALUE
NUMBER OF SECURITIES OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END (1) AT YEAR-END (2)
ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ron W. Luniewski.................. -- -- 175,100 25,000 $ 679,388 $ 97,000
Phillip C. Hermann................ -- -- 5,100 75,000 19,788 291,000
Steve A. Molnar................... -- -- 130,100 20,000 504,788 67,600
David M. Marshall................. -- -- 100 -- 388 --
Russell M. Fine................... -- -- 100 -- 388 --
Robert M. Fell.................... -- -- 100 -- 388 --
----------- ----------- ----------- ------------- ------------ -------------
TOTAL......................... -- -- 310,600 120,000 $ 1,205,128 $ 455,600
----------- ----------- ----------- ------------- ------------ -------------
----------- ----------- ----------- ------------- ------------ -------------
</TABLE>
- ---------
(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 market price for the
common stock of $6.38 on December 31, 1998.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 25, 1998: (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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER(1)(2) BENEFICIAL OWNER PERCENT OF CLASS
- ---------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
Robert M. Fell........................................................ 604,550(3) 4.1
David M. Marshall..................................................... 2,099,015(4) 14.6
Sid Marshall.......................................................... 878,222(5) 6.0
1170-M Pacific Coast Highway
Malibu, CA 90265
Marshall Gift Trust................................................... 532,250(6) 3.7
1700 Bank of America Plaza
300 South Fourth Street
Las Vegas, NV 80101
Russell M. Fine....................................................... 1,976,491(7) 13.8
Ceasar P. Kimmel...................................................... 49,333(8) .3
Alan Landsburg........................................................ 43,333(9) .3
Jess Rifkind.......................................................... 67,333(10) .5
William H. Roedy...................................................... 133,333(11) .9
Ron W. Luniewski...................................................... 120,100(12) .8
Phillip C. Hermann.................................................... 23,850(13) .2
Steve A. Molnar....................................................... 115,850(14) .8
All executive officers and directors as a group (11 persons).......... 5,269,955(15) 34.6
</TABLE>
- ---------
* less than one percent
(1) The address of the above beneficial owners is Youbet.com, Inc., 1950
Sawtelle Boulevard, Suite 180, Los Angeles, California, 90025, 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 400,000 shares of common stock represented by the currently
exercisable portion of the Fell Warrant, but does not include the 800,000
shares of common stock represented by the portion of the Fell Warrant which
is fully vested but not exercisable within 60 days.
(4) Includes 100 shares of common stock represented by a fully vested stock
option and 55,878 shares of common stock represented by currently
exercisable common stock purchase warrants as follows: Series C--27,939;
Series D--27,939. Excludes shares of common stock and common stock purchase
warrants owned by Sid Marshall and the Marshall Gift Trust. David M.
Marshall is the son of Sid Marshall.
(5) Includes 457,000 shares of common stock represented by currently exercisable
common stock purchase warrants as follows: Series A--20,000; Series
C--345,000; Series D--92,000. Does not include
41
<PAGE>
shares of common stock and common stock purchase warrants owned by the
Marshall Gift Trust, of which Sid Marshall is the trustee. Sid Marshall is
the father of David M. Marshall.
(6) Includes 141,333 shares of common stock subject to currently exercisable
common stock purchase warrants as follows: Series C--80,000; Series
D--61,333.
(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 as follows: Series C-- 20,171; Series
D--20,171.
(8) Includes 33,333 shares of common stock represented by a stock option
exercisable within 60 days of March 25, 1999.
(9) Includes 10,000 shares of common stock represented by 1,000 shares of Series
A Convertible Preferred Stock and 33,333 shares of common stock represented
by a stock option exercisable within 60 days of March 25, 1999.
(10) Includes 53,333 shares of common stock represented by a stock option
exercisable within 60 days of March 25, 1999.
(11) Includes 33,333 shares of common stock represented by a stock option
exercisable within 60 days of March 25, 1999.
(12) Consists solely of 120,100 shares of common stock represented by stock
options exercisable within 60 days of March 25, 1999.
(13) Consists solely of 23,850 shares of common stock represented by stock
options exercisable within 60 days of March 25, 1999.
(14) Consists solely of 115,100 shares of common stock represented by stock
options exercisable within 60 days of March 25, 1999.
(15) Includes 429,450 shares of common stock represented by fully vested stock
options and stock options exercisable within 60 days of March 25, 1999,
96,220 shares of common stock represented by currently exercisable common
stock purchase warrants, 400,000 shares of common stock represented by the
currently exercisable portion of the Fell Warrant, and 10,000 shares of
common stock represented by 1,000 shares of Series A Convertible Preferred
Stock, but does not include the 800,000 shares of common stock represented
by the portion of the Fell Warrant which is fully vested but not exercisable
within 60 days.
CHANGES IN CONTROL:
Youbet.com is unaware of any contract or other arrangement, the operation of
which may at a subsequent date result in a change in control of Youbet.com.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1998, David M. Marshall converted $104,773 of his employee deferred
compensation into 55,879 shares of common stock (and 27,939 Series C and 27,939
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998, Russell M. Fine converted $75,640 of his employee deferred
compensation into 40,341 shares of common stock (and 20,171 Series C and 20,171
Series D common stock purchase warrants) at $1.875 per share as part of a
company wide deferred salary conversion program.
In June 1998, Youbet.com issued 177,000 Series C common stock purchase
warrants as additional consideration for short-term advances of $440,000, of
which 90,000 warrants were issued to Sid Marshall, the father of David M.
Marshall, and 44,000 warrants were issued to a company associated with
Youbet.com's financial and marketing consulting firm.
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<PAGE>
In January 1998, Youbet.com commenced a bridge financing, consisting of a
secured note with interest at 12% due December 1998, secured by a junior lien on
substantially all the assets of Youbet.com and an option to convert into
securities offered in any subsequent private placement (or the equivalent amount
of common stock, if such financing did not consist of common stock), at 75% to
80% of the private placement offering price. Youbet.com issued a total of
$2,415,000 of bridge notes of which $1,247,000 were issued to related parties.
In July 1998, as a result of the sale of Series A Convertible Preferred Stock,
the holders of the bridge notes payable converted such notes into 1,303,319
shares of common stock, including 683,176 shares to related parties, of which
232,821 shares were issued to Sid Marshall, the father of David M. Marshall, and
450,355 shares were issued to companies associated with Youbet.com's financial
and marketing consulting firm.
In June 1998 Youbet.com entered into a Stock Purchase Agreement with certain
investors. Pursuant to this agreement Youbet.com sold 200,000 shares of Series A
Convertible Preferred Stock for $25.00 per share. Robert M. Fell, David M.
Marshall, Jess Rifkind, Caesar Kimmel, Alan Landsburg, William Roedy, Gary N.
Jacobs or trusts of which they are beneficiaries purchased 445, 445, 400, 1,600,
1,000, 10,000 and 2,000 shares, respectively.
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 December 1998 the Fell Trust
converted the Series A Preferred Stock into common stock which remains subject
to such pledge.
In June, 1998 the purchasers of the Series A Convertible Preferred Stock,
Russell M. Fine and Youbet.com, entered into a stockholders agreement, under
which the parties agreed to vote all shares of Series A Convertible Preferred
Stock and common stock beneficially owned by them (determined in accordance with
Rule 13d-3 of the Securities Exchange Act of 1934, as amended) and any stock
acquired in the future, for the election to the board of directors of four
persons designated by Robert Fell and three persons designated by David Marshall
and Russell Fine. The Stockholders Agreement terminates on June 29, 2000. As of
March 25, 1999, the Stockholders Agreement covers shares of common stock and
Series A Convertible Preferred Stock representing approximately 29.2% of the
outstanding voting power of Youbet.com's stock (not including shares of common
stock beneficially owned as a result of stock options and warrants).
43
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended December 31,
1998.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Acquisition Agreement between PC Totes, Inc. and Embassy Acquisition, Inc. dated as of December 6, 1995
(Incorporated herein by reference to Youbet.com's Form 10-K dated December 31, 1995.)
3.1 Restated Certificate of Incorporation (Incorporated herein by reference to Youbet.com's Form 10-K dated
December 31, 1995.)
3.2 By-Laws of Youbet.com (Incorporated herein by reference to Youbet.com's Form 10-K dated December 31,
1995.)
3.3 Certificate of Designation for Series A Convertible Preferred Stock dated June 18, 1998
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.)
10.3 Stock Purchase Agreement dated June 29, 1998 (Incorporated herein by reference to Youbet.com's Form 8-K
dated June 29, 1998.)
10.4 Securities Purchase Agreement dated June 29, 1998 (Incorporated herein by reference to Youbet.com's Form
8-K dated June 29, 1998.)
10.5 Stockholders Agreement dated June 29, 1998 (Incorporated herein by reference to Youbet.com's Form 8-K
dated June 29, 1998.)
10.6 Registration Rights Agreement dated June 29, 1998 (Incorporated herein by reference to Youbet.com's Form
8-K dated June 29, 1998.)
10.7 Warrant to Purchase Common Stock dated June 29, 1998 (Incorporated herein by reference to Youbet.com's
Form 8-K dated June 29, 1998.)
10.8 Employment Agreement between Youbet.com and David M. Marshall dated June 29, 1998 (Incorporated herein
by reference to Youbet.com's Form 8-K dated June 29, 1998.)
10.9 Employment Agreement between Youbet.com and Russell M. Fine dated June 29, 1998 (Incorporated herein by
reference to Youbet.com's Form 8-K dated June 29, 1998.)
10.10 1998 Stock Option Plan
10.11 Services Agreement between Youbet.com and David Marshall, Inc. dated January 1, 1999
10.12 Services Agreement between Youbet.com and Fell & Company, Inc. dated June 29, 1998, amended and restated
as of March 1, 1999
10.13 Employment Agreement between Youbet.com and Ronald W. Luniewski dated May 1 1998, superceded by an
Employment Agreement dated February 23, 1999.
10.14 Employment Agreement between Youbet.com and Phillip C. Hermann dated May 1, 1998, superceded by an
Employment Agreement dated February 23, 1999.
10.15 Telecommunications Facilitation System Agreement between Youbet.com and Mountain Laurel Racing, Inc. and
Washington Trotting Association, Inc. dated June 23, 1997
10.16 Agreement between Youbet.com and Netixs Communications dated March 3, 1999.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.17 Form of Note Purchase Agreement dated April 5, 1999 relating to the 11% Senior Convertible Discount
Notes.
10.18 Form of 11% Senior Convertible Discount Note.
27 Financial Data Schedule.
</TABLE>
45
<PAGE>
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.
<TABLE>
<S> <C> <C>
YOUBET.COM, INC.
(Registrant)
Date: April 9, 1999 By: /s/ ROBERT M. FELL
-----------------------------------------
Robert M. Fell
CHIEF EXECUTIVE OFFICER
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below, hereby constitutes and appoints Robert M. Fell and Phillip Hermann, each
acting alone, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments or supplements to this
report and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing necessary or appropriate to be done with respect to
this report or any amendments or supplements hereto in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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.
<TABLE>
<S> <C> <C>
Date: April 9, 1999 By: /s/ ROBERT M. FELL
-----------------------------------------
Robert M. Fell
Chief Executive Officer and
Chairman of the Board of
Directors
Date: April 9, 1999 By: /s/ DAVID M. MARSHALL
-----------------------------------------
David M. Marshall
President and
Vice Chairman of the Board of
Directors
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C>
Date: April 9, 1999 By: /s/ RUSSELL M. FINE
-----------------------------------------
Russell M. Fine
Executive Vice President
Chief Technology Officer
and Director
Date: April 9, 1999 By: /s/ PHILLIP C. HERMANN
-----------------------------------------
Phillip C. Hermann
Executive Vice President
and Chief Financial Officer
Date: April 9, 1999 By: /s/ CAESAR P. KIMMEL
-----------------------------------------
Caesar P. Kimmel
Director
Date: April 9, 1999 By: /s/ ALAN W. LANDSBURG
-----------------------------------------
Alan W. Landsburg
Director
Date: April 9, 1999 By: /s/ JESS RIFKIND
-----------------------------------------
Jess Rifkind
Director
Date: By:
-----------------------------------------
William H. Roedy
Director
</TABLE>
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants--BDO Seidman, LLP....................................... F-1
Independent Accountants' Report--Weinbaum & Yalamanchi..................................................... F-2
Consolidated Balance Sheets--December 31, 1997 and 1998.................................................... F-3
Consolidated Statements of Operations--Years Ended December 31, 1996, 1997 and 1998, and 1995 through
1998..................................................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency)--Years Ended December 31, 1995, 1996, 1997 and
1998..................................................................................................... F-5
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1997 and 1998, and 1995 through
1998..................................................................................................... F-8
Notes to Consolidated Financial Statements--Years Ended December 31, 1996, 1997 and 1998, and 1995 through
1998..................................................................................................... F-10
</TABLE>
48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Youbet.com, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Youbet.com,
Inc. (formerly You Bet International, Inc.) and subsidiaries (a development
stage company) as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended. We have also audited the consolidated statements of
operations and cash flows for the period from inception of development stage
(January 1, 1995) through December 31, 1998 (Note 1), except that we did not
audit these financial statements for the period from inception of development
stage (January 1, 1995) to December 31, 1996 (Note 1); those statements were
audited by other auditors. 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 generally accepted auditing
standards. 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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Youbet.com, Inc. (a development
stage company) and subsidiaries as of December 1998 and 1997, and the results of
their operations and their cash flows for the years then ended and the
cumulative period from January 1, 1997 to December 31, 1998, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 25, 1999, except for Note 11,
which is as of April 6, 1999
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders of
Youbet.com, Inc. (formerly YouBet International, Inc.)
(a development stage company)
Los Angeles, California
We audited Youbet.com, Inc.'s (Youbet) accompanying consolidated statements
of operations, stockholders' (deficiency) and cash flows for the year ended
December 31, 1996. These financial statements are the responsibility of Youbet's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant management estimates,
as well as evaluating the overall presentation of the financial statements. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Youbet's financial position, results
of operations and cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
WEINBAUM & YALAMANCHI
Los Angeles, California
April 10, 1998
F-2
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
ASSETS (Note 5)
Current assets:
Cash............................................................................. $ 52,895 $ 1,540,616
Stock subscriptions receivable (Note 6a and 6c).................................. -- 2,100,000
Receivables...................................................................... 6,158 50,364
Prepaid expenses................................................................. 49,315 22,344
Other current assets............................................................. 4,288 11,317
------------- -------------
Total current assets........................................................... 112,656 3,724,641
------------- -------------
Property and equipment (Notes 4 and 7)............................................. 1,260,411 1,700,211
Less: Accumulated depreciation and amortization.................................... (423,177) (820,535)
------------- -------------
Property and equipment, net........................................................ 837,234 879,676
------------- -------------
Deferred financing costs, net of amortization...................................... -- 31,395
Deposits........................................................................... 53,963 17,537
------------- -------------
Total assets................................................................... $ 1,003,853 $ 4,653,249
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................................................. $ 910,278 $ 984,258
Accrued compensation and related items........................................... 503,467 144,252
Accrued interest payable......................................................... 116,892 --
Other accrued expenses........................................................... 341,108 451,127
Advances and bridge loans payable (Note 5):
Related parties................................................................ 390,000 --
Unrelated parties.............................................................. 300,000 --
State income taxes payable (Note 9).............................................. 6,400 --
Current portion of capitalized lease obligations (Note 7)........................ 283,695 220,317
------------- -------------
Total current liabilities...................................................... 2,851,840 1,799,954
Capitalized lease obligations, less current portion (Note 7)....................... -- 60,134
------------- -------------
Total liabilities.............................................................. 2,851,840 1,860,088
------------- -------------
Commitments and contingencies (Notes 3, 7 and 8)
Stockholders' equity (deficiency) (Note 6):
Preferred stock, $.001 par value (aggregate liquidation preference of
$2,677,750); authorized--1,000,000 shares; issued and outstanding--0 share and
107,110 shares at December 31, 1997 and 1998, respectively..................... -- 107
Common stock, $.001 par value; authorized--50,000,000 shares; issued and
outstanding and issuable--9,603,994 shares and 13,970,268 shares at December
31, 1997 and 1998, respectively................................................ 9,604 13,970
Additional paid-in capital....................................................... 23,413,989 42,326,397
Accumulated deficit during development stage..................................... (23,964,394) (37,825,941)
Deferred compensation (Note 6d).................................................. (1,307,186) (1,161,372)
Stock notes receivable (Note 6c)................................................. -- (560,000)
------------- -------------
Total stockholders' equity (deficiency)........................................ (1,847,987) 2,793,161
------------- -------------
Total liabilities and stockholders' equity (deficiency)........................ $ 1,003,853 $ 4,653,249
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
<TABLE>
<CAPTION>
1995
THROUGH
1998
1996 1997 1998 (NOTE 1)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues......................................... $ -- $ -- $ 263,793 $ 263,793
Operating expenses:
Network operations............................. 220,721 665,399 1,287,295 2,173,415
Research and development....................... 1,389,883 1,253,663 1,267,153 4,228,766
Sales and marketing............................ 663,572 710,532 1,404,752 2,778,856
General and administrative..................... 1,441,439 1,804,176 2,740,603 6,179,563
Depreciation and amortization.................. 122,673 307,935 397,357 830,821
Non-cash compensation (Note 6d)................ 102,263 2,176,182 4,262,963 6,579,883
-------------- -------------- -------------- --------------
Total operating expenses....................... 3,940,551 6,917,887 11,360,123 22,771,304
-------------- -------------- -------------- --------------
Loss from operations............................. (3,940,551) (6,917,887) (11,096,330) (22,507,511)
Other income (expense):
Interest expense............................... (15,154) (390,471) (331,763) (770,921)
Amortization of deferred financing costs....... -- -- (119,546) (119,546)
Discount on conversion of bridge loans,
accounts payable and employee deferred
salaries into common stock and warrants (Note
6a).......................................... -- (573,348) (849,963) (1,423,311)
Fair value of warrants issued for financing
costs (Note 6d).............................. -- (3,656,202) (1,405,684) (5,061,886)
Release of forfeiture restrictions on common
stock owned by officers/ major stockholders
(Note 6b).................................... -- (7,875,000) -- (7,875,000)
Interest income................................ 78,000 1,145 70,627 163,974
Consulting revenues............................ 7,725 5,400 -- 164,602
Other.......................................... 9,875 (831) (126,488) (97,444)
-------------- -------------- -------------- --------------
Total other income (expense)................... 80,446 (12,489,307) (2,762,817) (15,019,532)
-------------- -------------- -------------- --------------
Loss before provision for state income and
franchise taxes.................................. (3,860,105) (19,407,194) (13,859,147) (37,527,043)
Provision for state income and franchise taxes
(Note 9)......................................... (4,629) (9,644) (2,400) (19,073)
-------------- -------------- -------------- --------------
Net loss......................................... $ (3,864,734) $ (19,416,838) $ (13,861,547) $ (37,546,116)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net loss per common share--basic and diluted..... $ (0.67) $ (3.06) $ (1.32)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average number of common shares
outstanding...................................... 5,730,333 6,355,352 10,534,905
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995.................................. -- $ -- 343,333 $ 343 $ 21,657
Issuance of shares in reverse merger (Note 1)............. -- -- 5,800,000 5,800 (522,796)
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 1,490,000 1,490 3,723,510
Costs of private placement................................ -- -- -- -- (575,860)
Shares issued as underwriters compensation ($2.50 per
share) (Note 6a)........................................ -- -- 200,000 200 499,800
Shares issued in exchange for debt ($2.50 per share) (Note
6a)..................................................... -- -- 238,000 238 594,762
Stock options issued for services......................... -- -- -- -- 289,575
Amortization of deferred compensation..................... -- -- -- -- --
Net loss for the year..................................... -- -- -- -- --
--
--- --------- ----------- -----------
BALANCE, December 31, 1995................................ -- -- 8,071,333 8,071 4,030,648
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 212,000 212 529,788
Costs of private placement (Note 6a)...................... -- -- -- -- (278,025)
Stock options issued for services rendered (Note 6d)...... -- -- -- -- 128,250
Amortization of deferred compensation (Note 6d)........... -- -- -- -- --
Net loss for the year..................................... -- -- -- -- --
--
--- --------- ----------- -----------
BALANCE, December 31, 1996................................ -- -- 8,283,333 8,283 4,410,661
Shares issued as payment for amounts due to vendors and
employees ($2.50 per share for vendors and $1.88 per
share for employee services) (Note 6a).................. -- -- 27,433 28 61,410
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- 897,760 898 2,243,502
Costs of private placement (Note 6a)...................... -- -- -- -- (291,020)
Shares issued to bridge loan investors for conversion into
common stock and warrants ($1.88 per share) (Note 6a)... -- -- 895,468 895 1,678,105
(continued)
<CAPTION>
STOCK
ACCUMULATED DEFERRED NOTES
DEFICIT COMPENSATION RECEIVABLE TOTAL
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995.................................. $ (279,825) $ -- $ -- $ (257,825)
Issuance of shares in reverse merger (Note 1)............. -- -- -- (516,996)
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 3,725,000
Costs of private placement................................ -- -- -- (575,860)
Shares issued as underwriters compensation ($2.50 per
share) (Note 6a)........................................ -- -- -- 500,000
Shares issued in exchange for debt ($2.50 per share) (Note
6a)..................................................... -- -- -- 595,000
Stock options issued for services......................... -- (289,575) -- --
Amortization of deferred compensation..................... -- 38,475 -- 38,475
Net loss for the year..................................... (402,997) -- -- (402,997)
------------ ------------- --- -----------
BALANCE, December 31, 1995................................ (682,822) (251,100) -- 3,104,797
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 530,000
Costs of private placement (Note 6a)...................... -- -- -- (278,025)
Stock options issued for services rendered (Note 6d)...... -- (128,250) -- --
Amortization of deferred compensation (Note 6d)........... -- 102,263 -- 102,263
Net loss for the year..................................... (3,864,734) -- -- (3,864,734)
------------ ------------- --- -----------
BALANCE, December 31, 1996................................ (4,547,556) (277,087) -- (405,699)
Shares issued as payment for amounts due to vendors and
employees ($2.50 per share for vendors and $1.88 per
share for employee services) (Note 6a).................. -- -- -- 61,438
Shares issued in private placement ($2.50 per share) (Note
6a)..................................................... -- -- -- 2,244,400
Costs of private placement (Note 6a)...................... -- -- -- (291,020)
Shares issued to bridge loan investors for conversion into
common stock and warrants ($1.88 per share) (Note 6a)... -- -- -- 1,679,000
(co
</TABLE>
F-5
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Shares returned to Company for cancellation by
officers/major stockholders ($0.001 per share)
(Note 6b)........................................ -- -- (750,000) (750) 750 --
Release of forfeiture restrictions on common stock
owned by officers/major stockholders ($4.50 per
share) (Note 6b)................................. -- -- -- -- 7,875,000 --
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into
common stock and warrants (Note 5)............... -- -- -- -- 573,348 --
Shares issued as finders fees for capital raising
transactions (Note 6a)........................... -- -- 250,000 250 (250) --
Amortization of deferred compensation (Note 6d).... -- -- -- -- -- --
Fair value of stock options and warrants issued
(Note 6d)........................................ -- -- -- -- 6,862,483 --
Net loss for the year.............................. -- -- -- -- -- (19,416,838)
--------- ----- ----------- --------- ------------ -------------
BALANCE, December 31, 1997......................... -- -- 9,603,994 9,604 23,413,989 (23,964,394)
Warrants exercised and converted to stock (Note
6a).............................................. -- -- 355,000 355 1,068,645 --
Shares issued as payment for amounts due to vendors
and employees ($2.50 per share for vendors and
$1.88 per share for employee services) (Note
6a).............................................. -- -- 27,603 28 69,510 --
Shares issued as payment for amounts due to
officers and directors ($1.88 per share) (Note
6a).............................................. -- -- 96,220 96 180,317 --
Shares issued through financing activities ($3.94
per share) (Note 6a)............................. -- -- 20,000 20 78,730 --
Shares issued to bridge loan investors for
conversion into common stock and warrants ($1.88
per share for 1997 loans and $2.00 per share for
1998 loans) (Note 6a)............................ -- -- 1,513,551 1,513 2,999,217 --
Preferred shares issued in private placement
($25.00 per share) (Note 6c)..................... 262,500 262 -- -- 6,562,238 --
(continued)
<CAPTION>
STOCK
DEFERRED NOTES
COMPENSATION RECEIVABLE TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Shares returned to Company for cancellation by
officers/major stockholders ($0.001 per share)
(Note 6b)........................................ -- -- --
Release of forfeiture restrictions on common stock
owned by officers/major stockholders ($4.50 per
share) (Note 6b)................................. -- -- 7,875,000
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into
common stock and warrants (Note 5)............... -- -- 573,348
Shares issued as finders fees for capital raising
transactions (Note 6a)........................... -- -- --
Amortization of deferred compensation (Note 6d).... 167,965 -- 167,965
Fair value of stock options and warrants issued
(Note 6d)........................................ (1,198,064) -- 5,664,419
Net loss for the year.............................. -- -- (19,416,838)
------------- ---------- -------------
BALANCE, December 31, 1997......................... (1,307,186) -- (1,847,987)
Warrants exercised and converted to stock (Note
6a).............................................. -- -- 1,069,000
Shares issued as payment for amounts due to vendors
and employees ($2.50 per share for vendors and
$1.88 per share for employee services) (Note
6a).............................................. -- -- 69,538
Shares issued as payment for amounts due to
officers and directors ($1.88 per share) (Note
6a).............................................. -- -- 180,413
Shares issued through financing activities ($3.94
per share) (Note 6a)............................. -- -- 78,750
Shares issued to bridge loan investors for
conversion into common stock and warrants ($1.88
per share for 1997 loans and $2.00 per share for
1998 loans) (Note 6a)............................ -- -- 3,000,730
Preferred shares issued in private placement
($25.00 per share) (Note 6c)..................... -- (490,000) 6,072,500
</TABLE>
F-6
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Cost of private placement (Note 6c)................. -- -- -- -- (360,909) --
Proceeds from the sale of warrants (Note 6c)........ -- -- -- -- 4,531 --
Warrants purchased by officers (Note 6c)............ -- -- -- -- 75,000 --
Preferred stock converted to common shares (Note
6c)............................................... (155,390) (155) 1,553,900 1,554 (1,399) --
Shares issued in private placement ($2.50 per share)
(Note 6a)......................................... -- -- 800,000 800 1,999,200 --
Cost of private placement (Note 6a)................. -- -- -- -- (120,000) --
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into common
stock and warrants (Note 5)....................... -- -- -- -- 849,963 --
Fair value of warrants issued for financing costs
(Note 6d)......................................... -- -- -- -- 1,405,684 --
Non-cash compensation (Note 6d)..................... -- -- -- -- 4,196,881 --
Cancellation of warrants (Note 6d).................. -- -- -- -- (95,200) --
Amortization of deferred compensation (Note 6d)..... -- -- -- -- -- --
Net loss for the year............................... -- -- -- -- -- (13,861,547)
--------- ----- ------------ --------- ------------ -------------
BALANCE, December 31, 1998.......................... 107,110 $ 107 13,970,268 $ 13,970 $ 42,326,397 $ (37,825,941)
--------- ----- ------------ --------- ------------ -------------
--------- ----- ------------ --------- ------------ -------------
<CAPTION>
STOCK
DEFERRED NOTES
COMPENSATION RECEIVABLE TOTAL
------------- ---------- -------------
<S> <C> <C> <C>
Cost of private placement (Note 6c)................. -- -- (360,909)
Proceeds from the sale of warrants (Note 6c)........ -- -- 4,531
Warrants purchased by officers (Note 6c)............ -- (70,000) 5,000
Preferred stock converted to common shares (Note
6c)............................................... -- -- --
Shares issued in private placement ($2.50 per share)
(Note 6a)......................................... -- -- 2,000,000
Cost of private placement (Note 6a)................. -- -- (120,000)
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into common
stock and warrants (Note 5)....................... -- -- 849,963
Fair value of warrants issued for financing costs
(Note 6d)......................................... -- -- 1,405,684
Non-cash compensation (Note 6d)..................... (1,434,988) -- 2,761,893
Cancellation of warrants (Note 6d).................. -- -- (95,200)
Amortization of deferred compensation (Note 6d)..... 1,580,802 -- 1,580,802
Net loss for the year............................... -- -- (13,861,547)
------------- ---------- -------------
BALANCE, December 31, 1998.......................... $(1,161,372) $ (560,000) $ 2,793,161
------------- ---------- -------------
------------- ---------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- -----------
1995
THROUGH
1998
-----------
(NOTE 1)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,864,734) $(19,416,838) $(13,861,547) $(37,546,116)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 122,673 307,935 397,357 830,821
Amortization of deferred financing.................... -- -- 119,546 119,546
Other losses.......................................... -- -- 70,640 70,640
Reduction of loan from settlement agreement........... -- -- -- (20,000)
Settlement of accounts payable and accrued
liabilities......................................... -- 280,438 520,212 800,650
Non-cash compensation................................. 102,263 2,176,182 4,262,963 6,579,883
Discount on conversion of bridge loans, accounts
payable and employee deferred salaries into common
stock and warrants.................................. -- 573,348 849,963 1,423,311
Fair value of warrants issued for financing costs..... -- 3,656,202 1,405,684 5,061,886
Release of forfeiture restrictions on common stock
owned by officers/major stockholders................ -- 7,875,000 -- 7,875,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables......................................... 28,100 1,350 (44,206) (20,364)
Prepaid expenses.................................... (143,238) 93,923 10,296 (39,019)
Other current assets................................ (632) 1,708 16,532 12,244
Deposits............................................ (53,963) -- (17,537) (71,500)
Increase (decrease) in:
Accounts payable.................................... 568,385 82,679 73,980 984,258
Accrued compensation and related items.............. 146,712 311,542 (374,065) 115,996
Accrued interest payable............................ 1,250 115,642 (71,128) 28,685
Other accrued expenses.............................. 258,901 76,797 110,019 451,127
State income taxes payable.......................... 2,020 1,980 (6,400) (800)
---------- ----------- ----------- -----------
Net cash used in operating activities....................... (2,832,263) (3,862,112) (6,537,690) (13,343,751)
---------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (790,152) (132,356) (359,800) (1,363,318)
---------- ----------- ----------- -----------
Net cash used in investing activities....................... (790,152) (132,356) (359,800) (1,363,318)
---------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants...... -- -- 1,069,000 1,069,000
Increase in deferred financing costs...................... -- -- (96,000) (96,000)
Proceeds from lease financing............................. -- 150,261 -- 150,261
Proceeds from sale of securities, net of offering costs... 251,975 1,953,380 5,501,122 10,855,617
Proceeds from advances and bridge loans:
Related parties......................................... 200,000 844,000 888,875 2,218,862
Unrelated parties....................................... -- 1,315,000 1,190,000 2,505,000
Repayments of advances:
Related parties......................................... -- (104,000) (23,875) (127,875)
Unrelated parties....................................... -- (105,000) (30,000) (135,000)
Payments on capitalized lease obligations................. (40,150) (93,596) (113,911) (247,657)
---------- ----------- ----------- -----------
Net cash provided by financing activities................... 411,825 3,960,045 8,385,211 16,192,208
---------- ----------- ----------- -----------
</TABLE>
(continued)
F-8
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1995
THROUGH
1996 1997 1998 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents.............................. (3,210,590) (34,423) 1,487,721 1,485,139
Cash and cash equivalents at beginning of
period................................... 3,297,908 87,318 52,895 55,477
---------- --------- --------- ---------
Cash and cash equivalents at end of
period................................... $ 87,318 $ 52,895 $1,540,616 $1,540,616
---------- --------- --------- ---------
---------- --------- --------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest................................. $ 12,627 $ 27,364 $ 26,780 $ 117,383
State income taxes....................... 1,756 6,443 6,166 15,165
---------- --------- --------- ---------
---------- --------- --------- ---------
Non-cash investing and financing activities:
Equipment acquired under capital leases.... $ 267,180 $ -- $ 80,000 $ 347,180
Reduction of loan from settlement
agreement................................ -- -- -- (20,000)
Additions to deferred compensation......... 128,250 -- 1,434,988 1,852,813
Advances and bridge loans, including
accrued interest, converted into common
stock and warrants:
Related parties........................ -- 632,500 1,366,365 1,998,865
Unrelated parties...................... -- 1,046,500 1,634,504 2,681,004
Conversion of accounts payable and accrued
compensation into common stock........... -- 61,438 249,951 311,389
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
Youbet.com, Inc., a Delaware corporation (formerly known as You Bet
International, Inc.), You Bet!, Inc., a Delaware corporation and a wholly-owned
subsidiary of Youbet.com, Inc., and Middelware Telecom Corporation, a California
corporation and a wholly-owned subsidiary of You Bet!, Inc., are collectively
referred to herein as the "Company". Youbet.com, Inc. is the successor to You
Bet International, Inc. through a merger transaction effective January 22, 1999.
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 entertainment purposes. The Company's first service being offered to
subscribers is The You Bet Network, an interactive online horseracing network
that is broadcast over the Company's virtual private network.
DEVELOPMENT STAGE
As of December 31, 1998, the Company is considered to be a development stage
entity, as it has not realized a significant amount of revenues from planned
principal operations. Accordingly, the Company has provided cumulative
consolidated statements of operations, consolidated statements of stockholders'
equity (deficiency) and consolidated statements of cash flows for the period
from inception of development stage (January 1, 1995) through December 31, 1998.
ORGANIZATION
On December 6, 1995, Continental Embassy Acquisition, Inc. ("CEA"), a public
shell which was organized in Utah in 1987, acquired 100% of the outstanding
capital stock of You Bet!, Inc., a Delaware corporation, in exchange for the
issuance of 5,800,000 shares of common stock, including 5,710,000 shares of
common stock to two officers/major stockholders of the Company (who were the
founders of the Company's predecessor entity), their nominees and a stockholder
related to one of the officers. In conjunction with the contemporaneous 1995
private placement of the Company's securities as described at Note 6, 2,500,000
of the 5,710,000 shares were deemed subject to forfeiture by the holders under
certain conditions, also as described at Note 6b. Concurrent with this
transaction, CEA reincorporated in the State of Delaware and changed its name to
You Bet International, Inc., and the management of You Bet!, Inc. became the
management of You Bet International, Inc. For accounting purposes, the
acquisition of You Bet!, Inc. by You Bet International, Inc. has been treated as
a reverse acquisition of You Bet!, Inc. with You Bet!, Inc. considered the
acquiror. The operating results reflected in the accompanying financial
statements, where 1995 through 1998 amounts are presented, do not include CEA's
operating activities prior to the You Bet!, Inc. acquisition, as the amounts are
not significant.
F-10
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue as wagers are placed (see Note 3). The
Company also recognizes revenue from monthly subscription fees as earned and
from the sale of handicapping information as used by subscribers.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development costs in
compliance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." 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, which is marketed to customers, includes the You Bet Network
(YBN), an internet site developed by the Company, and software which customers
install on their personal computers in order to access the YBN. Management
believes technological feasibility was achieved in early 1998, and the Company's
network became available for general release to customers shortly thereafter.
Capitalizable software costs incurred subsequent to establishing technological
feasibility have not been capitalized due to the uncertainty surrounding the
recoverability of these costs. The Company has determined that software
development costs to date should properly be charged to operations. Since the
Company's software has become available for use, the Company has expensed
maintenance costs as incurred.
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 whether or not it is more likely that
the net deferred tax asset will be realized.
F-11
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Basic earnings per share are calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are calculated by dividing net income (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. These dilutive
securities were anti-dilutive in 1996, 1997 and 1998.
For the year ended December 31, 1996, potential dilutive securities
representing 1,026,364 outstanding stock options, 1,387,188 outstanding common
stock purchase warrants, and $200,000 of convertible notes, are not included in
the earnings per share calculation since their effect would be antidilutive.
For the year ended December 31, 1997, potential dilutive securities
representing 1,121,433 outstanding stock options, 5,896,011 outstanding common
stock purchase warrants, and $345,000 of convertible notes, are not included in
the earnings per share calculation since their effect would be antidilutive.
As of December 31, 1998, potential dilutive securities representing
10,804,038 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 1,914,212 outstanding stock options, 7,818,726
outstanding common stock purchase warrants, and 107,110 shares of preferred
stock convertible into 1,071,100 shares of common stock. Basic and diluted
earnings per share are the same for all periods presented.
During 1997, 2,500,000 shares of common stock issued and outstanding to two
officers/major stockholders and a stockholder related to one of the officers
were subject to forfeiture under certain specified conditions, and were excluded
from the calculation of net loss per share in 1997. The forfeiture provisions
were released effective December 31, 1997, in exchange for the return to the
Company and cancellation of 750,000 of such shares. See Note 6b for additional
information.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans. The provisions of this
Statement 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", but to disclose the pro forma effect on net income (loss) and net
income (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.
In accordance with this Statement, the Company has provided footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and is recognized over the vesting period. The value of the
stock-based award is determined using a pricing model whereby compensation cost
is the excess of the fair
F-12
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value of the award as determined by the pricing model at grant date or other
measurement date above the amount an employee must pay to acquire the stock.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, consisting
primarily of stock subscriptions receivable, accounts payable, notes payable and
capitalized lease obligations, approximates fair value due to the maturity of
these financial instruments and the borrowing costs to the Company.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income", during the year ended December 31, 1998.
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income. Adoption of
this statement did not have an impact on the Company's current disclosures and
presentation.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", during the year ended December 31, 1998.
This Statement requires that public companies report certain information about
their major customers, operating segments, products and services, and the
geographic areas in which they operate. Because the Company operates within a
single operating segment, adoption of this statement did not have an impact on
the Company's current disclosures and presentation.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" (SFAS No. 132), which is effective for financial statements issued for
fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
requires comparative information for earlier years to be restated. The Company
adopted SFAS No. 132 for its fiscal
F-13
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year beginning January 1, 1998. Adoption of SFAS No. 132 did not have an effect
on the Company's financial statement presentation and disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for financial statements issued for all fiscal quarters of fiscal
years beginning after June 15, 1999. This statement requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. Historically, the Company has not entered into derivative contracts to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to have any effect on
its financial statements.
NOTE 3--AGREEMENT WITH LADBROKE
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 (the "Ladbroke Agreement"),
which provides that the Company will facilitate interactive telecommunications
between subscribers to The You Bet Network and Ladbroke's horseracing
activities. The Ladbroke Agreement contains certain exclusivity provisions
during the first two years of the agreement, and also provides Ladbroke 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
Ladbroke 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 Ladbroke
Agreement is through January 2003.
The Company is entitled to receive on a weekly basis one-half of the net
commissions to Ladbroke derived from wagers placed by Youbet.com subscribers.
Net commissions are calculated as gross commissions generated from wagers, less
state taxes and certain direct costs. The Ladbroke 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 either
the initial eighteen month period ending June 1999, or for any full twelve month
period during the term of the agreement subsequent to the initial eighteen month
period.
During the year ended December 31, 1998, all of the Company's revenues were
generated from the Ladbroke Agreement, and the Company expects that
approximately one-half of its revenues during the year ending December 31, 1999
will also be generated from the Ladbroke Agreement. The Company currently
estimates that net commissions will exceed $1,000,000 during the initial
eighteen month period ending June 1999. However, should net commissions be less
than $1,000,000 during such eighteen month
F-14
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 3--AGREEMENT WITH LADBROKE (CONTINUED)
period, Ladbroke could elect to terminate the agreement, which could have a
material adverse effect on the Company's business plans and capital raising
efforts.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Computer equipment................................................ $ 602,449 $ 1,015,411
Office furniture and equipment.................................... 176,987 202,504
Leasehold improvements............................................ 63,534 64,855
Assets under capital leases (Note 7).............................. 417,441 417,441
------------ ------------
1,260,411 1,700,211
Less: Accumulated depreciation and amortization................... (423,177) (820,535)
------------ ------------
$ 837,234 $ 879,676
------------ ------------
------------ ------------
</TABLE>
At December 31, 1997 and 1998, accumulated depreciation and amortization
included $131,352 and $113,540, respectively, related to assets under capital
leases.
F-15
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 5--ADVANCES AND BRIDGE LOANS PAYABLE
Advances and bridge loans consisted of the following at December 31, 1997
and 1998:
<TABLE>
<CAPTION>
RELATED UNRELATED
PARTIES PARTIES
------------- -------------
<S> <C> <C>
ADVANCES
Balance, January 1, 1997............................................................ $ -- $ --
Add: New loans...................................................................... 594,000 105,000
Less: Repayments.................................................................... (104,000) (105,000)
Converted into 1997 bridge financing........................................... (100,000) --
------------- -------------
Balance, December 31, 1997.......................................................... 390,000 --
Add: New loans...................................................................... 508,875 105,000
Less: Repayments.................................................................... (23,875) (30,000)
Converted into 1998 bridge financing........................................... (875,000) (75,000)
------------- -------------
Balance, December 31, 1998.......................................................... $ -- $ --
------------- -------------
------------- -------------
BRIDGE LOANS PAYABLE
Balance, January 1, 1997............................................................ $ 200,000 $ --
Add: New loans...................................................................... 250,000 1,210,000
Converted from advances........................................................ 100,000 --
Less: Converted into common stock and warrants...................................... (550,000) (910,000)
------------- -------------
Balance, December 31, 1997.......................................................... -- 300,000
Add: New loans...................................................................... 380,000 1,085,000
Converted from advances........................................................ 875,000 75,000
Less: Conversion of 1997 bridge loans into common stock and warrants................ -- (300,000)
Conversion of 1998 bridge loans into common stock.............................. (1,255,000) (1,160,000)
------------- -------------
Balance, December 31, 1998.......................................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Interest expense with respect to bridge loans payable aggregated $264,000
during 1997, including $82,500 to related parties. Additional financing cost was
also incurred during 1997 as a result of the issuance of an aggregate of 966,000
Series C common stock purchase warrants to the parties that provided unsecured
advances during 1997 and to the participants in the 1997 bridge financing,
including 456,000 warrants to related parties. As a result, the Company recorded
a charge to operations of $2,949,420 in 1997, including $1,504,580 allocable to
related parties, as more fully described at Note 6a.
Interest expense with respect to bridge loans and advances payable
aggregated $240,730 during 1998, including $111,365 to related parties.
Additional financing cost was also incurred during 1998 as a result of the
issuance of an aggregate of 177,000 Series C and 105,117 Series D common stock
purchase warrants to the parties that provided unsecured advances during 1998
and to the participants in the 1998 bridge financing, including 134,000 warrants
to related parties. As a result, the Company recorded a charge to operations of
$910,099 in 1998, including $500,600 allocable to related parties, as more fully
described at Note 6a.
F-16
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 5--ADVANCES AND BRIDGE LOANS PAYABLE (CONTINUED)
CONVERSION DISCOUNT
As part of the consideration for making the 1997 bridge loans, the Company
agreed at the time the bridge loans were funded to give the bridge investors the
option to convert their bridge loans, including accrued interest, into the
subsequent private placement securities at the lesser of $25,000 per unit or 75%
of the private placement offering price. As a result, bridge investors exchanged
their bridge loans for units offered in the private placement at the rate of
$18,750 per unit, equivalent to a 25% discount from the $25,000 private
placement price. Accordingly, the Company recognized a charge to operations,
with a corresponding credit to additional paid-in capital, representing the
aggregate discount of $559,667, including $210,834 allocable to related parties.
As part of the consideration for making the 1998 bridge loans, the Company
granted the investors the option to convert their bridge loans, including
accrued interest, into the securities offered in any subsequent private
placement (or the equivalent amount of common stock, if such financing is not a
common stock financing), at 75% to 80% of the private placement offering price,
representing discounts of 20% to 25%. As a result of the sale of preferred stock
on June 29, 1998 as described in Note 6c, the difference between the fair value
of the Company's common stock of $2.50 per share on June 29, 1998 (as determined
by an investment and merchant banking firm) and the effective conversion rates
ranging from $1.875 to $2.00 per share, was recognized as a charge to
operations. Accordingly, the Company recognized a charge to operations, with a
corresponding credit to additional paid-in capital, representing the aggregate
discount of $849,963, including $341,588 allocable to related parties.
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY)
A. ISSUANCE OF COMMON STOCK AND WARRANTS
Concurrent with the completion of the reverse merger discussed in Note 1,
the Company completed a private placement offering of securities to investors.
The Company sold 149 units at $25,000 per unit. Each unit consisted of 10,000
shares of common stock and 5,000 Series A common stock purchase warrants
exercisable at $5.25 per share and expiring two years from the date on which a
registration statement registering the warrants is declared effective. Total
offering costs of $575,860 were charged against the gross proceeds of
$3,725,000, resulting in net proceeds of $3,149,140. As a result of the sale of
149 units under this private placement offering in 1995, the Company issued a
total of 1,490,000 shares of common stock and 745,000 Series A common stock
purchase warrants.
In 1995, the Company issued 200,000 shares of common stock and Series B
common stock purchase warrants representing the right to purchase 417,188 shares
of common stock as commission to the placement agent of the private placement
offering, which were valued at $500,000. The Series B common stock purchase
warrants are exercisable at $3.12.
In conjunction with the closing of the reverse merger and private placement
offering in 1995, bridge loans payable aggregating $250,000 were exchanged for
10 units of common stock and Series A common stock purchase warrants, and
advances aggregating $345,000, including $100,000 from a related party, were
exchanged for 13.8 units of common stock and Series A common stock purchase
warrants. As a result of
F-17
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
the issuance of 23.8 units, the Company issued an aggregate of 238,000 shares of
common stock and 119,000 Series A common stock purchase warrants, including
40,000 shares and 20,000 Series A common stock purchase warrants to a related
party.
During 1996, the Company sold an additional 21.2 units as part of the
private placement offering commenced during 1995. Total offering costs of
$278,025 were charged against the gross proceeds of $530,000, resulting in net
proceeds of $251,975. As a result of the sale of 21.2 units under this private
placement offering in 1996, the Company issued a total of 212,000 shares of
common stock and 106,000 Series A common stock purchase warrants.
During November 1997, the Company reduced the exercise price of the Series A
common stock purchase warrants from $5.25 to $2.50 per share.
During November 1997, the Company completed a private placement offering of
securities to investors. The Company sold 89.78 units at $25,000 per unit. Each
unit consisted of 10,000 shares of common stock and 5,000 Series D common stock
purchase warrants exercisable at $5.25 and expiring November 1999. Total
offering costs of $291,020 were charged against the gross proceeds of
$2,244,400, resulting in net proceeds of $1,953,380. As a result of the sale of
89.78 units under this private placement in 1997, the Company issued a total of
897,760 shares of common stock and 448,880 Series D common stock purchase
warrants.
In conjunction with the closing of the private placement offering, bridge
loans payable aggregating $1,679,000, representing a principal balance of
$1,460,000 and accrued interest of $219,000, were exchanged for 89.55 units of
common stock and Series D common stock purchase warrants. Included in the
$1,679,000 was $632,500, representing a principal balance of $550,000 and
accrued interest of $82,500, from related parties. As a result of the issuance
of 89.55 units in 1997, the Company issued 895,468 shares of common stock and
447,734 Series D common stock purchase warrants, including 337,335 shares of
common stock and 168,667 Series D common stock purchase warrants to related
parties.
In conjunction with the 1997 private placement offering, the Company issued
690,275 Series E common stock purchase warrants to finders exercisable at $3.125
per share through November 2000. The Series E common stock purchase warrants had
an aggregate fair value of $1,891,354. The Company also issued 250,000 common
stock shares to finders.
During 1997, amounts due to vendors aggregating $40,000 and deferred
employee compensation aggregating $21,438 were exchanged for 2.74 units of
common stock and Series D common stock purchase warrants. As a result of the
issuance of 2.74 units, the Company issued 27,433 shares of common stock and
13,717 Series D common stock purchase warrants. The employees exchanged their
deferred compensation for common stock and warrants at the same rate as did the
bridge investors, and the vendors received a premium to exchange their debt for
common stock and warrants. As a result, the Company also recognized a charge to
operations, with a corresponding credit to additional paid-in capital, for
$13,681.
During 1998, in conjunction with the restructuring of a capital lease
obligation, the Company issued 20,000 shares of common stock to the lessor with
an approximate fair market value of $79,000 (Note 7).
F-18
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
During 1998, the Company issued 2,500 shares of common stock to a former
employee for services rendered which were valued at $15,469 and charged to
operations.
During 1998, the Company issued 1,513,551 shares of common stock (and
105,117 Series D common stock purchase warrants) in conjunction with the
conversion of bridge financing notes with a principal balance of $2,715,000 and
accrued interest of $285,730.
During 1998, the Company issued 355,000 shares of common stock to four
individuals, including two former officers, in conjunction with the exercise of
warrants and stock options with exercise prices ranging from $2.50 to $3.125 per
share, generating gross proceeds to the Company of $1,069,000.
During 1998, the Company issued 11,200 shares of common stock (and 5,600
Series D common stock purchase warrants) in conjunction with the conversion of
vendor debt of $28,000 into common stock.
During 1998, the Company issued 110,123 shares of common stock (and 55,063
Series C and 55,063 Series D common stock purchase warrants), including 96,220
shares to two officers/major stockholders, in conjunction with the conversion of
employee deferred compensation of $206,483 into common stock.
During December 1998, the Company entered into a stock subscription
agreement for the sale of 800,000 shares of common stock and 40,000 Series E
common stock purchase warrants for gross proceeds of $2,000,000. The Company
incurred direct costs related to such financing of $120,000. The Company
received the proceeds during January and February 1999.
B. DIVESTMENT SHARES
In conjunction with the December 1995 reverse merger discussed in Note 1 and
the contemporaneous 1995 private placement offering, 2,500,000 of the 5,710,000
shares issued to related parties were subject to forfeiture under certain
conditions if the Company did not achieve certain customer subscription levels
within a specified timeframe through December 5, 1999 (the "Divestment Shares").
The Company's original short-term goal, established in 1995, was to maximize
customer subscription levels. However, as a result of a change in the Company's
marketing strategy during 1997, the Company has decided to de-emphasize its
original short-term goal in order to focus on certain long-term goals. The
Company's revised marketing strategy is focused on building a brand name and
becoming a market leader, acquiring and retaining a large and loyal customer
base, and maximizing long-term profitability. Accordingly, effective December
31, 1997, the Board of Directors authorized the release of the forfeiture
restrictions on the 2,500,000 shares of common stock in exchange for the return
of 750,000 shares to the Company.
The release from the possibility of forfeiture with respect to the
Divestment Shares is recorded for accounting purposes as the payment of
compensation to the recipients when the possibility of forfeiture terminates,
and results in a charge to operations in an amount equal to the fair market
value of the Divestment Shares retained at the time such forfeiture possibility
terminates. Accordingly, the Company recognized a charge to operations, with a
corresponding credit to additional paid-in capital, of $7,875,000 at December
31, 1997, reflecting the release of the 1,750,000 shares.
F-19
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
C. 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.
The Preferred Stock has a liquidation preference of $25.00 per share and
will rank senior to all other series of preferred stock that may be issued in
the future. Each share of Preferred Stock is convertible into ten shares of
common stock of the Company, and will be automatically converted into common
stock at the then prevailing conversion rate at such time as the Company has
completed a public offering which raises not less than $15,000,000 in gross
proceeds and has its common stock listed on a major exchange or the NASDAQ
National Market System. The holders of the Preferred Stock are not entitled to
dividends, except that if dividends are paid on the Company's common stock,
holders of Preferred Stock will be entitled to dividends on the basis of the
number of shares of common stock into which the Preferred Stock is then
convertible. The Preferred Stock will vote together with the holders of common
stock on all matters presented to stockholders for a vote on the basis of the
number of shares of common stock into which the Preferred Stock is then
convertible. The holders of the Preferred Stock have unlimited piggyback
registration rights and certain demand registration rights.
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.
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 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"). 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
F-20
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
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, the Preferred Stock held by the
Fell Trust was converted into common stock, which remained subject to the pledge
to secure the Notes.
The $490,000 Note and the $70,000 Note were recorded as reductions to
stockholders' equity at December 31, 1998. 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.
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 will 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,
reflecting the increase in Mr. Fell's involvement with the Company from 70% to
100% of his available time.
Effective June 29, 1998, in connection with the Preferred Stock financing,
the Company entered into new employment agreements with Mr. Marshall and Mr.
Fine pursuant to which they will serve as Vice Chairman and Chief Technology
Officer, respectively. Both employment agreements provide for terms of five
years and compensation of $150,000 per annum, subject to cost of living
increases, and standard benefits.
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.
F-21
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
D. STOCK OPTIONS AND WARRANTS
The Company issued various stock options and warrants during 1997 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. Deferred compensation is
being amortized on the straight-line basis over the period in which the Company
expects to receive benefit.
The Company issued a warrant to an officer of a subsidiary in 1997 to
purchase 100,000 shares of common stock at an exercise price of $3.00,
exercisable through October 31, 1998, partially in exchange for an accrued but
unpaid bonus. Aggregate fair value of the warrant was $210,000, which was
charged to operations in 1997.
The Company issued various stock options and warrants to certain consultants
during 1997 to purchase an aggregate of 394,000 shares of common stock at
exercise prices ranging from $2.50 to $3.12 and exercisable for periods ranging
from one to five years. Aggregate fair value was $720,680, of which $359,421 was
charged to operations in 1997, and the remaining $361,259 is being charged to
operations in 1998 and 1999.
Pursuant to a letter of intent dated May 11, 1997 and a final agreement
entered into on December 19, 1997, the Company issued a financial and marketing
consulting firm warrants to purchase 1,000,000 shares of common stock
exercisable for a period of 5.5 years, 500,000 of which are exercisable at
$3.125 per share and 500,000 of which are exercisable at $5.25 per share, for
services rendered and to be rendered for the two year period commencing May 11,
1997. In addition, the Company issued a bonus to such firm during December 1997
in the form of 500,000 warrants exercisable for a period of 5 years, 250,000 of
which are exercisable at $3.125 per share and 250,000 of which are exercisable
at $5.25 per share. Aggregate fair value of the 1,000,000 warrants was
$1,218,000, of which $389,084 was charged to operations in 1997, and the
remaining $828,916 is being charged to operations through 1999. Aggregate fair
market value of the 500,000 warrants issued as a bonus was $1,037,750, all of
which was charged to operations in 1997.
During 1997, the Company issued an aggregate of 1,114,217 Series C common
stock purchase warrants to various parties as financing costs. The Series C
common stock purchase warrants are exercisable at $2.50 per share through
December 31, 2002. Employees deferring a portion of their compensation received
5,717 warrants, vendors deferring amounts due them received 142,500 warrants,
individuals providing short-term unsecured advances to the Company received
262,000 warrants (including 236,000 warrants to related parties), and bridge
investors received 704,000 warrants (including 220,000 warrants to related
parties). Aggregate fair market value of the warrants was $3,656,202 (including
$1,504,580 allocable to related parties), all of which was charged to operations
in 1997.
During March 1998, the Company entered into a supplemental agreement with a
financial and marketing consulting firm to develop and manage an expanded
investor relations program to publicize the
F-22
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Company to stockholders, investors, brokerages, and industry professionals
during 1998. During April 1998, the Company issued warrants to the financial and
marketing consulting firm to purchase an aggregate of 300,000 shares of common
stock, of which 200,000 warrants are exercisable at $3.125 per share and 100,000
warrants are exercisable at $5.25 per share, for additional services rendered
during January through June 1998. The warrants are exercisable through March
2003. The aggregate fair value of the 300,000 warrants of $1,444,000 was
recorded as a charge to operations in 1998.
During April 1998, the Company issued a warrant to purchase 25,000 shares of
common stock exercisable at $3.00 per share to the Company's Acting Chief
Financial Officer at that time for services rendered during 1998. The warrant is
exercisable through April 1999. The fair value of the warrant was approximately
$75,000, which was charged to operations in 1998. The warrant has been
exercised.
During 1998, the Company issued Series C common stock purchase warrants for
254,593 shares of common stock to various parties. The Series C common stock
purchase warrants are exercisable at $2.50 per share through June 2003. The
Company issued 5,000 warrants to a vendor which deferred an amount due it,
55,063 warrants (including 48,110 warrants to two officers/major stockholders)
in conjunction with the conversion into common stock of employee deferred
compensation of $206,483, and 177,000 warrants (including 134,000 warrants to
related parties) as additional consideration for short-term advances of
$440,000, all of which were considered financing costs. Aggregate fair value of
the warrants issued for financing costs was $1,019,444, which was charged to
operations as financing costs in 1998.
During 1998, a Series C common stock purchase warrant for 20,000 shares of
common stock, originally issued in 1997, was returned to the Company due to lack
of performance and was cancelled. The fair value of such warrant at the time of
issuance was $95,200, which amount was recognized as a credit to operations in
1998. The Company also issued 17,530 warrants for legal fees. The warrant issued
for legal fees had an aggregate fair value of $100,447, which was charged to
operations in 1998.
During 1998, the Company issued Series D common stock purchase warrants for
165,780 shares of common stock to various parties. The Series D common stock
purchase warrants are exercisable at $5.25 per share through September 2000. The
Company issued 105,117 warrants in conjunction with the conversion into common
stock of 1997 bridge financing notes with a principal balance of $300,000, 5,600
warrants in conjunction with the conversion into common stock of vendor debt of
$28,000, and 55,063 warrants (including 48,110 warrants to two officers/major
stockholders) in conjunction with the conversion into common stock of employee
deferred compensation of $206,483, all of which were considered financing costs.
The aggregate fair value of such warrants of $386,240 was charged to operations
as financing costs in 1998.
During 1998, the Company issued Series E common stock purchase warrants to
various parties. The Series E common stock purchase warrants are exercisable at
$3.125. During April 1998, the Company issued a Series E common stock purchase
warrant for 50,000 shares of common stock to a consulting firm exercisable
through April 2001. The fair value of the warrant of $251,000 was charged to
operations in 1998.
F-23
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
During 1998, in conjunction with the 1997 private placement and the
conversion of the 1998 bridge financing into common stock, the Company issued
87,844 Series E common stock purchase warrants exercisable through 2001, which
had an aggregate fair value of $243,251 and was charged to operations in 1998.
During 1998, in conjunction with the sale of 800,000 shares of common stock,
the Company issued 40,000 Series E common stock purchase warrants exercisable
through February 2004, which had an aggregate fair value of $212,400.
Information with respect to common stock purchase warrants and stock options
issued, excluding stock options issued under the Stock Option Plans as described
below, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE
WARRANTS PRICE
---------- -----------
<S> <C> <C>
Balance, January 1, 1996............................................... 1,281,188 $ 2.70
Warrants/stock options issued.......................................... 106,000 $ 2.50
----------
Balance, December 31, 1996............................................. 1,387,188 $ 2.69
Warrants/stock options issued.......................................... 4,508,823 $ 3.70
----------
Balance, December 31, 1997............................................. 5,896,011 $ 3.48
Warrants/stock options issued.......................................... 2,148,628 $ 2.90
Exercised.............................................................. (375,000) $ 3.07
----------
Balance, December 31, 1998............................................. 7,669,639 $ 3.33
----------
----------
Warrants/stock options exercisable (vested) at December 31, 1998....... 7,669,639 $ 3.33
----------
----------
</TABLE>
Additional information about outstanding warrants/stock options to purchase
the Company's common stock at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WARRANTS/STOCK OPTIONS OUTSTANDING AND
EXERCISABLE
-------------------------------------------------
WEIGHTED AVG.
REMAINING
NUMBER CONTRACTUAL LIFE WEIGHTED AVG.
RANGE OF EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE
- -------------------------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
$.01........................................ 24,166 Not determinable $ .01
$2.50....................................... 52,000 2.68 $ 2.50
$2.50....................................... 3,567,143 Not determinable $ 2.50
$3.00....................................... 112,000 2.12 $ 3.00
$3.13....................................... 1,948,221 Not determinable $ 3.13
$5.25....................................... 1,966,109 Not determinable $ 5.25
---------- -----
Total....................................... 7,669,639 $ 3.33
---------- -----
---------- -----
</TABLE>
F-24
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
STOCK OPTION PLANS
The Company has Employee Stock Option Plans and a Stock Option Plan for
Non-Employee Directors. These 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 these Plans is 15% of the total number of shares of common stock
outstanding. The options generally vest in four equal annual installments, and
have a term of five to ten years.
On February 6, 1998, the Company's Board of Directors adopted a new employee
stock option plan. This plan provides for the granting of options to both
employees and non-employees. The Company issued options to purchase 500,000
shares of common stock at $2.50 per share of such amount, 205,000 options were
issued to officers. Such options were fully vested upon issuance, but are not
exercisable until February 1999, and expire on February 6, 2003. The Company has
recorded the aggregate difference between the fair market value of the Company's
common stock on the issuance date and the $2.50 exercise price of $828,151 as
compensation cost in 1998.
During 1996, deferred compensation of $128,250 was recorded as a result of
the issuance of stock options being granted with exercise prices less than the
current market price, and is being amortized on the straight-line basis over the
vesting period of the stock options. Deferred compensation charged to operations
from the above transaction as well as a transaction occurring in 1995 was
$102,263 in 1996, $167,965 in 1997 and $63,561 in 1998.
During 1997, the Company issued a stock option to the non-employee director
under the 1995 Plan to purchase 5,000 shares of common stock at an exercise
price of $2.75 per share, exercisable for a period of ten years. Aggregate fair
value was $9,083, of which $1,811 was charged to operations in 1997, and the
remaining $7,272 was charged to operations in 1998.
During 1997, the Company issued stock options to certain consultants under
the 1995 Plans to purchase an aggregate of 3,773 shares of common stock at
exercise prices ranging from $3.00 to $3.88 and exercisable for a period of ten
years. Aggregate fair value was $10,151, all of which was charged to operations
in 1997.
During 1998, the Company granted various stock options, as follows:
(1) On May 1, 1998, the Company issued a stock option to its newly-appointed
Executive Vice President and Chief Financial Officer under the 1995 Stock
Option Plan to purchase 75,000 shares of common stock at an exercise
price of $2.50 per share. The stock option vests in four equal annual
installments commencing one year after the grant date, and is exercisable
for a period of ten years. The Company has recorded a charge to deferred
compensation of $323,438 to reflect the aggregate difference between the
fair market value of the Company's common stock on the grant date of
$6.81 per share and the exercise price of $2.50 per share, and is
charging this amount to operations over the four year period beginning
May 1, 1998. On May 1, 1998, the Company also issued a stock option to
its newly-appointed Executive Vice President and Chief Financial Officer
under the 1998 Stock Option Plan to purchase 5,000 shares of common stock
at an exercise price of $2.50 per share. The stock option vested
immediately and is exercisable for a
F-25
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
period of five years. The aggregate difference between the fair market
value of the Company's common stock on the grant date of $6.81 per share
and the exercise price of $2.50 per share was $21,550, and was charged to
operations.
(2) Stock options were granted to employees to purchase 13,000 shares of
common stock at $5.50 per share, the fair value on the date of grant.
These options vest over four years and are exercisable for a period of
ten years.
(3) Stock options were granted to non-employees to purchase 224,000 shares
of common stock (165,000 to directors), 204,000 shares at $2.50 per
share, and 20,000 shares averaging $5.46 per share, the fair value at the
date of grant. The director options generally vest over one year and the
other options generally vest over one to two years. The fair value of
these stock options of $1,148,860 ($888,150 allocated to the director
options) is being charged to operations over the respective vesting
periods.
(4) During July 1998, the Company issued a stock option to the Company's
legal counsel, who acts as Secretary of the Company, to purchase 40,000
shares of common stock at an exercise price of $2.50 per share. The stock
option vests monthly over the two year period beginning July 1998, and is
exercisable for a period of ten years. The fair value of the stock option
of $179,600 is being charged to operations over the two year period
beginning July 1998. During December 1998, the Company also issued a
stock option to its legal counsel to purchase 100 shares of common stock
at an exercise price of $2.50 per share. The stock option vested
immediately and is exercisable for a period of five years. The fair value
of the stock option of $508 was charged to operations.
(5) During December 1998, the Company issued a stock option to each
executive officer of the Company, consisting of six persons, to purchase
100 shares of common stock at an exercise price of $2.50 per share. The
stock options vested immediately and are exercisable for a period of five
years. The aggregate difference between the fair market value of the
Company's common stock on the grant date of $6.13 per share and exercise
price of $2.50 per share was $2,178, and was charged to operations.
F-26
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Information with respect to activity under the Plans is summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED
STOCK EXERCISE
OPTIONS PRICE
---------- -----------
<S> <C> <C>
Options granted........................................................ 755,000 $ 2.50
Options terminated..................................................... (111,500) $ 2.50
----------
Balance, January 1, 1996............................................... 643,500 $ 2.50
Options granted........................................................ 469,914 $ 2.60
Options terminated..................................................... (87,050) $ 2.50
----------
Balance, December 31, 1996............................................. 1,026,364 $ 2.55
Options granted........................................................ 246,735 $ 3.06
Options terminated..................................................... (151,666) $ 2.70
----------
Balance, December 31, 1997............................................. 1,121,433 $ 2.64
Options granted........................................................ 837,469 $ 2.65
Options terminated..................................................... (44,690) $ 2.93
----------
Balance December 31, 1998.............................................. 1,914,212 $ 2.64
----------
----------
Options exercisable (vested) at December 31, 1998...................... 1,408,154 $ 2.60
----------
----------
</TABLE>
Additional information about outstanding options to purchase the Company's
common stock at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING ---------------------------
NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
RANGE OF EXERCISE PRICES OF SHARES LIFE (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
- ------------------------- ---------- ----------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$2.50.................... 1,622,186 6.54 2.50 1,240,505 2.50
$2.51-$2.99.............. 30,500 8.25 2.75 11,500 2.75
$3.00.................... 179,706 8.30 3.00 112,429 3.00
$3.01-$5.50.............. 81,820 6.97 4.44 43,720 4.51
---------- --- ----- ---------- -----
Total.................... 1,914,212 6.75 $ 2.64 1,408,154 $ 2.60
---------- --- ----- ---------- -----
---------- --- ----- ---------- -----
</TABLE>
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
F-27
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 6--STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life in years.......................................... 5 5 5
Risk free interest rate......................................... 5.7% 6.75% 6.75%
Dividend yield.................................................. 0% 0% 0%
Expected volatility............................................. 100% 83.4% 83.4%
</TABLE>
The weighted average fair value at the date of grant for stock options and
warrants granted during 1996, 1997 and 1998 was $2.61 per option in 1996, $2.12
per option and $2.31 per warrant in 1997, and $3.88 per option and $2.84 per
warrant in 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net loss
As reported................................. $ (3,864,734) $ (19,416,838) $ (13,861,547)
Pro forma................................... $ (4,138,734) $ (20,015,044) $ (15,389,025)
Net loss per share
As reported................................. $ (0.67) $ (3.06) $ (1.32)
Pro forma................................... $ (0.72) $ (3.15) $ (1.46)
</TABLE>
NOTE 7--CAPITAL AND OPERATING LEASES
During the year ended December 31, 1996, the Company acquired $267,180 of
equipment under capital leases. During the year ended December 31, 1997, the
Company financed $150,261 of equipment through a capital lease transaction. The
Company's capitalized lease obligations of $283,695 at December 31, 1997
(excluding the interest portion of $45,556) has been classified as a current
liability in the accompanying consolidated financial statements.
Effective March 31, 1998, the Company restructured a capital lease
obligation aggregating $170,516 into a new capital lease bearing interest at
approximately 14% per annum. In conjunction with this transaction, the Company
increased the outstanding lease obligation by $80,000 to reflect the acquisition
of office and computer equipment from the lessor. The Company agreed to pay the
lessor eighteen monthly payments of $15,500 commencing July 1, 1998 under the
restructured lease agreement. The Company also issued 20,000 shares of common
stock to the lessor with an approximate fair market value of $79,000. The
Company recorded deferred financing costs of $54,941 as a result of the issuance
of the 20,000 shares of common stock to the lessor, which are being amortized to
operations through December 31, 1999.
Effective September 1, 1998, the Company restructured a capital lease
obligation aggregating $120,286 into a new capital lease bearing interest at
approximately 7% per annum. The Company agreed
F-28
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 7--CAPITAL AND OPERATING LEASES (CONTINUED)
to pay the lessor $21,000, and thirty monthly payments of $4,495 commencing
September 15, 1998 under the restructured lease agreement.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 239,940
2000.............................................................................. 53,940
2001.............................................................................. 8,990
----------
Total payments.................................................................... 302,870
Less: amount representing interest................................................ 22,419
----------
Present value of minimum payments................................................. $ 280,451
----------
----------
Current portion................................................................... $ 220,317
Long-term portion................................................................. 60,134
----------
$ 280,451
----------
----------
</TABLE>
The Company leases its executive and operating offices under an operating
lease which expires on October 31, 1999. Rent expense under this lease was
$89,928, $106,269 and $228,578 for the years ended December 31, 1996, 1997 and
1998, respectively. Under this non-cancellable lease, the Company is committed
to future minimum payments of $190,370 through October 31, 1999.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment agreement with Robert M. Fell,
which expires on June 30, 2001. This agreement calls for Mr. Fell to devote
approximately 70% of his business time to the affairs of the Company. This
agreement was amended subsequent December 31, 1998. The new employment agreement
provides for compensation of $225,000 per annum. Additional details are
described at Note 6c.
The Company also entered into new employment agreements with David M.
Marshall and Russell M. Fine. Both employment agreements provide for terms of
five years and compensation of $150,000 per annum, subject to cost of living
increases.
Subsequent to December 31, 1998, the Company renewed employment agreements
with Ronald W. Luniewski and Phillip C. Hermann. Both employment agreements
expire on April 30, 2000 and provide for compensation of $150,000 per annum.
The Company entered into license agreements with service providers which
require the payment of certain license fees based on usage levels and product
sales. The Company is required to make minimum payments of $247,590 in 1999,
$60,000 in 2000, $60,000 in 2001, and $50,000 in 2002.
From time to time, the Company is involved in litigation arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
F-29
<PAGE>
YOUBET.COM, INC.
(FORMERLY YOU BET INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND 1995 THROUGH 1998
NOTE 9--INCOME TAXES
The Company has recorded a provision for current minimum state income taxes
in the accompanying consolidated financial statements. At December 31, 1998, the
Company has available Federal and State net operating loss carryforwards of
approximately $16,896,000 and $16,659,000, respectively, for income tax
purposes, which expire in varying amounts through 2018 for federal and 2005 for
state purposes.
The net operating loss carryforward generated a deferred tax asset of
approximately $7,200,000 as of December 31, 1998. 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.
NOTE 10--RELATED PARTY TRANSACTIONS
The non-employee member of the Board of Directors was paid a consulting fee
of $2,400 per month from January through June 1998.
Additional related party transactions are described at Notes 5 and 6.
NOTE 11--SUBSEQUENT EVENT
On April 5, 1999, the Company issued $45,500,000 principal amount of 11%
Senior Convertible Discount Notes for cash proceeds of $36,728,510, which
represents a discount of 11% per year, compounded semi-annually, to April 5,
2001. The Company incurred approximately $1,600,000 of costs related to this
offering and issued 50,000 warrants exercisable at $10.00 per share as a
finder's fee. The Notes begin accruing interest on April 5, 2001 at 11% per
year, payable semi-annually. Principal and unpaid interest are due and payable
on April 5, 2004. The Notes plus accrued, unpaid interest are convertible at any
time at the rate of $10 per common share, subject to reset provisions as defined
in the Notes. The conversion price resets one time at the earlier of (1) a
placement, after April 5, 1999, of common stock and any securities convertible
into common stock which raises at least $15 million gross proceeds to the
Company or (2) April 5, 2000. In the event that a placement of common stock or
convertible securities occurs first, the conversion price will be reset to the
lesser of $10 per share or the lowest price per share at which the Company sells
common stock after the date of the placement of common stock or convertible
securities (excluding options, warrants and other convertible securities
existing prior to April 5, 1999). In the event that the reset occurs on April 5,
2000, the conversion price will be reset to the lower of $10 per share or the
average daily closing price for the ten-day period ending on April 5, 2000, but
in no event less than $5 per share. The notes also contain customary financial
covenants and restrictions limiting the ability of the Company to engage in
certain financings, other transactions and dividend distributions.
F-30
<PAGE>
CERTIFICATE OF DESIGNATION
of
SERIES A CONVERTIBLE PREFERRED STOCK
of
YOU BET INTERNATIONAL, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
YOU BET INTERNATIONAL, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Corporation's Restated Certificate of
Incorporation (the "Certificate of Incorporation"), the said Board of Directors
on June 29, 1998, adopted the following resolution creating a series of four
hundred thousand (400,000) shares of preferred stock designated as "Series A
Convertible Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of the
Certificate of Incorporation, a series of Preferred Stock, par value
$.001 per share, of the Corporation be and hereby is created, and that
the designation and number of shares thereof and the voting and other
powers, preferences and relative, participating, optional or other
rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
SERIES A CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of preferred stock
that shall be designated as "Series A Convertible Preferred Stock" (hereinafter
referred to as the "Preferred Shares"), and the number of shares constituting
such series shall be four hundred thousand (400,000). Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of Preferred Shares to less
than the number of Preferred Shares then issued and outstanding.
1
<PAGE>
2. DIVIDENDS AND DISTRIBUTIONS. The holders of Preferred Shares shall
not be entitled to receive any dividends or other distributions; provided that
in the event any cash dividends are paid on the Company's Common Stock, par
value $.001 per share (the "Common Stock"), the holders of Preferred Shares
shall be entitled to receive dividends (at the same dividend rate payable on the
Common Stock) on the basis of the number of shares of Common Stock into which
the Preferred Shares are convertible at the time any such dividends are so
declared; provided further that if the Corporation shall make any distribution
of property or securities to the holders of Common Stock (including any stock
dividend, rights or warrants), the Corporation shall make a distribution to the
holders of Preferred Shares of the same property or securities on the basis of
the number of shares of Common Stock into which the Preferred Shares are
convertible at the time of any such distribution.
3. REORGANIZATION. If the Corporation shall in any manner split,
subdivide or combine the outstanding shares of Common Stock, the outstanding
Preferred Shares shall be proportionally split, subdivided or combined in the
same manner and on the same basis as the outstanding shares of Common Stock. In
the event any distribution or dividend in the form of shares of Common Stock is
made to the holders of shares of Common Stock, a distribution or dividend in the
form of Preferred Shares shall be made to the holders of Preferred Shares in an
amount equal to one-tenth (1/10) of the number of shares of Common Stock
delivered to holders of Common Stock.
4. VOTING RIGHTS. The holders of Preferred Shares shall have the
following voting rights:
(A) Except as provided in Section 4(B) hereof, holders of Preferred
Stock shall vote together with the holders of Common Stock on all
matters presented to stockholders for a vote. Holders of
Preferred Shares shall vote on the basis of the number of shares
of Common Stock into which the Preferred Shares held by them are
convertible at the record date fixed for such vote;
(B) The Preferred Shares, voting separately as a class, shall have
the right to vote on all matters affecting the rights and
preferences of the Preferred Shares;
(C) Except as expressly provided herein, holders of the Preferred
Shares shall have no other voting rights, except as required by
law, and their consent shall not be required for taking any
corporate action.
5. REACQUIRED SHARES. Any Preferred Shares purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired promptly
after the acquisition thereof. All
2
<PAGE>
such shares shall upon their retirement become authorized but unissued shares of
preferred stock and may be reissued as part of a new series of preferred stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (upon liquidation, dissolution or winding up) to
the Preferred Shares unless, prior thereto, the holders of Preferred Shares
shall have received an amount per share equal to $25.00 plus any declared but
unpaid dividends (the "Liquidation Preference").
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Liquidation Preference, then such
remaining assets shall be distributed ratably to the holders of Preferred Shares
in proportion to the number of Preferred Shares owned by the holders.
(C) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, and after payment in full of the Liquidation
Preference to holders of the Preferred Shares, the payment in full of all
liquidation preferences of all other series of Preferred Stock and the payment
in full to the holders of Common Stock of an amount per share equal to $25.00
plus any declared but unpaid dividends, the remaining assets of the Corporation
shall be distributed ratably to the holders of the Preferred Shares and the
Common Stock (distributions to holders of Preferred Shares shall be on the basis
of the number of shares of Common Stock into which the Preferred Shares held by
them are then convertible.
(D) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6.
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the Common
Stock is to be exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each Preferred Share shall at
the same time be similarly exchanged or changed in an amount per share equal
to the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be into which or for which each share of
Common Stock is changed or exchanged; provided, however, that any stock or other
securities received by holders of Preferred Shares shall contain rights with
respect to liquidation, conversion, dividends
3
<PAGE>
and voting substantially similar to the liquidation, conversion, dividend and
voting rights contained herein.
8. NO REDEMPTION. The Preferred Shares shall not be subject to
redemption by the Corporation.
9. RANKING. The Preferred Shares shall rank senior with respect to
dividends and distributions and upon liquidation, dissolution and winding up of
the Corporation to all other preferred stock, whether currently outstanding or
issued at a future date.
10. CONVERSION.
(A) The Preferred Shares shall be convertible at any time at the
option of the holder or holders, in whole or in part, into ten shares of Common
Stock (the "Conversion Rate"), subject to appropriate adjustment as provided
herein.
(B) At such time as the Corporation has completed a secondary public
offering registered under the Securities Act of 1933, as amended, which raises
not less than fifteen million dollars ($15,000,000) in gross proceeds (not
including proceeds raised from the exercise of currently outstanding option or
warrants) and has listed its Common Stock on the New York Stock Exchange,
American Stock Exchange or the facilities of NASDAQ - National Market each
outstanding Preferred Share shall be automatically converted into ten shares of
Common Stock, subject to appropriate adjustment as provided herein.
(C) Each Preferred Share shall be convertible at the office of the
transfer agent for the Preferred Shares, if any, at the offices of the
Corporation or at such other office or offices as the Board of Directors of the
Corporation may designate. The Corporation shall promptly issue a
certificate(s) representing the Common Stock to be issued upon the conversion of
the Preferred Shares. A person presenting Preferred Shares for conversion shall
be deemed to be the owner of the Common Stock issuable upon such conversion as
of the date Preferred Shares are presented for conversion.
(D) The Corporation shall not be required to issue fractions of
shares of Common Stock upon the conversion of Preferred Shares. If any fraction
of a share would, but for this restriction, be issuable upon the conversion of
Preferred Shares, in lieu of delivering such fractional share, the Corporation
shall pay to the holder of the Preferred Shares to be converted an amount in
cash equal to the same fraction times the fair market value of the Common Stock
(determined in accordance with Section 11 hereof) immediately prior to the
conversion of the Preferred Shares.
4
<PAGE>
(E) The Corporation shall at all times reserve and keep available,
out of its authorized and unissued stock, solely for the purpose of effecting
the conversion of the Preferred Shares, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all Preferred
Shares from time to time outstanding.
11. COMPUTATION OF FAIR MARKET VALUE. For the purposes of any
computation pursuant to this Certificate of Designation, the fair market value
of the Corporation's Common Stock shall be deemed to be the average of the daily
closing prices of the Corporation's Common Stock for the thirty (30) consecutive
business days commencing forty-five (45) business days before the date of the
relevant event, E.G., the conversion of the Preferred Shares. For purposes of
this Section 11, the closing price for each day shall be the last sale price of
the Corporation's Common Stock on the principal exchange on which the Common
Stock is then trading, or if the Corporation's Common Stock is not traded on an
exchange or on the NASDAQ-National Market, the average of the bid and asked
prices as furnished by any New York Stock Exchange member firm selected from
time to time by the Corporation for such purpose, or if no such bid and asked
prices can be obtained from any such firm, the fair market value of one share of
the Common Stock on such day as determined in good faith by the Board of
Directors of the Corporation.
12. OTHER MATTERS. Except as provided herein or provided by law, the
holders of Preferred Shares shall not have any other rights.
[THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.]
5
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 29th
day of June, 1998.
YOU BET INTERNATIONAL, INC.
By: /S/
---------------------------------------------
President and Chief Executive Officer
6
<PAGE>
YOU BET INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND DEFINITIONS.
(a) The 1998 Stock Option Plan (the "Plan") of You Bet
International, Inc., a Delaware corporation (the "Company"), is hereby adopted.
The Plan shall provide for the issuance of incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") to purchase the Stock (as defined at Section
3(a)) of the Company.
(b) The purpose of this Plan is to promote the long-term
success of the Company by attracting, motivating and retaining directors,
officers, employees and consultants of the Company and its Affiliates (the
"Participants") through the use of competitive long-term incentives which are
tied to shareholder value. The Plan seeks to balance Participants' and
shareholder interests by providing incentives to the Participants in the form of
stock options which offer rewards for achieving the long-term strategic and
financial objectives of the Company.
(c) The Plan is intended to provide a means whereby
Participants may be given an opportunity to purchase shares of Stock of the
Company pursuant to (i) options which may qualify as ISOs under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), or
(ii) NSOs which may not so qualify.
(d) The term "Affiliates" as used in this Plan means, in
the case of an ISO, parent or subsidiary corporations, as defined in Section
424(e) and (f) of the Code (but substituting "the Company" for "employer
corporation"), including parents or subsidiaries which become such after
adoption of the Plan, and in all other cases, any entity which is controlled by
or which controls the Company.
2. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Compensation
Committee of the Board of Directors (the "Board") or such other committee
appointed by the Board to administer the Plan (the "Committee") or the Board
acting as a whole.
(b) The Committee or the Board may from time to time
determine which Participants (each an "option holder") shall be granted options
under the Plan, the terms thereof (including without limitation determining
whether the option is an ISO and the times at which the options shall become
exercisable), and the number of shares of Common Stock for which an option or
options may be granted.
1
<PAGE>
(c) If rights of the Company to repurchase Stock are
imposed, the Board or the Committee may, in its sole discretion, accelerate, in
whole or in part, the time for lapsing of any rights of the Company to
repurchase shares of such Stock or forfeiture restrictions.
(d) If rights of the Company to repurchase Stock are
imposed, the certificates evidencing such shares of Stock awarded hereunder,
although issued in the name of the option holder concerned, shall be held by the
Company or a third party designated by the Committee in escrow subject to
delivery to the option holder or to the Company at such times and in such
amounts as shall be directed by the Board under the terms of this Plan. Share
certificates representing Stock which is subject to repurchase rights shall have
imprinted or typed thereon a legend or legends summarizing or referring to the
repurchase rights.
(e) The Board or the Committee shall have the sole
authority, in its absolute discretion, to adopt, amend and rescind such rules
and regulations, consistent with the provisions of the Plan, as, in its
opinion, may be advisable in the administration of the Plan, to construe and
interpret the Plan, the rules and regulations, and the instruments evidencing
options granted under the Plan and to make all other determinations deemed
necessary or advisable for the administration of the Plan. All decisions,
determinations and interpretations of the Committee shall be binding on all
option holders under the Plan.
3. STOCK SUBJECT TO THE PLAN.
(a) "Stock" shall mean the Common Stock of the Company or
such stock as may be changed as contemplated by Section 3(c) below. Stock shall
include shares drawn from either the Company's authorized but unissued shares of
Common Stock or from reacquired shares of Common Stock, including without
limitation shares repurchased by the Company in the open market.
(b) Options may be granted under the Plan from time to time
to eligible persons to purchase an aggregate of up to 1,000,000 shares of Stock.
Stock options awarded pursuant to the Plan which are forfeited, terminated,
surrendered or canceled for any reason prior to exercise shall again become
available for grants under the Plan (including any option canceled in accordance
with the cancellation regrant provisions of Section 6(f) herein).
(c) If there shall be any change in the Stock subject to
the Plan, including Stock subject to any option granted hereunder, through
merger, consolidation, recapitalization, reorganization, reincorporation, stock
split, reverse stock split, stock dividend, combination or reclassification of
the Company's Stock or other similar events, an appropriate adjustment shall be
made by the Committee in the number of shares and/or the option price with
respect to any unexercised shares of Stock. Consistent with the
2
<PAGE>
foregoing, in the event that the outstanding Stock is changed into another class
or series of capital stock of the Company, outstanding options to purchase Stock
granted under the Plan shall become options to purchase such other class or
series and the provisions of this Section 3(c) shall apply to such new class or
series.
(d) The Company may grant options under the Plan in
substitution for options held by employees of another company who become
employees of the Company as a result of merger or consolidation. The Company may
direct that substitute options be granted on such terms and conditions as deemed
appropriate by the Board or the Committee.
(e) The aggregate number of shares of Stock approved by the
Plan may not be exceeded without amending the Plan and obtaining shareholder
approval within twelve months of such amendment.
4. ELIGIBILITY.
Persons who shall be eligible to receive stock options granted under
the Plan shall be those Participants referred to in Section 1(b) above;
provided, however, that (i) ISOs may only be granted to employees of the Company
and its Affiliates and (ii) any person holding capital stock possessing more
than 10% of the total combined voting power of all classes of capital stock of
the Company or any Affiliate shall not be eligible to receive ISOs unless the
exercise price per share of Stock is at least 110% of the fair market value of
the Stock on the date the option is granted.
5. EXERCISE PRICE FOR OPTIONS GRANTED UNDER THE PLAN.
(a) All ISOs will have option exercise prices per option
share equal to the fair market value of a share of the Stock on the date the
option is granted, except that in the case of ISOs granted to any person
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any Affiliate the price shall be not less than 110%
of such fair market value. The option exercise prices per option for NSO's shall
be as determined by the Committee. The price of ISOs or NSOs granted under the
Plan shall be subject to adjustment to the extent provided in Section 3(c)
above.
(b) The fair market value on the date of grant shall be
determined based upon the closing price on an exchange on that day or, if the
Stock is not listed on an exchange, on the average of the closing bid and asked
prices in the Over the Counter Market on that day.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) Each option granted pursuant to the Plan shall be
evidenced
3
<PAGE>
by a written stock option agreement (the "Option Agreement") executed by the
Company and the person to whom such option is granted. The Option Agreement
shall designate whether the option is an ISO or an NSO.
(b) The term of each ISO and NSO shall be no more than 10
years, except that the term of each ISO issued to any person possessing more
than 10% of the voting power of all classes of stock of the Company or any
Affiliate shall be no more than 5 years.
(c) In the case of ISOs, the aggregate fair market value
(determined as of the time such option is granted) of the Stock to which ISOs
are exercisable for the first time by any individual during any calendar year
(under this Plan and any other plans of the Company or its Affiliates if any)
shall not exceed the amount specified in Section 422(d) of the Internal Revenue
Code, or any successor provision in effect at the time an ISO becomes
exercisable.
(d) The Option Agreement may contain such other terms,
provisions and conditions regarding vesting, repurchase or other similar
provisions as may be determined by the Committee and not inconsistent with this
Plan. If an option, or any part thereof, is intended to qualify as an ISO, the
Option Agreement shall contain those terms and conditions which the Committee
determines are necessary to so qualify under Section 422 of the Internal Revenue
Code.
(e) The Committee shall have full power and authority to
extend the period of time for which any option granted under the 1998 Option
Plan is to remain exercisable following the option holder's cessation of service
as an employee or consultant, including without limitation cessation as a result
of death or disability; provided, however, that in no event shall such option be
exercisable after the specified expiration date of the option term.
(f) The Committee shall have full power and authority to
effect at any time and from time to time, with the consent of the affected
option holders, the cancellation of any or all outstanding options under the
Plan and to grant in substitution new options under the Plan covering the same
or different numbers of shares of Stock with the same or different exercise
prices.
(g) As a condition to option grants under the Plan, the
option holder agrees to grant the Company the repurchase rights as the Company
may at its option require and as may be set forth in the Option Agreement or a
separate repurchase agreement.
(h) Any option granted under the Plan may be subject to a
vesting schedule as provided in the Option Agreement and, except as provided in
this Section 6 herein, only the vested portion of such option may be exercised
at any time
4
<PAGE>
during the Option Period. All rights to exercise any option shall lapse and be
of no further effect whatsoever immediately if the option holder's service as an
employee is terminated for "Cause" (as hereinafter defined) or if the option
holder voluntarily terminates the option holder's service as an employee. The
unvested portion of the option will lapse and be of no further effect
immediately upon any termination of employment of the option holder for any
reason. In the remaining cases where the option holder's service as an employee
is terminated or due to death, permanent disability, or is terminated by the
Company (or its Affiliates) without Cause at any time, the vested portion of the
option will extend for a period of three (3) months following the termination of
employment and shall lapse and be of no further force or effect whatsoever only
if it is not exercised before the end of such three (3) month period. There
shall be "Cause" for termination as set forth in any applicable employment or
consulting agreement or, in the absence of such agreement if (i) the option
holder is convicted of a felony, (ii) the option holder engages in any
fraudulent or other dishonest act to the detriment of the Company, (iii) the
option holder fails to report for work on a regular basis, except for periods of
authorized absence or bona fide illness, (iv) the option holder misappropriates
trade secrets, customer lists or other proprietary information belonging to the
Company for the option holder's own benefit or for the benefit of a competitor,
(v) the option holder engages in any willful misconduct designed to harm the
Company or its shareholders, or (vi) the option holder fails to perform properly
assigned duties with a failure to cure after 20 days notice.
(i) No fractional shares of Stock shall be issued under the
Plan, whether by initial grants or any adjustments to the Plan.
7. USE OF PROCEEDS.
Cash proceeds realized from the sale of Stock under the Plan shall
constitute general funds of the Company.
8. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board may at any time suspend or terminate the
Plan, and may amend it from time to time in such respects as the Board may deem
advisable provided that (i) such amendment, suspension or termination complies
with all applicable state and federal requirements and requirements of any stock
exchange on which the Stock is then listed, including any applicable requirement
that the Plan or an amendment to the Plan be approved by the shareholders. The
Plan shall terminate on the earlier of (i) ten (10) years from February 6, 1998
or (ii) the date on which no additional shares of stock are available for
issuance under the Plan.
(b) No option may be granted during any suspension or after
the termination of the Plan, and no amendment, suspension or termination of the
Plan shall, without the option holder's consent, alter or impair any rights or
obligations under any option granted under the Plan.
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(c) The Committee, with the consent of affected option
holders, shall have the authority to cancel any or all outstanding options under
the Plan and grant new options having an exercise price which may be higher or
lower than the exercise price of canceled options.
9. ASSIGNABILITY OF OPTIONS AND RIGHTS.
(a) Subject to Subparagraph (b), no Option issued under the
Plan shall be assignable or transferable by an option holder other than by will
or the laws of descent and distribution. An Option awarded to an option holder
during such option holder's lifetime shall be exercisable only by an option
holder or his or her guardian or legal representative.
(b) Notwithstanding Subparagraph (a), in the case of an
NSO, an option holder shall be permitted to transfer the Option to the option
holder's spouse, adult lineal descendants, adult spouses of adult lineal
descendants and trusts for the benefit of the option holder's minor or adult
lineal descendants (a "Related Transferee") if the Option Agreement under which
the Option is granted so specifies. If the Option is transferred to a Related
Transferee pursuant to the preceding sentence, the Related Transferee shall,
upon exercise of the Option, hold the Stock subject to all the provisions of the
transferor's Option Agreement in the same manner as the transferor and shall
execute and deliver to the Company such instruments as the Company shall require
to evidence the same.
10. PAYMENT UPON EXERCISE.
Payment of the purchase price upon exercise of any option or right to
purchase Stock granted under this Plan shall be made by giving the Company
written notice of such exercise, specifying the number of such shares of Stock
as to which the option is exercised. Such notice shall be accompanied by payment
of an amount equal to the Option Price of such shares of Stock. Such payment may
be (i) cash, (ii) by check drawn against sufficient funds, (iii) by delivery to
the Company of the option holder's promissory note, (iv) such other
consideration as the Committee, in its sole discretion, determines and is
consistent with the Plan's purpose and applicable law, or (v) any combination of
the foregoing. Any Stock used to exercise options to purchase Stock (including
Stock withheld upon the exercise of an option to pay the purchase price of the
shares of Stock as to which the option is exercised) shall be valued in
accordance with procedures established by the Committee. Any promissory note
used to exercise options to purchase Stock shall be a full recourse, interest-
bearing obligation secured by Stock in the Company being purchased and
containing such terms as the Committee shall determine. If a promissory note is
used to exercise options the option holder agrees to execute such further
documents as the Company may deem necessary or appropriate in connection with
issuing the promissory note, perfecting a security interest in the stock
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purchased with the promissory note and any related terms the Company may
propose. Such further documents may include, without limitation, a security
agreement and an assignment separate from certificate. If accepted by the
Committee in its discretion, such consideration also may be paid through a
broker-dealer sale and remittance procedure pursuant to which the option holder
(I) shall provide irrevocable written instructions to a designated brokerage
firm to effect the immediate sale of the purchased Stock and remit to the
Company, out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate option price payable for the purchased Stock plus
all applicable Federal and State income and employment taxes required to be
withheld by the Company in connection with such purchase and (II) shall provide
written directives to the Company to deliver the certificates for the purchased
Stock directly to such brokerage firm in order to complete the sale transaction.
11. WITHHOLDING TAXES.
(a) Shares of Stock issued hereunder shall be delivered to
an option holder only upon payment by such person to the Company of the amount
of any withholding tax required by applicable federal, state, local or foreign
law. The Company shall not be required to issue any Stock to an option holder
until such obligations are satisfied.
(b) The Committee may, under such terms and conditions as
it deems appropriate, authorize an option holder to satisfy withholding tax
obligations under this Section 11 by surrendering a portion of any Stock
previously issued to the option holder or by electing to have the Company
withhold shares of Stock from the Stock to be issued to the option holder, in
each case having a fair market value equal to the amount of the withholding tax
required to be withheld.
12. CORPORATE TRANSACTIONS.
(a) For the purpose of this Section 12, a "Corporate
Transaction" shall include any of the following shareholder-approved
transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is
not the surviving entity, except for a transaction the principal purpose of
which is to change the State of the Company's incorporation; or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or dissolution of
the Company.
(b) Upon the occurrence of a Corporate Transaction, if the
surviving corporation or the purchaser, as the case may be, does not assume the
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obligations of the Company under the Plan, then irrespective of the vesting
provisions contained in individual option agreements, all outstanding options
shall become immediately exercisable in full and each option holder will be
afforded an opportunity to exercise their options prior to the consummation of
the merger or sale transaction so that they can participate on a pro rata basis
in the transaction based upon the number of shares of Stock purchased by them on
exercise of options if they so desire. To the extent that the Plan is unaffected
and assumed by the successor corporation or its parent company a Corporate
Transaction will have no effect on outstanding options and the options shall
continue in effect according to their terms.
(c) Each outstanding option under this Plan which is
assumed in connection with the Corporate Transaction or is otherwise to continue
in effect shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply and pertain to the number and class of securities which
would have been issued to the option holder in connection with the consummation
of such Corporate Transaction had such person exercised the option immediately
prior to such Corporate Transaction. Appropriate adjustments shall also be made
to the option price payable per share, provided the aggregate option price
payable for such securities shall remain the same. In addition, the class and
number of securities available for issuance under this Plan following the
consummation of the Corporate Transaction shall be appropriately adjusted.
(d) The grant of options under this Plan shall in no way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
13. LOANS OR GUARANTEE OF LOANS.
(a) The Committee may, in its discretion, assist any option
holder in the exercise of options granted under this Plan, including the
satisfaction of any income and employment tax obligations arising therefrom by
(i) authorizing the extension of a loan from the Company to such option holder,
(ii) permitting the option holder to pay the exercise price for the Stock in
installments over a period of years or (iii) authorizing a guarantee by the
Company of a third party loan to the option holder. The terms of any loan,
installment method of payment or guarantee (including the interest rate and
terms of repayment) will be upon such terms as the Committee specifies in the
applicable option or issuance agreement or otherwise deems appropriate under the
circumstances. Loans, installment payments and guarantees may be granted with or
without security or collateral (other than to option holders who are not
employees, in which event the loan must be adequately secured by collateral
other than the purchased Stock). However, the maximum credit available to the
option holder may not exceed the exercise or purchase price of the acquired
shares of Stock plus any Federal and State income and employment tax liability
incurred by the option holder in connection with the acquisition of such shares
of Stock.
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(b) The Committee may, in its absolute discretion,
determine that one or more loans extended under this financial assistance
program shall be subject to forgiveness by the Company in whole or in part upon
such terms and conditions as the Committee may deem appropriate.
14. REGULATORY APPROVALS.
The obligation of the Company with respect to Stock issued under the
Plan shall be subject to all applicable laws, rules and regulations and such
approvals by any governmental agencies or stock exchanges as may be required.
The Company reserves the right to restrict, in whole or in part, the delivery of
Stock under the Plan until such time as any legal requirements or regulations
have been met relating to the issuance of Stock, to their registration or
qualification under the Securities Exchange Act of 1934, if applicable, or any
applicable state securities laws, or to their listing on any stock exchange at
which time such listing may be applicable.
15. NO EMPLOYMENT/SERVICE RIGHTS.
Neither the action of the Company in establishing this Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of this
Plan shall be construed so as to grant any individual the right to remain in the
employ or service of the Company (or any parent, subsidiary or affiliated
corporation) for any period of specific duration, and the Company (or any
parent, subsidiary or affiliated corporation retaining the services of such
individual) may terminate or change the terms of such individual's employment or
service at any time and for any reason, with or without cause.
16. MISCELLANEOUS PROVISIONS.
(a) The provisions of this Plan shall be governed by the
laws of the State of California, as such laws are applied to contracts entered
into and performed in such State, without regard to its rules concerning
conflicts of law.
(b) The provisions of this Plan shall inure to the benefit
of, and be binding upon, the Company and its successors or assigns, whether by
Corporate Transaction or otherwise, and the option holders, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.
(c) The option holders shall have no dividend rights,
voting rights or any other rights as a shareholder with respect to any options
under the Plan prior to the issuance of a stock certificate for such Stock.
(d) With respect to grants to non-U.S. residents, options
may be granted hereunder which may vary from the terms of the Plan but which are
consistent
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with the purposes thereof to the extent necessary or appropriate to comply with
foreign laws including but not limited to tax laws.
10
<PAGE>
SERVICES AGREEMENT
This SERVICES AGREEMENT ("Agreement") is made as of January 1, 1999 by and
between YOU BET INTERNATIONAL, INC., a Delaware corporation (the "Company"), and
DAVID MARSHALL, INC., a California corporation ("DMI").
WHEREAS, the Company desires to retain the services of David Marshall
("Marshall") and DMI desires to make such services available.
In consideration of the mutual covenants and agreements herein set forth,
the parties hereto agree as follows:
1. ENGAGEMENT AND ACCEPTANCE; TERM. DMI hereby agrees to make available
to the Company the services of Marshall for a term commencing on the date hereof
and terminating on June 24, 2003 (the "Term").
2. DUTIES.
A. SERVICES. During the Term, Marshall shall serve as Vice Chairman
of the Board, President and Chief Operating Officer and shall have
responsibilities normally commensurate with such positions. In addition, until
the company retains a Chief Executive Officer, Marshall shall serve with Robert
Fell and Russell Fine in staffing the Office of the Chief Executive. Marshall
shall report to the Chairman of the Board of Company. With respect to matters
under the purview of the Chief Executive Officer of Company, Marshall shall
report to the Chief Executive Officer, or, if applicable, coordinate all efforts
with the other two individuals with whom Marshall will serve in staffing the
Office of Chief Executive.
3. COMPENSATION.
A. FEES. The Company shall, during the continuance of this
Agreement, pay to DMI, and DMI agrees to accept, in consideration of making
Marshall's services available to the Company the sum of (i) $150,000 per each
twelve-month period during the Term (the "Base Fee") and (ii) the amount of
payroll and other taxes that the Company would be required to pay if Marshall
were employed by the Company at a salary equal to the Base Fee. The Base Fee
shall be payable in semi-monthly installments. If the base salary of any
employee of Company, other than the base salary of the Chief Executive Officer
of Company (not including the base salary of Robert M. Fell while he is the
Chief Executive Officer of the Company), ever exceeds the Base Fee, the Base Fee
shall automatically increase to the rate of such higher salary.
B. BASE FEE ADJUSTMENT. The Base Fee shall be reviewed annually by
the Board of Directors (the "Board"), and the Board in its sole discretion may
increase (but not decrease) the Base Fee; provided, the Base Fee shall be
adjusted upward (but not downward) annually on
<PAGE>
each anniversary of the date hereof for changes in the Consumer Price Index
("CPI") governing the statistical area in which Los Angeles, California is
located for purposes of calculating the CPI.
C. INCENTIVE COMPENSATION. DMI and Marshall shall be entitled to
receive annual bonuses or other incentive compensation at the discretion of the
Board. If any employee of Company, other than the Chief Executive Officer of
Company, receives a bonus (not including a bonus granted for extraordinary
contributions, not associated with a day-to-day services as determined by the
Board with the approval of Robert Fell, Russell Fine and Marshall), DMI or
Marshall shall immediately be given a bonus no less favorable. Any Common Stock
of the Company delivered to DMI or Marshall as a bonus or incentive compensation
shall be registered on Form S-8 if the Company shall be eligible to use such
form.
D. ADDITIONAL BENEFITS. During the Term, the Company shall provide
Marshall (or reimburse DMI to the extent it provides Marshall) the following
benefits:
(i) a monthly automobile allowance in the amount of $750;
(ii) reimbursement of all business-related operating expenses of
Marshall's automobile, including without limitation, registration, gas, oil and
repairs;
(iii) reimbursement of the expenses of an automobile liability
insurance policy on Marshall's automobile, with coverage including Marshall in
the minimum amount of $1,000,000 combined single limit;
(iv) all benefits and perquisites under any and all formal or
informal benefit plans, understandings, arrangements or programs including, but
not limited to, cash bonus and incentive plans, pension and profit sharing
plans, stock or warrant plans, group insurance, hospitalization, medical,
dental, health and accident and disability plans, supplemental health care plans
and plans providing for life insurance coverage (inclusive of insurance related
to accidental death or dismemberment) which are available to the Company's
senior executive officers;
(v) reimbursement of Marshall's cellular phone and long distance
phone expenses for calls related to the business of the Company;
(vi) an annual vacation of twenty (20) days, which need not be
taken in consecutive periods. If Marshall does not take all such vacation time
in any given calendar year, such unused time shall carry forward into the next
calender year; and
(vii) all paid holidays provided by the Company to its senior
executive employees.
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At no time during the term of this Agreement shall Marshall receive benefits
less than those received by any employee of Company, including the Chairman of
the Board of Company (other than the benefits of employment received by the
Chief Executive Officer of Company, not including the benefits received by
Robert M. Fell while he is the Chief Executive Officer of the Company).
Marshall acknowledges that Robert Fell will only devote approximately 70% of his
time to Company. Such time commitment shall not be a benefit for purposes of
this Section. If at any time Marshall receives such lesser benefits of
employment, Marshall's benefits shall automatically increase to the rate of such
higher benefits and/or include such additional benefits.
E. DEDUCTIONS. The Company shall not deduct from the Base Fee or
any other amounts payable to DMI by the Company any social security taxes,
federal, state or municipal taxes or any other charges and deductions which are
required to be made from wages of employees. DMI shall indemnify and hold the
Company harmless from and against any damages or penalties incurred by the
Company by reason of its not withholding such amounts from amounts payable to
DMI hereunder.
4. REIMBURSEMENT OF CERTAIN EXPENSES. The Company shall promptly
reimburse DMI and Marshall for reasonable out-of-pocket expenses incurred in
connection with the Company's business, including, without limitation, travel
expenses, food, lodging while away from home, telephone expenses, and automobile
expenses, subject to such policies as the Company may from time to time
reasonably establish.
5. CERTAIN OTHER PROVISIONS. Marshall shall comply with all policies,
procedures and practices of the Company from time to time in effect.
6. COMPANY LOCATION. During the term of this Agreement, Company shall
provide Marshall with an office located in the Los Angeles metropolitan area
within ten (10) miles of Marshall's principal residence, and Marshall shall be
entitled to perform duties hereunder from Marshall's home to the extent
appropriate; provided, however, Marshall agrees to undertake reasonable travel
which is necessary in order for Marshal to perform Marshall's duties hereunder.
7. DIRECTORS AND OFFICERS LIABILITY INSURANCE COVERAGE. During the term
of this Agreement, and for twenty-four (24) months thereafter, Company shall, to
the extent commercially reasonably available, maintain in effect a directors and
officers liability insurance policy with a minimum coverage amount of Five
Million dollars ($5,000,000) or, if after exercising its best efforts Company
cannot obtain such minimum coverage amount of Five Million dollars ($5,000,000),
whatever maximum coverage is commercially reasonably available.
8. REGISTRATION RIGHTS. DMI and Marshall shall be entitled to
registration rights in accordance with the terms of that certain Registration
Rights Agreement between Marshall and Company dated as of June 29, 1998. In
addition, any trusts or other entities formed by Marshall for estate planning
purposes shall be entitled to similar registration rights.
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9. CONFIDENTIAL INFORMATION. DMI and Marshall shall not during the Term
or at any time thereafter (i) disclose to any person not employed by the Company
or person, firm or corporation engaged to render services to the Company except
during the Term for the benefit of the Company, or (ii) use for the benefit of
either of them, or others, any confidential information of the Company obtained
by DMI or Marshall prior to the date hereof, during the Term or any time
thereafter, including, without limitation, "know-how," trade secrets, details of
supplier's, manufacturer's or distributor's contracts, 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 the Company PROVIDED HOWEVER, that this provision shall not
preclude DMI or Marshall from (x) upon advice of counsel and after reasonable
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 9 by or on behalf of DMI or Marshall).
10. TERMINATION.
A. TERMINATION EVENTS. This Agreement may be terminated prior to
the expiration of the Term in accordance with the following:
(a) DEATH. This Agreement shall terminate upon Marshall's
death.
(b) DISABILITY. If, as a result of Marshall's incapacity due to
physical or mental illness, Marshall shall have been unable to perform the
duties, functions and responsibilities required hereunder for ninety (90)
consecutive days or shorter periods aggregating to one hundred twenty (120) days
in any twelve (12) months, the Company may terminate this Agreement. During any
period that Marshall fails to perform his duties hereunder as a result of
incapacity or due to physical or mental illness, he shall continue to receive
full compensation and other benefits called for hereunder until such time as
this Agreement is terminated pursuant to this Section 10.A.(b) hereof.
(c) CAUSE. This Agreement shall be subject to termination by the
Board for cause, which for purposes of this Agreement shall mean a termination
on the grounds of (i) a breach by DMI or Marshall of any material term of this
Agreement, which breach shall not have been cured within thirty (30) days after
receipt by DMI of written notice thereof from the Board, (ii) the reasonable
belief by the Board, after conducting an appropriate investigation, of the
commission by DMI or Marshall of any act of fraud, theft or criminal dishonesty
or (iii) the conviction of DMI or Marshall of any felony. For purposes of this
Agreement, this Agreement shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to DMI a copy of a resolution,
duly adopted by the affirmative vote of a majority of the entire membership of
the Board at a meeting called and held for this purpose after reasonable notice
to DMI and an opportunity for it, together with its counsel, to be heard by the
Board,
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<PAGE>
finding that, in the good faith opinion f the Board, DMI or Marshall is guilty
of misconduct of the type described in this Section 10.A.(c) hereof and
specifying the particulars thereof in detail.
(d) NOTICE BY MARSHALL. This Agreement may be terminated by
Marshall and/or DMI upon thirty (30) days written notice.
(e) NOTICE BY COMPANY. This Agreement may be terminated at any
time by Company upon thirty (30) days written notice; provided, however, that
during a period of physical or mental illness as described in Section 10.A.(c)
hereof, Company shall not utilize this Section 10.A. (e) to terminate Marshall.
(f) CONSTRUCTIVE TERMINATION. This Agreement may be terminated by
Marshall and/or DMI immediately upon written notice to Company if Marshall has
been "constructively terminated" by Company. For the purposes of this Agreement,
"constructively terminated" shall mean any action by Company which results in a
material diminution in Marshall's then position (including status, titles and
reporting requirements), authority, duties or responsibilities, but excluding,
for this purpose, an isolated, insubstantially and inadvertent action not taken
in bad faith and which is remedied by Company promptly after receipt of notice
from Marshall.
B. COMPENSATION AND BENEFITS PAYABLE BY COMPANY UPON TERMINATION.
Compensation and benefits shall be payable by Company upon a termination of this
Agreement in accordance with the following:
(a) In the event of termination of this Agreement under Section
10.A.(a) hereof, DMI shall continue to receive the compensation and benefits
specified in Section 3 hereof, to the extent applicable, for a period of twelve
(12) months, notwithstanding such termination.
(b) In the event of a termination of this Agreement under Section
10.A.(b), Marshall or his duly appointed personal representatives, shall
continue to receive the compensation and benefits specified in Section 3 herein,
to the extent applicable, for a period of twelve (12) months, notwithstanding
such termination; PROVIDED THAT such amounts shall be reduced by any disability
insurance payments received by DMI or Marshall from insurance purchased by the
Company.
(c) In the event of a termination of this Agreement under Section
10.A.(c), Company's obligation to provide the compensation and benefits
specified in Section 3 herein shall terminate as of the effective date of such
termination.
(d) In the event of a termination of this Agreement under Section
10.A(d):
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<PAGE>
(i) prior to December 31, 1999, Company's obligation to
provide the compensation and benefits specified in Section 3 shall end on
the effective date of such termination; or
(ii) on or after December 31, 1999, Company's obligation
to provide the compensation and benefits specified in Section 3 shall
continue for the lesser of (x) two (2) years from the effective date of
such termination, or (y) the balance of the then remaining term of this
Agreement, but in no event for less than one (1) year.
(e) In the event of a termination of this Agreement under
Section 10.A(e) or (f), Company's obligation to provide the compensation and
benefits specified in Section 3 for the then remaining term of this Agreement
shall be paid to DMI in semi-monthly installments commencing within fifteen (15)
days following the effective date of such termination; provided, however, that
in no event shall such compensation and benefits be for less than one (1) year.
C. NO DUTY TO MITIGATE. In the event Marshall's services to Company are
terminated for any reason, neither DMI nor Marshall shall have any duty, either
express or implied, to mitigate any damages hereunder and Company shall remain
liable for all compensation (whether fees, bonus or other benefits) provided for
under the terms of this Agreement. Any compensation earned by Marshall in any
capacity after the date of such termination shall not reduce or mitigate the
amounts payable by Company hereunder.
D. DUTIES OF MARSHALL AFTER ANY TERMINATION OF THE EMPLOYMENT. Following
any termination of the Employment, DMI and Marshall shall fully cooperate with
Company in all matters relating to the winding up of the Marshall's work on
behalf of Company and the orderly transfer of any such pending work and of
Marshall' duties and responsibilities for Company to such other person or
persons as may be designated by Company in its sole discretion.
E. COOPERATION AFTER TERMINATION OF AGREEMENT. Following termination of
this Agreement, regardless of the reason for such termination, DMI and Marshall
shall cooperate with the Company in the prosecution of any claims,
controversies, suits, arbitrations or proceedings involving events occurring
prior to the termination of this Agreement. DMI and Marshall acknowledge that
Marshall may be required to give testimony at trial or deposition or give
declarations. If Marshall shall be required to spend a material amount of time,
the Company shall compensate DMI at a per diem rate equal to the per diem amount
of the Base Fee in effect at the time of the termination. The Company shall use
its best efforts to provide Marshall with reasonable prior notice of any actions
required of him.
11. INDEMNIFICATION. Company shall indemnify and hold Marshall and DMI
harmless from any liability due to the negligence, error, or omission in the
transaction of any general business by an executive, officer, or director of
Company other than Marshall. Company shall keep that certain Indemnification
Agreement between Marshall and Company dated as of January 1, 1998 in effect.
The Company shall provide DMI with substantially similar indemnification.
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<PAGE>
12. COPYRIGHTS AND INVENTIONS. Marshall and DMI acknowledge that Marshall
is obligated under that certain Employee Confidential Information and
Inventions Agreement dated May 26, 1996, which agreement shall be incorporated
herein by reference.
13. NON COMPETE. DMI and Marshall, during the Term and for a period of
twenty-four (24) months thereafter, shall not solicit or entice any employee of
the Company to leave the Company to work for anyone in competition with the
Company. During the Term and for a period of twenty-four (24) months
thereafter, within any county or similar political subdivision of the United
States or any other country in which the Company, or any divisions, subdivisions
or affiliated companies of the Company, has conducted business during the past
two (2) years or conducts business during the Term, DMI and Marshall shall not,
directly or indirectly, whether as a partner, owner, employee, creditor,
shareholder, or otherwise, promote, participate, or engage, directly or
indirectly, in the development and sale of proprietary, interactive software
which will provide individual computer users with race handicapping or other
sports oddsmaking information or, the ability to place bets on horse racing and
other sports contests, as well as recreational games and contests related to
such information. DMI and Marshall shall not be prohibited from investing in
any competitive company, so long as (i) the stock of such company is publicly
traded, (ii) the aggregate ownership by DMI and Marshall is less than two
percent (2%) of the outstanding stock of such company, (iii) such stock is held
for investment purposes, and (iv) DMI and Marshall do not participate or engage,
directly or indirectly, in the business of such competitor, as an employee,
consultant, spokesperson or otherwise.
14. ASSIGNABILITY. This Agreement and the rights and obligations of the
parties hereunder may not be assigned by either party without the prior written
consent of the other party.
15. ARBITRATION. Any dispute, controversy or claim arising out of, or
relating to this Agreement, shall be settled by binding and final arbitration in
the County of Los Angeles, State of California, under the commercial arbitration
rules of the American Arbitration Association then existing and judgment on the
arbitration award may be entered in any court having jurisdiction of the subject
matter over the controversy.
16. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of California applicable to contracts
executed in and to be performed solely within the State of California.
17. ABILITY TO FULFILL OBLIGATIONS. Neither the Company, DMI nor Marshall
is a party to or bound by any agreement which would be violated by the terms of
this Agreement.
18. NOTICE. Any notice required or permitted to be given hereunder shall
be given in writing and may be given by telex, telegram, facsimile transmission
or similar method if confirmed by mail as herein provided and addressed as
follows:
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<PAGE>
To the Company: You Bet International, Inc.
1950 Sawtelle Boulevard
Suite 180
Los Angeles, California 90025
Attention: Robert M. Fell
Fax: (310) 444-3310
If to DMI: David Marshall, Inc.
c/o You Bet International, Inc.
1950 Sawtelle Boulevard
Suite 180
Los Angeles, California 90025
Attention: David Marshall
Fax: (310) 444-3310
by mail if sent postage prepaid by registered mail, return receipt requested; or
by hand delivery to any party at the address of the party first above set forth.
If notice, direction or instruction is given by telex, telegram or facsimile
transmission or similar method or by hand delivery, it shall be deemed to have
been given or made on the day on which it was given, and if mailed, shall be
deemed to have been given or made on the third business day following the day
after which it was mailed. Any party may, from time to time, by like notice give
notice of any change of address and in such event, the address of such party
shall be deemed to be changed accordingly.
19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings including that certain Employment Agreement dated June 24, 1998
between the Company and Marshall. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof or in effect among the
parties. No custom or trade usage, nor course of conduct among the parties,
shall be relied upon to vary the terms hereof. This Agreement may not be
amended, and no provision hereof shall be waived, except by a writing signed by
all of the parties to this agreement which states that it is intended to amend
or waive a provision of this Agreement. Any waiver of any rights or failure to
act in a specific instance shall relate only to such instance and shall not be
construed as an agreement to waiver any rights or fail to act in any other
instance, whether or not similar.
20. SEVERABILITY. Should any provision of this Agreement be unenforceable
or prohibited by any applicable law, this Agreement shall be considered
divisible as to such provision which shall be inoperative, and the remainder of
this Agreement shall be valid and binding as though such provision were not
included herein and shall be construed in such a manner to maximize its validity
and enforceability.
-8-
<PAGE>
21. EMPLOYMENT/INDEPENDENT CONTRACTORS RELATIONSHIP. Any reference in
this Agreement to the employment by the Company shall also be deemed to include
any independent contractor relationship which may exist.
22. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original.
23. HEADINGS. All headings in this Agreement are for convenience only and
will not affect the meaning of any provision hereof.
24. SURVIVAL OF CERTAIN PROVISIONS. The provisions of Sections 3, 4, 8,
9, 10, 11, 12, 13, 15, 16 and 25 shall, to the extent applicable, continue in
full force and effect notwithstanding the expiration or earlier termination of
this Agreement or of Marshall's services hereunder in accordance with the terms
of this Agreement.
25. ATTORNEYS' FEES. Except as otherwise provided herein, in the event of
arbitration with respect to the subject mater of this Agreement, the prevailing
party shall be entitled to all of its costs and expenses, including the
reasonable attorneys' fees and costs, incurred in resolving or settling the
dispute. These costs and expenses shall be in addition to any other damages to
which the prevailing party may be entitled.
26. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall inure to the benefit of, and be binding upon, the Company and
any corporation with which the Company merges or consolidates, and upon DMI and
the Marshall and his executors, administrators, heirs and legal representatives.
-9-
<PAGE>
IN WITNESS WHEREOF, Marshall on behalf of DMI has executed this Agreement
and the Company has caused this Agreement to be executed by a duly authorized
officer as of the day and year first above written.
YOU BET INTERNATIONAL, INC., a Delaware
corporation
By: /s/ [ILLEGIBLE]
--------------------------------------
Name:
------------------------------------
Title:
-------------------------------------
DAVID MARSHALL, INC., a California corporation
By: /s/ David Marshall
------------------------------
Name: David Marshall
Title: President
The undersigned hereby agrees to (i) provide DMI the services required of
DMI hereunder, and (ii) comply with the provisions in the foregoing Services
Agreement which are applicable to me personally.
/s/ David Marshall
-----------------------------------------
David Marshall
-10-
<PAGE>
SERVICES AGREEMENT
This SERVICES AGREEMENT ("Agreement") is made as of June 29, 1998 by and
between YOU BET INTERNATIONAL, INC., a Delaware corporation (the "Company"), and
FELL & COMPANY, INC., a California corporation ("FCI").
WHEREAS, the Company desires to retain the services of Robert M. Fell
("Fell") and FCI desires to make such services available.
In consideration of the mutual covenants and agreements herein set forth,
the parties hereto agree as follows:
1. ENGAGEMENT AND ACCEPTANCE; TERM. FCI hereby agrees to make available
to the Company the services of Fell for a term commencing on the date hereof and
continuing for a period of three (3) years (the "Term").
2. DUTIES.
A. SERVICES. During the Term, Fell shall serve as Chairman of the
Board of the Company and shall, subject to the provisions of this Agreement,
perform such duties and responsibilities as shall be assigned to Fell by the
Board of Directors. In addition, subject to Section 2.C hereof, until such time
as the Company shall employ a Chief Executive Officer, Fell shall also serve as
interim Chief Executive Officer.
B. TIME COMMITMENT. Fell shall devote approximately 70% of his
business time, labor, skill and energy to the business and affairs of the
Company and to the duties and responsibilities set forth herein. The parties
acknowledge that Fell's services will be provided on a non-exclusive basis,
PROVIDED THAT Fell shall not engage in any activities which are competitive with
the business of the Company. In addition, for so long as Fell shall serve as
Chief Executive Officer, Fell shall not engage in any new projects. SCHEDULE
2.B. hereto sets forth a list of Fell's current activities. SCHEDULE 2.B. may
be supplemented by Fell from time to time with the approval of the Company.
C. SELECTION OF CHIEF EXECUTIVE OFFICER; OFFICE OF THE CHIEF
EXECUTIVE. At any time after the date hereof, Fell may, or at the request of
the Board of Directors Fell shall, select a person to become Chief Executive
Officer. Any such selection shall be subject to the approval of (i) either
David Marshall and Russell Fine (such approval not to be unreasonably withheld),
and (ii) the Board of Directors; PROVIDED THAT if neither Marshall nor Fine
approve of Fell's first two selections of a person to serve as Chief Executive
Officer, then neither Marshall nor Fine shall have any further right to approve
or disapprove persons selected to be Chief Executive Officer with respect to the
then open position (other than in their capacity as directors). In the event
that the Company does not enter into an employment agreement with a new Chief
Executive Officer
<PAGE>
within six months of the date hereof or new aChief Executive Officer does not
commence employment within eight months from the date hereof, then until such
new Chief Executive Officer commences employment, the position of Chief
Executive Officer shall become the Office of the Chief Executive, which shall be
staffed by Fell, Marshall and Fine.
3. COMPENSATION.
A. FEES. The Company shall, during the continuance of this
Agreement, pay to FCI, and FCI agrees to accept, in consideration of making
Fell's services available to the Company the sum of (i) $150,000 per each
twelve-month period during the Term and (ii) the amount of payroll and other
taxes that the Company would be required to pay if Fell were employed by the
Company at a salary equal to the amount payable under clause (i) of this Section
3.A. (the "Base Fee"). The Base Fee shall be payable in semi-monthly
installments. The amount set forth in clause (i) of this Section 3.A. shall be
adjusted upward (but not downward) annually on each anniversary of the date
hereof for changes in the Consumer Price Index ("CPI") governing the statistical
area in which Los Angeles, California is located for purposes of calculating the
CPI.
B. INCENTIVE COMPENSATION. FCI and Fell shall be entitled to
receive annual bonuses or other incentive compensation at the discretion of the
Board based upon the contributions made by FCI and Fell to the development of
the Company. Any Common Stock of the Company delivered to FCI or Fell as a
bonus or incentive compensation shall be registered on Form S-8 if the Company
shall be eligible to use such form.
C. STAFF. The Company shall provide Fell with such secretarial and
other administrative support as he may reasonably require in connection with the
performance of the duties to be performed by him.
D. ADDITIONAL BENEFITS. During the Term, the Company shall provide
Fell (or reimburse FCI to the extent it provides Fell) the following benefits:
(i) a monthly automobile allowance in the amount of $750;
(ii) reimbursement of all business-related operating expenses of
Fell's automobile, including without limitation, registration, gas, oil and
repairs;
(iii) reimbursement of the expenses of an automobile liability
insurance policy on Fell's automobile, with coverage including Fell in the
minimum amount of $1,000,000 combined single limit;
(iv) all benefits and perquisites under any and all formal or
informal benefit plans, understandings, arrangements or programs including, but
not limited to, cash bonus and incentive plans, pension and profit sharing
plans, stock or warrant plans, group insurance,
-2-
<PAGE>
hospitalization, medical, dental, health and accident and disability plans,
supplemental health care plans and plans providing for life insurance coverage
(inclusive of insurance related to accidental death or dismemberment) which are
available to the Company's senior executive officers;
(v) reimbursement of Fell's cellular phone and long distance
phone expenses for calls related to the business of the Company;
(vi) an annual vacation of twenty (20) days, which need not be
taken in consecutive periods. If Fell does not take all such vacation time in
any given calendar year, such unused time shall carry forward into the next
calender year; and
(vii) all paid holidays provided by the Company to its senior
executive employees.
E. DEDUCTIONS. The Company shall not deduct from the Base Fee or
any other amounts payable to FCI by the Company any social security taxes,
federal, state or municipal taxes or any other charges and deductions which are
required to be made from wages of employees. FCI shall indemnify and hold the
Company harmless from and against any damages or penalties incurred by the
Company by reason of its not withholding such amounts from amounts payable to
FCI hereunder.
4. REIMBURSEMENT OF CERTAIN EXPENSES. The Company shall promptly
reimburse FCI and Fell for reasonable out-of-pocket expenses incurred in
connection with the Company's business, including, without limitation, travel
expenses, food, lodging while away form home, telephone expenses, and automobile
expenses, subject to such policies as the Company may from time to time
reasonably establish.
5. CERTAIN OTHER PROVISIONS. Fell shall comply with all policies,
procedures and practices of the Company from time to time in effect.
6. CONFIDENTIAL INFORMATION. FCI and Fell shall not during the Term or
at any time thereafter (i) disclose to any person not employed by the Company or
person, firm or corporation engaged to render services to the Company except
during the Term for the benefit of the Company, or (ii) use for the benefit of
either of them, or others, any confidential information of the Company obtained
by FCI or Fell prior to the date hereof, during the Term or any time thereafter,
including, without limitation, "know-how," trade secrets, details of supplier's,
manufacturer's or distributor's contracts, 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 the
Company PROVIDED HOWEVER, that this provision shall not preclude FCI or Fell
from (x) upon advice of counsel and after reasonable notice to the Company,
making any disclosure required by any applicable law, or (y) using or disclosing
information known generally
-3-
<PAGE>
to the public (other than information known generally to the public as a result
of any violation of this Section 6 by or on behalf of FCI or Fell).
7. TERMINATION.
A. TERMINATION EVENTS. This Agreement may be terminated prior to
the expiration of the Term in accordance with the following:
(a) DEATH. This Agreement shall terminate upon Fell's death.
(b) DISABILITY. If, as a result of Fell's incapacity due to
physical or mental illness, Fell shall have been unable to perform the duties,
functions and responsibilities required hereunder for ninety (90) consecutive
days or shorter periods aggregating to one hundred twenty (120) days in any
twelve (12) months, the Company may terminate this Agreement. During any period
that Fell fails to perform his duties hereunder as a result of incapacity or due
to physical or mental illness, he shall continue to receive full compensation
and other benefits called for hereunder until such time as this Agreement is
terminated pursuant to this Section 7.A.(b) hereof.
(c) CAUSE. This Agreement shall be subject to termination by the
Board of Directors of the Company (the "Board") for cause, which for purposes of
this Agreement shall mean a termination on the grounds of (i) a breach by FCI or
Fell of any material term of this Agreement, which breach shall not have been
cured within thirty (30) days after receipt by FCI of written notice thereof
from the Board, (ii) the reasonable belief by the Board, after conducting an
appropriate investigation, of the commission by FCI or Fell of any act of fraud,
theft or criminal dishonesty or (iii) the conviction of FCI or Fell of any
felony. For purposes of this Agreement, this Agreement shall not be deemed to
have been terminated for cause unless and until there shall have been delivered
to FCI a copy of a resolution, duly adopted by the affirmative vote of a
majority of the entire membership of the Board at a meeting called and held for
this purpose after reasonable notice to FCI and an opportunity for it, together
with its counsel, to be heard by the Board, finding that, in the good faith
opinion f the Board, FCI or Fell is guilty of misconduct of the type described
in this Section 7.A.(c) hereof and specifying the particulars thereof in detail.
B. COMPENSATION AND BENEFITS PAYABLE BY COMPANY UPON TERMINATION.
Compensation and benefits shall be payable by Company upon a termination of this
Agreement in accordance with the following:
(a) In the event of termination of this Agreement under Section
7.A.(a) hereof, FCI shall continue to receive the compensation and benefits
specified in Sections 3.A. and 3.D. hereof, to the extent applicable, for a
period of twelve (12) months, notwithstanding such termination.
(b) In the event of a termination of this Agreement under
Section 7.A.(b), Fell or his duly appointed personal representatives, shall
continue to receive the compensation and
-4-
<PAGE>
benefits specified in Sections 3.A. and 3.B. herein, to the extent applicable,
for a period of twelve (12) months, notwithstanding such termination; PROVIDED
THAT such amounts shall be reduced by any disability insurance payments received
by FCI or Fell from insurance purchased by the Company.
C. COOPERATION AFTER TERMINATION OF AGREEMENT. Following
termination of this Agreement, regardless of the reason for such termination,
FCI and Fell shall cooperate with the Company in the prosecution of any claims,
controversies, suits, arbitrations or proceedings involving events occurring
prior to the termination of this Agreement. FCI and Fell acknowledge that Fell
may be required to give testimony at trial or deposition or give declarations.
If Fell shall be required to spend a material amount of time, the Company shall
compensate FCI at a per diem rate equal to the per diem amount of the Base Fee
in effect at the time of the termination. The Company shall use its best
efforts to provide Fell with reasonable prior notice of any actions required of
him.
8. SEVERANCE. In the event that upon the expiration of the Term the
Company shall not renew this Agreement (and provided that FCI is willing to do
so), the Company shall, within ten days of the expiration of the Term, pay FCI
an amount equal to the Base Fee payable to FCI in the 12 months immediately
preceding the expiration of the Term.
9. NON COMPETE.
A. The Company, FCI and Fell acknowledge that this Services
Agreement is being entered into in furtherance of the transactions contemplated
by that certain Stock Purchase Agreement dated June 29, 1998, among the Company
and the other parties thereto. FCI and Fell, during the Term and for a period
of twenty-four (24) months thereafter, shall not solicit or entice any employee
of the Company to leave the Company to work for anyone in competition with the
Company. During the Term and for a period of twenty-four (24) months
thereafter, within any county or similar political subdivision of the United
States or any other country in which the Company, or any divisions, subdivisions
or affiliated companies of the Company, has conducted business during the past
two (2) years or conducts business during the Term, FCI and Fell shall not,
directly or indirectly, whether as a partner, owner, employee, creditor,
shareholder, or otherwise, promote, participate, or engage, directly or
indirectly, in the development and sale of proprietary, interactive software
which will provide individual computer users with race handicapping or other
sports oddsmaking information or, the ability to place bets on horse racing and
other sports contests, as well as recreational games and contests related to
such information. FCI and Fell shall not be prohibited from investing in any
competitive company, so long as (i) the stock of such company is publicly
traded, (ii) the aggregate ownership by FCI and Fell is less than two percent
(2%) of the outstanding stock of such company, (iii) such stock is held for
investment purposes, and (iv) FCI and Fell do not participate or engage,
directly or indirectly, in the business of such competitor, as an employee,
consultant, spokesperson or otherwise.
-5-
<PAGE>
10. ASSIGNABILITY. This Agreement and the rights and obligations of the
parties hereunder may not be assigned by either party without the prior written
consent of the other party.
11. ARBITRATION. Any dispute, controversy or claim arising out of, or
relating to this Agreement, shall be settled by binding and final arbitration in
the County of Los Angeles, State of California, under the commercial arbitration
rules of the American Arbitration Association then existing and judgment on the
arbitration award may be entered in any court having jurisdiction of the subject
matter over the controversy.
12. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of California applicable to contracts
executed in and to be performed solely within the State of California.
13. ABILITY TO FULFILL OBLIGATIONS. Neither the Company, FCI nor the Fell
is a party to or bound by any agreement which would be violated by the terms of
this Agreement.
14. NOTICE. Any notice required or permitted to be given hereunder shall
be given in writing and may be given by telex, telegram, facsimile transmission
or similar method if confirmed by mail as herein provided and addressed as
follows:
To the Company: You Bet International, Inc.
1950 Sawtelle Boulevard
Suite 180
Los Angeles, California 90025
Attention: David Marshall
Fax: (310) 444-3310
If to FCI: Fell & Company, Inc.
10550 Wilshire Boulevard
Suite 1105
Los Angeles, California
Attention: Robert M. Fell
Fax: (310) 475-3480
by mail if sent postage prepaid by registered mail, return receipt requested; or
by hand delivery to any party at the address of the party first above set forth.
If notice, direction or instruction is given by telex, telegram or facsimile
transmission or similar method or by hand delivery, it shall be deemed to have
been given or made on the day on which it was given, and if mailed, shall be
deemed to have been given or made on the third business day following the day
after which it was mailed. Any party may, from time to time, by like notice give
notice of any change of address and in such event, the address of such party
shall be deemed to be changed accordingly.
-6-
<PAGE>
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings, including that certain Memorandum of Understanding dated as of
April 1, 1998 between the Company and FCI. There are no oral promises,
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof or in effect among the
parties. No custom or trade usage, nor course of conduct among the parties,
shall be relied upon to vary the terms hereof. This Agreement may not be
amended, and no provision hereof shall be waived, except by a writing signed by
all of the parties to this agreement which states that it is intended to amend
or waive a provision of this Agreement. Any waiver of any rights or failure to
act in a specific instance shall relate only to such instance and shall not be
construed as an agreement to waiver any rights or fail to act in any other
instance, whether or not similar.
16. SEVERABILITY. Should any provision of this Agreement be unenforceable
or prohibited by any applicable law, this Agreement shall be considered
divisible as to such provision which shall be inoperative, and the remainder of
this Agreement shall be valid and binding as though such provision were not
included herein and shall be construed in such a manner to maximize its validity
and enforceability.
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original.
18. HEADINGS. All headings in this Agreement are for convenience only and
will not affect the meaning of any provision hereof.
19. SURVIVAL OF CERTAIN PROVISIONS. The provisions of Sections 3, 4, 6,
7, 8, 9, 11, 12 and 20 shall, to the extent applicable, continue in full force
and effect notwithstanding the expiration or earlier termination of this
Agreement or of Fell's services hereunder in accordance with the terms of this
Agreement.
20. ATTORNEYS' FEES. Except as otherwise provided herein, in the event of
arbitration with respect to the subject mater of this Agreement, the prevailing
party shall be entitled to all of its costs and expenses, including the
reasonable attorneys' fees and costs, incurred in resolving or settling the
dispute. These costs and expenses shall be in addition to any other damages to
which the prevailing party may be entitled.
21. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall inure to the benefit of, and be binding upon, the Company and
any corporation with which the Company merges or consolidates, and upon FCI and
the Executive and his executors, administrators, heirs and legal
representatives.
-7-
<PAGE>
IN WITNESS WHEREOF, the Executive has executed this Agreement and the
Company has caused this Agreement to be executed by a duly authorized officer as
of the day and year first above written.
YOU BET INTERNATIONAL, INC., a Delaware
Corporation
By: [ILLEGIBLE]
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
FELL & COMPANY, INC.
By: /s/ Robert M. Fell
-----------------------------------------------
Name: Robert M. Fell
Title: President
The undersigned hereby agrees to (i) provide FCI the services required of
FCI hereunder, and (ii) comply with the provisions in the foregoing Services
Agreement which are applicable to me personally.
/s/ Robert M. Fell
--------------------------------------------------
Robert M. Fell
-8-
<PAGE>
SCHEDULE 2.B.
PERMITTED FELL ACTIVITIES
1. Fell & Company, Inc.
2. Fell & Nicholson Technology Resources
3. Brad Marks International
4. Silicon Gaming, Inc.
5. Colony Capital/Colony Advisors
6. Lucky Brands, Inc.
<PAGE>
AMENDED AND RESTATED SERVICES AGREEMENT
This RESTATED AND AMENDED SERVICES AGREEMENT ("Agreement") is made
effective as of March 1, 1999 by and between YOUBET.COM, INC., a Delaware
corporation formerly known as You Bet International, Inc. (the "Company"), and
FELL & COMPANY, INC., a California corporation ("FCI").
WHEREAS, the Company and FCI entered into a Services Agreement dated as of
June 29, 1998 (the "Services Agreement") pursuant to which, among other things,
the Company retained the services of Robert M. Fell ("Fell").
WHEREAS, the Company and Fell desire to amend and restate the Services
Agreement.
In consideration of the mutual covenants and agreements set forth herein
and other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. ENGAGEMENT AND ACCEPTANCE; TERM. FCI hereby agrees to make available
to the Company the services of Fell for a term commencing on June 29, 1998 and
continuing through and including June 30, 2001 (the "Term").
2. DUTIES.
A. SERVICES. During the Term, Fell shall serve as Chairman of the
Board of the Company and shall, subject to the provisions of this Agreement,
perform such duties and responsibilities as shall be assigned to Fell by the
Board of Directors. In addition, subject to Section 2C hereof, until such time
as the Company shall employ a Chief Executive Officer other than Fell, Fell
shall also serve as Chief Executive Officer.
B. TIME COMMITMENT. During such time as Fell is serving as Chief
Executive Officer, Fell shall devote 100% of his business time, labor, skill and
energy to the business and affairs of the Company and to the duties and
responsibilities set forth herein. At all other such times Fell shall devote
approximately 70% of his business time, labor, skill and energy to the business
and affairs of the Company and to the duties and responsibilities set forth
herein. The parties acknowledge that except during the time Fell is serving as
Chief Executive Officer, Fell's services will be provided on a non-exclusive
basis, PROVIDED THAT Fell shall not engage in any activities which are
competitive with the business of the Company. In addition, as long as Fell
shall serve as Chief Executive Officer, Fell shall not engage in any new
projects. SCHEDULE 2.B. hereto sets forth a list of Fell's current activities.
SCHEDULE 2.B. may be supplemented by Fell from time to time with the approval of
the Company.
<PAGE>
C. SELECTION OF CHIEF EXECUTIVE OFFICER. At any time after the date
hereof, Fell may, or at the request of the Board of Directors, Fell shall select
a person to become Chief Executive Officer. Any such selection shall be subject
to the approval of (i) either David Marshall and Russell Fine (such approval not
to be unreasonably withheld), and (ii) the Board of Directors; PROVIDED THAT if
neither Marshall nor Fine approve of Fell's first two selections of a person to
serve as Chief Executive Officer, then neither Marshall nor Fine shall have any
further right to approve or disapprove persons selected to be Chief Executive
Officer with respect to the then open position (other than in their capacity as
directors). In the event that the Company enters into an employment agreement
with a new Chief Executive Officer Fell shall continue his services for the
remainder of the Term as Chairman of the Board.
3. COMPENSATION.
A. FEES. The Company shall, during the continuance of this
Agreement, pay to FCI, and FCI agrees to accept, in consideration of making
Fell's services available to the Company the compensation determined at the rate
of (i) $225,000 per annum during the Term and (ii) the amount of payroll and
other taxes that the Company would be required to pay if Fell were employed by
the Company at a salary equal to the amount payable under clause (i) of this
Section 3.A. (the "Base Fee"); provided that the rate of compensation set forth
in clause (i) of this Section 3.A shall be reduced to $150,000 per annum at such
time as Fell shall cease to serve as Chief Executive Officer and shall, for the
period from June 29, 1998 through February 28, 1999, inclusive be at the rate of
$150,000 per annum. The Base Fee shall be payable in semi-monthly installments.
The amount set forth in clause (i) of this Section 3.A. shall be adjusted
upward (but not downward) annually on each June 30, for changes during the prior
twelve months in the Consumer Price Index ("CPI") governing the statistical area
in which Los Angeles, California is located for purposes of calculating the CPI.
B. INCENTIVE COMPENSATION. FCI and Fell shall be entitled to
receive annual bonuses or other incentive compensation at the discretion of the
Board based upon the contributions made by FCI and Fell to the development of
the Company. Any Common Stock of the Company delivered to FCI or Fell as a
bonus or incentive compensation shall be registered on Form S-8 if the Company
shall be eligible to use such form.
C. STAFF. The Company shall provide Fell with such secretarial and
other administrative support as he may reasonably require in connection with the
performance of the duties to be performed by him.
D. ADDITIONAL BENEFITS. During the Term, the Company shall provide
Fell (or reimburse FCI to the extent it provides Fell) the following benefits:
(i) a monthly automobile allowance in the amount of $750;
-2-
<PAGE>
(ii) reimbursement of all business-related operating expenses of
Fell's automobile, including without limitation, registration, gas, oil and
repairs;
(iii) reimbursement of the expenses of an automobile liability
insurance policy on Fell's automobile, with coverage including Fell in the
minimum amount of $1,000,000 combined single limit;
(iv) all benefits and perquisites under any and all formal or
informal benefit plans, understandings, arrangements or programs including, but
not limited to, cash bonus and incentive plans, pension and profit sharing
plans, stock or warrant plans, group insurance, hospitalization, medical,
dental, health and accident and disability plans, supplemental health care plans
and plans providing for life insurance coverage (inclusive of insurance related
to accidental death or dismemberment) which are available to the Company's
senior executive officers;
(v) reimbursement of Fell's cellular phone and long distance
phone expenses for calls related to the business of the Company;
(vi) an annual vacation of twenty (20) days, which need not be
taken in consecutive periods. If Fell does not take all such vacation time in
any given calendar year, such unused time shall carry forward into the next
calender year; and
(vii) all paid holidays provided by the Company to its senior
executive employees.
E. DEDUCTIONS. The Company shall not deduct from the Base Fee or
any other amounts payable to FCI by the Company any social security taxes,
federal, state or municipal taxes or any other charges and deductions which are
required to be made from wages of employees. FCI shall indemnify and hold the
Company and its officers, directors, employees and agents harmless from and
against any damages or penalties incurred by the Company by reason of its not
withholding such amounts from amounts payable to FCI hereunder.
4. REIMBURSEMENT OF CERTAIN EXPENSES. The Company shall promptly
reimburse FCI and Fell for reasonable out-of-pocket expenses incurred in
connection with the Company's business, including, without limitation, travel
expenses, food, lodging while away from home, telephone expenses, and automobile
expenses, subject to such policies as the Company may from time to time
reasonably establish.
5. CERTAIN OTHER PROVISIONS. Fell shall comply with all policies,
procedures and practices of the Company from time to time in effect.
-3-
<PAGE>
6. CONFIDENTIAL INFORMATION. FCI and Fell shall not during the Term or
at any time thereafter (i) disclose to any person not employed by the Company or
person, firm or corporation engaged to render services to the Company except
during the Term for the benefit of the Company, or (ii) use for the benefit of
either of them, or others, any confidential information of the Company obtained
by FCI or Fell prior to the date hereof, during the Term or any time thereafter,
including, without limitation, "know-how," trade secrets, details of supplier's,
manufacturer's or distributor's contracts, 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 the
Company PROVIDED HOWEVER, that this provision shall not preclude FCI or Fell
from (x) upon advice of counsel and after reasonable 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 6 by or on
behalf of FCI or Fell).
7. TERMINATION.
A. TERMINATION EVENTS. This Agreement may be terminated prior to
the expiration of the Term in accordance with the following:
(a) DEATH. This Agreement shall terminate upon Fell's death.
(b) DISABILITY. If, as a result of Fell's incapacity due to
physical or mental illness, Fell shall have been unable to perform the duties,
functions and responsibilities required hereunder for ninety (90) consecutive
days or shorter periods aggregating to one hundred twenty (120) days in any
twelve (12) months, the Company may terminate this Agreement. During any period
that Fell fails to perform his duties hereunder as a result of incapacity or due
to physical or mental illness, he shall continue to receive full compensation
and other benefits called for hereunder until such time as this Agreement is
terminated pursuant to this Section 7.A.(b) hereof.
(c) CAUSE. This Agreement shall be subject to termination by the
Board of Directors of the Company (the "Board") for cause, which for purposes of
this Agreement shall mean a termination on the grounds of (i) a breach by FCI or
Fell of any material term of this Agreement, which breach shall not have been
cured within thirty (30) days after receipt by FCI of written notice thereof
from the Board, (ii) the reasonable belief by the Board, after conducting an
appropriate investigation, of the commission by FCI or Fell of any act of fraud,
theft or criminal dishonesty or (iii) the conviction of FCI or Fell of any
felony. For purposes of this Agreement, this Agreement shall not be deemed to
have been terminated for cause unless and until there shall have been delivered
to FCI a copy of a resolution, duly adopted by the affirmative vote of a
majority of the entire membership of the Board at a meeting called and held for
this purpose after reasonable notice to FCI and an opportunity for it, together
with its counsel, to be heard by the Board, finding that, in the good faith
opinion of the Board, FCI or Fell is
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<PAGE>
guilty of misconduct of the type described in this Section 7.A.(c) hereof and
specifying the particulars thereof in detail.
B. COMPENSATION AND BENEFITS PAYABLE BY COMPANY UPON TERMINATION.
Compensation and benefits shall be payable by Company upon a termination of this
Agreement in accordance with the following:
(a) In the event of termination of this Agreement under Section
7.A.(a) hereof, FCI shall continue to receive the compensation and benefits
specified in Sections 3.A. and 3.D. hereof, to the extent applicable, for a
period of twelve (12) months, notwithstanding such termination.
(b) In the event of a termination of this Agreement under
Section 7.A.(b), Fell or his duly appointed personal representatives, shall
continue to receive the compensation and benefits specified in Sections 3.A. and
3.B. herein, to the extent applicable, for a period of twelve (12) months,
notwithstanding such termination; PROVIDED THAT such amounts shall be reduced by
any disability insurance payments received by FCI or Fell from insurance
purchased by the Company.
(c) In the event of a termination of this Agreement under
Section 7.A.(C) hereof, FCI shall receive all compensation and benefits
specified in Section 3.A. and 3.D. hereof through the date of termination.
C. COOPERATION AFTER TERMINATION OF AGREEMENT. Following
termination of this Agreement, regardless of the reason for such termination,
FCI and Fell shall cooperate with the Company in the prosecution of any claims,
controversies, suits, arbitrations or proceedings involving events occurring
prior to the termination of this Agreement. FCI and Fell acknowledge that Fell
may be required to give testimony at trial or deposition or give declarations.
If Fell shall be required to spend a material amount of time, the Company shall
compensate FCI at a per diem rate equal to the per diem amount of the Base Fee
in effect at the time of the termination. The Company shall use its best
efforts to provide Fell with reasonable prior notice of any actions required of
him.
8. SEVERANCE. In the event that upon the expiration of the Term the
Company shall not renew this Agreement (and provided that FCI is willing to do
so), the Company shall, within ten days of the expiration of the Term, pay FCI
an amount equal to the Base Fee payable to FCI in the 12 months immediately
preceding the expiration of the Term.
9. NON COMPETE.
a. The Company, FCI and Fell acknowledge that this Services
Agreement is being entered into in furtherance of the transactions contemplated
by that certain Stock Purchase
-5-
<PAGE>
Agreement dated June 29, 1998, among the Company and the other parties thereto.
FCI and Fell, during the Term and for a period of twenty-four (24) months
thereafter, shall not solicit or entice any employee of the Company to leave the
Company to work for anyone in competition with the Company. During the Term and
for a period of twenty-four (24) months thereafter, within any county or similar
political subdivision of the United States or any other country in which the
Company, or any divisions, subdivisions or affiliated companies of the Company,
has conducted business during the past two (2) years or conducts business during
the Term, FCI and Fell shall not, directly or indirectly, whether as a partner,
owner, employee, creditor, shareholder, or otherwise, promote, participate, or
engage, directly or indirectly, in the development and sale of proprietary,
interactive software which will provide individual computer users with race
handicapping or other sports oddsmaking information or, the ability to place
bets on horse racing and other sports contests, as well as recreational games
and contests related to such information. FCI and Fell shall not be prohibited
from investing in any competitive company, so long as (i) the stock of such
company is publicly traded, (ii) the aggregate ownership by FCI and Fell is less
than two percent (2%) of the outstanding stock of such company, (iii) such stock
is held for investment purposes, and (iv) FCI and Fell do not participate or
engage, directly or indirectly, in the business of such competitor, as an
employee, consultant, spokesperson or otherwise.
10. ASSIGNABILITY. This Agreement and the rights and obligations of the
parties hereunder may not be assigned by either party without the prior written
consent of the other party.
11. ARBITRATION. Any dispute, controversy or claim arising out of, or
relating to this Agreement, shall be settled by binding and final arbitration in
the County of Los Angeles, State of California, under the commercial arbitration
rules of the American Arbitration Association then existing and judgment on the
arbitration award may be entered in any court having jurisdiction of the subject
matter over the controversy.
12. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of California applicable to contracts
executed in and to be performed solely within the State of California.
13. ABILITY TO FULFILL OBLIGATIONS. Neither the Company, FCI nor the Fell
is a party to or bound by any agreement which would be violated by the terms of
this Agreement.
14. NOTICE. Any notice required or permitted to be given hereunder shall
be given in writing and may be given by telex, telegram, facsimile transmission
or similar method if confirmed by mail as herein provided and addressed as
follows:
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<PAGE>
To the Company: Youbet.com, Inc.
1950 Sawtelle Boulevard
Suite 180
Los Angeles, California 90025
Attention: David Marshall
Fax: (310) 444-3310
If to FCI: Fell & Company, Inc.
10550 Wilshire Boulevard
Suite 1105
Los Angeles, California
Attention: Robert M. Fell
Fax: (310) 475-3480
by mail if sent postage prepaid by registered mail, return receipt requested; or
by hand delivery to any party at the address of the party first above set forth.
If notice, direction or instruction is given by telex, telegram or facsimile
transmission or similar method or by hand delivery, it shall be deemed to have
been given or made on the day on which it was given, and if mailed, shall be
deemed to have been given or made on the third business day following the day
after which it was mailed. Any party may, from time to time, by like notice give
notice of any change of address and in such event, the address of such party
shall be deemed to be changed accordingly.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes any
and all prior or contemporaneous oral and prior written agreements and
understandings, including that certain Memorandum of Understanding dated as of
April 1, 1998 between the Company and FCI and, effective as of the date hereof,
that certain Services Agreement dated as of June 29, 1998 between the Company
and FCI. There are no oral promises, conditions, representations,
understandings, interpretations or terms of any kind as conditions or
inducements to the execution hereof or in effect among the parties. No custom
or trade usage, nor course of conduct among the parties, shall be relied upon to
vary the terms hereof. This Agreement may not be amended, and no provision
hereof shall be waived, except by a writing signed by all of the parties to this
agreement which states that it is intended to amend or waive a provision of
this Agreement. Any waiver of any rights or failure to act in a specific
instance shall relate only to such instance and shall not be construed as an
agreement to waiver any rights or fail to act in any other instance, whether or
not similar.
16. SEVERABILITY. Should any provision of this Agreement be unenforceable
or prohibited by any applicable law, this Agreement shall be considered
divisible as to such provision which shall be inoperative, and the remainder of
this Agreement shall be valid and binding as though such provision were not
included herein and shall be construed in such a manner to maximize its validity
and enforceability.
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<PAGE>
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original.
18. HEADINGS. All headings in this Agreement are for convenience only and
will not affect the meaning of any provision hereof.
19. SURVIVAL OF CERTAIN PROVISIONS. The provisions of Sections 3, 4, 6,
7, 8, 9, 11, 12 and 20 shall, to the extent applicable, continue in full force
and effect notwithstanding the expiration or earlier termination of this
Agreement or of Fell's services hereunder in accordance with the terms of this
Agreement.
20. ATTORNEYS' FEES. Except as otherwise provided herein, in the event of
arbitration with respect to the subject mater of this Agreement, the prevailing
party shall be entitled to all of its costs and expenses, including the
reasonable attorneys' fees and costs, incurred in resolving or settling the
dispute. These costs and expenses shall be in addition to any other damages to
which the prevailing party may be entitled.
21. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall inure to the benefit of, and be binding upon, the Company and
any corporation with which the Company merges or consolidates, and upon FCI and
the Executive and his executors, administrators, heirs and legal
representatives.
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<PAGE>
IN WITNESS WHEREOF, the Executive has executed this Agreement and the
Company has caused this Agreement to be executed by a duly authorized officer as
of the day and year first above written.
YOUBET.COM, INC., a Delaware Corporation
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
FELL & COMPANY, INC.
By:/s/ Robert M. Fell
-----------------------------------------------
Name: Robert M. Fell
Title: President
The undersigned hereby agrees to (i) provide FCI the services required of
FCI hereunder, and (ii) comply with the provisions in the foregoing Services
Agreement which are applicable to me personally.
/s/ Robert. M. Fell
-------------------------------------------------
Robert M. Fell
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective May
1, 1998 by and between You Bet, Inc. a Delaware corporation ("the Company") and
Ron Luniewski ("Executive"), in connection with the Company's engagement of
Executive for personal services.
1. EMPLOYMENT; DUTIES AND ACCEPTANCE:
(a) EMPOYMENT BY COMPANY.
The Company hereby engages Executive, and Executive hereby agrees to
provide his services as President and Chief Operating officer of the Company
(Executive)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.
(b) LOCATION OF EMPLOYMENT:
Executive shall render his services at the Company's offices at 1950
Sawtelle Blvd, Los Angeles, CA 90025; 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 be for a period of
one (1) year commencing as of May 1, 1998 and ending on April 30, 1999 (the
"Term") unless sooner terminated pursuant to Section 7 hereof. After the
contract term the employment will be 'at will', and as such Employee or Employer
may terminate obligations under this Agreement by giving 30 days prior written
notice.
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 $130,000 per annum. However, upon the
Company raising an additional $5,000,000 in new funding, the Executive's Annual
Salary shall increase thereafter to $150,000. The Annual Salary shall be less
such deductions as shall be required to be withheld by applicable law and
regulations and shall be
<PAGE>
pro-rated for any period that does not constitute a full twelve (12) month
period.
(b) BONUS:
A. 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. The Company shall define
and commit to a cash bonus in accordance with a
target award schedule for Executive by the
November 1998 Board of Directors meeting. In the
event the Company fails to define and commit to a
cash bonus program the Executive shall have the
right but not the obligation to consider such
event to be a termination without cause of this
agreement, provided the Executive provides the
Company 30 days written notice of intent to
consider lack of a bonus program termination and
the Company has the ability to cure the problem
within the 30 days.
(c) SEVERANCE:
The Executive shall have the right at anytime for any reason to give
thirty (30) days written notice of resignation upon which the Executive shall
receive (2) months of salary, health benefits and vested stock options as of the
date of resignation.
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, and disability plans, 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
2
<PAGE>
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.
Under no circumstances can Executive accrue more vacation than twenty (20) work
days (the "Ceiling"). Thus, once the maximum amount of paid vacation time is
accrued or earned, no further vacation time is accrued or earned until after
vacation is taken and the amount of Executive's accrued vacation time goes below
the Ceiling as stated above. At that point, Executive will start to accrue
vacation time again until Executive reaches the Ceiling.
(c) SICK LEAVE:
Employee shall accrue one-half (1/2) day per calendar month as sick
leave with full pay. Upon termination of this Agreement, Employee shall be paid
for any unused sick leave. Under no circumstances can Executive accrue more Sick
Leave than Ten (10) work days (the "Ceiling" ).
(d) EXPENSES:
Company will reimburse Executive for actual and necessary travel and
accommodation costs, entertainment and other business expenses incurred as a
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.
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
follow:
(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, You Bet International, Inc. 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
3
<PAGE>
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 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.
4
<PAGE>
(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-PENCILLING:
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 Paragraph 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 paragraph 5
5
<PAGE>
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 Paragraph 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) Executive becomes 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.
The existence of Executive's disability for the purposes of this Agreement shall
be determined by a reputable physician selected by Company who is experienced in
the relevant field of medicine. If Executive's services are terminated, as
aforesaid, Executive or the designated beneficiary of Executive, shall be
entitled to receive Executive's base salary, accrued share of the Bonus for that
Fiscal Year and unused vacation (hereinafter collectively referred to as "Fringe
Benefits"), if any, earned through the date of Executive's termination and
continuing thereafter until the end of the Term of this agreement, and an
additional four (4) months. The Company will deduct any disability payments made
to Executive from any insurance source from payments 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 designation of any such beneficiary
may be changed by the Executive 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.
6
<PAGE>
(c) TERMINATION FOR CAUSE:
The Company shall have the option to terminate Executive upon the
occurrence of any of the following:
(i) 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;
(ii) Executive shall have been convicted of a crime involving
moral turpitude; or
(iii) Any of the representations and warranties of Executive
hereunder shall be breached in a material respect.
If Executive's services are terminated as set forth in this subparagraph
(c), Executive's services shall be terminated as of the effective date of
termination and all compensation shall cease as of such effective date.
(d) TERMINATION WITHOUT CAUSE:
If the Executive is terminated without cause the Executive shall be
entitled to receive Executive's base salary, health benefits, accrued share
of the Bonus for that Fiscal Year and unused vacation, if any, earned through
the date of Executive's termination and base salary continuing thereafter
until the end of the Term of this agreement, and an additional four (4)
months.
(e) Executive Stock Options
If the Executive is terminated without cause, the time period the
Executive may hold stock options as defined in the "1995 Employee Option
Agreement" will be changed to a three (3) year holding period and the
Executive's options will vest through the Term of this agreement.
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:
7
<PAGE>
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.
8
<PAGE>
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
law 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.
WHEREFORE, the parties hereto have executed this Agreement as of the day
and year first above written.
/s/ Ron Luniewski
By: --------------------------------------
Ron Luniewski
Agreed to and Accepted:
You Bet!, Inc., a
Delaware Corporation
By: [ILLEGIBLE]
-----------------------
Its: CEO
-----
10
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
February 23, 1999 by and between Youbet.com, Inc., a Delaware corporation
formerly known as You Bet International, Inc. ("the Company") and Ron Luniewski
("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:
(a) EMPLOYMENT BY COMPANY.
The Company hereby engages Executive, and Executive hereby agrees
to service as Executive Vice 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.
(b) LOCATION OF EMPLOYMENT.
Executive shall render his services at the Company's offices at
1950 Sawtelle Blvd., Los Angeles, CA 90025; 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:
(a) The term of Executive's employment hereunder shall commence on
the date hereof and end on April 30, 2000 (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 $150,000 per annum. All Salary shall be less such
deductions as shall be required to
<PAGE>
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 be granted 100,000 options pursuant to the
Company's 1998 Stock Option Plan. The 100,000 options will have an exercise
price of $10.50 per share and shall expire on February 22, 2009. The options
will vest as follows:
February 22, 2000 - 25,000 options
February 22, 2001 - 25,000 options
February 22, 2002 - 25,000 options
February 22, 2003 - 25,000 options
Any unvested options shall-terminate if the Executive ceases to
be employed by the Company, or as provided in the Company's 1998 Stock Option
Plan.
All unvested option 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
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7(c) hereof or (iii) without cause pursuant to Section 7(d) hereof, Executive
shall be entitled to receive an amount equal to two (2) 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. Under no
circumstances can Executive accrue more vacation than twenty (20) work days,
including vacation time accrued prior to the commencement of the Term (the
"Ceiling"). Thus, once the maximum amount of paid vacation time is accrued or
earned, no further vacation time is accrued or earned until after vacation is
taken and the amount of Executive's accrued vacation time goes below the Ceiling
as stated above. At that point, Executive will start to accrue vacation time
again until Executive reaches the Ceiling.
(c) EXPENSES.
Company will reimburse Executive for actual and necessary travel
and accommodation costs, entertainment and other business expenses incurred as a
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.
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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, You Bet!, Inc. 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 ind 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.
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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.
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(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. The determination of whether a Disability exists shall be made by a
reputable physician selected by Company who is experienced in the relevant field
of medicine. 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 designation of any such
beneficiary may be changed by the Executive 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.
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(c) TERMINATION FOR CAUSE.
The Company shall have the option to terminate Executive upon the
occurrence of any of the following:
(i) 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;
(ii) Executive shall have been convicted of a crime involving
moral turpitude; or
(iii) Any of the representations and warranties of Executive
hereunder shall be breached in a material respect.
If Executive's services are terminated as set forth in this
subsection (c), Executive's services shall be terminated as of the 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 until the end of the Term, and for an additional four (4) months
thereafter.
(e) EXECUTIVE STOCK OPTIONS.
If the Executive is terminated without cause by the Company
during the Term, 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.
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<PAGE>
(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 1293.05 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.
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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):
(i) If to Ron Luniewski, to his address at:
---------------------------------------------
---------------------------------------------
Fax (____)--------------------------
Fax (818)-------------------------
(ii) If to Company, to its address at:
Youbet.com, Inc.
1950 Sawtelle Blvd.
Suite 18O
Los Angeles, CA 90025
Attention: Chief Executive Officer
Fax (310) 444-3390
Copy to:
Christensen, Miller, Fink, Jacobs
Glazer, Weil & Shapiro, LP
2121 Avenue of the Stars, 18th Floor
Los Angeles, CA, 90067
Attention: Gary N. Jacobs
Fax (310) 556-2920
(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.
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12. 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, including that certain Employment Agreement dated as of May 1, 1998
between the Company and Executive. 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.
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<PAGE>
WHEREFORE, the parties hereto have executed this Agreement as of the
day and year first above written.
By: /s/ Ron Luniewski
---------------------
Ron Luniewski
Agreed to and Accepted:
Youbet.com, Inc., a
Delaware corporation
By:[ILLEGIBLE]
----------------------
Its:---------------------
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<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective May 1,
1998 by and between You Bet International, Inc. a California corporation ("the
Company") and Phillip Hermann ("Executive"), in connection with the Company's
engagement of Executive for personal services.
1. EMPLOYMENT; DUTIES AND ACCEPTANCE:
(a) EMPLOYMENT BY COMPANY.
The Company hereby engages Executive, and Executive hereby agrees to
service as 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.
(b) LOCATION OF EMPLOYMENT:
Executive shall render his services at the Company's offices at
1950 Sawtelle Blvd, Los Angeles, CA 90025; 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 be for a period of
one (1) year commencing as of May 1, 1998 and ending on April 30, 1999 (the
"Term") unless sooner terminated pursuant to Section 7 hereof.
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 $130,000 per annum. However, upon the Company
raising an additional $5,000,000 in direct funding, the Executive's Annual
Salary shall increase thereafter to $150,000. 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.
<PAGE>
(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 be granted 75,000 options pursuant to the Company's 1995
Stock Option Plan. The 75,000 options will have a strike price of $2.50. The
options will vest as follows:
May 1, 1999 - 18,750 options
May 1, 2000 - 18,750 options
May 1, 2001 - 18,750 options
May 1, 2002 - 18,750 options
Any unvested options shall terminate if the Executive ceases to be employed
by the company, or as provided in the Company's 1995 Stock Option Plan.
All unvested option 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 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 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). Notwithstanding anything herein to the contrary, a change in
control shall not be deemed to have occurred as a result of the private
placement currently being conducted through Fell
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<PAGE>
& Company, Inc.
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, and disability plans, 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. Under no
circumstances can Executive accrue more vacation than twenty (20) work days
(the "Ceiling"). Thus, once the maximum amount of paid vacation time is
accrued or earned, no further vacation time is accrued or earned until after
vacation is taken and the amount of Executive's accrued vacation time goes
below the Ceiling as stated above. At that point, Executive will start to
accrue vacation time again until Executive reaches the Ceiling.
(c) EXPENSES:
Company will reimburse Executive for actual and necessary travel and
accommodation costs, entertainment and other business expenses incurred as a
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.
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
follow:
(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, You Bet!, Inc. or any affiliate of either (the "Protected
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<PAGE>
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.
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<PAGE>
(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 PENCILLING:
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 Paragraph 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
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<PAGE>
that upon Executive's breach of any provision of paragraph 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 Paragraph 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) Executive becomes
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. The existence of Executive's disability for the
purposes of this Agreement shall be determined by a reputable physician
selected by Company who is experienced in the relevant field of medicine. If
Executive's services are terminated, as aforesaid, Executive or the
designated beneficiary of Executive, shall be entitled to receive Executive's
base salary, accrued share of the Bonus for that Fiscal Year and unused
vacation (hereinafter collectively referred to as "Fringe Benefits"), if any,
earned through the date of Executive's termination and continuing thereafter
for an additional period of six (6) months but not extending beyond the
expiration of the Term hereof.
(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 designation of any such
beneficiary may be changed by the Executive 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:
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<PAGE>
The Company shall have the option to terminate Executive upon of the
occurrence of any of the following:
(i) 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;
(ii) Executive shall have been convicted of a crime involving
moral turpitude; or
(iii) Any of the representations and warranties of Executive
hereunder shall be breached in a material respect.
If Executive's services are terminated as set forth in
this subparagraph (c), Executive's services shall be terminated as of the
effective date of termination and all compensation shall cease as of such
effective date.
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.
7
<PAGE>
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):
(i) If to Phillip Hermann, to his address at:
10809 Eton Avenue
Chatsworth, CA 91311
8
<PAGE>
(ii) If to Company, to its address at:
You Bet!, Inc.
1950 Sawtelle Blvd
Suite 180
Los Angeles, CA 90025
Copy to:
David L. Ficksman, Esq.
Loeb & Loeb LLP
1000 Wilshire Blvd., Suite 1800
Los Angeles, CA 90017
(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 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 such
matter. 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
law 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
9
<PAGE>
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: /s/ Phillip Hermann
--------------------------
Phillip Hermann
Agreed to and Accepted:
You Bet International, Inc., a
Delaware Corporation
By /s/ ILLEGIBLE
--------------------------
Its: CHAIRMAN
--------------------------
10
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as
of February 23, 1999 by and between Youbet.com, Inc., a Delaware corporation
formerly known as You Bet International, Inc. ("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:
(a) EMPLOYMENT BY COMPANY.
The Company hereby engages Executive, and Executive hereby
agrees to service as Executive Vice President 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.
(b) LOCATION OF EMPLOYMENT.
Executive shall render his services at the Company's offices
at 1950 Sawtelle Blvd., Los Angeles, CA 90025; 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:
(a) The term of Executive's employment hereunder shall commence
on the date hereof and end on April 30, 2000 (the "Term") unless sooner
terminated pursuant to Section 7 hereof.
3. COMPENSATION AND BENEFITS:
(a) SALARY.
During the Term, Executive shall receive a salary (the
"Annual Salary") at the rate of $150,000 per annum. All Salary shall be less
such deductions as shall be required to
<PAGE>
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 be granted 50,000 options pursuant to the
Company's 1998 Stock Option Plan. The 50,000 options will have an exercise
price of $10.50 per share and expire on February 22, 2009. The options will
vest as follows:
February 22, 2000 - 12,500 options
February 22, 2001 - 12,500 options
February 22, 2002 - 12,500 options
February 22, 2003 - 12,500 options
Any unvested options shall-terminate if the Executive ceases
to be employed by the Company, or as provided in the Company's 1998 Stock Option
Plan.
All unvested option 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).
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<PAGE>
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. Under no
circumstances can Executive accrue more vacation than twenty (20) work days,
including vacation time accrued prior to the commencement of the Term (the
"Ceiling"). Thus, once the maximum amount of paid vacation time is accrued or
earned, no further vacation time is accrued or earned until after vacation is
taken and the amount of Executive's accrued vacation time goes below the Ceiling
as stated above. At that point, Executive will start to accrue vacation time
again until Executive reaches the Ceiling.
(c) EXPENSES.
Company will reimburse Executive for actual and necessary
travel and accommodation costs, entertainment and other business expenses
incurred as a 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.
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<PAGE>
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, You Bet!, Inc. 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.
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<PAGE>
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.
-5-
<PAGE>
(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. The determination of whether a Disability exists
shall be made by a reputable physician selected by Company who is experienced
in the relevant field of medicine. 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 for an
additional period of six (6) months but not extending beyond the expiration
of the Term hereof.
(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 designation of any such
beneficiary may be changed by the Executive 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.
-6-
<PAGE>
(c) TERMINATION FOR CAUSE.
The Company shall have the option to terminate Executive
upon the occurrence of any of the following:
(i) 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;
(ii) Executive shall have been convicted of a crime
involving moral turpitude; or
(iii) Any of the representations and warranties of Executive
hereunder shall be breached in a material respect.
If Executive's services are terminated as set forth in this
subsection (c), Executive's services shall be terminated as of the effective
date of termination and all compensation shall cease as of such effective date.
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.
-7-
<PAGE>
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):
(i) If to Phillip Hermann, to his address at:
10809 Eton Avenue
Chatsworth, CA 91311
Fax (818) ___________
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<PAGE>
(ii) If to Company, to its address at:
Youbet.com, Inc.
1950 Sawtelle Blvd.
Suite 180
Los Angeles, CA 90025
Attention: Chief Executive Officer
Fax (310) 444-3390
Copy to:
Christensen, Miller, Fink, Jacobs
Glaser, Weil & Shapiro, LLP
2121 Avenue of the Stars, 18th Floor
Los Angeles, CA, 90067
Attention: Gary N. Jacobs
Fax (310) 556-2920
(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 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 May 1,
1998 between the Company and Executive. 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.
-9-
<PAGE>
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: /s/ Phillip Hermann
------------------------------
Phillip Hermann
Agreed to and Accepted:
Youbet.com, Inc., a
Delaware corporation
By: [ILLEGIBLE]
--------------------------
Its:
--------------------------
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<PAGE>
[LOGO] ORIGINAL
JOHN M. SWIATEK VICE PRESIDENT
412-937-4410
June 23, 1997
You Bet!, Inc.
1950 Sawtelle Blvd.
Suite 180
Los Angeles, California 90024
RE: Telecommunications Facilitation System Agreement
Gentlemen:
We are this date entering into that certain Telecommunications
Facilitation System Agreement (the "Agreement") between You Bet!, Inc.,
Mountain Laurel Racing, Inc. and Washington Trotting Association, Inc.
Notwithstanding anything contained in the Agreement to the contrary, You
Bet!, Inc. agrees that Mountain Laurel Racing, Inc. and Washington Trotting
Association, Inc. ("Ladbroke") have the right to terminate the Agreement for
a period of thirty (30) days from the date hereof in the event that You Bet!,
Inc. does not enter into an agreement with Bloodstock Research Information
Services, Inc. and Thoroughbred Sports Network which preserves Ladbroke's
existing relationship with them in a manner reasonably acceptable to
Ladbroke. In the event no such agreement is reached, we reserve the right to
terminate the Agreement without recourse or liability.
We both agree to keep this letter agreement confidential. If you are in
agreement with this understanding, please indicate so by signing below, and
returning a fully executed copy of this letter to us.
MOUNTAIN LAUREL WASHINGTON TROTTING
RACING, INC. ASSOCIATION, INC.
By: John M. Swiatek By: John M. Swiatek
-------------------- --------------------
Its: Vice President Its: Vice President
-------------------- --------------------
Intending to be legally bound hereby, accepted
and agreed this 24th day of June 1997.
YOU BET!, INC.
By: Steve A. Molnar
-------------------
Its: CEO
-------------------
LADBROKE RACING CORPORATION
Foster Plaza 9, 750 Holiday Drive, Pittsburgh, Pennsylvania 15220
Phone (412) 937-4410 FAX (412)937-4418
[LOGO] A Ladbroke Group Company
<PAGE>
TELECOMMUNICATIONS FACILITATION SYSTEM AGREEMENT
This TELECOMMUNICATIONS FACILITATION SYSTEM AGREEMENT (this "Agreement") is
entered into as of June 16, 1997, by and between You Bet!, Inc., a Delaware
corporation, the address of which is 1950 Sawtelle Boulevard, Suite 180, Los
Angeles, California 90025 ("You Bet!"), on the one hand, and Mountain Laurel
Racing, Inc., and Washington Trotting Association, Inc., each a Pennsylvania
corporation, the address of which is Post Office Box 499, Racetrack Road,
Meadowlands, Pennsylvania 15347 (collectively, "Ladbroke"), on the other.
WHEREAS, Ladbroke operates horse racing operations within the State of
Pennsylvania; and
WHEREAS, You Bet! is currently developing the System (as defined in Section
1.14), which is an interactive system designed to facilitate the transmission
of wagering information; and
WHEREAS, Ladbroke and You Bet! would like to form a relationship whereby
You Bet! will provide to Ladbroke the service of connecting the System to the
operations of Ladbroke for the purpose of facilitating telecommunications by and
between Ladbroke and its clientele regarding racing products of Ladbroke.
NOW, THEREFORE, the parties to this Agreement hereby agree as follow:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
set forth in this Section 1.
1.1. APPLICATION. The term "Application" shall have the meaning set forth
in Section 7.4.
1.2. APPROVAL. The term "Approval" shall have the meaning set forth in
Section 7.4.
1.3. CLIENT SOFTWARE. The term "Client Software" shall mean that portion
of the System which it is intended will reside on the computers of End Users.
1.4. COMPLIANCE. The term "Compliance" shall mean all matters relating to
the System or Ladbroke (or any subsidiary or affiliate of Ladbroke) governed by
any legislation, statute, statutory instrument, by-law, public or governmental
or statutory or regulatory authority or person, the Ladbroke Group PLC Betting
and Gaming Division Compliance Manual, any directives, guidance and/or advice of
any regulatory or governing authority or body to which Ladbroke (or any
subsidiary or affiliate of Ladbroke) may be subject wheresoever situate, and
shall include, but not be limited to, membership rules and regulations, terms of
admittance, tax or other governmental/statutory/regulatory, reporting and/or
filing, gaming license (personal or corporate), liquor license, business and
other licenses (whether like or unlike the foregoing),
-1-
<PAGE>
conduct of gaming and house rules, banking, cage and gaming reserves, audit and
accounting, credit policies and procedures, security and currency rules and
regulations.
1.5. CONFIDENTIAL INFORMATION. The term "Confidential Information" shall
mean the System and the documentation associated with the System (as the
Confidential Information of You Bet!), and any information or material which:
(i) is proprietary to the disclosing party, or designated as Confidential
Information by the disclosing party and not generally known other than by the
disclosing party; or (ii) the disclosing party obtains from any third party
which the disclosing party treats as proprietary, or designates as Confidential
Information, whether or not owned by the disclosing party. "Confidential
Information" shall not include information which the receiving party can show
is: (i) known by the receiving party at the time of receipt from the disclosing
party and not subject to any other nondisclosure agreement between the parties
to this Agreement; (ii) now, or which hereafter becomes, generally known to the
industry through no fault of the receiving party; (iii) published or generally
disclosed to the public by the disclosing party; (iv) otherwise lawfully and
independently developed by the receiving party; or (v) lawfully acquired by the
receiving party from a third party, which third party is not itself in breach of
any obligation of confidentiality.
1.6. DISQUALIFICATION NOTICE. The term "Disqualification Notice" shall
have the meaning set forth in Section 7.4.
1.7. EFFECTIVE DATE. The term "Effective Date" shall mean the date first
set forth above, which shall be the effective date of this Agreement.
1.8. END USER. The term "End User" shall mean an ultimate end user of the
System who is a client of Ladbroke and You Bet!.
1.9. GAMING AUTHORITY. The term "Gaming Authority" shall have the meaning
set forth in Section 7.1.
1.10. HOST SOFTWARE. The term "Host Software" shall mean that portion of
the System intended to reside on one (1) or more interactive host server
computers owned, operated and access restricted to, You Bet!
1.11. INCLUDES: INCLUDING. Except where followed directly by the word
"only", the terms "includes" and "including" shall mean "includes, but is not
limited to," and "including, but not limited to" respectively, it being the
intention of the parties to this Agreement that any listing following thereafter
is illustrative and not exhaustive.
1.12. ITSP. The term "ITSP" shall mean the Inter Tote Standard Protocol,
which the parties to this Agreement acknowledge is the standard protocol of the
racetrack industry.
1.13. NET COMMISSION. The term "Net Commission" shall mean the so-called
gross commission from the revenue generated to Ladbroke from the wagering
information transmitted to Ladbroke through the System, less: (i) state taxes
paid by Ladbroke on gross commission
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(exclusive of taxes based upon the net income of Ladbroke); (ii) the actual
cost which Ladbroke pays to any racing facility for the simulcast signal
which Ladbroke provides pursuant to Section 3.3; (iii) so-called purses; (iv)
the actual cost which Ladbroke pays for all fees referenced in Section 8.1;
(v) the actual cost which Ladbroke pays for all fees referenced in Section
8.2, but only to the extent that such fees exceed the "not to exceed" amount
specified in Section 8.2; (vi) the actual cost which Ladbroke pays for all
fees and costs referenced in Section 8.3, but only to the extent that such
fees and costs are related to the subject matter of this Agreement (I.E.,
Ladbroke shall not have the right to deduct the cost of its licensing and
government approvals generally); (vii) the actual cost which Ladbroke pays
for all taxes referenced in Section 8.7, not including any tax based upon the
net revenue of Ladbroke, and only to the extent that such taxes are related
to the subject matter of this Agreement.
1.14. SYSTEM. The term "System" shall mean the interactive on-line
information system contemplated by this Agreement, including the Client Software
and the Host Software.
2. INTELLECTUAL PROPERTY RIGHTS
2.1. SYSTEM OWNERSHIP AND LIMITED USE RESTRICTION. Ladbroke hereby
acknowledges that the System constitutes the valuable proprietary, copyrighted
and trade secret property of You Bet!. Accordingly, Ladbroke shall use its best
efforts to restrict access to the System and its components, and use security
procedures and locations which will minimize the risk of theft or unauthorized
copying. Ladbroke shall hold all information regarding the System in confidence,
disclosing information regarding the System only to authorized personnel and
agents of Ladbroke having a need to know such information, and to take all
reasonable precautions to prevent disclosure to other parties. Ladbroke shall
not make, have made or permit to be made any copies of the System and/or its
components. This Agreement does not grant to Ladbroke any rights to patents,
copyrights, trade secrets, trade names, trademarks (whether registered or
unregistered), or any other rights, franchises or licenses in respect of the
System. Title to and ownership of the System and its components, any
reproductions thereof and/or any documentation associated therewith shall remain
with You Bet!. Ladbroke shall not adapt or use any trademark or trade name
which is likely to be similar to or confusing with that of You Bet!, or take any
other action which might impair or reduce the trademark rights of You Bet! or
its affiliates.
2.2. NO RIGHT TO REPRODUCE OR REVERSE ENGINEER SYSTEM. Nothing in this
Agreement shall be construed as giving Ladbroke any right to, and Ladbroke shall
not, and shall not permit or assist any third party to: (i) manufacture or
otherwise make copies of the System, including the Client Software and the Host
Software, or the documentation associated therewith; (ii) reverse engineer all
or any part of the System, including the Client Software and the Host Software,
or the Confidential Information of You Bet!, or otherwise attempt to discover
any of the Confidential Information of You Bet!; or (iii) transfer, give away,
rent, lease, loan or otherwise distribute the whole or any part of the System,
including the Client Software and the Host Software.
2.3. END USER INFORMATION AND LIMITED USE RESTRICTION.
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2.3.1. You Bet! hereby acknowledges that all information concerning
End Users, their personal information and wagering history with Ladbroke (as
opposed to with other partners of You Bet!) constitutes the valuable proprietary
and trade secret property of Ladbroke. Accordingly, You Bet! shall use its best
efforts to restrict access to such information and will use security procedures
which will minimize the risk of theft or unauthorized us of such information.
You Bet! shall hold all such information regarding End Users in confidence,
disclosing information regarding End Users only to authorized personnel and
agents of You Bet! having a need to know such information, and take all
reasonable precautions to prevent disclosure to other parties. You Bet! shall
not make, have made, or permit to be made any copies of any such information
concerning End Users. This Agreement does not grant You Bet! any rights to trade
secrets, trade names, trademarks (whether registered or unregistered) or any
other rights, franchises or licenses in respect of such information concerning
End Users. Title to and ownership of all such information relating to End Users,
any reproductions thereof, or any documentation associated therewith shall
remain with Ladbroke.
2.3.2. Notwithstanding the foregoing, or anything else in this
Agreement, nothing in this Agreement shall be deemed to restrict the rights of
You Bet! in or to information regarding End Users where: (i) such information
does not relate to information conveyed by End Users to Ladbroke and was gained
by You Bet! other than through performance under this Agreement (E.G., through
the fact that an End User is also an end user of the System with a You Bet!
partner other than Ladbroke); and/or (ii) Ladbroke agrees, in its reasonable
discretion, that such information is merely demographic, as opposed to End User
specific.
2.4. NO RIGHT TO REPRODUCE END USER INFORMATION. Except as provided in
Section 2.3, nothing in this Agreement shall be construed as giving You Bet! any
right to, and You Bet! shall not, and shall not permit or assist any third party
to, transfer, give away, rent, lease, own or otherwise distribute the whole or
any part of any information concerning End Users, their personal information and
wagering history with Ladbroke.
2.5. MUTUAL RESERVATION. All rights not specifically and expressly
granted in this Agreement are hereby reserved.
3. RESPECTIVE OBLIGATIONS
3.1. SYSTEM IMPLEMENTATION. You Bet! shall develop and implement the
System materially in accordance with written specifications which shall be
agreed upon by You Bet! and Ladbroke after the Effective Date, and which, upon
such agreement, shall be attached as Exhibit H to this Agreement.
3.2. PHYSICAL SPACE. Ladbroke shall provide for You Bet!, during the term
of this Agreement, reasonably comfortable and professional office space, within
the race track enclosure of a facility operated by Ladbroke, for all equipment
and personnel reasonably deemed necessary by You Bet! for its performance under
this Agreement. The general parameters of the space which it is anticipated will
be required pursuant to the preceding sentence of this Section 3.2 is specified
in Exhibit A to this Agreement.
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3.3. RACE SIMULCAST SIGNAL. Ladbroke shall provide, for use in connection
with the operation of the System as contemplated by this Agreement, racing
information, including odds, scratches, changes, racecards, and post times, as
well as a simulcast audio and video signal of racing activities which shall be
the subject of wagering information transmitted to Ladbroke in connection with
the utilization of the System as contemplated by this Agreement, including
simulcasted races (from both Ladbroke, and from other racing facilities
simulcasted by Ladbroke to the extent that all approvals desired by either party
to this Agreement, in their respective reasonable discretion, to transmit such
signals from such other racing facilities have been procured). Ladbroke
represents and warrants You Bet! that the simulcast signal which Ladbroke is
required to provide pursuant to this Section 3.3 shall be contemporaneous with
the live events which it portrays, and that no other recipient of such simulcast
shall receive such simulcast prior to receipt of such simulcast by You Bet!.
3.4. SYSTEM PROTOCOL. Ladbroke shall commit to the implementation of the
System by way of the ITSP, or another protocol specified by You Bet! and agreed
to by Ladbroke, in its reasonable discretion, and shall support such
implementation with regard to connection of the System with the on-track host
totalisator system used by Ladbroke in the operation of its business.
3.5. Distribution by You Bet!. You Bet! shall have the sole obligation
and authority to determine and communicate to Ladbroke the geographic regions,
designated by state and country, to which the simulcast signal which Ladbroke
provides pursuant to Section 3.3 will be transmitted utilizing the System. You
Bet! shall bear the sole responsibility for all legal ramification(s) of such
determination by You Bet!, and the rights of Ladbroke and obligations of You
Bet! pursuant to Sections 13 and 14 shall be operable in the event of any such
legal ramification(s).
3.6. GEOGRAPHIC REGION DETERMINATIONS. Ladbroke shall have the sole
obligation and authority to determine and communicate to You Bet! the geographic
regions, designated by state and country, from which wagering information shall
be received utilizing the System. Ladbroke and You Bet! shall jointly bear the
responsibility for all legal ramification(s) of such determination by Ladbroke.
3.7. END USER DETERMINATIONS. Ladbroke shall make the initial
determination as to whether it is lawful and legal to receive wagering
information from End Users through the System, including whether such End Users
are of legal age to participate in activities related to the transmission of
wagering information to Ladbroke as contemplated by this Agreement. Ladbroke and
You Bet! shall jointly bear the responsibility for all legal ramification(s) of
such determinations by Ladbroke.
3.8. VETO RIGHTS ON GEOGRAPHIC REGIONS AND END USERS. Notwithstanding the
provisions of Section 3.6 and Section 3.7, You Bet! shall have the right, in its
sole and absolute discretion, to decline to make the System available to any
particular geographic region generally, or any End User(s) specifically (i.e.,
to not allow the System to receive wagering information from, such geographic
region and/or such End User(s)).
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3.9. GOVERNMENTAL APPROVALS AND LICENSES.
3.9.1. Ladbroke shall use its best efforts to procure, and maintain
for the entire term of this Agreement, all such government approvals and
licenses required for: (i) the operation of Ladbroke in general; (ii) the
operation of the wagering system in Pennsylvania, which is intended to be the
recipient of wagering information through the System from End Users.
3.9.2. You Bet! shall procure, and maintain for the entire term of
this Agreement, all such government approvals and licenses required for: (i) the
operation of You Bet! in general; and (ii) the operation of the System, as
contemplated by this Agreement. Notwithstanding the foregoing, nothing in this
Agreement is intended to require You Bet! to become a licensed gaming entity.
3.9.3. Each party to this Agreement shall bear the sole
responsibility for all legal ramifications of its obligations under this Section
3.9, and will maintain any such approval and/or license, and the rights of each
party to this Agreement pursuant to Sections 13 and 14 shall be operable in the
event of any such legal ramifications.
3.10. TECHNOLOGY MODIFICATIONS. You Bet! and Ladbroke shall each modify
the technology under their respective control which it is anticipated by You
Bet! will interface and communicate with the System such that such technology is
compatible with the ITSP (or another protocol specified by You Bet! and agreed
to by Ladbroke.
4. END USERS
4.1. LICENSE OF CLIENT SOFTWARE. You Bet! shall have the sole
responsibility to: (i) develop, and grant to each End User a non-exclusive and
non-transferable and time limited license to utilize the Client Software: and
(ii) arrange for the availability to all End Users of the server
telecommunications systems necessary to connect to the Host Software.
4.2. TECHNICAL SUPPORT. During the term of this Agreement: (i) You Bet!
shall provide to End Users a reasonable amount of training and technical support
regarding the use and operation of the Client Software; and (ii) Ladbroke shall
have no obligation to provide any technical support to any End User.
4.3. CHARGES TO END USERS.
4.3.1. You Bet! shall have the right to charge to End Users fees
for on-line time and/or information purchases which You Bet! may from time to
time decide, in its sole discretion, to offer to End Users through the System;
provided, however, that it is the intention of the parties to this Agreement
that any such charges shall be to allow You Bet! to offset the following costs
of operating the System: (i) network personnel; (ii) network hardware, software
and information purchase and development; (iii) on-line, communications
connections and cash transactions fees; and (iv) promotion of the You Bet!
Racing Network. You Bet! shall have no
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right to charge to End Users any other fees or charges whatsoever, without the
express and unambiguous written consent of Ladbroke, which consent shall not be
unreasonably withheld or delayed. It is the intention of the parties to this
Agreement that, unless Ladbroke grants consent pursuant to the preceding
sentence of this Section 4.3.1, the sole profit income to You Bet! in relation
to the operation of the System shall be the income, if any, which it is paid to
You Bet! by Ladbroke pursuant to Section 8.4. Notwithstanding anything else in
this Section 4.3.1 or this Agreement, Ladbroke shall grant consent to other fees
and charges in the event that other revenue streams are discovered; provided,
however, that You Bet! and Ladbroke shall proportionately share the profits from
each such revenue stream, and shall negotiate in good faith, given the nature of
each such revenue stream, as to the best manner of so proportionately sharing.
4.3.2. Ladbroke shall have no right to charge to End Users any fee
whatsoever for usage, either on a time (e.g., monthly, weekly, etc.), on-line
time (e.g., per minute) or per transaction basis during the term of this
Agreement without the express and unambiguous written consent of You Bet!, which
consent shall not be unreasonably withheld or delayed. It is the intention of
the parties to this Agreement that, unless You Bet! grants consent pursuant to
the preceding sentence of this Section 4.3.2, the sole income to Ladbroke in
relation to the operation of the System shall be the income, if any, which it
earns from wagering information transmitted from End Users through the System.
4.4. LEGALITY. Ladbroke and You Bet! shall share responsibility that: (i)
operation of the System shall not violate any statute or ordinance of any
geographic region(s) to or from which information may be transmitted utilizing
the System; (ii) the operation of the System as contemplated by this Agreement
shall not violate any law, rule or regulation in effect in any entity,
government or territory which may assert jurisdiction over such operations,
Ladbroke and/or You Bet!; (iii) it is lawful and legal for each End User who
utilizes the System to so utilize the System; and (iv) each End User who
utilizes the System is of legal age to participate in the transmission of
wagering information as contemplated by this Agreement.
5. MARKETING
5.1. PRESS RELEASES AND OTHER PUBLICITY. Neither party to this Agreement
shall have the right to disclose any information regarding the subject matter of
this Agreement, including the name of the other party to this Agreement, without
the prior written consent of the other party to this Agreement; provided,
however, that each party to this Agreement shall have the right to disclose
information as required by law or legal process.
5.2. LICENSE OF TRADEMARKS.
5.2.1. Concurrently with the execution of this Agreement, Ladbroke
shall cause Ladbroke Racing Corporation, a Delaware corporation, to execute a
license to You Bet! in the form attached as Exhibit F to this Agreement.
Execution of such a license shall be a condition precedent to the covenants,
representations and warranties of You Bet! under this Agreement.
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5.2.2. Concurrently with the execution of this Agreement, You Bet!
shall execute a license to Ladbroke in the form attached as Exhibit G to this
Agreement. Execution of such a license shall be a condition precedent to the
covenants, representations and warranties of Ladbroke under this Agreement.
5.3. YOU BET! EXCLUSIVITY TO LADBROKE. For the first twenty-four (24)
months of the term of this Agreement, You Bet! shall not enter into any
agreement of any nature with any horse racing facility, race book, simulcast
provider or other provider of racing signals, other than a single such provider
in the State of New York, regarding the integration of such racing signals into
the System, or into any other system which is materially similar in intent, form
or substance to the System. In the event that You Bet! intends to enter into any
such arrangement following the expiration of such exclusivity, You Bet! will
notify Ladbroke of such intent, and of the agreements which are contemplated
under such arrangements, and Ladbroke will have the right to either terminate
this Agreement or otherwise reach agreement with You Bet! concerning such
changes to the terms and conditions of this Agreement as the parties to this
Agreement may both agree.
5.4. LADBROKE MOST FAVORED NATIONS STATUS. In the event that You Bet!
enters into, or has entered into, any written agreement with any other horse
racing facility, race book, simulcast provider or other provider of racing
signals in the United States or Canada regarding an integration of the System,
or any other system which is materially similar in intent, form or substance to
the System, into the operations of such horse racing facility, race book,
simulcast provider or other provider of racing signals which written agreement
contains terms more favorable to such other horse racing facility, race book,
simulcast provider or other provider of racing signals than those provided to
Ladbroke under this Agreement, You Bet! shall offer to Ladbroke the benefit of
such more favorable terms under this Agreement, on a going forward basis from
the effective date of such other agreement (as opposed to on a retroactive basis
prior to the effective date of such other agreement); provided, however, that in
transferring the benefits of such more favorable terms to this Agreement, the
parties shall take into account all terms and conditions of both agreements, so
that this Agreement, as modified by the benefit of this Section 5.4, is, on the
whole, no more favorable than the agreement entered into with such other horse
racing facility, race book, simulcast provider or other provider of racing
signals. Ladbroke shall have the right to periodically audit the contracts of
You Bet! in order to confirm compliance with the provisions of this Section 5.4;
provided, however, that: (i) no audit (other than the first audit) may be
conducted less than one (1) year after the previous audit; and (ii) You Bet! and
Ladbroke shall cooperate, through the use of an independent third party
accounting firm, paid for and selected by Ladbroke, with the approval of You
Bet!, to review and evaluate such agreements in compliance with any
confidentiality obligations in place.
5.5. LADBROKE EXCLUSIVITY TO YOU BET! During the first twenty-four (24)
months of the term of this Agreement, Ladbroke shall not enter into any
agreement which provides for the distribution of the audio and/or video of any
Ladbroke racing schedule to be distributed on any interactive service which is
integrated with the end user utilizing an IBM personal computer, a clone of an
IBM personal computer or a Macintosh personal computer; provided, however, that
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the prohibition set forth in this Section 5.5 shall not be applicable to any
future agreement entered into with any of the following with whom Ladbroke has
any business relationship as of the Effective Date: (i) Bloodstock Research
Information Services, Inc.; (ii) Thoroughbred Sports Network; (iii) TCI Cable;
(iv) Autotote; (v) any cable television operator; and (vi) any direct broadcast
satellite provider.
5.6. YOU BET! RIGHTS OF FIRST REFUSAL ON OTHER LADBROKE ACTIVITIES.
5.6.1. For the first twenty-four (24) months of the term of this
Agreement, You Bet! shall have a right of first refusal with respect to other
opportunities as to which Ladbroke shall have the opportunity to enter into with
ODS Technologies, L.P. In the event that Ladbroke has the opportunity to enter
into any such transaction, Ladbroke shall offer in writing to enter into such
transaction with You Bet! on the terms and conditions described in this Section
5.6.1. Upon learning of the opportunity to enter into such transaction with ODS
Technologies, L.P., Ladbroke shall provide written notice to You Bet!, which
written notice shall include all material terms and conditions of such proposed
transaction. For a period of thirty (30) days from the date upon which You
Bet! receives such written notice, You Bet! shall have the right to enter into
such transaction with Ladbroke on the same material terms and conditions as set
forth in such written notice, so long as You Bet! can reasonably demonstrate
that it has the ability to perform in such transaction in accordance with the
timelines set forth in the written notice. In the event that You Bet! fails to
exercise its rights under this Section 5.6.1, Ladbroke shall be free, for a
period of ninety (90) days from the expiration of the thirty (30) day period
specified in this Section 5.6.1, to consummate a transaction with ODS
Technologies, L.P., on the same material terms and conditions specified in the
written notice to You Bet!, and shall have no obligation to enter into any such
transaction with You Bet! Any transaction by and between Ladbroke and ODS
Technologies, L.P., after the expiration of the ninety (90) day period referred
to in this Section 5.6.1, as well as any transaction on material terms and
conditions substantially dissimilar those set forth in the written notice to You
Bet!, shall be deemed pursuant to a new offer, requiring compliance once again
with the terms and conditions of this Section 5.6.1.
5.6.2. In addition to the right of first refusal set forth in
Section 5.6.1, during the term of this Agreement, You Bet! shall have the
opportunity to present for Ladbroke's consideration competing alternatives to
Ladbroke allowing the audio and/or video of any Ladbroke racing activity to be
distributed on any interactive service, other than those as to which You Bet!
has exclusivity pursuant to Section 5.5, including on any such interactive
service which involves interactive television application. In the event that
Ladbroke is considering entering into any such distributions, Ladbroke shall
provide written notice to You Bet! sufficiently in advance of entering into such
distributions such that You Bet! has a meaningful opportunity to respond in
accordance with this Section 5.6.2 For a period of thirty (30) days from the
date upon which You Bet! receives such written notice, You Bet! shall have the
right to indicate an intention to enter into such transaction with Ladbroke and,
in the event that You Bet! so indicates such an intention, a proposal for a
transaction and timetable shall be presented to Ladbroke within the next thirty
(30) days. Following receipt of such proposal, Ladbroke shall have the right,
but not the obligation, to enter into such proposed transaction with You Bet!.
Permitting
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the presentation of a proposal in accordance with this Section 5.6.2 shall fully
satisfy Ladbroke's obligations under this Section 5.6.2, and in no event shall
Ladbroke be obligated to enter into with You Bet! any transaction described by
this Section 5.6.2.
5.7. MARKETING PLAN. The parties to this Agreement shall each use
commercially reasonable efforts to implement the marketing plan attached as
Exhibit B to this Agreement.
6. COMPLIANCE
Ladbroke shall have the right at all times to direct You Bet! to make such
changes in and to the operation of the System, and to implement and take such
actions in the management of the System, as are considered necessary and/or
desirable from time to time, in the reasonable discretion of Ladbroke, in order
to ensure that all matters of Compliance are strictly and properly adhered to,
fulfilled and followed; provided, however, that Ladbroke shall provide to You
Bet! a reasonably detailed explanation of the reasoning behind each such
direction.
7. REGULATORY AUTHORITY CONDITIONS
7.1. ACKNOWLEDGMENT OF OPERATIONS. You Bet! understands and acknowledges
that Ladbroke (and its subsidiaries and affiliates) now and may hereafter
conduct gaming operations in various countries throughout the world and are and
may become subject to the jurisdiction and regulation of various local
regulatory authorities throughout the world (each a "Gaming Authority") in
respect of such gaming operations as are now and may hereafter be conducted by
Ladbroke (and its subsidiaries and affiliates).
7.2. PROVISION OF INFORMATION. Ladbroke shall be entitled to provide to
any Gaming Authority such financial and other information in relation to the
System and You Bet! as any Gaming Authority may require from time to time, and
You Bet! shall provide such information as may be required of it from time to
time so that Ladbroke (and its subsidiaries and affiliates) may properly respond
to any request or demand of any such Gaming Authority in a timely manner.
7.3. PROVISION OF SHAREHOLDER INFORMATION. You Bet! shall, upon written
request from Ladbroke, provide Ladbroke (and its subsidiaries and affiliates)
with reasonable details and the identity of the immediate, intermediate and
ultimate shareholders of You Bet! and such other information relating to You
Bet! and such shareholders as may be requested of Ladbroke (and its subsidiaries
and affiliates) by any Gaming Authority to which Ladbroke (and its subsidiaries
and affiliates) may be subject from time to time, but this shall not require You
Bet! to provide details of or relating to the shareholders of any company within
the You Bet! group of companies which is quoted on any international stock
exchange. In the event that such requests for information from such Gaming
Authorities are not responded to, to the satisfaction of the laws, regulations
and requests of such Gaming Authorities, prior to the date upon which the first
transmission of live wagering information is scheduled to occur with an End
User: (i) Ladbroke shall have the right to terminate this Agreement, effective
upon thirty (30) days written notice to You Bet!, provided that requirements are
not satisfied within the thirty (30) day notice period); and (ii) in at
requirements are not satisfied within, the thirty (30) day notice period); and
(ii) in
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no event shall any transmission of live wagering information occur with any End
User until all such requests for information are responded to, to the
satisfaction of the laws, regulations and requests of such Gaming Authorities.
7.4. DISQUALIFICATION NOTICE. In the event that Ladbroke (or any
subsidiary or affiliate of Ladbroke) (i) is ordered, required or otherwise
advised by a Gaming Authority to terminate its relationship with You Bet!, (ii)
is advised in writing by a Gaming Authority that its relationship with You Bet!
or any directors, officers, shareholders or principals of You Bet! jeopardizes
its registrations, licenses, findings of suitability or approvals (collectively
the "Approvals" and individually an "Approval") or any application by Ladbroke
(or any subsidiary of affiliate of Ladbroke) for an Approval (collectively,
"Applications" and individually an "Application"), or (iii) determines in its
reasonable judgment that its relationship with You Bet! or any directors,
officers, shareholders or principals of You Bet! does or may jeopardize its
Approvals or any Application, then Ladbroke shall have the right, but not the
obligation, to deliver a written notice specifying the relevant event or
situation set forth in this Section 7.4 (a "Disqualification Notice") to You
Bet!. In the event that the facts and circumstances giving rise to a
Disqualification Notice are not remedied, in a time frame and manner determined
in the discretion of Ladbroke, then Ladbroke shall have the right to terminate
this Agreement, effective upon thirty (30) days written notice to You Bet!
8. CONSIDERATION, PAYMENTS AND OTHER FINANCIAL RESPONSIBILITIES
8.1. LADBROKE PAYMENT OF TOTALISATOR FEES. Ladbroke shall be solely
responsible for all fees to be paid, levied or imposed by the Autotote
totalisator system utilized by Ladbroke (or any such other totalisator system
which Ladbroke may use during the term of this Agreement) and/or by any other
third party vendor utilized by Ladbroke to which You Bet! shall be required
to make an electronic connection for the purpose of its performance under
this Agreement, including for retrieving racing data, account management and
retrieving audio and video signals.
8.2. LADBROKE PAYMENT OF TELECOMMUNICATIONS FEES. Ladbroke shall be
solely responsible for all fees to be paid, levied or imposed arising out of
or related to the use of telecommunications systems (e.g., telephone lines;
T1 lines, etc.) in connection with the operation of the System. Ladbroke
shall pay directly, or reimburse You Bet! for, the amount of such fees which
You Bet! is at any time obligated to pay. Notwithstanding the foregoing, in
the event that the fees paid by Ladbroke pursuant to this Section 8.2 exceed
Twelve Thousand Dollars($12,000.00) per calendar year, Ladbroke shall have
the right to deduct the amount paid in excess of such "not to exceed" amount,
in the calculation of Net Commission.
8.3. APPROVAL AND LICENSE FEES AND COSTS. Ladbroke shall be solely
responsible for the fees and costs paid to any government agency associated
with each and any of the governmental approvals and/or licenses which
Ladbroke is required to procure and maintain pursuant to Section 3.9.1.
Ladbroke shall pay directly, or reimburse You Bet! for, the amount of such
fees and/or costs which You Bet! is at any time obligated to pay.
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8.4. YOU BET! COMPENSATION. Ladbroke shall pay to You Bet!, for each
calendar week during the term of this Agreement, a sum equal to fifty percent
(50%) of the Net Commission. For purposes of this Agreement, a calendar week
shall be the period beginning with the first race subsequent to the close of
racing each Sunday, and ending at the close of racing the immediately
subsequent Sunday.
8.5. PAYMENT TIMING AND REPORTS. Each Tuesday prior to 3:00 p.m.
Eastern Time during the term of this Agreement, Ladbroke shall cause to be
transferred to an account of You Bet! via wire transfer, as such account may
be specified by You Bet! from time to time during the term of this Agreement,
the fee due You Bet! for the calendar week ended with the close of racing the
preceding Sunday (I.E., the day before), pursuant to Section 8.4.
Concurrently with the funds transfer required pursuant to this Section 8.5,
Ladbroke shall forward to You Bet! a written report specifying the fee earned
by You Bet! during the previous calendar week, and the calculation thereof,
in accordance with the detail specified in Exhibit C to this Agreement. In
addition to the weekly written reports required by the preceding sentence of
this Section 8.5, Ladbroke shall also forward to You Bet! written reports on
a daily and monthly basis, in accordance with the detail specified in Exhibit
C to this Agreement.
8.6. AUDIT RIGHTS. Ladbroke shall allow You Bet! representatives
and/or independent auditors to audit and analyze appropriate and relevant
accounting records of Ladbroke, at the premises of Ladbroke, to verify
accurate and full accounting for revenues, and compliance by Ladbroke with
the terms of this Agreement. If any such audit discloses a discrepancy of
more than five percent (5%) for the period as to which the discrepancy has
arisen, Ladbroke shall pay the reasonable cost of the audit. Any such audit
shall be permitted during business hours within 10 days of receipt by
Ladbroke of written request from You Bet! provided, however, that no audit
(other than the first audit) may be conducted less than one (1) year after
the previous audit.
8.7. TAXES. Ladbroke shall be solely responsible for any Federal,
state or local tax, tariff, duty or assessment levied or imposed arising out
of or related to any of the transactions contemplated under this Agreement,
including any Federal excise wagering tax (but, excluding any tax based upon
the net income of You Bet!) which may be assessed in connection with the
operation of the System. Ladbroke shall pay directly, or reimburse You Bet!
for, the amount of such tax, tariff, duty or assessment which You Bet! is at
any time obligated to pay or collect.
8.8. OTHER EXPENSES AND PAYMENTS. Except as expressly and
unambiguously set forth in this Agreement, each party to this Agreement shall
be responsible for payment of its own costs and expenses involved in
performance under this Agreement, and no party to this Agreement shall be
obligated to compensate the other party to this Agreement in any manner
whatsoever.
9. CONFIDENTIALITY
9.1. NO DISCLOSURE. Except as may be required by law or legal
process, each party to this Agreement shall: (i) hold in confidence, and not
disclose or reveal to any person or entity, any Confidential Information
disclosed under this Agreement without the clear and express prior written
consent of a duly authorized representative of the disclosing party; and (ii)
not use or
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disclose any of the Confidential Information for any purpose at any time, other
than for the limited purpose of performance under this Agreement.
9.2. PUBLISHED REPORTS. Without limiting the generality of Section 9.1,
any reports concerning Confidential Information which are not made or authorized
by the disclosing party and which appear in any publication prior to official
disclosure of such Confidential Information shall not release the receiving
party from its obligations under this Agreement with respect to such
Confidential Information.
9.3. OBLIGATION TO HAVE PERSONNEL EXECUTE CONFIDENTIALITY AGREEMENTS.
Ladbroke shall have each of its personnel who may receive Confidential
Information of You Bet! execute the standard form non-disclosure agreement
used by Ladbroke, in the form attached as Exhibit D to this Agreement. You
Bet! shall have each of its personnel who may receive Confidential
Information of Ladbroke execute the standard form non-disclosure agreement
used by You Bet! in the form attached as Exhibit E to this Agreement.
9.4. NO CONFIDENTIAL INFORMATION OF THIRD PARTIES. Ladbroke and You
Bet! each represent and warrant to each other that it shall not use, in the
course of its performance under this Agreement, and shall not disclose to the
other, any confidential information or other intellectual property of any
third party (including competitors of You Bet! or Ladbroke) unless such party
making such disclosure is expressly authorized in writing by such third party
to do so, and discloses same to the other.
10. WARRANTIES AND DISCLAIMERS OF YOU BET!
10.1. PROPRIETARY RIGHTS. You Bet! hereby covenants, represents and
warrants to Ladbroke that: (i) You Bet! has full right, power and authority
to enter into this Agreement and, provided that Ladbroke is not in breach of
this Agreement, to grant to and vest in Ladbroke all rights set forth in this
Agreement, free and clear of any and all claims, rights and obligations
whatsoever; (ii) the rights under this Agreement, and any and all of the
results and proceeds of the services of You Bet! under this Agreement,
delivered and to be delivered by You Bet! under this Agreement, are and shall
be new and original; and (iii) You Bet! shall be the creator of, or otherwise
have the right to, the Client Software and the Host Software, and no part of
either the Client Software or the Host Software shall be an imitation or copy
of, or shall infringe upon, any other material, or shall violate or infringe
upon any common law or statutory rights of any person or entity, including
rights relating to defamation, contract, trademark, patent, copyright, trade
secret, privacy or publicity.
10.2. TRANSACTION COMMUNICATIONS. You Bet! covenants, represents and
warrants to Ladbroke that the System shall accurately convey wagering
information from End Users to the Autotote totalisator system utilized by
Ladbroke. In the event that any wagering information from any End User is not
accurately conveyed by the System to the Autotote totalisator system utilized
by Ladbroke, the indemnity and hold harmless obligation of You Bet! as set
forth in Section 13.1 shall apply as to any action by such End User whose
wagering information was not accurately conveyed.
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10.3. LICENSES AND THIRD PARTY RIGHTS. You Bet! covenants, represents
and warrants to Ladbroke that to the extent that any third parties have any
rights with respect to any portion of the System, You Bet! has obtained any
and all such third party rights or permissions which are required for the
uses contemplated by this Agreement and for exercise by Ladbroke of the
rights granted to it under this Agreement, and that all such rights will be
in effect for the full term of this Agreement.
10.4. DISCLAIMER OF IMPLIED WARRANTIES. EXCEPT FOR THE EXPRESS
WARRANTIES SET FORTH IN THIS SECTION 10, THE SYSTEM IS PROVIDED WITHOUT
WARRANTY OF ANY KIND, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. LADBROKE SHALL HAVE
THE SOLE OBLIGATION TO DETERMINE THAT THE SYSTEM SUFFICIENTLY MEETS ITS
REQUIREMENTS. YOU BET! DOES NOT WARRANT THAT THE SYSTEM IS ERROR FREE, AND
YOU BET! DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING
THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE
AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS WITH RESPECT TO THE SYSTEM. THIS
DISCLAIMER OF WARRANTY CONSTITUTES AN ESSENTIAL PART OF THIS AGREEMENT.
10.5. NO PASS-THROUGH OF WARRANTIES. Ladbroke shall not have the
right to make or pass on, and shall take all measures necessary to ensure
that neither it nor any of its personnel or agents makes or passes on, or
attempts to make or pass on, any representation or warranty on behalf of You
Bet! to any third party, including any End User.
11. WARRANTIES AND DISCLAIMERS OF LADBROKE
11. 1. PROPRIETARY RIGHTS. Ladbroke hereby covenants, represents and
warrants to You Bet! that: (i) Ladbroke has full right, power and authority
to enter into and perform this Agreement, and to grant to and vest in You
Bet! all rights set forth in this Agreement, free and clear of any and all
claims, rights and obligations whatsoever; (ii) the rights under this
Agreement, and any and all of the results and proceeds of the services of
Ladbroke under this Agreement, delivered and to be delivered by Ladbroke
under this Agreement, are and shall be new and original; and (iii) Ladbroke
shall be the creator of, or otherwise have the right to, all items to be
provided by Ladbroke under this Agreement, including the simulcast and racing
information to be provided pursuant to Section 3.3, and no part of any such
item shall be an imitation or copy of, or shall infringe upon, any other
material, or shall violate or infringe upon any common law or statutory
rights of any person or entity, including rights relating to defamation,
contract, trademark, patent, copyright, trade secret, privacy or publicity.
11.2. LICENSES AND THIRD PARTY RIGHTS. Ladbroke covenants, represents
and warrants to You Bet! that to the extent that any third parties have any
rights with respect to any portion of the items to be provided by Ladbroke
under this Agreement, including the simulcast and racing information to be
provided pursuant to Section 3.3, Ladbroke has obtained any and all such
third party rights or permissions which are required for the uses
contemplated by this Agreement and
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for exercise by You Bet! of the rights granted to it under this Agreement, and
that all such rights will be in effect for the full term of this Agreement.
12. TERM AND TERMINATION
12.1. TERM. The term of this Agreement shall commence as of the Effective
Date and shall continue, unless lawfully terminated earlier, until the earlier
of: (i) the five (5) year anniversary of the date upon which the first
transmission of live wagering information occurs with an End User; or (ii) the
one hundred fiftieth (150th) day subsequent to the five (5) year anniversary of
the Effective Date.
12.2. MUTUAL RIGHT OF TERMINATION FOR CAUSE. Either party to this
Agreement shall have the right to terminate this Agreement at any time prior to
expiration of the term of this Agreement, effective upon thirty (30) days
written notice of termination to the other party to this Agreement in the event
that such other party to this Agreement materially fails to perform any of its
material obligations under this Agreement, and such failure is not cured by such
party within the thirty (30) day notice period.
12.3. RIGHTS OF TERMINATION FOR LACK OF FEASIBILITY.
12.3.1. You Bet! shall have the right to terminate this Agreement at
any time prior to expiration of the term of this Agreement, effective upon one
hundred twenty (120) days written notice of termination to Ladbroke in the event
that the transaction contemplated by this Agreement is no longer competitive in
the interactive racing/wagering information market due to the fact that the
geographic reach specified by Ladbroke pursuant to Section 3.6 becomes such that
performance under this Agreement by You Bet! becomes commercially unreasonable.
12.3.2. Each party to this Agreement shall have the right to
terminate this Agreement at any time prior to expiration of the term of this
Agreement, effective upon one hundred twenty (120) days written notice of
termination to the other party to this Agreement, in the event that Net
Commissions are, or are projected in good faith by either party to this
Agreement to be, less than One Million Dollars ($1,000,000.00) for either: (i)
the first eighteen (18) full months subsequent to the date upon which the first
transmission of live wagering information occurs with an End User; or (ii) any
full twelve (12) month period during the term of this Agreement subsequent to
the eighteen (18) month period described in Subsection (i) of this Section
12.3.2.
12.4. AUTOMATIC TERMINATION FOR INSOLVENCY. This Agreement shall terminate
automatically, with no further act or action required of either party to this
Agreement, if: (i) a receiver is appointed for either party to this Agreement or
the property of such party; (ii) either party to this Agreement makes an
assignment for the benefit of its creditors; (iii) any proceedings are commenced
by, for or against either party to this Agreement under any bankruptcy or
insolvency for debtor's relief law; or (iv) either party to this Agreement is
liquidated or dissolved. Notwithstanding the foregoing, this Agreement shall not
automatically so terminate in the event that the other party to this
Agreement provides the financially distressed party to this
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Agreement with written notice, within thirty (30) days of written notice to such
other party of an event which would effect an automatic termination of this
Agreement pursuant to this Section 12.4, that such other party desires to keep
this Agreement in full force and effect.
12.5. AUTOMATIC TERMINATION FOR TERMINATION OF UNDERLYING LICENSE.
12.5.1. In the event of any termination of any license for any
intellectual property involved in the operation of the System, for any reason
whatsoever, including expiration, this Agreement, and the rights granted under
this Agreement, shall automatically terminate effective immediately upon the
effective date of such termination or expiration. Notwithstanding the foregoing,
in the event that any party to this Agreement learns of any such termination, or
any potential such termination, or any facts or circumstances which would or
might give rise to such termination, such party to this Agreement shall promptly
provide written notice of such matter to the other party to this Agreement.
12.5.2. In the event of any termination of any approval or license
which either party to this Agreement is required to procure and maintain
pursuant to Section 3.9, for any reason whatsoever, including expiration, this
Agreement, and the rights granted under this Agreement, shall automatically
terminate effective immediately upon the effective date of such termination or
expiration. Notwithstanding the foregoing, in the event that any party to this
Agreement learns of any such termination, or any potential such termination, or
any facts or circumstances which would or might give rise to such termination,
such party to this Agreement shall promptly provide written notice of such
matter to the other party to this Agreement.
12.6. TERMINATION FOR INFRINGEMENT CLAIM. In the event that the System is,
or in the reasonable judgment of You Bet! is likely to become, the subject of
any infringement or misappropriation claim, You Bet! shall either use its best
efforts to obtain a valid license to use the System, or to replace or modify the
System to make it non-infringing, in which case that replacement shall then be
governed by the terms of this Agreement, as the System. However, in the event
that neither option of the foregoing sentence of this Section 12.6 is
commercially reasonable, You Bet! shall have the right to terminate this
Agreement, effective immediately upon written notice of termination to Ladbroke.
Notwithstanding the foregoing, in the event that You Bet! terminates this
Agreement pursuant to this Section 12.6 in the first six (6) months following
the date upon which the first transmission of live wagering information occurs
with an End User, You Bet! shall pay to Ladbroke the sum of Fifty Thousand
Dollars ($50,000.00) for each full month less than six (6) for which such
information was conveyed by End Users. Such payment is intended as liquidated
damages as fair compensation to Ladbroke for its losses hereunder and not as a
penalty.
12.7. EFFECT OF TERMINATION. Upon termination of this Agreement for any
reason whatsoever, Ladbroke shall: (i) erase or otherwise destroy all copies of
part or all of the System that are fixed or resident in memory in computers
owned or controlled by Ladbroke; and (ii) return to You Bet! all other existing
copies (including original copies) of part or all of the System in the
possession or under the control of Ladbroke, together with a description of the
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circumstances which resulted in the destruction of any such copies that were
once (but no longer are) in the possession or under the control of Ladbroke.
12.8. NO DAMAGES OR INDEMNIFICATION FOR TERMINATION OF THIS AGREEMENT.
Neither party to this Agreement shall be liable to the other party to this
Agreement for damages of any kind, including incidental or consequential
damages, or for indemnification, solely on account of the lawful termination of
this Agreement, even if informed of the possibility of such damages. Neither
party to this Agreement shall be liable to the other party to this Agreement by
reason of termination of this Agreement for compensation, reimbursement or
damages on account of any loss of prospective profits on anticipated sales or on
account of expenditures, investments, leases or other commitments relating to
the business or goodwill of either party to this Agreement, notwithstanding any
law to the contrary.
12.9. SURVIVAL OF TERMS UPON TERMINATION OF THIS AGREEMENT. The provisions
of this Agreement that by their sense and context are intended to survive
termination of this Agreement, including provisions regarding payment,
confidentiality and indemnity, shall so survive this Agreement.
13. INDEMNITY AND HOLD HARMLESS
13.1. MUTUAL INDEMNIFICATION FOR BREACH OF COVENANT, REPRESENTATION OR
WARRANTY. Each party to this Agreement shall defend, as its sole responsibility,
any claim, suit or proceeding brought against the other party to this Agreement
insofar as such claim, suit or proceeding is based upon a claim by a third party
alleging facts or circumstances that, if true, would constitute a breach of any
covenant, representation or warranty of such indemnifying party set forth in
this Agreement, provided the party entitled to indemnity gives written notice of
any such suit or proceeding promptly upon first learning of such suit or
proceeding, and provides the indemnifying party, at no cost, with such
assistance and cooperation as the indemnifying party may reasonably request in
the defense thereof. The provisions of this Section 13.1 shall apply to any such
claim, suit or proceeding, regardless of the jurisdiction, venue, tribunal
and/or governing law. The indemnifying party shall pay any damages, costs and/or
fines (to the extent that such payment of fines is not held by a Court of
competent jurisdiction to be either illegal or against public policy) assessed
against the party entitled to indemnity (or paid or payable by such party
pursuant to a settlement agreement or any other resolution, formal or informal,
provided that such settlement agreement or other resolution is approved by the
indemnifying party, which approval shall not be unreasonably withheld or
delayed) in connection with such claim, suit or proceeding. The indemnifying
party shall indemnify and hold the party entitled to indemnity harmless from and
with respect to any such loss, damage and/or fine (including reasonable
attorneys' fees and costs).
13.2. OTHER INDEMNIFICATION BY LADBROKE. Ladbroke shall defend and
indemnify You Bet! (including reasonable attorneys' fees and costs of
litigation) against and hold You Bet! harmless from, any and all claims by any
third party, regardless of the form of action: (i) resulting from Ladbroke's
acts, omissions or misrepresentations; and (ii) any claim arising from or based
upon the combination, operation or use of the System with equipment, data or
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programming of Ladbroke, or any alteration or modification of the System made
without the express written approval of You Bet!.
14. ACTIONS
14.1. ACTIONS TO PROTECT THE SYSTEM. You Bet! shall have the right, in its
absolute discretion, to employ attorneys and to institute or defend any action
or proceeding and to take any other appropriate steps and, in that connection,
to settle, compromise in good faith or in any other manner dispose of any
matter, claim, action or proceeding and to satisfy any judgment that may be
rendered, in any manner as You Bet! in its sole discretion shall have the right
to determine, to protect all right, title and interest in and to the System, and
every portion of the System.
14.2. ACTIONS INVOLVING INDEMNITY RIGHTS. In the event that either party
to this Agreement becomes entitled to indemnity and/or hold harmless rights from
the other under Section 13.1 and/or Section 13.2, the indemnifying party shall
defend, at its sole expense, the claim, suit or proceeding brought against the
other party to this Agreement; provided, however, that the party seeking
indemnity gives written notice of any such suit or proceeding promptly upon
first learning of such suit or proceeding, and provides the party from which
indemnity is sought, at no cost, with such assistance and cooperation as such
party may reasonably request in the defense thereof. The indemnifying party
shall pay any damages and costs assessed against the party entitled to indemnity
(or paid or payable by such party pursuant to a settlement agreement or any
other resolution, formal or informal, provided that such settlement agreement or
other resolution is approved by the indemnifying party, which approval shall not
be unreasonably withheld or delayed) in connection with such claim, suit or
proceeding. The party providing indemnity shall indemnify and hold the party
entitled to indemnity harmless from and with respect to any such loss or damage
(including reasonable attorneys' fees and costs).
15. EXCLUSION OF CONSEQUENTIAL DAMAGES
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, AND
EXCEPT FOR THE OBLIGATIONS ARISING OUT OF SECTION 9 AND SECTION 13, IN NO EVENT
SHALL EITHER PARTY TO THIS AGREEMENT UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE
OTHER PARTY TO THIS AGREEMENT FOR CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES
INCLUDING LOST PROFITS OR DATA, EVEN IF SUCH PARTY HAS BEEN APPRISED OF THE
LIKELIHOOD OF SUCH DAMAGES OCCURRING.
16. NOTICES
Except as specifically provided in this Agreement, all notices required
under this Agreement shall be in writing and shall be given by personal
delivery, national overnight courier service or United States mail, certified or
registered, postage prepaid, return receipt requested, to the parties to this
Agreement at their respective addresses first set forth above, or to any party
to this Agreement at such other addresses as shall be specified in writing by
such party to this Agreement to the other parties to
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this Agreement in accordance with the terms and conditions of this Section 16.
All notices shall be deemed effective upon personal delivery, or three (3) days
following deposit in the United States mail in accordance with this Section 16,
or one (i) business day following deposit with any national overnight courier
service in accordance with this Section 16.
17. MISCELLANEOUS
17.1. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement, and supersedes any and all prior representations,
understandings and agreements between the parties to this Agreement with respect
to the subject matter of this Agreement, all of which are merged in this
Agreement. Notwithstanding the foregoing, any confidentiality agreements between
the parties to this Agreement are separate from this Agreement and, except as
expressly stated in this Agreement, nothing contained in this Agreement shall be
construed as affecting the rights or obligations of either party to this
Agreement set forth in any such agreement. It is expressly understood and agreed
that no employee, agent, or other representative of either party to this
Agreement has any authority to bind such party to this Agreement with regard to
any statement, representation, warranty or other expression unless the same is
specifically set forth or incorporated by reference in this Agreement. It is
expressly understood and agreed that, there being no expectation of the contrary
between the parties to this Agreement, no usage of trade or custom and practice
within the industry, and no regular practice or method of dealing between the
parties to this Agreement shall be used to modify, interpret, supplement or
alter in any manner the express terms of this Agreement or any part of this
Agreement.
17.2. NO THIRD PARTY BENEFICIARY. Nothing contained in this Agreement
shall be deemed to create or be construed as creating, any third party
beneficiary right of action upon any third party or entity whatsoever, in any
manner whatsoever.
17.3. WAIVER. No waiver of any provision of this Agreement, or any rights
or obligations of either party to this Agreement under this Agreement, shall be
effective, except pursuant to a written instrument signed by the party or
parties to this Agreement waiving compliance, and any such waiver shall be
effective only in the specific instance and for the specific purpose stated in
such writing.
17.4. AMENDMENTS. All amendments or modifications of this Agreement shall
be binding upon the parties to this Agreement despite any lack of consideration
so long as such amendments or modifications are in writing and executed by the
parties to this Agreement in accordance with the other terms of this Agreement
regarding modifications.
17.5. SEVERABILITY OF PROVISIONS. In the event that any provision of this
Agreement is found invalid or unenforceable pursuant to judicial decree or
decision, the remainder of this Agreement shall remain valid and enforceable
according to its terms. Without limiting the generality of the foregoing, this
Agreement is intended to follow and be governed by, and not to supersede, the
laws and judicial decisions of the United States of America and the State of
Pennsylvania, and in the event of any irreconcilable conflict such laws and
judicial decisions shall prevail.
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17.6. ASSIGNMENT. Subject to any governmental approval which may be
required, either party to this Agreement shall have the right to assign or
transfer this Agreement, or any interest in this Agreement (including rights and
duties of performance), to any entity: (i) which owns more than fifty percent
(50%) of the issued and outstanding voting stock of such party; (ii) in which
such party owns more than fifty percent (50%) of the issued and outstanding
voting stock; (iii) which acquires all or substantially all of the operating
assets of such party; or (iv) into which such party is merged or reorganized
pursuant to any plan of merger or reorganization. This Agreement shall be
binding upon and inure to the benefit of each of the parties to this Agreement
and their respective legal successors and permitted assigns.
17.7. EXTENSION OF BENEFITS TO AFFILIATES. All rights and benefits to
either You Bet! or Ladbroke under this Agreement shall be deemed to extend, and
inure to the benefit, of any parent, subsidiary or affiliate of You Bet! or
Ladbroke, respectively. Notwithstanding the foregoing, no parent, subsidiary or
affiliate of You Bet! or Ladbroke shall have any obligation or duty to Ladbroke
or You Bet!, respectively, whatsoever, such obligations and duties resting
solely with You Bet! and Ladbroke.
17.8. NO BREACH WITHOUT NOTICE. Neither party to this Agreement shall be
deemed to be in material breach of any of its obligations under this Agreement
unless and until such party to this Agreement shall have been given written
notice by certified or registered mail, return receipt requested, of the nature
of such breach, and such party shall have failed to cure such breach within
thirty 30) days after receipt of such written notice.
17.9. FORUM AND JURISDICTION. This Agreement was entered into in the State
of Pennsylvania, and its validity, construction, interpretation and legal effect
shall be governed by the laws and judicial decisions of the State of
Pennsylvania applicable to contracts entered into and performed entirely within
the State of Pennsylvania. Any action at law or in equity arising under this
Agreement shall be filed only in an appropriate State or Federal Court located
in the State of Pennsylvania. The parties to this Agreement hereby consent and
submit to the personal jurisdiction of such courts for the purposes of
litigating any such action.
17.10. ATTORNEYS' FEES. In the event that any litigation or other
proceeding is brought by either party to this Agreement in connection with this
Agreement, the prevailing party in such litigation or other proceeding shall be
entitled to recover from the other party all costs, attorneys' fees and other
expenses incurred by such prevailing party in such litigation.
17.11. FORCE MAJEURE. Neither You Bet! nor Ladbroke shall be deemed in
default if its performance or obligations under this Agreement are delayed or
become impossible or impractical by reason of any act of God, war, fire,
earthquake, labor dispute, sickness, accident, civil commotion, epidemic, act of
government or government agency or officers, or any other cause beyond the
control of such party to this Agreement. Notwithstanding the foregoing, a change
in economic conditions or technology shall not be deemed a force majeure event.
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17.12. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first set forth above.
YOU BET!, INC. MOUNTAIN LAUREL
RACING, INC.
By: /s/ Steve A. Molnar By: /s/ John M. Swiatek
----------------------- -------------------------------
Its: CEO Its: Vice President
----------------------- -------------------------------
WASHINGTON TROTTING
ASSOCIATION, INC.
By: /s/ John M. Swiatek
-------------------------------
Its: Vice President
-------------------------------
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This Service Agreement ("Agreement") is made and entered into by and between
NETIXS Communications and the Customer ("Customer") listed below, and shall take
effect as of the effective date as indicated in the NETIXS Communications
service request form attached.
1. SERVICE DATE. The Service Date shall be the date any NETIXS Communications
Services ordered under this Agreement are first available for use by the
Customer.
2. SERVICE STANDARDS. If customer's service suffers outage of more than ten
(10) consecutive minutes. NETIXS Communications will credit customer for
one day of service. 30 Day Installation Guarantee for Customers within
Standard Service Area. Dedicated Internet Access service and Collocation
is backed by the NETIXS Standard Service Level Agreement that has two
components: a Service Delivery SLA and a Network Performance SLA. Network
Performance Guarantee (all measurements based on monthly average), 99.99%
Port Availability, 99% Packet Delivery Guarantee (for all types of
packets).
3. INITIAL TERM. The Initial Term shall be for 24 months for the Agreement,
beginning on the Service Date.
4. RENEWAL. The Agreement shall renew automatically for additional 12-month
terms unless notification of non-renewal is provided by either party not
less than 30 days prior to the expiration of the Initial Term or renewal
period.
5. CANCELLATION OR TERMINATION. The Agreement is cancelable with a minimum
termination fee 25% of the remaining contract price for the remaining term
of the agreement Payable to NETIXS Communications. Customer will assume all
liability and penalty by any 3rd party telco. The Agreement is cancelable
by Youbet.com in the event the above service standards (reference item 2.
Service Standards) are not met, or in the event of multiple outages within
a single day, or multiple outages of a similar nature within a month,
Youbet.com shall have the right, at their discretion, to terminate this
contract with 90 days written notice, without penalty or termination fee.
6. PAYMENT. Initial Fees are payable in advance of order. Monthly Fees will be
billed monthly in advance beginning one month from the Service Date.
Payment of Monthly Fees are due upon receipt of invoice, and are delinquent
if not received within 15 days. Any Fees not received 30 days from the date
of invoice are subject to a late charge of 1 1/2% per month.
7. TAXES. Customer agrees to pay any sales, use, gross receipts, excise,
access, bypass or other local, state and Federal taxes or charges, imposed
on or based upon the provision, sale or use of the NETIXS Communications
Services.
8. INTERRUPTION OF SERVICES. Services may be interrupted if any fees remain
unpaid 30 days from date of invoice, or if Customer engages in any conduct
or activities which NETIXS Communications in its responsible discretion
believes violates any of the term of this Agreement.
9. ASSIGNMENT. Customer shall not, without prior written consent of NETIXS
Communications, which shall not be unreasonably withheld, assign, transfer
or in any other manner dispose of, any of its rights, privileges, or
obligations under this Agreement.
10. CUSTOMER EQUIPMENT AND FACILITIES. Customer shall at its own expense
undertake all necessary preparations to comply with NETIXS Communications'
installation instructions. If Customer Is not ready to accept NETIXS
Communications Services 30 days after the Planned Service Date, NETIXS
Communications may begin billing Monthly Fees using the Planned Service
Date as the Service Date. Customer is responsible for the use,
compatibility and maintenance of all Customer owned equipment.
11. LETTER OF AGENCY (LOA). Customer hereby authorizes NETIXS Communications to
act on its behalf with the Local Exchange Carriers and others for the
provisioning of local access required as part of the NETIXS Communications
Services. This LOA shall remain in effect until cancellation by Customer in
writing.
12. ACCEPTABLE USE. NETIXS Communications Services may only be used for
lawful purposes. Transmission of any material in violation of any Federal,
state or local regulation is prohibited. This includes without limitation
material protected by trade secret, copyrighted material, and material
legally judged to be threatening or obscene, any access to and use of other
networks connected to NETIXS Communications, including the Internet, must
comply with the rules and behavior guidelines of that network.
13. THE GUARANTEE. In consideration of Customer's commitment to use NETIXS
Communications Service for the specified Term and the monthly Commitment
level, NETIXS Communications agrees to provide the Customer dedicated
Internet or Collocation services for the duration of this Agreement at the
NETIXS Rates in effect on the Effective Date.
14. CIRCUMSTANCES. Under no circumstances shall NETIXS Communications or its
affiliates be liable for any direct, indirect, incidental, special,
punitive or consequential damages that result in any way from the use of
or inability to use NETIXS Communications Services, or Customer's reliance
on or use of information, services or merchandise provided on or via NETIXS
Communications Services, or that result from mistakes, omissions,
interruptions, deletion of files, errors, defects, delays in operation,
or transmission, or failure of performance.
15. INDEMNITY. Customer agrees to defend, indemnify and hold NETIXS
Communications and its affiliates harmless from any and all liabilities,
costs and expenses, including reasonable attorney's fees, settlement
payments and any damages awarded related to or arising from: (1) any
violation of this Agreement by Customer or its affiliates; (2) the use
of NETIXS Communications Services or the placement or transmission of any
message, information, software or other materials on any other network
connected to NETIXS Communications; (3) negligent acts or omissions of
Customer or its in connection with the construction, installation,
maintenance, presence, use or removal of systems, channels, equipment,
or software not provided by NETIXS Communications which are connected or
are to be connected to NETIXS Communications Services; and (4) claims for
infringement arising from the use of equipment and software, apparatus and
systems not provided by NETIXS Communications.
16. DISPUTES. This agreement shall be construed in accordance with the laws of
the state of California. For purposes of Venue and Jurisdiction, this
Agreement shall be deemed made and to be performed in the City of Los
Angeles, CA.
17. ENTIRE AGREEMENT. This Agreement supersedes all prior representations,
agreements and understandings whether oral or implied, and may only be
modified in writing.
AGREED TO AND ACCEPTED:
[ILLEGIBLE] [ILLEGIBLE] 3/3/1999
- --------------------------------------------------------------------------------
YOU BET Date NETIXS Date
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NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (the "Agreement") is entered into as of April
5, 1999, by and among Youbet.com, Inc., a Delaware corporation (the "Company"),
and the purchaser whose name appears on the signature line below (the
"Purchaser"; and collectively with all other such purchasers of the Company's
Convertible Notes in the transaction of which this Agreement is a part, the
"Purchasers").
WHEREAS, the Company wishes to issue and sell an aggregate of up to
$45,500,000 principal amount of its 11% Senior Convertible Discount Notes, the
proceeds from which will be used for general corporate purposes;
WHEREAS, the Purchaser wishes to purchase certain of such notes on the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE CONVERTIBLE NOTES
Section 1.1 ISSUANCE OF THE CONVERTIBLE NOTES. Subject to the terms and
conditions set forth in this Agreement, the Company will duly authorize the
issuance and sale of its 11% Senior Convertible Discount Notes due April 5, 2004
in substantially the form of EXHIBIT A hereto (such notes, together with any
notes that may be issued hereunder in substitution or exchange therefor, are
collectively referred to herein as the "CONVERTIBLE NOTES" and each such note is
individually referred to herein as a "CONVERTIBLE NOTE"). The terms and
conditions of the Convertible Notes are incorporated herein by reference.
Section 1.2 DESCRIPTION OF THE CONVERTIBLE NOTES. The Convertible Notes
shall provide as follows:
(a) All principal, plus all accrued but unpaid interest and penalties,
shall be due and payable on April 5, 2004 (the "Maturity Date").
(b) Each Convertible Note will be issued at substantial discount from its
principal amount for a price equal to its Purchase Price on the date of purchase
(the "Issue Date"). Cash interest will not accrue on the Convertible Notes
prior to April 5, 2001. Thereafter, interest on the Convertible Notes will
accrue at the rate of 11% per annum payable semi-annually in arrears commencing
on October 5, 2001, and thereafter on April 5 and October 5 of each year and on
the Maturity Date, and thereafter, on demand. Interest on the Convertible Notes
shall be computed on the basis of a 360-day year of twelve 30-day months.
<PAGE>
(c) As provided for and on the terms and conditions set forth in the
Convertible Notes, the Convertible Notes may be converted at any time at the
option of the holder, unless previously redeemed, into shares (the "Conversion
Shares") of the Company's common stock, par value $0.001 per share (the "Common
Stock").
(d) The Convertible Notes may not be redeemed or prepaid in whole or in
part prior to the second anniversary of the Issue Date. Thereafter, the
outstanding principal amount of the Convertible Notes may be prepaid in whole or
in part at any time as provided and on the terms and conditions set forth in the
Convertible Notes.
Section 1.3 SALE AND DELIVERY OF THE CONVERTIBLE NOTES. Subject to the
terms and conditions set forth herein, the Company hereby agrees to sell to
Purchaser, and Purchaser hereby agrees to purchase from the Company, the face
principal amount of the Convertible Notes set forth opposite the name of
Purchaser under the heading "Principal Amount of Notes" on SCHEDULE I, at a
purchase price equal to the purchase price set forth under the heading "Purchase
Price" on Schedule I (the "Purchase Price"). The Convertible Notes delivered to
the Purchaser on the Closing Date will be delivered in the form of a single
registered Convertible Note registered in the name of the Purchaser or in the
name of such nominee or in such other denominations (not less than $100,000 in
principal amount) as the Purchaser may specify no later than two business days
prior to the Closing Date and in substantially the form attached hereto as
Exhibit A.
Section 1.4 CLOSING. The closing of the transactions contemplated by
this Agreement shall take place at the offices of Seward & Kissel LLP, One
Battery Park Plaza, New York, New York, on April 5, 1999, or at such other
location, date and time as may be agreed upon between the Purchasers and the
Company (such closing being called the "Closing" and such date and time being
called the "Closing Date"). At the Closing, the Company shall issue and deliver
to the Purchaser the Convertible Notes, the opinion of the Company's counsel set
forth in Section 5.2, the certificate of the Company's Chief Executive or Chief
Operating Officer set forth in Sections 5.3 and 5.4, and the documents set forth
in Section 5.7. At the Closing, as payment in full for the Convertible Notes
being purchased by it and against delivery of such Convertible Notes, the
Purchaser shall deliver to the Company an amount equal to the Purchase Price of
the Convertible Notes being purchased by the Purchaser as set forth on Schedule
I. Payment of the Purchase Price shall be made in immediately available United
States funds by wire transfer to the account of the Company.
Section 1.5 PREPAYMENTS AT PURCHASER'S OPTION FOLLOWING CHANGE IN
CONTROL. In the event that any Change in Control of the Company occurs, the
Company shall promptly (but in any event not later than 10 days after the
occurrence of such Change in Control) notify each Holder of such Change in
Control by telecopy or other similar electronic device (i) describing, in
reasonable detail, the facts and circumstances which resulted in such Change in
Control, and (ii) providing a means whereby the Convertible Notes held by any
Holder will be prepaid in connection with such Change in Control if such Holder
so elects. The Company will also
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provide such further information relating to such Change in Control as any
Holder may reasonably request. In connection with any Change in Control, each
Holder shall have the right (whether or not notice is given by the Company),
exercisable by written notice given to the Company, not later than 30 days after
receipt by such Holder of the original notice of such Change in Control, to
elect to require the Company to prepay the Convertible Notes held by such
Holder. In the event any Holder elects to require the Company to prepay the
Convertible Notes held by such Holder, the Company shall so prepay, on a date
specified by the Company (which date shall be not less than 30 days nor more
than 60 days after the giving by such Holder of the notice of its election as
provided in this Section 1.5), all of the Convertible Notes held by such Holder
(i) in the case of any such prepayment on or prior to the second anniversary of
the Issue Date, the face principal amount of such Convertible Notes, and (ii) in
the case of any prepayment after the second anniversary of the Issue Date, the
face principal amount of such Convertible Notes together with all accrued and
unpaid interest thereon to the prepayment date, and a premium equal to the
premium which would have been payable pursuant to Section 3 of such Convertible
Note if such Convertible Note were prepaid at the option of the Company on such
prepayment date. Such notice of prepayment having been so given, the aggregate
principal amount of Convertible Notes to be prepaid, together with the premium,
if any, and all accrued and unpaid interest thereon to the prepayment date,
shall become due and payable on the date so specified. Immediately upon receipt
by the Company of a notice from any Holder that such Holder elects to have the
Convertible Notes held by such Holder prepaid as provided in this Section 1.5,
the Company will notify each other Holder of receipt of such notice by telecopy
or other similar electronic device.
ARTICLE II
REGISTRATION RIGHTS
Section 2.1 CERTAIN DEFINITIONS. As used herein, the following
capitalized terms shall have the following meanings:
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as shall be in effect from time to time.
"FORM S-1" shall mean the form so designated, promulgated by the SEC for
registration of securities under the Securities Act, and any forms succeeding to
the functions of such form.
"FORM S-3" shall mean the form so designated, promulgated by the SEC for
"shelf" and certain other registrations of securities under the Securities Act,
and any forms succeeding to the functions of such form.
"HOLDER" shall mean the Purchasers and any other holder of all or part of
the Convertible Notes or the Registrable Shares.
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"HOLDER INFORMATION" shall have the meaning set forth in Section 2.5.
"REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a registration
effected by the filing of a registration statement (the "REGISTRATION
STATEMENT") in compliance with the Securities Act and the declaration or
ordering by the SEC of the effectiveness of such registration statement.
"REGISTRABLE SHARES" shall mean the Conversion Shares, the Warrant Shares
(as that term is defined in that certain Warrant to Purchase Common Stock, dated
of even date with the Convertible Notes, issued by the Company in favor of U.S.
Bancorp Libra and its designees in connection with its services as placement
agent of the Convertible Notes) and any other securities into which the
Conversion Shares or the Warrant Shares are exchanged or converted.
"Registration Expenses" shall have the meaning set forth in Section 2.6.
"SEC" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act or the Exchange Act.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
similar successor federal statute and the rules and regulations thereunder, all
as shall be in effect from time to time.
Section 2.2 REGISTRATION OF REGISTRABLE SHARES. On or before the date
which is six months following the Closing, the Company shall use its best
efforts to have the Registration Statement with respect to resales of the
Registrable Shares by the Holders on Form S-3 (if available) or Form S-1 (if
Form S-3 is not available) declared effective by the SEC, and maintain the
effectiveness of the Registration Statement through and until the date which is
the earliest of (a) the date on which all Registrable Shares are sold by the
Holders via the Registration Statement, (b) the date on which all Registrable
Shares are freely saleable by all Holders under Rule 144(k) (or its then
equivalent) without limits as to volume or otherwise, or (c) April 5, 2004,
such date to be extended 1.5 days for each day after the effectiveness of the
Registration Statement on which any Holder is unable to sell Registrable Shares
because of any Suspension (as herein defined), delisting, suspension of trading,
blackout or similar event; PROVIDED, HOWEVER, that after the date set forth in
clause (b) above, the Company is required to maintain the effectiveness of the
Registration Statement only as to those Registrable Shares that are not freely
tradeable as set forth in clause (b). The Company's obligations with respect to
the Registration Statement will not be deemed to have been satisfied unless the
Registration Statement has been declared effective by the SEC and the Company
has complied in all material respects with its obligations under this Article
with respect thereto; provided, however, that if after it has been declared
effective, the offering of Registrable Shares pursuant to the Registration
Statement is interfered with by any stop order, injunction or other order or
requirement of the SEC or any other governmental agency or court, in connection
with any notice given pursuant to the last paragraph of Section 2.5 hereof, or
by any voluntary action of the Company resulting in any
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Purchaser not being able to offer and sell any Registrable Shares (a
"SUSPENSION"), the Registration Statement will be deemed not to have become
effective during the period of such Suspension until the offering of Registrable
Shares pursuant to the Registration Statement may legally resume.
Section 2.3 CASH PAYMENTS. If (i) the Registration Statement does not
become effective by October 5, 1999; (ii) at any time after October 5, 1999 (a)
the Company does not have sufficient authorized shares of Common Stock to permit
conversion of all of the then outstanding Convertible Notes, (b) the Company
fails for any reason to honor a request for conversion of any of the Convertible
Notes, or (c) the shares of Common Stock of the Company are delisted from any
securities exchange on which such shares are listed or lose eligibility for
inclusion in the NASDAQ National Market or NASDAQ SmallCap Market or the NASD
"bulletin board," and as a result thereof the Company's Common Stock is not
listed on any national securities exchange or eligible for inclusion in the
NASDAQ National Market or NASDAQ SmallCap Market or the NASD "bulletin board";
or (iii) a Suspension is in effect for a cumulative period in excess of 60 days;
then the Company shall pay, in addition to any other remedies available at law
or in equity, (i) to each Holder of the Convertible Notes, a cash payment equal
to 3% of the principal amount of the then outstanding Convertible Notes held by
such Holder and (ii) to each Holder of the Conversion Shares, for each
Conversion Share, a cash payment equal to 3% of the principal amount of the
Convertible Note from which such Conversion Share was converted for each 30-day
period thereafter, pro rated as to any period of less than 30 days. Cash
payments under this Section 2.3 shall be due at the end of each relevant 30-day
period or pro rated period. Notwithstanding anything herein to the contrary:
(x) the cumulative cash payments under this Section 2.3 (which, for the
avoidance of doubt, are in addition to any remedy whether at law or in equity to
which any Holder is entitled other than pursuant to this Section 2.3) shall not
exceed 18% of the principal amount of the Convertible Notes; (y) no cash
payments shall be required (1) pursuant to clause (ii)(a) or (ii)(b) above with
respect to any issued and outstanding Conversion Share; (2) pursuant to clause
(ii)(c) or (iii) above with respect to any Conversion Share that has been sold
by the Holder; and (3) pursuant to clause (iii) above with respect to any
Conversion Share that is freely tradeable by the Holder under Rule 144(k) (or
its then equivalent) or any Convertible Note which, if converted, would yield
Conversion Shares which are freely tradeable under Rule 144(k) (or its then
equivalent).
Section 2.4 HOLDBACK AGREEMENT. If any registration of Registrable
Shares shall be in connection with an underwritten public offering (PROVIDED,
HOWEVER, that nothing herein shall be construed to require or obligate the
Company to undertake any underwritten public offering of the Registrable
Shares), the Company agrees (A) not to effect any public sale or distribution of
any of its equity securities or of any security convertible into or exchangeable
or exercisable for any equity security of the Company (other than any such sale
or distribution of such securities in connection with any merger or
consolidation by the Company or any affiliate of the Company or the acquisition
by the Company or an affiliate of the Company of the shares or substantially all
the assets of any other Person or in connection with an employee stock ownership
or other benefit plan) during the 10 days prior to, and during the 180-day
period (or such lesser period as
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may be agreed upon between such holders and the managing underwriter of such
offering) which begins on, the effective date of such registration statement
(except as part of such registration), and (B) that any agreement entered into
after the date hereof pursuant to which the Company issues or agrees to issue
any privately placed equity securities shall contain a provision under which the
holders of such securities agree not to effect any public sale or distribution
of any such securities during the period and in the manner referred to in the
foregoing clause (A), including a private placement pursuant to Rule 144A under
the Securities Act (or any successor provision) or otherwise and any sale
pursuant to Rule 144 under the Securities Act (except as part of such
registration, if permitted).
Section 2.5 REGISTRATION PROCEDURES. In satisfaction of its obligations
under this Article, the Company will as expeditiously as possible:
(a) Prepare and file with the SEC the Registration Statement on Form S-3
(if available) or Form S-1 (if Form S-3 is not available) and which form shall
be available for the sale of the Registrable Shares in accordance with the
intended methods of distribution thereof, and use its best efforts to cause such
registration statement to become and remain effective as provided in Section 2.2
hereof, PROVIDED that before filing with the SEC a registration statement or
prospectus or any amendments or supplements thereto, the Company will
(A) furnish to one counsel selected by the holders of a majority of the
Registrable Shares copies of all such documents proposed to be filed for said
counsel's review and comment, and (B) notify each holder of Registrable Shares
of any stop order issued or threatened by the SEC and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered;
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for the period set forth
in Section 2.2, and comply with the provisions of the Securities Act with
respect to the disposition of all of the Registrable Shares covered by the
Registration Statement in accordance with the intended method of disposition set
forth in the Registration Statement for such period;
(c) furnish to the Holders such number of copies of the Registration
Statement and the prospectus included therein (including each preliminary
prospectus) as such Holders reasonably may request in order to facilitate the
public sale or other disposition of the securities covered by the Registration
Statement;
(d) use its best efforts to register or qualify the Holders' Registrable
Shares covered by the Registration Statement under the securities or "blue sky"
laws of such jurisdictions as the Holders or, in the case of an underwritten
public offering, the managing underwriter reasonably shall request, PROVIDED,
HOWEVER, that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction when
it is not so qualified or to consent to general service of process in any such
jurisdiction;
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(e) use its best efforts to cause the Registrable Shares covered by the
Registration Statement to be listed on any securities exchange or accepted for
quotation on any facility of the National Association of Securities Dealers,
Inc. or stock exchange on which the Company's Common Stock is then quoted or
listed;
(f) use its best efforts to cause the Registrable Shares covered by such
registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the holder or holders thereof
to consummate the disposition of such Registrable Shares;
(g) immediately notify each Holder at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the happening
of any event of which the Company has knowledge as a result of which the
prospectus contained in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statement therein not
misleading in light of the circumstances then existing, and the Company will
promptly prepare and furnish to such Holder a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Registrable Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading;
(h) furnish an opinion of counsel representing the Company for the
purposes of such registration, dated the effective date of the Registration
Statement, addressed to the Holders, stating that the Registration Statement has
become effective under the Securities Act and that (A) to the knowledge of such
counsel, no stop order suspending the effectiveness thereof has been issued and
no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) the Registration Statement, the
related prospectus and each amendment or supplement thereof comply as to form in
all material respects with the requirements of the Securities Act (except that
such counsel need not express any opinion as to financial statements contained
therein), and (C) such counsel examined the Registration Statement and any
amendment thereof or supplement thereto and has participated in conferences with
officers and other representatives of the Company, representatives of the
Purchasers, counsel to the Purchasers (selected pursuant to Section 2.5(a)
hereof) and representatives of the independent certified public accountants of
the Company, at which the contents of the Registration Statement and any
amendment thereof or supplement thereto and related matters were discussed and,
although such counsel has not independently verified and is not passing upon and
assumes no responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and prospectus included
therein, nothing has come to such counsel's attention that has caused such
counsel to believe that the Registration Statement, on the effective date
thereof, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading, or that the prospectus on the date thereof or
on the date of such opinion, contained or contains an untrue statement of
material fact or omitted or omits to state a material
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fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel will express no view with respect to the financial statements contained
therein);
(i) make available for inspection by the Holders and any attorney,
accountant or other agent retained by the Holders, during business hours upon
reasonable notice, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
Holder, attorney, accountant or agent in connection with the Registration
Statement;
(j) use its best efforts to obtain a "cold comfort" letter from the
Company's appointed auditors in customary form and covering such matters of the
type customarily covered by "cold comfort" letters as the Holders of a majority
in interest of the Registrable Shares being sold reasonably request, subject to
the Holders making all representations and warranties reasonably required by
such auditors; and
(k) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC.
In connection with each registration hereunder, each Holder will furnish to
the Company in writing such information regarding such Holder as the Company may
require in connection with the preparation of the Registration Statement (the
"HOLDER INFORMATION") of such Holder. The Company will include the Holder
Information in the prospectus without alteration and will not file a
Registration Statement over the reasonable objection of any Holder; provided
that (i) such objection must be made in writing to the Company, state with
specificity such Holder's grounds for objection to the Registration Statement
and identify what changes to the Registration Statement would cause such Holder
to remove its objection; (ii) such Holder shall negotiate openly and in good
faith with the Company to remove such objection for a period of 10 days after
notifying the Company of its objection; and (iii) the Company shall not be
required to pay any penalties to any Holder pursuant to Section 2.3 for such
10-day period. In connection with a registration hereunder, if a Holder shall
distribute a prospectus of the Company in compliance with applicable securities
laws and if the Company provides the Holder with a written prospectus for
distribution in connection with such registration and thereafter the Company
delivers a written notice to the Holder in accordance with this Agreement
requesting that the Holder refrain from further distribution of such prospectus
because such prospectus contains an untrue statement of material fact or omits
to state a material fact required to be stated therein or necessary to make the
statement therein not misleading, then the Holder will not thereafter further
distribute such prospectus. In the event that the Company shall give such
notice, a Suspension shall be deemed to exist for the period from and including
the date of the giving of such notice to and including the date when each holder
of Registrable Shares covered by the Registration Statement shall have received
the copies of the supplemented or amended prospectus contemplated by Section
2.5(f) hereof.
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Section 2.6 REGISTRATION EXPENSES. The Company will pay all
Registration Expenses in connection with the Registration Statement under this
Article. "REGISTRATION EXPENSES" shall mean all expenses incurred in connection
with a registration hereunder or otherwise incurred by the Company in complying
with this Article, including, without limitation, all registration and filing
fees, listing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and disbursements of
counsel referred to in Section 2.5(a), fees and expenses (including counsel
fees) incurred in connection with complying with state securities or "blue sky"
laws, fees of the National Association of Securities Dealers, Inc., transfer
taxes, fees of transfer agents and registrars and costs of insurance if any, but
excluding underwriting discounts and selling commissions applicable to the sale
of the Registrable Shares.
Section 2.7 INDEMNIFICATION.
(a) In the event of a registration of any Registrable Shares under
the Securities Act pursuant to this Article, the Company will indemnify and hold
harmless, to the full extent permitted by law, each Holder, their respective
directors and officers, parents, subsidiaries, general partners, limited
partners and managing directors, each Person, if any, who controls the Holder
within the meaning of the Securities Act, each underwriter of such Registrable
Shares thereunder and each other Person, if any, who controls the underwriter
within the meaning of the Securities Act (and directors, officers, parents,
subsidiaries, controlling Persons, partners and managing directors of any of the
foregoing), against any losses, claims, damages, liabilities and expenses
(including any amounts paid in any settlement effected with the Company's
consent, which consent will not be unreasonably withheld, and also including the
costs of enforcement of this Agreement and the Convertible Notes), to which such
Holder, director, officer, general or limited partner, managing director,
underwriter or controlling Person may become subject under the Securities Act,
United States state securities "blue sky" laws, common law or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
or expenses arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Shares were registered under the Securities Act
pursuant to this Article, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, or arise out of any violation or alleged violation by the Company of
any United States federal, state or common law rule or regulation applicable to
the Company and relating to action required of or inaction by the Company in
connection with any such registration, and will reimburse each Holder, and each
such director, officer, parent, subsidiary, general partner, limited partner or
managing director, each such underwriter and each such controlling Person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
PROVIDED, HOWEVER, that the Company will not be liable in any such case to such
Holder if and only to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or omission made in reliance
upon and in conformity with the Holder Information pertaining to and provided by
such Holder in writing specifically for use in the
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Registration Statement or prospectus. The indemnity provided for herein shall
remain in full force and effect regardless of any investigation made by or on
behalf of such Holder or any such director, officer, general partner, limited
partner, managing director, underwriter or controlling Person and shall survive
the transfer of such Registrable Shares by such Holder.
(b) In the event of a registration of any Registrable Shares under
the Securities Act pursuant to this Article, each Holder will indemnify and hold
harmless the Company, each Person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
Registration Statement, each director of the Company, each underwriter of such
Registrable Shares, each Person, if any, who controls any underwriter within the
meaning of the Securities Act, and each other Holder against any losses,
claims, damages or liabilities to which the Company or such officer, director,
underwriter, controlling Person or Holder may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities or actions in respect thereof arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement under which such Registrable Shares were registered
under the Securities Act pursuant to this Article, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, directors, underwriter, controlling Person and Holder for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, PROVIDED HOWEVER,
that each Holder will be liable hereunder (i) in any such case if and only to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or omission made in reliance upon and in
conformity with the Holder Information pertaining to such Holder, as such,
furnished in writing to the Company by such Holder specifically for use in the
Registration Statement or prospectus, and (ii) in any event in no greater amount
than the net proceeds received by such Holder from its sale of Registrable
Shares pursuant to such Registration Statement or prospectus. The indemnity
provided for herein shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer,
general partner, limited partner, managing director, underwriter, controlling
Person or other Holder and shall survive the transfer of such Registrable Shares
by the indemnifying Holder.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action, such indemnified party shall,
if a claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the omission so
to notify the indemnifying party shall not relieve the indemnifying party from
any liability which it may have to such indemnified party other than as provided
in this Section and shall only relieve the indemnifying party from any liability
which it may have to such indemnified party under this Section if and to the
extent the indemnifying party is materially prejudiced by such omission. In
case any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof,
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unless such indemnified party shall have been advised by counsel that a conflict
of interest between such indemnified party and indemnifying parties may exist in
respect of such claim, the indemnifying party shall be entitled to participate
in and, to the extent it shall so desire, to assume and undertake the defense
thereof with counsel reasonably satisfactory to such indemnified party, and,
after notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the indemnifying party
shall not be liable to such indemnified party under this Section for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof, PROVIDED, HOWEVER, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have been advised by counsel that there may be
reasonable defenses available to the indemnified party which are different from
or in addition to those available to the indemnifying party such that the
interests of the indemnified party reasonably may be deemed to conflict with the
interests of the indemnifying party, the indemnified party shall have the right
to select one separate counsel and to assume such legal defenses and otherwise
to participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred. In no event shall an
indemnifying party be liable for any settlement reached without its consent,
which consent shall not be unreasonably withheld (such settlement must include
general releases). No indemnifying party will consent to entry of any judgment
or enter into any settlement that does not include as an 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. An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel in any single jurisdiction for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels as may be reasonably
necessary. Notwithstanding anything to the contrary set forth herein, and
without limiting any of the rights set forth above, in any event any party will
have the right to retain, at its own expense, counsel with respect to the
defense of a claim.
(d) Indemnification similar to that specified in the preceding
subsections of this Section 2.7 (with appropriate modifications) shall be given
by the Company and each Holder, to the full extent permitted by applicable law,
with respect to any required registration or other qualification of securities
under any United States federal or state law or regulation or governmental
authority other than the Securities Act.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in this Section 2.7
is for any reason held to be unenforceable although applicable in accordance
with its terms, then, and in each such case, the Company and the Holders will
contribute to the aggregate losses, claims, damages, liabilities and expense to
which they may be subject in such proportion as is appropriate to reflect the
relative fault of the Company, on the one hand, and the Holders, on the other,
with respect to the
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statements or omissions that resulted in such loss, liability, claim, damage or
expense, or action in respect thereof, as well as any other relevant equitable
considerations. The relative fault of the Company, each Holder and the other
indemnified and indemnifying parties shall be determined by reference to, among
other things, whether any action in question, including any untrue or allegedly
untrue statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information supplied by, such
parties, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The Company and the Holders
agree that it would not be just and equitable if contribution pursuant to this
Section 2.7 were to be determined by pro rata allocation or by any other method
of allocation that does not take into account the equitable considerations
referred to herein. Notwithstanding anything to the contrary contained herein,
the Company and the Holders agree that (A) any contribution required to be made
by a Holder pursuant to this Section 2.7 shall not exceed the net proceeds from
the offering of Registrable Shares received by such Holder with respect to such
offering; and (B) no Person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any Person or entity who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 2.7, each Person, if any, who
controls a Holder or an underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such Holder or
underwriter, and each director of the Company, each officer of the Company who
signed the registration statement, and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as the Company.
Section 2.8 REPORTS UNDER THE SECURITIES ACT AND THE EXCHANGE ACT. With
a view to making available to the Holders the benefits of any rule or regulation
of the SEC that may at any time permit the Holders to sell securities of the
Company to the public pursuant to a registration on Form S-3 or otherwise, the
Company agrees to file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act.
Section 2.9 LOCK-UP RESTRICTIONS. Purchasers acknowledge that the
Company is contemplating proceeding in 1999 with an underwritten offering of its
Common Stock, solely for the account of the Company and certain holders (other
than officers, directors or employees of the Company or affiliates of such
Persons or Persons whose holdings are under applicable SEC rules attributed to
any of the foregoing) of existing stock purchase warrants as disclosed pursuant
to Section 3.4 hereof (the "Stock Offering"). Purchasers agree that between the
time of execution of any underwriting agreement for the Stock Offering until the
expiration of such period as the underwriters in the Stock Offering shall
require (such period not to exceed 180 days or to continue after March 31,
2000), they will not sell, pledge or otherwise transfer without the consent of
such underwriters any of the Convertible Notes or Conversion Shares except to
transferees who agree in writing to be bound by such restrictions (the "Lock-Up
Restrictions"); provided, however, that no Purchaser shall be bound by any
Lock-Up Restrictions unless all then officers, directors and affiliates (within
the meaning of the Securities Act) of the Company
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(within the meaning of the Securities Act), and Persons whose holdings are under
applicable SEC rules attributed to any of the foregoing, contemporaneously agree
in writing to be bound by such Lock-Up Restrictions for a period extending for
30 days beyond the period that the Purchaser is bound by the Lock-Up
Restrictions. The Company's obligations to register the Registrable Shares
under this Article II shall not be applicable to any subsequent holder of
Convertible Notes who does not agree in writing to be bound by this Section 2.9.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that, except as set
forth in this Agreement, the Form 10-K (as defined below), the Financial
Statements (as defined below) or the Disclosure Schedule delivered to the
Purchasers:
Section 3.1 ORGANIZATION, QUALIFICATION AND CORPORATE POWER.
(a) The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware, and each Subsidiary is
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its organization, and the Company and each Subsidiary is duly
licensed or qualified to transact business in all jurisdictions in which the
nature of the business transacted by the Company or such Subsidiary or the
character of the properties owned or leased thereby requires that the Company or
such Subsidiary qualify to do business as a foreign corporation, except where
the failure to be so licensed or qualified would not have a Material Adverse
Effect. The Company and each Subsidiary has the corporate power and authority
to own and hold its properties and to carry on its business as now conducted and
as proposed to be conducted. The Company has the corporate power and authority
to execute, deliver and perform this Agreement, to issue, sell and deliver the
Convertible Notes and to issue and deliver the Conversion Shares.
(b) The subsidiaries of the Company are set forth on SCHEDULE 3.1(b) of
the Disclosure Schedule. The Company owns 100% of the issued and outstanding
common stock of each Subsidiary, and no Subsidiary has any equity interests, or
options, warrants or convertible securities therefor, other than such common
stock. Other than such Subsidiaries, the Company does not own of record or
beneficially, directly, (i) any shares of capital stock or securities
convertible into capital stock of any other corporation or, (ii) any
participating interest in any partnership, joint venture or other non-corporate
business enterprise and does not control, directly or indirectly, any other
entity.
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Section 3.2 AUTHORIZATION OF AGREEMENTS, ETC.
(a) The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder, the issuance, sale and
delivery of the Convertible Notes and the issuance and delivery of the
Conversion Shares have been duly authorized by all requisite corporate action
and will not violate (i) any provision of any law, order of any court or other
agency of government applicable to the Company, the Certificate of Incorporation
of the Company (the "Charter"), or the By-Laws of the Company, as amended, or
(ii) any provision of any indenture, agreement or other instrument to which the
Company or any of its properties or assets is bound, or (iii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under any such indenture, agreement or other instrument, or (iv) result
in the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company, which in the cases of clauses (ii), (iii) and (iv) would have a
Material Adverse Effect.
(b) The Conversion Shares have been duly authorized, reserved for issuance
upon conversion of the Convertible Notes and, when so issued, will be validly
issued, fully paid and nonassessable shares of Common Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances. Neither the issuance,
sale or delivery of the Convertible Notes nor the issuance or delivery of the
Conversion Shares is subject to any preemptive right of stockholders of the
Company or to any right of first refusal or other right in favor of any person.
Section 3.3 VALIDITY. This Agreement and the Convertible Notes (on
delivery at the Closing) have been (or, in the case of the Convertible Notes,
will be on delivery at the Closing) duly executed and delivered by the Company
and constitute the legal, valid and binding obligations of the Company,
enforceable in accordance with their terms, subject to laws of general
application from time to time in effect affecting creditors' rights and the
exercise of judicial discretion in accordance with general equitable principles.
Section 3.4 AUTHORIZED CAPITAL STOCK. The authorized capital stock of
the Company consists of 50,000,000 shares of the Common Stock and 1,000,000
shares of preferred stock (the "PREFERRED STOCK"). The Company has authorized
the creation of a series of 400,000 shares of Preferred Stock designated "Series
A Convertible Preferred Stock" out of the 1,000,000 shares of authorized
Preferred Stock. As of March 31, 1999 there were outstanding 14,314,731 shares
of Common Stock, 1,051,100 shares of Series A Convertible Preferred Stock,
warrants to purchase 7,536,514 shares of Common Stock and options to purchase
1,956,596 shares of Common Stock. Since March 31, 1999, the Company has not
issued any securities other than pursuant to the exercise of rights under
options, warrants, or convertible securities existing prior to March 31, 1999.
The designations, powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class and series of authorized capital stock of
the Company are as set forth in the Charter, a copy of which is attached hereto
as EXHIBIT B. No subscription, warrant, option, convertible security, or other
right (contingent or other) to purchase or otherwise acquire from
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the Company any equity securities of the Company is authorized or outstanding
and there is no commitment by the Company to issue shares, subscriptions,
warrants, options, convertible securities, or other such rights or to distribute
to holders of any of its equity securities any evidence of indebtedness or
asset. Except as provided for in the Charter or as set forth in SCHEDULE 3.4 of
the Disclosure Schedule, the Company has no obligation (contingent or otherwise)
to purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution thereof.
Section 3.5 COMPANY FORM 10-K. The Company has delivered to Purchaser a
copy of the Company's draft Form 10-KSB for the year ended December 31, 1998
substantially in the form expected to be filed with the SEC on or about April
15, 1999 (the "Form 10-K"). The Form 10-K does not contain any misstatements of
material fact or fail to state any material fact necessary to make the
statements therein not misleading. The financial statements included in the
Form 10-K (the "Financial Statements") comply as to form with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto. The financial statements included in the Form 10-K have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto). The balance sheets contained in the Form 10-K present fairly
the financial condition of the Company and the Subsidiaries on a consolidated
basis as of the dates thereof. The income statements contained in the Form 10-K
present fairly the results of the operations of the Company and the Subsidiaries
on a consolidated basis for the periods covered thereby and do not contain any
items of special or nonrecurring income, except as specifically set forth
therein. Since December 31, 1998 (i) there has not been any change in the
business, financial condition, operations or accounting procedures of the
Company, except changes in the ordinary course of business which do not
individually or in the aggregate constitute a Material Adverse Effect, and (ii)
the Company and its Subsidiaries have not incurred any Indebtedness for Borrowed
Money, directly or indirectly, actual or contingent.
Section 3.6 SEC REPORTING. Since January 1, 1998, to the date hereof,
the Company has filed its annual reports on Form 10-KSB, quarterly reports on
Form 10-QSB and current reports on Form 8-K (the "SEC Documents"), which are all
the documents (other than preliminary material) that the Company was required to
file with the SEC since such date. As of their respective dates, none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and no material event has occurred which could make any of
the disclosures contained therein misleading other than as disclosed in later
filed SEC Documents or in the Form 10-K. The financial statements of the
Company included in the SEC Documents have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited financial statements, as may be permitted by Form 10-QSB of
the SEC) and such statements together with the notes thereto fairly present
(subject in the case of unaudited financial statements, only to normal recurring
year-end audit adjustments) the consolidated financial
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position of the Company and its consolidated Subsidiaries as at the dates
thereof and the consolidated results of their operations and changes in
financial position for the periods then ended.
Section 3.7 CERTAIN EVENTS. The Company has not, and no Subsidiary has,
(i) issued any stock, bond or other corporate security, (ii) borrowed any amount
or incurred or become subject to any material liability (absolute, accrued or
contingent), except current liabilities incurred and liabilities under contracts
entered into in the ordinary course of business, (iii) discharged or satisfied
any lien or encumbrance or incurred or paid any obligation or liability
(absolute, accrued or contingent) other than current liabilities incurred in the
ordinary course of business, (iv) declared or made any payment or distribution
to stockholders or purchased or redeemed any shares of its capital stock or
other security, (v) mortgaged, pledged or subjected to lien any of its assets,
tangible or intangible, other than liens for current real property taxes not yet
due and payable, (vi) sold, assigned or transferred any of its material tangible
assets except in the ordinary course of business, or canceled any material debt
or claim, (vii) sold, assigned, transferred or granted any license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (viii) suffered any material loss of property or waived
any material right of substantial value whether or not in the ordinary course of
business, (ix) made any change in officer compensation except in the ordinary
course of business and consistent with past practices, (x) made any material
change in the manner of business or operations of the Company, (xi) entered into
any material transaction except in the ordinary course of business or as
otherwise, contemplated hereby, or (xii) entered into any material commitment
(contingent or otherwise) to do any of the foregoing.
Section 3.8 GOVERNMENTAL APPROVALS. Subject to the accuracy of the
representations and warranties of the Purchasers set forth in Article IV, no
registration or filing with, or consent or approval of or other action by, any
federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the issuance, sale and delivery of the Convertible Notes or,
upon conversion thereof, the issuance and delivery of the Conversion Shares,
other than the filing of notices prior or subsequent to the Closing that may be
required pursuant to federal and state securities laws in connection with the
sale of the Convertible Notes.
Section 3.9 LITIGATION; COMPLIANCE WITH LAW. There is no (i) action,
suit, claim, proceeding or investigation pending or, to the Company's knowledge,
threatened against the Company or any Subsidiary, at law or in equity to
restrain, prohibit, restrict or delay the transactions contemplated by this
Agreement before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) outstanding or unsatisfied judgment for money damages or otherwise
against the Company or any Subsidiary, (iii) action, suit, claim, proceeding or
investigation pending or, to the Company's knowledge, threatened against the
Company or any Subsidiary, which, if determined adversely to the Company or such
Subsidiary, would have a Material Adverse Effect, (iv) arbitration proceeding
relating to the Company or any Subsidiary pending under collective
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bargaining agreements or otherwise, or (v) governmental inquiry pending, or to
the Company's knowledge, threatened against the Company or any Subsidiary
(including without limitation any inquiry as to the qualifications of the
Company or any Subsidiary to hold or receive any governmental license or
permit). Neither the Company nor any Subsidiary is in default with respect to
any order, writ, injunction or decree known to or served upon the Company or any
Subsidiary of any court or of any federal, state, municipal, or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign. There is no action or suit by the Company or any
Subsidiary pending or contemplated against others. The Company and each
Subsidiary has complied in all material respects with all laws, rules,
regulations, and orders applicable to its business, operations, properties,
assets, products and services, and the Company and each Subsidiary has all
material governmental permits, licenses and other authorizations required to
conduct its business as conducted and as proposed to be conducted. There is no
existing law, rule, regulation or order, and the Company has no knowledge of any
proposed law, rule, regulation or order, whether federal or state, which would
prohibit or restrict the Company or any Subsidiary from, or otherwise materially
adversely affect the Company or any Subsidiary in, conducting its business in
any jurisdiction in which it is now conducting business or in which it proposes
to conduct business.
Section 3.10 TITLE TO PROPERTIES. The Company and each Subsidiary has
good and marketable title to its properties and assets reflected in the balance
sheet that is part of the Financial Statements or thereafter acquired (other
than properties and assets disposed of in the ordinary course of business since
the date of the Balance Sheet) and all such properties and assets are free and
clear of mortgages, pledges, security interests, Liens, charges, claims,
restrictions and other encumbrances, except for liens for or current taxes not
yet due and payable and minor imperfections of title, if any, not material in
nature or amount and not materially distracting from the value or impairing the
use of the property subject thereto or impairing the operations or proposed
operations of the Company or any Subsidiary. Such assets are suitable for the
purposes for which they are used by the Company and each Subsidiary.
Section 3.11 LEASEHOLD INTERESTS. Each lease or agreement to which the
Company or any Subsidiary is a party under which it is a lessee of any property,
real or personal, is a valid and subsisting agreement without any default of the
Company or such Subsidiary thereunder and, to the Company's or such Subsidiary's
knowledge, without any default thereunder of another party thereto. No event
has occurred and is continuing which, with notice or lapse of time or both,
would constitute a default or event of default by the Company or any Subsidiary
under any such lease agreement or, to the Company's or any Subsidiary's
knowledge, by any other party thereto. The Company's and each Subsidiary's
possession of such property has not been disturbed and, to the Company's and
each Subsidiary's knowledge, no claim has been asserted against the Company or
any Subsidiary adverse to its rights in such leasehold interests. Neither the
Company nor any Subsidiary has assigned, transferred, conveyed or mortgaged any
interest in any such lease or agreement. Such properties are suitable for the
purposes for which they are used by the Company and each Subsidiary.
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Section 3.12 TAXES. The Company and each Subsidiary has filed all tax
returns, federal, state, county and local, required to be filed by it, and the
Company and each Subsidiary has paid, or made adequate provision for the payment
of, all taxes shown to be due and payable including without limitation all taxes
which the Company or such Subsidiary is obligated to withhold from amounts owing
to employees, creditors and third parties. The Company reasonably believes that
it has established adequate reserves for all taxes accrued but not yet payable.
The tax returns of the Company and each Subsidiary have never been audited by
the Internal Revenue Service or any other taxing authority. No deficiency
assessment with respect to or proposed adjustment of the Company's or any
Subsidiary's federal, state, county or local taxes is pending or, to the
Company's knowledge, threatened. There is no tax lien, whether imposed by any
federal, state, county or local-taxing authority, outstanding against the
assets, properties or business of the Company or any Subsidiary. Neither the
Company nor any Subsidiary nor, to the Company's knowledge, any of the
stockholders thereof has ever filed (a) an election pursuant to Section 1362 of
the Internal Revenue Code of 1986, as amended (the "Code"), that the Company or
such Subsidiary be taxed as a S corporation or (b) consent pursuant to Section
341(f) of the Code relating to collapsible corporations.
Section 3.13 OTHER AGREEMENTS. Neither the Company nor any Subsidiary is
a party to or otherwise bound by any written or oral:
(i) contract or agreement which is not terminable on less than
ninety (90) days notice, without cost or other liability to the Company or any
Subsidiary (except for contracts which, in the aggregate, are not material to
the business of the Company or any Subsidary);
(ii) contract which entitles any customer to a rebate or right of
set-off, or which varies in any material respect from the Company's or any
Subsidiary's standard contracts;
(iii) contract with any labor union (and, to the knowledge of the
Company and each Subsidiary, no organizational effort is being made with respect
to any of its employees);
(iv) contract or other commitment with any supplier of goods or
services containing any provision permitting any party other than the Company or
Subsidiary to renegotiate the price or other terms, or containing any pay-back
or other similar provision upon the occurrence of a failure by the Company or
any Subsidiary to meet its obligations under the contract when due or the
occurrence of any other event;
(v) contract for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(vi) contract for the employment of any officer, employee or
other person (whether of a legally binding nature of informal understandings) on
a full-time or consulting
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basis which is not terminable on notice without cost or other liability to the
Company or Subsidiary, except normal severance arrangements and accrued vacation
pay;
(vii) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, contract or understanding
pursuant to which benefits are provided to any employee of the Company or any
Subsidiary (other than group insurance plans applicable to employees generally);
(viii) guaranty of any obligation for borrowed money or otherwise;
(ix) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the Company or any Subsidiary;
(x) agreement, or group of related agreements with the same
party or any group of affiliated parties, under which the Company or any
Subsidiary has advanced or agreed to advance money or has agreed to lease an
property as lessee or lessor;
(xi) agreement or obligation (contingent or otherwise) to issue,
sell or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its property;
(xii) agreement under which it has granted any person any
registration rights;
(xiii) agreement under which it has limited or restricted its right
to compete with any person in any respect; or
(xiv) contract or group of related contracts with the same party
involving more than $100,000 or continuing over a period of more than twelve
months from the date or dates thereof (including renewals or extensions optional
with another party), which contract or group of contracts is not terminable by
the Company without penalty upon notice of thirty (30) days or less.
The Company and each Subsidiary, and to the Company's and each Subsidiary's
knowledge, each other party thereto have in all material respects performed all
the obligations required to be performed by them to date, have received no
notice of default and are not in default (with due notice or lapse of time, or
both) under any material lease, agreement or contract now in effect to which the
Company or any Subsidiary is a party or by which it or its property may be
bound. Neither the Company nor any Subsidiary has any present expectation or
intention of not fully performing all its obligations under each such material
lease, contract or other agreement, and neither the Company nor any Subsidiary
has knowledge of any breach or anticipated breach by the other party to any
material contract or commitment to which the
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Company or any Subsidiary is a party. The Company and each Subsidiary is in
compliance with all of the terms and provisions of its Charter and Bylaws.
Section 3.14 PATENTS, TRADEMARKS, ETC. Set forth in Schedule 3.14 is a
list and brief description of all patents, patent rights, patent applications,
trademarks, trademark applications, service marks, service mark applications,
trade names and copyrights, and all applications for such which are in the
process of being prepared, owned by or registered in the name of the Company and
each Subsidiary, or of which the Company or any Subsidiary is a licensor or
licensee or in which the Company or any Subsidiary has any right, and in each
case a brief description of the nature of such right. The Company and each
Subsidiary currently has all licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, manufacturing processes, formulae, trade
secrets and know how (collectively, "Intellectual Property") which the Company
or any Subsidiary presently believes are necessary or desirable to the conduct
of its business as conducted and proposed to be conducted, and no claim is
pending or, to the Company's or any Subsidiary's knowledge, threatened, to the
effect that the operations of the Company or any Subsidiary infringe upon or
conflict with the asserted rights of any other person under any Intellectual
Property. No claim is pending or, to the Company's or any Subsidiary's
knowledge, threatened, to the effect that any such Intellectual Property owned
or licensed by the Company or any Subsidiary, or which the Company or any
Subsidiary otherwise has the right to use, is invalid or unenforceable by the
Company or such Subsidiary. To the Company's knowledge, all technical
information developed by and belonging to the Company and each Subsidiary which
has not been patented has been kept confidential. Neither the Company nor any
Subsidiary has granted or assigned to any other person or entity any right to
manufacture, have manufactured, assemble or sell the products or proposed
products or to provide the services or proposed services of the Company or any
Subsidiary.
Section 3.15 LOANS AND ADVANCES. Neither the Company nor any Subsidiary
has any outstanding loans or advances to any person and is not obligated to make
any such loans or advances, except, in each case, for advances to employees of
the Company in respect of relocation costs or reimbursable business expenses
anticipated to be incurred by them in connection with their performance of
services for the Company.
Section 3.16 ASSUMPTIONS, GUARANTIES, ETC. OF INDEBTEDNESS OF OTHER
PERSONS. Neither the Company nor and Subsidiary has assumed, guaranteed,
endorsed or otherwise become directly or contingently liable on any indebtedness
or any other obligation of any other person (including, without limitation,
liability by way of agreement, contingent or otherwise, to purchase, to provide
funds for payment, to supply finds to or otherwise invest in the debtor, or
otherwise to assure the creditor against loss), except for guaranties by
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business.
Section 3.17 MATERIAL CUSTOMERS AND SUPPLIERS. No customer or supplier
which is material to the Company or any Subsidiary has terminated, materially
reduced or threatened to
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terminate or materially reduce its purchases from or provision of products or
services to the Company or any Subsidiary, as the case may be.
Section 3.18 DISCLOSURE. The Company's representations and warranties in
this Agreement and in the Schedules and Exhibits to this Agreement do not
contain any untrue statement of a material fact or omit a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 3.19 OFFERING OF THE CONVERTIBLE NOTES. Except for U.S. Bancorp
Libra, a division of U.S. Bancorp Investments, Inc. ("U.S. Bancorp Libra"),
which the Company has engaged as its exclusive financial advisor and placement
agent with respect to the Convertible Notes, neither the Company nor any person
authorized or employed by the Company as agent, broker, dealer or otherwise in
connection with the offering or sale of the Convertible Notes or any security of
the Company similar to the Convertible Notes has offered the Convertible Notes
or any such similar security for sale to, or solicited any offer to buy the
Convertible Notes or any such similar security from, or otherwise approached or
negotiated with respect thereto with, any person or persons, and neither the
Company nor any person acting on its behalf has taken or will take any other
action (including, without limitation, any offer, issuance or sale of any
security of the Company under circumstances which might require the integration
of such security with the Convertible Notes under the Securities Act), in either
case so as to subject the offering, issuance or sale of the Convertible Notes to
the registration provisions of the Securities Act.
Section 3.20 BROKERS. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement, except for the Company's agreement
with U.S. Bancorp Libra.
Section 3.21 SOLVENCY. The Company is not entering into any of the
transactions contemplated hereby, nor does the Company intend to make any
transfer or incur any obligations hereunder, with actual intent to hinder, delay
or defraud either present or future creditors. On the Closing Date, after
giving effect to the consummation of the transactions contemplated hereby and
the use of the proceeds of the issuance and sale of the Convertible Notes for
the purposes described herein, (i) without prejudice to the Company's
representation contained in Section 3.9 hereof, the Company expects the cash
available to the Company and the Subsidiaries on a consolidated basis, after
taking into account all other anticipated uses of the cash of the Company and
the subsidiaries, will be sufficient to satisfy all final judgments for money
damages which have been docketed against the Company and the Subsidiaries or
which may be rendered against the Company and the Subsidiaries in any action in
which the Company or any Subsidiary is a defendant (taking into account the
reasonably anticipated maximum amount of any such judgment and the earliest time
at which such judgment might be entered); (ii) the sum of the present fair
saleable value of the assets of the Company and the Subsidiaries on a
consolidated basis will exceed the probable liability of the Company and the
Subsidiaries on their debts; (iii) the Company and the Subsidiaries on a
consolidated basis will not have incurred or intend to incur, or believed that
they will have incurred, debts beyond their ability to pay such debts as
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such debts mature (taking into account the timing and amounts of cash to be
received by the Company from any source, and the amounts to be payable on or in
respect of debts of the Company and the Subsidiaries); and (iv) the Company and
the Subsidiaries on a consolidated basis will have sufficient capital with which
to conduct their present and proposed businesses and the property of the Company
and the Subsidiaries does not constitute unreasonably small capital with which
to conduct their present or proposed businesses. For purposes of this Section
3.21 "debt" means any liability on a claim, and "claim" means (1) any right to
payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed (other than those
being disputed in good faith), undisputed, legal, equitable, secured or
unsecured, or (2) any right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to an
equitable remedy is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable secured,
or unsecured.
Section 3.22 TRANSACTIONS WITH AFFILIATES. No director, officer,
employee or stockholder of the Company or any Subsidiary, or, to the Company's
or any Subsidiary's knowledge, any member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person,
or, to the Company's or any Subsidiary's knowledge, any member of the family of
any such person, has a substantial interest or is an officer, director, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof, is a
party to any transaction with the Company or any Subsidiary, including any
contract, agreement or other arrangement providing for the employment of
furnishing the services by, rental of real or personal property from or
otherwise requiring payments to any such person or firm.
Section 3.23 EMPLOYEES. No officer or key employee of the Company or any
Subsidiary has advised the Company or such Subsidiary (orally or in writing)
that he intends to terminate employment with the Company or such Subsidiary. To
the Company's and each Subsidiary's knowledge, the Company and each Subsidiary
has complied in all material respects with all applicable laws relating to the
employment of labor, including provisions relating to wages, hours, equal
opportunity, collective bargaining and the payment of Social Security and other
taxes and the Employee Retirement Income Security Act of 1974, as amended.
Section 3.24 YEAR 2000 PROBLEM. The Company and each Subsidiary is
taking all action necessary to mitigate the risk that computer applications used
by the Company or any Subsidiary may be unable to recognize and properly perform
date-sensitive functions involving dates prior to, during and after the year
2000 (the "Year 2000 problem"). The Company believes that the Year 2000 Problem
will not have a Material Adverse Effect.
Section 3.25 MARGIN REGULATIONS. Neither the Company nor any Subsidiary
is engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation T, U or X of the Board
of Governors of the Federal Reserve System) and no proceeds of the Convertible
Notes will be used in a manner that would violate, or result in a violation of,
such Regulation T, U or X.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchaser represents and warrants to the Company, for itself only,
that:
(a) It is an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act and was not organized for the specific
purpose of acquiring the Convertible Notes;
(b) It has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company's stage of development so as to
be able to evaluate the risks and merits of its investment in the Company and it
is able to financially bear the risks thereof;
(c) It has had an opportunity to discuss the Company's business,
management and financial affairs with the Company's management;
(d) The Convertible Notes being purchased by it are being acquired for its
own account and not with a view to or for sale in connection with any
distribution thereof;
(e) It understands that (i) the Convertible Notes and the Conversion
Shares have not been registered under the Securities Act, (ii) the Convertible
Notes and, upon conversion thereof, the Conversion Shares must be held
indefinitely unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from such registration, (iii) the Convertible Notes
and the Conversion Shares will bear a legend to such effect and (iv) the Company
will make a notation on its transfer books to such effect;
(f) It has no present need for liquidity in connection with its purchase
of the Convertible Notes;
(g) The purchase of the Convertible Notes is consistent with the general
investment objectives of the Purchaser, and that it understands that the
purchase of the Convertible Notes involves a high degree of risk in view of the
fact that, among other things, the Company has a limited operating history and
its capital stock trades on the NASD "bulletin board" and accordingly there
might not be a consistent market for trades in such stock;
(h) If the Purchaser is a corporation, partnership, trust or other entity,
(i) the individual executing this Agreement on its behalf has been duly
authorized to execute and deliver this Agreement, (ii) the signature of such
individual is binding upon such partnership, corporation, trust and other
entity, (iii) the Purchaser is duly organized, validly existing and in good
standing in its jurisdiction of incorporation or organization and has all
requisite power and
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authority to execute and deliver this Agreement, and (iv) the execution and
delivery of this Agreement and the purchase of the Convertible Notes hereunder
will not result in the violation of, constitute a breach or default under, or
conflict with, any term or provision of the charter, bylaws or other governing
document of the Purchaser or, to its knowledge, constitute a material breach or
default under any agreement, judgment, decree, order, statute or regulation by
which it is bound or applicable to it;
(i) This Agreement constitutes the legal, valid and binding obligation of
the Purchaser, enforceable in accordance with its terms, subject to laws of
general application from time to time in effect affecting creditors' rights and
the exercise of judicial discretion in accordance with general equitable
principles; and
(j) It has no contract, arrangement or understanding with any broker,
finder or similar agent with respect to the transactions contemplated by this
Agreement.
ARTICLE V
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
The obligation of the Purchaser to purchase and pay for the Convertible
Notes to be purchased by it on the Closing Date is subject to the satisfaction
or waiver, on or before such Closing Date, of the following conditions:
Section 5.1 DUE DILIGENCE. The Purchasers shall have completed their
due diligence review of the Company in all aspects satisfactory to the
Purchasers in their sole discretion.
Section 5.2 OPINION OF COMPANY'S COUNSEL. The Purchasers shall have
received from Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP,
counsel for the Company, an opinion dated the Closing Date, substantially in the
form attached to this Agreement as EXHIBIT C.
Section 5.3 REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties of the Company contained in Article III shall be
true, complete and correct in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of such date, and the Chief Executive or Chief Operating Officer
of the Company shall have certified to such effect to the Purchasers in writing
on behalf of the Company.
Section 5.4 PERFORMANCE. The Company shall have performed and complied
in all material respects with all agreements contained herein required to be
performed or complied with by it prior to or at the Closing Date, and the Chief
Executive or Chief Operating Officer of the Company shall have certified to the
Purchasers in writing to such effect on behalf of the Company.
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Section 5.5 ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and
other proceedings to be taken by the Company in connection with the
transactions contemplated hereby and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Purchasers and their
counsel and the Purchasers and their counsel shall have received all such
counterpart originals or certified or other copies of such documents as they
reasonably may request.
Section 5.6 PURCHASE BY OTHER PURCHASERS. The aggregate principal
amount of Convertible Notes to be purchased at the Closing by the Purchasers
shall be not less than $30,000,000.
Section 5.7 SUPPORTING DOCUMENTS. The Purchaser shall have received
copies of the following documents:
(a) The Charter, certified as of a recent date by the Secretary of State
of the State of Delaware, in the form of EXHIBIT B, together with a certificate
of said Secretary dated as of a recent date as to the legal existence and good
standing of the Company in the State of Delaware, and certificates of the
Secretary of State of each jurisdiction in which the Company is qualified to do
business as a foreign corporation dated as of a recent date as to the Company's
qualification and good standing in such jurisdiction.
(b) A certificate of the Secretary of the Company dated as of the Closing
Date and certifying (i) that attached thereto is a true and complete copy of the
Bylaws of the Company as in effect on the date of such certification, (ii) that
attached thereto is a true and complete copy of all resolutions adopted by the
Board of Directors of the Company authorizing the execution, delivery and
performance of this Agreement and the Convertible Notes, and the issuance, sale
and delivery of the Conversion Shares, and that all such resolutions are in full
force and effect and are all of the resolutions adopted in connection with the
transactions contemplated by this Agreement, and (iii) to the incumbency and
signatures of each officer of the Company executing this Agreement and the
Convertible Notes on behalf of the Company and any certificate or instrument
furnished pursuant hereto, and a certification by another officer of the Company
as to the incumbency and signature of the officer signing the certificate
referred to in this subsection (b).
(c) The acceptance, by CT Corporation System, of its appointment as agent
for service of process pursuant to Section 7.9 of this Agreement and Section 9.6
of the Convertible Notes.
All such documents required under this Article V shall be satisfactory in
form and substance to the Purchasers and their counsel.
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ARTICLE VI
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchaser that, from and after
the Closing until payment in full or conversion of all of the Convertible Notes,
except with respect to the covenants contained in Sections 6.4, 6.5, 6.6, 6.7,
6.13, 6.14, 6.15 and 6.21, which covenants shall terminate and the Company shall
be discharged from future compliance therewith at such time as the aggregate
Accreted Value of all of the Convertible Notes held by all of the Purchasers is
equal to or less than $15,000,000:
Section 6.1 FINANCIAL STATEMENTS, REPORTS. The Company shall furnish to
each holder of the Convertible Notes:
(a) Within ten (10) business days of their becoming available, copies of
(i) all financial statements, reports, notices and proxy statements and other
communications sent or made available by the Company to its security holders,
(ii) all regular periodic reports and all registration statements and
prospectuses, if any, filed by the Company with any securities exchange or with
the SEC, and (iii) all press releases made available by the Company.
(b) At the time of delivery of each annual financial statement pursuant to
Section 6.1(a), a certificate executed by the Chief Financial Officer or other
senior executive officer of the Company stating that such officer has caused
this Agreement and the terms of the Convertible Notes to be reviewed and has no
knowledge of any default by the Company in the performance or observance of any
of the provisions of this Agreement or the Convertible Notes or, if such officer
has such knowledge, specifying such default and the nature thereof;
(c) Promptly after the commencement thereof, notice of actions, suits,
claims, proceedings, investigations and inquiries that, in the reasonable
judgment of the Company, if adversely determined would have a Material Adverse
Effect on the Company;
(d) Within two (2) business days after any executive officer of the
Company obtains actual knowledge (i) of any condition or event that constitutes
a material default of any of the Company's duties or obligations under this
Agreement or the Convertible Notes, or (ii) that any Purchaser has given any
notice or taken any action with respect to a claimed default by the Company, a
certificate of the Company's Chief Executive or Chief Operating Officer
specifying, as applicable, the nature and period of existence of such condition
or event, the notice given (and providing a copy thereof), action taken and the
nature of such claimed default, event or condition, and what action the Company
has taken, is taking and proposes to take with respect thereto.
(e) Immediately upon receipt of any notice of any default or acceleration
delivered to the Company by any Purchaser, written notice thereof setting forth
the name of the person that
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delivered the notice and the aggregate amount of Convertible Notes held by such
person, together with a copy of each such notice.
Section 6.2 RESERVE FOR CONVERSION OF CONVERTIBLE NOTES. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, for the purpose of effecting the conversion of the
Convertible Notes and otherwise complying with the terms of this Agreement, a
number of its duly authorized shares of Common Stock equal to the greater of (i)
1.5 times the maximum number of Conversion Shares into which Convertible Notes
may be converted pursuant to Section 4 of the Convertible Notes from time to
time and (ii) 12,000,000 (as proportionately adjusted for stock splits,
combinations and the like). If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of the Convertible Notes or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval (including shareholder approval if
at any time necessary) or other action and will make any filing with any court
or administrative body that may be required under applicable state securities
laws or rules of any exchange or self-regulatory organization (as defined in the
Exchange Act) applicable to the Convertible Notes or Registrable Shares in
connection with the issuance of shares of Common Stock upon conversion of the
Convertible Notes.
Section 6.3 CORPORATE EXISTENCE. The Company and each Subsidiary
shall maintain its corporate existence, rights and franchises in full force and
effect; provided, however, that nothing contained in this Section 6.3 shall
limit the ability of the Company or any Subsidiary to enter into any merger,
consolidation or business combination otherwise permitted by this Agreement.
Section 6.4 LIMITATIONS ON INDEBTEDNESS. The Company and the
Subsidiaries shall not, directly or indirectly, create, assume, incur,
guarantee, or otherwise become directly or indirectly liable with respect to
Indebtedness for Borrowed Money; PROVIDED, that the Company may incur (i)
Indebtedness for Borrowed Money in an amount not to exceed $7,500,000 at any
time outstanding from a reputable commercial lender, and (ii) Indebtedness in
respect of capital leases and conditional sales of equipment and other property
used in the ordinary course of business ("Permitted Property"), incurred in the
ordinary course of business in an amount not to exceed $4,000,000 at any time
outstanding.
Section 6.5 LIENS. The Company shall not, and shall not permit any
Subsidiary to, directly or indirectly, create, incur, assume or permit to exist
any Lien, or file or execute or agree to the execution of any financing
statement, on or with respect to any property, real or personal, of the Company
or any Subsidiary, whether now owned or hereafter acquired, or any income or
profits therefrom, except:
(i) existing Liens identified on SCHEDULE 6.5;
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(ii) Liens to secure Indebtedness for Borrowed Money
permitted pursuant to Section 6.4(i), provided that the Convertible
Notes are equally and ratably secured by such Liens; and
(iii) other or additional Liens on Permitted Property to
secure Indebtedness with respect to the acquisition of such Permitted
Property of the Company and the Subsidiaries on a consolidated basis
arising in the ordinary course of business in an amount not to exceed
$4,000,000 at any time outstanding.
Section 6.6 LIMITATION ON SALES OF ASSETS. The Company shall not in one
or a series of transactions, other than in the ordinary course of business,
sell, lease, transfer, convey or otherwise dispose of all or any significant
part of the property or its assets in one or any series of related transactions,
or enter into any agreement to do any of the foregoing, without prior written
notice to the Holders and unless the net proceeds of such transaction (after
taxes and expenses associated with the transaction) are used within 180 days of
the closing of such transaction to: (i) be deployed in a Permitted Business, or
(ii) retire indebtedness, including the Convertible Notes then outstanding. As
used in this Section, a "significant part" shall be deemed to be property and/or
assets representing more than 5% of the Company's total assets.
Section 6.7 LIMITATION ON INVESTMENTS. The Company shall not, and shall
procure that no Subsidiary shall, make any Investment in (a) any Person other
than a Subsidiary, or (b) any track or racetrack; PROVIDED, HOWEVER, that the
Company or any Subsidiary may make Permitted Investments not at any time to
exceed the aggregate of (i) $4,000,000 and (ii) an amount equal to 50% of the
net proceeds of any new issue for cash consideration of Common Stock of the
Company made after the Closing Date.
Section 6.8 PROPERTIES, BUSINESS, INSURANCE. The Company shall maintain
and cause each of its Subsidiaries to maintain as to their respective properties
and business, with financially sound and reputable insurers, insurance against
such casualties and contingencies and of such types and in such amounts as is
customary in the case of business organizations engaged in the same or similar
business or having similar properties similarly situated.
Section 6.9 RESTRICTIVE AGREEMENTS PROHIBITED. Neither the Company nor
any of its Subsidiaries shall become a party to any agreement which by its terms
restricts the Company's performance of this Agreement.
Section 6.10 TRANSACTION WITH AFFILIATES. Except for transactions
unanimously approved by the members of the Board of Directors having no material
interest in such transaction or transactions as being on fair and reasonable
terms no less favorable to the Company or any Subsidiary than it would obtain in
a transaction between unrelated parties, neither the Company nor any of its
Subsidiaries shall enter into any transaction with any director, officer or
employee of the Company or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company or any of its
Subsidiaries, member of the
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family of any such person, or any corporation, partnership, trust or other
entity in which any such person, or member of the family of any such person, is
a director, officer, trustee, partner or holder of more than 5% of the
outstanding capital stock or other ownership or control interests thereof.
Section 6.11 USE OF PROCEEDS. The Company shall use the proceeds from
the sale of the Convertible Notes at the Closing for working capital in
accordance with the Company's financial budgets and operating plans.
Section 6.12 COMPENSATION. The Company shall pay compensation to its
officers only as shall be approved by the Board of Directors or a committee
thereof designated for the purpose of establishing officer compensation.
Section 6.13 MERGERS, SALE OF ASSETS, ETC. OF SUBSIDIARIES. Except for
transactions permitted by Section 6.6, the Company shall not permit any
Subsidiary to consolidate or merge into or sell or transfer all or substantially
all its assets, except that any Subsidiary may (i) consolidate or merge into or
sell or transfer assets to any other Subsidiary, or (ii) merge into or sell or
transfer assets to the Company.
Section 6.14 MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Except for
transactions permitted by Section 6.6, the Company shall not sell or otherwise
transfer any shares of capital stock of any Subsidiary, except to the Company or
another Subsidiary, or permit any Subsidiary to issue, sell or otherwise
transfer any shares of its capital stock or the capital stock of any Subsidiary,
except to the Company or another Subsidiary.
Section 6.15 NO NEW SUBSIDIARIES. The Company shall not, and shall
procure that the Subsidiaries shall not, form or acquire any Subsidiary of any
kind (a "New Subsidiary") after the Closing Date, unless such New Subsidiary (a)
has executed and delivered to the holders of the Convertible Notes a binding and
enforceable unconditional guarantee of the Convertible Notes satisfactory in
form and substance to counsel designated by a majority in interest of the then
Holders of the Convertible Notes, and (b) agrees to be bound by, and to comply
with, all of the provisions of this Article VI which are by their terms
applicable to Subsidiaries.
Section 6.16 WRAP-UP OF SUBSIDIARIES. On or before September 30, 1999,
the Company shall cause all of its Subsidiaries existing as of the date hereof
to be merged into the Company.
Section 6.17 DISTRIBUTIONS BY THE COMPANY. The Company shall not
purchase or set aside any sums for the purchase of, or pay any dividend or make
any distribution on, any shares of its stock.
Section 6.18 DISTRIBUTIONS BY SUBSIDIARIES. The Company shall not permit
any Subsidiary to purchase or set aside any sums for the purchase of, or pay any
dividend or make
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any distribution on, any shares of its stock, except for dividends or other
distribution payable to the Company or another Subsidiary.
Section 6.19 LIMITATION ON CONVERTIBLE SECURITIES. The Company shall not
issue any securities exercisable for or convertible into Common Stock of the
Company for which the applicable exercise or conversion price or ratio may be
adjusted from its value at issuance based on the market price of the Common
Stock or any other floating standard.
Section 6.20 SUBSIDIARY DIVIDEND RESTRICTIONS. The Company will not
permit any Subsidiary to create, incur, assume or permit to exist any agreement
or instrument (other than this Agreement) which has the effect of restricting or
prohibiting the power, authority or legal right of such Subsidiary to declare or
pay any dividend or other distribution to the Company.
Section 6.21 PERMITTED BUSINESS. The Company shall not, and shall
procure that no Subsidiary shall, engage in any business other than a Permitted
Business.
Section 6.22 COMPLIANCE WITH LAWS. The Company shall comply, and cause
each Subsidiary to comply, with all applicable laws, rules, regulations, orders,
rulings and judgments, except where such noncompliance would not have a Material
Adverse Effect.
Section 6.23 RULE 144 COMPLIANCE. The Company agrees to take such action
as may be necessary to enable a holder of Common Stock to complete the public
sale of Common Stock in accordance with Rule 144 of the Securities and Exchange
Commission under the Securities Act or any similar successor rules or
regulations promulgated by the SEC.
Section 6.24 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company shall
keep, and cause each Subsidiary to keep, adequate records and books of account,
in which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
Section 6.25 YEAR 2000 PROBLEM. The Company shall take, and shall
procure that each Subsidiary shall take, all actions necessary to mitigate the
risk of the Year 2000 Problem.
ARTICLE VII
MISCELLANEOUS
Section 7.1 GENERAL INDEMNITY. The Company hereby indemnifies and holds
harmless the Purchaser and its successors and assigns against and in respect of
any and all costs, expenses, debts, liabilities and obligations incurred by any
of them, including reasonable attorney fees, for breach of any representation,
warranty or promise made to any of them by the Company or any Subsidiary
hereunder.
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Section 7.2 SURVIVAL OF AGREEMENTS. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement, the issuance, sale and delivery of the Convertible
Notes, and the issuance and delivery of the Conversion Shares.
Section 7.3 BROKERAGE. Each party hereto will indemnify and hold
harmless the others against and in respect of an claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party. The Company
acknowledges that it has engaged U.S. Bancorp Libra as its placement agent for
the Convertible Notes and will pay U.S. Bancorp Libra (and/or its designees) a
fee comprised of a cash amount equal to 4% of the aggregate gross proceeds
received from the sale of the Convertible Notes and an aggregate of warrants to
purchase 50,000 shares of the Company's Common Stock at an exercise price of
$10.00 per share.
Section 7.4 PARTIES IN INTEREST. All representations, covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generally of the foregoing, all representations, covenants and agreements
benefitting the Purchasers shall inure to the benefit of any and all subsequent
holders from time to time of the Convertible Notes or Registrable Shares.
Section 7.5 NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing, shall be addressed to the
receiving party's address set forth below or to such other address as a party
may designate by notice hereunder, and shall be either (i) delivered by hand,
(ii) made by telecopy or facsimile transmission, (iii) sent by overnight
courier, or (iv) sent by registered or certified mail, return receipt requested,
postage prepaid.
If to the Company, to: Youbet.com, Inc.
1950 Sawtelle Boulevard, Suite 180
Los Angeles, California 90025
Attn: Chief Executive Officer
Fax: (310) 444-3390
with a copy to: Christensen, Miller, Fink, Jacobs, Glaser,
Weil & Shapiro, LLP
2121 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
Attn: Gary N. Jacobs, Esq.
Fax: (310) 556-2920
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If to the Purchaser, at the address of the Purchaser set forth on
SCHEDULE I, and to Purchaser's counsel (if
such counsel is made known by notice to the
Company)
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telecopy or facsimile transmission, at the time that receipt
thereof has been acknowledged by electronic confirmation or otherwise, (iii) if
sent by overnight courier, on the next business day following the day such
notice is delivered to the courier service, or (iv) if sent by registered or
certified mail, on the fifth (5th) business day following the day such mailing
is made.
Section 7.6 WAIVERS AND CONSENTS. The holders of 66 2/3% in interest
of the principal amount of the Convertible Notes outstanding may waive the
Company's compliance with any of its covenants contained in this Agreement
(including those set forth in Article VI), or any breach or default by the
Company of any of its obligations pursuant to this Agreement and may rescind
an acceleration of the Convertible Notes, except (i) any default in the
payment of principal, interest, premium or penalty when and as due under this
Agreement or the Convertible Notes or (ii) any default in respect of a
provision that under Section 7.14 may not be amended without the consent of
each Holder affected.
Section 7.7 GOVERNING LAW. THE PARTIES HERETO ACKNOWLEDGE THAT THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND THE CONVERTIBLE NOTES BEAR A
REASONABLE RELATION TO THE STATE OF NEW YORK IN THAT, INTER ALIA, CERTAIN OF THE
PURCHASERS ARE RESIDENTS OF THE STATE OF NEW YORK, CERTAIN OF THE PURCHASERS
HAVE A PRINCIPAL PLACE OF BUSINESS IN THE STATE OF NEW YORK, AND A SUBSTANTIAL
PART OF THE NEGOTIATIONS RELATING TO THE TRANSACTIONS HAVE OCCURRED IN THE STATE
OF NEW YORK. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICT OF LAWS THEREOF. IT IS THE INTENT OF THE PARTIES THAT THE LAWS OF THE
STATE OF NEW YORK REGARDING USURY AND THE CHARGING OF INTEREST APPLY TO THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 7.8 USURY. Notwithstanding any other provision of this
Agreement to the contrary, all agreements among the Company and the Purchaser
are expressly limited, so that in no event or contingency whatsoever, whether by
reason of the advancement of the proceeds of the Convertible Notes, acceleration
of maturity of the unpaid principal balance, the addition of accrued interest to
principal or otherwise, shall the amount paid, charged for, contracted for,
received or agreed to be paid to any Holder for the use, forbearance or
detention of the money to be advanced under the Convertible Notes exceed the
highest lawful rate permissible under applicable usury laws as prescribed by a
court of competent jurisdiction ("Applicable Law"). If,
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from any circumstances whatsoever, interest would otherwise be payable to any
Holder in excess of the maximum amount permissible under Applicable Law, the
interest payable to such Holder shall be reduced to the maximum amount, and if
from any circumstances any Holder shall ever receive anything deemed interest by
Applicable Law in excess of the maximum amount permissible under Applicable Law,
an amount equal to the excessive interest shall by applied to the reduction of
the principal hereof and not to the payment of interest, or if such excessive
amount of interest exceeds the unpaid principal balance hereof, such excess
shall be refunded to the Company. All interest paid or agreed to be paid to
Holders shall, to the extent permitted by Applicable Law, be amortized,
prorated, allocated and spread throughout the full period (including any renewal
or extension) until payment in full of the principal so that the interest hereon
for such full period shall not exceed the maximum amount permissible under
Applicable Law. Purchaser expressly disavows any intent to contract for, charge
or receive interest in an amount which exceeds the maximum amount permissible
under Applicable Law. This Section 7.8 shall control agreements between the
Company and the Purchaser. This covenant shall survive the payment in full of
the Convertible Notes.
Section 7.9 SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR
SERVICE. Any legal action or proceeding in connection with this Agreement or
the performance hereof may be brought in the state and federal courts located in
the Borough of Manhattan, City, County and State of New York, and the parties
hereby irrevocably submit to the non-exclusive jurisdiction of such courts for
the purpose of any such action or proceeding. The Company hereby appoints CT
Corporation System of 1633 Broadway, New York, New York 10019 and any successor
thereto as its authorized agent to accept service of process in any such action
or proceeding and agrees that the failure of said firm to give the Company any
notice of any such service shall not impair or affect the validity of such
service or of any judgement rendered in any action or proceeding based thereon.
In addition to other methods of service allowed by applicable law, the Company
expressly consents that service of process in any action or proceeding hereunder
may be made by certified mail return receipt requested. Such service shall
become effective 30 days after mailing.
Section 7.10 WAIVER OF JURY TRIAL. THE PARTIES HEREBY IRREVOCABLY WAIVE
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM BROUGHT BY ANY PARTY HERETO OR
BENEFICIARY HEREOF ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS AGREEMENT.
Section 7.11 ATTORNEYS' FEES AND EXPENSES. The Company will pay all costs
and expenses of the Purchasers in connection with this Agreement and the
consummation of all transactions contemplated hereby (including the enforcement
of any rights of the Purchasers hereunder and the costs of counsel referred to
in Section 6.15), and all costs and expenses of the Purchasers and each other
Holder relating to any future amendment or supplement to this Agreement or any
of the Convertible Notes (or any proposal for such amendment or supplement)
whether or not consummated, or any waiver or consent with respect thereto (or
any proposal for such waiver or consent) whether or not consummated, including
but not limited to reasonable out-of-pocket expenses, the cost of obtaining a
private placement number for the Convertible
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Notes, the cost of all accounting services required hereby, all reasonable
attorney's fees and disbursements of Seward & Kissel LLP, all photocopying or
reproduction or printing expenses relating to such transactions, and the cost of
transmitting the Convertible Notes to the respective home offices of the
Purchasers or to such other addresses as may be requested by the Purchasers.
The Company will not be required to pay the costs and expenses of any
prospective transferee incurred in connection with such transferee's acquisition
of any Convertible Notes or Registrable Shares, other than the cost of
registering the same and the cost of transmitting the same to such transferee.
Section 7.12 ENTIRE AGREEMENT. This Agreement, including the Schedules
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof.
Section 7.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 7.14 AMENDMENTS. This Agreement may be amended or modified with
the written consent of the Company and the holders of at least 66-2/3% of the
outstanding principal amount of the Convertible Notes. However, without the
consent of each Holder affected thereby, no amendment may: (a) reduce the amount
of Convertible Notes whose Holders must consent to an amendment; (b) reduce the
rate or extend the time for payment of interest on any Convertible Notes; (c)
reduce the principal amount of or extend the Maturity Date of any Convertible
Notes; (d) reduce the premium payable upon prepayment of any Convertible Notes
pursuant to Section 3 of the Convertible Notes or change the time at which any
Convertible Note may be prepaid pursuant to Section 3 of the Convertible Notes;
(e) make any Convertible Notes payable in money other than United States
Dollars; or (f) make any change or amendment affecting the conversion of any
Convertible Note or the registration of any Registrable Share.
Section 7.15 SEVERABILITY. If any provision of this Agreement shall be
declared void or unenforceable by any judicial or administrative authority, the
validity of an other provision and of the entire Agreement shall not be affected
thereby.
Section 7.16 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are for convenience only and not to be considered in construing or
interpreting any term or provision of this Agreement.
Section 7.17 CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
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(a) "CAPITALIZED LEASE" shall mean, with respect to any person, any lease
or any other agreement for the use of property which, in accordance with
generally accepted accounting principles, should be capitalized on the lessee's
or user's balance sheet.
(b) "CAPITALIZED LEASE OBLIGATION" of any person shall mean and include,
as of any date as of which the amount thereof is to be determined, the amount of
the liability capitalized or disclosed (or which should be disclosed) in
accordance with generally accepted accounting principles, in a balance sheet of
such person in respect of a Capitalized Lease of such person.
(c) "CHANGE IN CONTROL" shall mean and include (i) the sale by the Company
and/or any Subsidiary of all or substantially all of the assets of the Company
and the Subsidiaries taken as a whole, (ii) any Acquisition by any person or any
persons acting together which would constitute a "group" for purposes of Section
13(d) of the Exchange Act (a "Group") of 20% or more of the total voting power
of all classes of capital stock of the Company entitled to vote generally in the
election of the Board of Directors of the Company, (iii) the acquisition by the
Company for cash, property or securities, in one transaction or a series of
related transactions within a 12-month period, of more than 30% of the capital
stock of the Company outstanding immediately prior to the commencement of such
acquisition, (iv) the payment of a dividend or other distribution by the Company
to its shareholders, in one transaction or a series of related transactions
within a 12-month period, of cash, property or securities having an aggregate
fair market value at the time of distribution that is 30% or more of the fair
market value of the capital stock of the Company outstanding immediately prior
to such distribution (both such fair market values as determined by reference to
the then most recently furnished valuations of the fair market value of the
Common Stock of the Company), or (v) any Acquisition by any person or Group of
the power to elect, appoint or cause the election or appointment of at least a
majority of the members of the Board of Directors of the Company, through
beneficial ownership of the capital stock or otherwise; PROVIDED, HOWEVER, that
notwithstanding anything contained in this Section to the contrary, the effect
of and actions taken pursuant to that certain Stockholders Agreement of the
Company, shall not be deemed to constitute a Change in Control for purposes of
this Agreement. For the purposes of this definition, "ACQUISITION' of the power
or properties and assets stated in the preceding sentence means the earlier of
(a) the actual possession thereof and (b) the consummation of any transaction or
series of related transactions which, with the passage of time, will give such
Person or Persons that actual possession thereof.
(d) "GAAP" shall mean generally accepted accounting principles as in
effect in the United States of America from time to time.
(e) "GUARANTEE" shall mean any obligation, contingent or otherwise, of any
person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other person in any manner, whether directly or indirectly,
and including, without limitation, any obligation of such person, direct or
indirect (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or to purchase (or to advance or supply funds for
the purchase of) any security for the payment of such Indebtedness, (ii) to
purchase property, securities or
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services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness, or (iii) to maintain working capital, equity
capital or other financial statement condition of the primary obligor so as to
enable the primary obligor to pay such Indebtedness; PROVIDED, HOWEVER, that the
term "Guarantee" shall not include endorsements for collection or deposit, in
either case, in the ordinary course of business.
(f) "INDEBTEDNESS" of any person shall mean and include, as of any date as
of which the amount thereof is to be determined, (i) all items (other than
capital items such as capital stock, surplus and retained earnings, as well as
reserves for taxes in respect of income deferred to the future and other
deferred credits and reserves), contingent or otherwise, which, in accordance
with generally accepted accounting principles, would be included in determining
total liabilities as shown on the liability side of a balance sheet of such
person, (ii) all obligations of such person evidenced by bonds, debentures,
notes or similar instruments, (iii) all obligations of such person upon which
interest charges are customarily paid, (iv) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person, (v) all obligations of such person issued or assumed
as the deferred purchase price property or services (other than accounts payable
to suppliers incurred in the ordinary course of business and paid when due),
(vi) all Indebtedness of others to the extent secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any lien or security interest on property owned or acquired by
such person whether or not the obligations secured thereby have been assumed,
(vii) all Capitalized Lease obligations of such person, and (viii) any
Guarantees or contingent liabilities of such person. If any person becomes a
Subsidiary after the date of this Agreement, all outstanding Indebtedness of
such person shall, for purposes of this Agreement, be deemed to have been
incurred by such person immediately after it becomes a Subsidiary.
(g) "INDEBTEDNESS FOR BORROWED MONEY" shall mean, without duplication, all
Indebtedness (i) in respect of money borrowed, (ii) evidenced by a note (other
than the Convertible Notes), debenture or other like written obligation to pay
money, (iii) in respect of rent or hire of property under leases or lease
arrangements which under GAAP are required to be capitalized, (iv) in respect of
obligations under conditional sales or other title retention agreements, and (v)
all subordinate indebtedness, and shall also include all guarantees of any of
the foregoing.
(h) "INVESTMENT" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee of similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of capital stock, Indebtedness or other
similar instruments issued by such Person.
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(i) "LIEN" shall mean: (i) any interest in property (whether real,
personal or mixed and whether tangible or intangible) which secures an
obligation owed to, or a claim by, a person other than the owner of such
property, whether such interest is based on the common law, statute or contract,
including, without limitation, any such interest arising from a Capitalized
Lease, arising from a mortgage, charge, pledge, security agreement, conditional
sale, trust receipt or deposit in trust, or arising from a consignment or
bailment given for security purposes, (ii) any encumbrance upon such property
which does not secure such an obligation, and (iii) any exception to or defect
in the title to or ownership interest in such property, including, without
limitation, reservations, rights of entry, possibilities of reverter,
encroachments, easements, rights of way, restrictive covenants, licenses and
PROFITS A PRENDRE. For purposes of this Agreement, the Company or a Subsidiary
shall be deemed to be the owner of any property which it has acquired or holds
subject to a Capitalized Lease or conditional sale agreement or other similar
arrangement pursuant to which title to the property has been retained by or
vested in some other person for security purposes.
(j) "MATERIAL ADVERSE EFFECT" shall mean a material, adverse effect on the
business, operations, prospects or financial condition of the Company or any of
its Subsidiaries.
(k) "PERMITTED BUSINESS" shall mean (i) any internet-related gaming or
wagering system operated in compliance with applicable law (the "Original
Business"); and (ii) any other business ancillary or reasonably related to the
Original Business, such as a track or other content provider, a licensed
wagering facility, a merchandising business targeted to customers and
prospective customers of the Original Business.
(l) "PERMITTED INVESTMENT" means an Investment by the Company or a
Subsidiary in a Person engaged in a Permitted Business.
(m) "PERSON" shall mean an individual, corporation, trust, partnership,
joint venture, unincorporated organization, government agency or any agency or
political subdivision thereof, or other entity.
(n) "PURCHASE PRICE" with respect to any Convertible Note shall mean the
Purchase Price thereof as set forth on Schedule I attached hereto.
(o) "REFINANCE" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"REFINANCED" and "REFINANCING" shall have correlative meanings.
(p) "SUBSIDIARY" shall mean, as to the Company, any corporation of which
more than 50% of the outstanding stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
or not at the time stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening
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of any contingency) is at the time directly or indirectly owned by the Company,
or by one or more of its subsidiaries, or by the Company and one or more of its
subsidiaries.
Section 7.18 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
Section 7.19 CONFIDENTIALITY. The Purchaser agrees that it will maintain
with the same degree of care it uses with respect to its own confidential
information all confidential, proprietary or secret information which the
Purchaser may obtain from the Company pursuant to financial statements, reports
and other materials submitted by Company to the Purchaser pursuant to this
Agreement, or pursuant to visitation or inspection rights granted hereunder,
unless such information is known, or until such information becomes known
through no fault of the Purchaser to the public, PROVIDED, HOWEVER, that a
Purchaser may disclose such information (i) on a confidential basis to its
attorneys, accountants, consultants any other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (ii) to any prospective purchaser of Convertible Notes or Conversion
Shares from the Purchaser as long as such prospective purchaser agrees in
writing to be bound by the provisions of this Section, (iii) to any affiliate or
partner of the Purchaser and (iv) as required by applicable law or legal
process, provided that the Purchaser shall use reasonable efforts to give the
Company ten (10) business days prior notice thereof. If a Purchaser is required
in any legal or administrative or other governmental proceedings to disclosure
any of such information, the Purchaser shall use reasonable efforts to give the
Company an opportunity to obtain protective provisions against further
disclosure. The Company agrees that, except as otherwise necessary or advisable
in connection with the registration of Registrable Shares pursuant to this
Agreement, it will maintain as confidential and will not disclose to the public,
by press release or otherwise, the identity of the Purchaser, such
confidentiality to be maintained by the Company on the same terms as the
Purchaser is to maintain confidential information obtained from the Company, as
set forth above.
Section 7.20 PERSONS DEEMED OWNERS. Prior to due presentment for
registration of transfer, the Company may treat the Person in whose name any
Conversion Shares are registered as the owner and Holder thereof for all
purposes, and the Company shall not be affected by notice to the contrary.
Prior to conversion of the Convertible Notes, no Holder thereof shall be deemed
to be a stockholder of the Company for any purpose by virtue of being such a
Holder.
Section 7.21 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of an Purchaser or the Company, the Company and the
Purchasers shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desire to confirm and carry out and
to effectuate fully the intent and purpose of this Agreement.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
COMPANY:
YOUBET.COM, INC.
By:
------------------------------
Its:
-------------------------------
PURCHASERS:
-----------------------------
By:
------------------------------
Its:
-------------------------------
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SCHEDULE I
<TABLE>
<CAPTION>
PURCHASER PURCHASE PRICE PRINCIPAL AMOUNT OF NOTES
- --------- -------------- -------------------------
<S> <C> <C>
[Name and address] $__,___,___.00 $__,___,000.00
</TABLE>
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<PAGE>
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT
BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE APPLICABLE SECURITIES UNDER THE ACT AND ANY STATE SECURITIES
LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION.
YOUBET.COM, INC.
11% SENIOR CONVERTIBLE DISCOUNT NOTE DUE 2004
$__,___,___
APRIL 5, 1999
NEW YORK, NEW YORK
FOR VALUE RECEIVED, subject to the terms and conditions herein set forth,
the undersigned, YOUBET.COM, INC., a Delaware corporation ("Maker" or the
"Company"), hereby promises to pay to the order of
______________________________________, a ______________________ ("Holder"), at
_________________________________________________ or such other address or
account as Holder may from time to time specify in writing to Maker, in lawful
money of the United States and in immediately available funds, the principal
amount of ______________________________________ Dollars ($___________________),
together with interest at the rate specified below. This 11% Senior Convertible
Discount Note due 2004 (the "Note") is one of the "Convertible Notes" of Maker
in the aggregate principal amount of $45,500,000 issued or to be issued under
and pursuant to the terms and provisions of the separate Note Purchase
Agreements, each dated as of April 5, 1999 (the "Purchase Agreements"; the
Purchase Agreement made by and between Maker and Holder referred to herein as
the "Purchase Agreement"), entered into by Maker and the respective original
Purchasers referred to therein. This Note and Holder hereof are entitled
equally and ratably with the holders of all other Convertible Notes outstanding
under the Purchase Agreements to all the benefits provided thereby or referred
to therein. Reference is hereby made to the Purchase Agreement for a statement
of such rights and benefits and said Purchase Agreement is incorporated herein
by reference. Capitalized terms not otherwise defined in this Note shall have
the meanings ascribed to them in the Purchase Agreement. This Note shall be
convertible into Maker's common stock, par value $0.001 (the "Common Stock"), as
provided in Section 4 below.
<PAGE>
SECTION 1. INTEREST. This Note is issued at a substantial discount from
its principal amount for a price equal to the Purchase Price. Cash interest
will not accrue on this Note prior to April 5, 2001. Thereafter, the unpaid
principal balance of this Note outstanding from time to time shall bear
interest at the rate of eleven percent (11%) per annum, payable in cash
semi-annually in arrears commencing on October 5, 2001, and thereafter on
April 5 and October 5 of each year and on the Maturity Date (as defined
below), and thereafter, on demand. Interest hereon shall be calculated on
the basis of a 360-day year and a 30-day month until all accrued and unpaid
interest is paid in full.
SECTION 2. PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. To the extent not
sooner converted into Common Stock in accordance with Section 4 below, the
entire amount due hereunder, including principal and accrued interest, shall
be due and payable on April 5, 2004 (the "Maturity Date"). All payments
shall be applied first to interest on the unpaid principal balance and the
remainder to principal. All interest due and payable hereunder which is not
paid when due for any reason shall, to the extent permitted by applicable
law, be cumulated and accrue interest at the rate set forth in Section 1.
SECTION 3. PREPAYMENT. The principal amount of this Note may not be
prepaid, in whole or in part, prior to April 5, 2001. After April 5, 2001,
the outstanding principal balance, together with any accrued interest, may be
prepaid in whole or in part, ratably among the Holders of all of the
Convertible Notes without preference, at any time, (i) if Maker's
Registration Statement as contemplated by Section 2 of the Purchase Agreement
has been declared effective by the SEC and no Suspension is continuing, (ii)
provided that the average daily closing price of the Common Stock, as quoted
on NASDAQ or the principal stock exchange on which the Company's Common Stock
is then trading, or if not so quoted or traded, on the NASDAQ Bulletin Board
(the "Closing Price"), for the twenty trading day period prior to the date
Maker tenders such prepayment is greater than $20.00 per share (subject to
appropriate adjustment on the occurrence of any of the events referred to in
Section 4.8 or 4.9 of this Note), and (iii) subject to Maker tendering a
prepayment premium equal to six percent (6.0%) of the principal amount being
prepaid together with the prepayment amount, if such prepayment is tendered
before April 5, 2003. Notwithstanding the foregoing provisions of this
Section 3, (a) Maker shall provide Holder with notice of any proposed
prepayment of this Note, such notice to specify the date (the "Prepayment
Date") on which Maker proposes to prepay this Note and such notice to be
delivered to Holder at least thirty (30) days prior to such Prepayment Date,
and (b) Holder shall have the option, exercisable by notice to Maker
delivered at least three (3) business days prior to the Prepayment Date, to
exercise its Conversion Right (as defined in Section 4 below) by delivering
its Conversion Notice in accordance with Section 4.2 below on or before the
Prepayment Date.
SECTION 4. CONVERSION.
4.1 CONVERSION AT OPTION OF HOLDER. At any time and from time to
time prior to the Maturity Date, Holder shall have the option (the "Conversion
Right") to convert the
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unpaid principal balance of this Note, together with any accrued and unpaid
interest hereunder, in whole or in part into that number of shares of Common
Stock (the "Conversion Shares") equal to the quotient of (i) a sum equal to the
Accreted Value (as defined below) of this Note and accrued and unpaid interest
being converted, divided by (ii) the Conversion Price (as defined in Section 4.7
below) in effect on the Conversion Date (as defined in Section 4.3 below).
"Accreted Value" shall mean, as of any date of determination (a) prior to April
5, 2001, the sum of (i) the Purchase Price of this Note and (ii) the portion of
the excess of the principal amount of this Note over such Purchase Price that
has been accreted thereon through such date, such amount to be so accreted on a
daily basis at the rate, compounded semi-annually, such that the Accreted Value
of this Note on April 5, 2001 shall equal its principal amount, and (b) from and
after April 5, 2001, the principal amount of this Note, and Maker shall certify
the Accreted Value from time to time at Holder's request.
4.2 EXERCISE OF CONVERSION RIGHT. In order to exercise the
Conversion Right, Holder shall surrender this Note to Maker accompanied by
Holder's written notice of its intention to exercise its Conversion Right, which
notice shall set forth the amount of the unpaid principal to be converted (the
"Conversion Notice"). Notwithstanding the foregoing, the Conversion Notice
shall be deemed duly given if transmitted to Maker by facsimile together with
facsimile transmission of this Note, provided Holder surrenders the original of
this Note and the Conversion Notice to Maker within seven (7) business days
following the date of such facsimile transmission.
4.3 CONVERSION DATE. The date on which Maker is deemed to be given
the Conversion Notice (as determined in accordance with Section 9.1) shall be
the Conversion Date.
4.4 ISSUANCE OF CERTIFICATES; DELIVERIES ON CONVERSION. As soon as
practicable, but in no event later than three (3) business days after the
Conversion Date, Maker shall cause to be delivered to Holder at the address of
Holder set forth on Maker's records: (a) a certificate or certificates (issued
in the name of Holder or in such name as Holder may designate in the Conversion
Notice) for the Conversion Shares; and (b) a replacement Note for any
outstanding principal balance as to which the Holder has not exercised the
Conversion Right; provided, however, that the Company shall not be required to
make the deliveries set forth in this Section 4.4 until such time as it has
received the surrendered Note pursuant to Section 4.2.
4.5 STATUS ON CONVERSION. Holder shall be deemed to have become the
shareholder of record of the Conversion Shares on the Conversion Date.
4.6 ELIMINATION OF FRACTIONAL INTERESTS. No fractional shares of
Common Stock shall be issued upon conversion of this Note, nor shall Maker be
required to pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated and that all issuances
of Common Stock shall be rounded up to the nearest whole share.
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4.7 CONVERSION PRICE; RESET. The initial Conversion Price of this
Note shall be ten dollars ($10.00) per share. The Conversion Price shall reset
one time upon the earlier to occur of (a) any date on which the aggregate gross
proceeds generated by Maker's issuance after April 5, 1999 (the "Original Issue
Date") of Common Stock and any securities convertible into Common Stock equals
at least $15,000,000, or (b) April 5, 2000. In the case of (a), the Conversion
Price shall be reset to the lesser of $10.00 per share and the lowest price at
which Maker issued and sold shares of Common Stock after the Original Issue Date
(other than: (i) pursuant to options, warrants or other convertible securities
of the Company committed to by the Company or outstanding as of the Original
Issue Date and disclosed prior to the Original Issue Date pursuant to Section
3.4 of the Purchase Agreement, (ii) in an amount not to exceed an aggregate of
500,000 shares of Common Stock, pursuant to any options granted to persons not
employed by the Company as of the date hereof under the Company's 1995 or 1998
Stock Option Plans, successor plans thereto or otherwise eligible for
registration on Form S-8 or any successor form thereto, and (iii) in an amount
not to exceed an aggregate of 500,000 shares of Common Stock, pursuant to
warrants granted to racetracks and other information content providers of the
Company in consideration of agreements with the Company for the provision of
such information content); PROVIDED, that solely for the purpose of determining
the lowest price at which Maker issued and sold Common Stock after the Original
Issue Date, (x) if Maker issues options or warrants to purchase Common Stock
(other than options or warrants exempted above), Maker shall be deemed to have
issued and sold shares of the underlying Common Stock at the exercise price of
such option or warrant, irrespective of whether such option or warrant is in
fact exercised (e.g., if Maker issues options to purchase Common Stock (not
exempted above) at an exercise price of $5.00 per share, Maker shall be deemed
to have issued the underlying Common Stock at a price of $5.00 per share), and
(y) if Maker issues any securities (other than convertible securities exempted
above) convertible into Common Stock (or options to purchase such securities),
Maker shall be deemed to have issued and sold shares of the Common Stock
issuable upon conversion of such securities at a price equal to the maximum
number of shares of Common Stock issuable upon such conversion divided by the
aggregate purchase price received by Maker from the issuance of such securities,
irrespective of whether such securities are in fact converted (e.g., if Maker
issues 100 shares of convertible preferred stock at a price of $1,000 per share
and each share of preferred stock is convertible into 200 shares of Common
Stock, Maker shall be deemed to have issued 20,000 shares of Common Stock at
$5.00 per share). In the case of (b), the Conversion Price shall be reset to
the lesser of $10.00 per share or the average daily Closing Price of the Common
Stock for the ten trading day period ending on April 5, 2000, but in no event
less than $5.00 per share.
4.8 ADJUSTMENTS TO CONVERSION PRICE. If Maker shall at any time
after the date hereof (i) issue any shares of Common Stock or "Common Stock
Equivalents" (as defined below) by way of a dividend or other distribution on
any security of the Company without consideration, or (ii) subdivide or combine
its outstanding shares of Common Stock, the Conversion Price shall be adjusted
by multiplying (x) the Conversion Price in effect immediately prior to the
adjustment by (y) a fraction, the numerator of which is the total number of
shares of Common Stock and Common Stock Equivalent Shares in the case of clause
(i) and the total
4
<PAGE>
number of shares of Common Stock in the case of clause (ii) outstanding
immediately before the issuance, subdivision or combination, and the denominator
of which is the total number of shares of Common Stock and Common Stock
Equivalent Shares in the case of clause (i) and the total number of shares of
Common Stock in the case of clause (ii) outstanding immediately after such
issuance, subdivision or combination. For purposes of this Note, "Common Stock
Equivalents" means all securities that are convertible into or exchangeable or
exercisable for (i) shares of Common Stock or (ii) shares of any preferred stock
or other security of Maker ("Voting Preferred") that is entitled to vote on
matters submitted to Maker's shareholders for approval. "Common Stock
Equivalent Shares" means (A) in respect of Common Stock equivalents that are
convertible into or exchangeable or exercisable for shares of Common Stock, the
number of shares of Common Stock into which such Common Stock Equivalents are
exchangeable or exercisable, as the case may be, and (B) in respect of Common
Stock Equivalents that are convertible into or exchangeable or exercisable for
Voting Preferred, (I) if such Voting Preferred is convertible into shares of
Common Stock, the number of such shares of Common Stock, and (II) if such Voting
Preferred is not convertible into shares of Common Stock, the number of such
shares of Voting Preferred. For the purposes of any computation made in
accordance with this Section, shares of Common Stock or Common Stock Equivalents
issuable by way of a dividend or distribution shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of stockholders entitled to receive such dividend or
distribution. Not less than ten business days in advance of any event referred
to in clauses (i) and (ii) above, Maker shall provide Holder with notice of such
event including a detailed description of such event.
4.9 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case
of the reclassification or change of outstanding shares of Common Stock (other
than a change in par value, or from no par value to par value or vice versa, or
as a result of a subdivision or combination), or in the case of any
consolidation or merger of Maker with or into a corporation (other than a
consolidation or merger into which Maker is the surviving corporation and which
does not result in any reclassification or change of outstanding shares of
Common Stock except a change as a result of a subdivision or combination of such
shares or a change in par value as described above), or in the case of a sale or
conveyance to another corporation of all or substantially all of the assets of
Maker, Holder shall thereafter have the right to convert this Note into the kind
and number of shares of stock and/or other securities or property receivable
upon such reclassification, change, consolidation, merger, sale or conveyance by
a holder of the number of shares of Common Stock into which this Note might have
been converted immediately before the time of determination of the stockholders
of Maker entitled to receive such shares of stock and/or other securities or
property; provided, however, that nothing contained herein shall enable or
authorize Maker to enter into a transaction of the type described in the
preceding clause of this Section in contravention of any covenant of Maker not
to do so contained in the Purchase Agreement. Maker shall be obligated to
retain and set aside, or otherwise make fair provision for exercise of the right
of Holder to receive, the shares of stock and/or other securities or property
provided for in this Section.
5
<PAGE>
4.10 CERTIFICATE CONCERNING ADJUSTED CONVERSION PRICE. Whenever the
Conversion Price is adjusted or reset pursuant to this Section 4, Maker promptly
shall: (i) place on file at its principal executive office an officer's
certificate signed by the chief financial officer or controller of Maker showing
in appropriate detail the facts requiring such adjustment, the computation
thereof, and the adjusted Conversion Price, and shall exhibit the certificate
from time to time to Holder of this Note if Holder desires to inspect the same;
and (ii) mail or cause to be mailed to Holder, in the manner provided for giving
notice pursuant to this Note, a notice stating that such adjustment has been
made and setting forth the adjusted Conversion Price.
4.11 RESERVATION AND LISTING OF SHARES FOR ISSUANCE. Maker shall at
all times reserve and keep available out of its authorized and unissued shares
of Common Stock, for the purpose of effecting the conversion of this Note, such
number of its duly authorized shares as shall from time to time be sufficient to
effect the conversion of this Note. Maker covenants that all shares of Common
Stock issued upon conversion of this Note in compliance with the terms hereof
will be duly and validly issued and fully paid and non-assessable. For so long
as this Note shall be outstanding, Maker shall use its reasonable best efforts
to cause all shares of Common Stock issuable upon conversion of this Note to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock is then listed.
SECTION 5. TRANSFER, EXCHANGE AND REPLACEMENT OF NOTE. Subject to the
provisions of Section 6.2 hereof and Section 2.9 of the Purchase Agreement,
Holder may transfer this Note in whole or in part. This Note shall be
transferable on the note register of Maker maintained at the office of Maker's
transfer agent or at the principal executive office of Maker, upon delivery
thereof duly endorsed by Holder, or accompanied (as reasonably required by
Maker) by proper evidence of succession, assignment or authority to transfer
executed by Holder. In addition, Holder and, if applicable, any transferee
shall comply with the terms of Section 6.2. Upon any registration of transfer,
Maker shall execute a new Note or Notes to the persons entitled thereto. Maker
may deem and treat the person in whose name this Note is registered as the
absolute, true and lawful owner of this Note for all purposes. Upon receipt by
Maker of evidence reasonably satisfactory to it of loss, theft, destruction or
mutilation of this Note, Maker shall make and deliver a new Note of like tenor
in lieu of this Note, if (i) in case of loss, theft or destruction, Maker
receives indemnity reasonably satisfactory to it, (ii) Maker is reimbursed for
all reasonable expenses incidental to such replacement, and (iii) this Note is
surrendered and canceled, if mutilated. For purposes of clause (i) above, Maker
agrees that an unsecured indemnity from the original Holder of this Note shall
be reasonably satisfactory to Maker.
SECTION 6. INVESTMENT ACQUISITION AND RESTRICTIONS ON TRANSFER.
6.1 INVESTMENT REPRESENTATIONS. By acceptance of this Note, Holder
represents and warrants to Maker as follows:
(a) Holder understands that neither the Note nor the Conversion
Shares have been registered under federal or state securities laws and have been
or will be issued,
6
<PAGE>
as the case may be, pursuant to exemptions from registration contained in such
laws based in part upon the representations of Holder made herein and in the
Purchase Agreement; and
(b) Holder has acquired the Note and will acquire the Conversion
Shares solely for its own account and not as a nominee for any other party and
not with a view toward the resale or distribution of the Note or the Conversion
Shares;
provided, however, that nothing contained herein shall be construed to relieve
Maker of its obligations and duties with respect to registration of resales of
the Conversion Shares by Holder as set forth in Article II of the Purchase
Agreement and Section 7 hereof.
6.2 RESTRICTIONS ON TRANSFER. Holder, by the acceptance of this
Note, agrees that Holder will not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of this Note or any of the Conversion Shares, or any interest
in the same in violation of the Securities Act of 1933, as amended, or any
applicable state securities laws.
SECTION 7. REGISTRATION RIGHTS. Maker and Holder (for itself and all
subsequent holders of this Note and the Conversion Shares), by acceptance of
this Note, agree that Holder shall have registration rights with respect to the
Conversion Shares on the terms and conditions set forth in Article II of the
Purchase Agreement.
SECTION 8. DEFAULTS AND REMEDIES.
8.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an "Event of Default" hereunder:
(a) Maker fails to pay any amount due under this Note when due;
(b) Maker fails to observe, perform or comply with any covenant,
agreement or term contained in this Note or in the Purchase Agreement and, if
subject to remedy, the same is not remedied within thirty days after notice from
a Purchaser;
(c) Any representation, warranty or certification made by Maker
pursuant to this Note or the Purchase Agreement having been false or misleading
in any material respect as of the date made;
(d) A default or event of default which remains uncured
following the applicable cure period with respect to any other indebtedness of
Maker or any Subsidiary thereof in excess of $500,000;
(e) Entry of a final judgment or judgments against Maker or any
Subsidiary thereof for the payment of money in excess of $500,000 in the
aggregate by one or more courts, administrative or arbitral tribunals or other
bodies having jurisdiction over Maker or
7
<PAGE>
such Subsidiary, and the same not having been discharged or no provision having
been made for such discharge or a stay of execution thereof not having been
procured within 90 days from the entry of such judgment or judgments;
(f) Maker or any Subsidiary thereof applies for or consents to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property;
Maker or any Subsidiary admits in writing its inability, or is generally unable,
to pay its debts as they become due; Maker or any Subsidiary thereof makes a
general assignment for the benefit of creditors; any proceeding is instituted by
or against Maker or any Subsidiary thereof seeking to adjudicate it a bankrupt
or insolvent, seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debts, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee or other similar official for its or for any substantial part of its
property, PROVIDED that, in any such case, if the same is dismissed or vacated
within 90 days of being instituted, then any such default shall be deemed cured;
or Maker or any Subsidiary thereof takes any corporate action to authorize any
of the actions set forth above;
(g) a material part of the operations or business of Maker and
its Subsidiaries, considered as a whole, shall be suspended or cease;
(h) Maker purports or attempts to assign or delegate any of its
rights or obligations hereunder or under the Purchase Agreement;
(i) the Purchase Agreement or this Note shall, at any time after
its execution and delivery, for any reason cease to be in full force and effect
(unless such occurrence is in accordance with its terms or after payment hereof)
or shall be declared null and void or the validity or enforceability thereof
shall be contested by Maker, or Maker denies that it has further liability or
obligation thereunder;
(j) Maker's business operations in respect of transmitting
wagering information at any time become prohibited pursuant to any applicable
United States federal law, rule, regulation or order of a United States federal
court, or Maker continues its business operations in respect of transmitting
wagering information in violation of any applicable law, rule or regulation of a
United States state or order of a United States state court and Maker fails to
cure such violation within ten days of Maker's first having actual knowledge of
the first occurrence of such violation; or
(k) Maker or any Subsidiary, or any officer or director thereof,
is determined by final judgment, decree or order of any court with competent
jurisdiction to have any criminal liability relating to Maker's business
operations in respect of transmitting wagering information.
8
<PAGE>
8.2 REMEDIES. During the continuance of any Event of Default, Holder
may, at its sole option, declare the entire Accreted Value and accrued, unpaid
interest on this Note (if any) immediately due and payable, by written notice to
Maker, in which event Maker immediately shall pay to Holder the entire Accreted
Value of this Note together with accrued, unpaid interest thereon to the date of
such payment. No delay or omission of Holder to exercise any right or power
occurring upon any Event of Default hereunder shall impair any such right or
power or shall be construed as a waiver of any such Event of Default or an
acquiescence therein. To the fullest extent permitted by law, Holder's rights
and remedies under this Note shall be cumulative, and Holder shall have all
other rights and remedies not inconsistent herewith as are provided under the
Uniform Commercial Code as in effect in the relevant jurisdictions, by law or in
equity. No exercise by Holder of one right or remedy shall be deemed an
election, no waiver by Holder of any default on the part of the Maker shall be
deemed a continuing waiver, and no delay by Holder shall constitute a waiver,
election or acquiescence by it.
8.3 WAIVERS AND CONSENTS BY HOLDER. Notwithstanding anything in
Section 8.2 to the contrary, Holder hereby acknowledges and agrees that the
holders of 66-2/3% in interest of the principal amount of the Convertible Notes
then outstanding may waive the Company's compliance with its covenants and
obligations under this Note and the Purchase Agreement, as set forth in Section
7.6 of the Purchase Agreement; except (i) any default in the payment of
principal, interest, premium or penalty when and as due under this Note or (ii)
any default in respect of a provision that under Section 7.14 of the Purchase
Agreement may not be amended without the consent of each Holder affected.
8.4 WAIVERS BY MAKER. Maker waives presentment, demand, notice of
dishonor, notice of default or delinquency, notice of acceleration, notice of
protest and nonpayment, notice of costs, expenses or losses and interest
thereon, notice of interest on interest and delinquence in taking any action to
collect any sums owing under this Note or in a proceeding against any of the
rights or interests in or to properties securing payment of this Note.
SECTION 9. MISCELLANEOUS.
9.1 NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and given in accordance with the
Purchase Agreement.
9.2 SUCCESSORS. All the covenants, agreements, representations and
warranties contained in this Note shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns, including any subsequent Holders of this Note.
9.3 ASSIGNMENT; PARTICIPATIONS. Maker and Holder shall include the
successors and assigns thereof; provided, however, that Maker may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of Holder. Holder may, without the consent of Maker, at any time assign
or grant participations in all or any portion of
9
<PAGE>
this Note and its rights hereunder; provided, however, that any such assignment
or participation shall be in accordance with applicable law, including without
limitation all applicable federal and state securities laws.
9.4 NO ORAL MODIFICATION. The provisions, terms and conditions of
this Note may not be changed orally, but only by an agreement in writing signed
by the party against whom enforcement of any waiver, change, modification or
discharge is sought.
9.5 GOVERNING LAW. MAKER ACKNOWLEDGES THAT THE TRANSACTIONS
CONTEMPLATED BY THIS NOTE BEAR A REASONABLE RELATION TO THE STATE OF NEW YORK IN
THAT, INTER ALIA, CERTAIN OF THE PURCHASERS ARE RESIDENTS OF THE STATE OF NEW
YORK, CERTAIN OF THE PURCHASERS HAVE A PRINCIPAL PLACE OF BUSINESS IN THE STATE
OF NEW YORK, AND A SUBSTANTIAL PART OF THE NEGOTIATIONS RELATING TO THE
TRANSACTIONS CONTEMPLATED BY THIS NOTE HAVE OCCURRED IN THE STATE OF NEW YORK.
THIS NOTE IS DELIVERED IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK WITHOUT
GIVING ANY EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. IT IS THE INTENT
OF MAKER THAT THE LAWS OF NEW YORK REGARDING USURY AND THE CHARGING OF INTEREST
APPLY TO THE TRANSACTIONS CONTEMPLATED HEREBY.
9.6 SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR SERVICE.
Any legal action or proceeding in connection with this Note or the performance
hereof may be brought in the state and federal courts located in the Borough of
Manhattan, City, County and State of New York, and the parties hereby
irrevocably submit to the non-exclusive jurisdiction of such courts for the
purpose of any such action or proceeding. Maker hereby appoints CT Corporation
System of 1633 Broadway, New York, New York 10019 and any successor thereto as
its authorized agent to accept service of process in any such action or
proceeding and agrees that the failure of said firm to give Maker any notice of
any such service shall not impair or affect the validity of such service or of
any judgment rendered in any such action or proceeding based thereon. In
addition to other methods of service allowed by applicable law, Maker expressly
consents that service of process in any action or proceeding hereunder may be
made by certified mail, return receipt requested. Such service shall become
effective 30 days after mailing.
9.7 WAIVER OF JURY TRIAL. MAKER, AND HOLDER BY ITS ACCEPTANCE
HEREOF, HEREBY IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
CLAIM BROUGHT BY MAKER, HOLDER OR ANY SUCCESSOR THERETO OR ANY BENEFICIARY
HEREOF ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
NOTE.
9.8 HEADINGS. The Section headings in this Note are inserted for
purposes of convenience only, and shall not affect in any way the meaning or
interpretation hereof.
10
<PAGE>
9.9 ATTORNEYS' FEES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Note or the rights and duties of the
parties in relation hereto, the prevailing party will be entitled, in addition
to any other relief granted, to all costs and expenses incurred by such
prevailing party, including, without limitation, all reasonable attorneys' fees.
9.10 TIME OF THE ESSENCE. Time is of the essence with respect to
every provision hereof.
9.11 USURY. Notwithstanding any other provision of this Note to the
contrary, all agreements among the Maker and Holder are expressly limited, so
that in no event or contingency whatsoever, whether by reason of the advancement
of the proceeds of this Note, acceleration of maturity of the unpaid principal
balance, the addition of accrued interest to principal or otherwise, shall the
amount paid, charged for, contracted for, received or agreed to be paid to
Holder for the use, forbearance or detention of the money to be advanced under
this Note exceed the highest lawful rate permissible under applicable usury laws
as prescribed by a court of competent jurisdiction ("Applicable Law"). If, from
any circumstances whatsoever, interest would otherwise be payable to Holder in
excess of the maximum amount permissible under Applicable Law, the interest
payable to Holder shall be reduced to the maximum amount permissible under
Applicable Law, and if from any circumstances Holder shall ever receive anything
deemed interest by Applicable Law in excess of the maximum amount permissible
under Applicable Law, an amount equal to the excessive interest shall be applied
to the reduction of the principal hereof and not to the payment of interest, or
if such excessive amount of interest exceeds the unpaid principal balance
hereof, such excess shall be refunded to Maker. All interest paid or agreed to
be paid to Holder shall, to the extent permitted by Applicable Law, be
amortized, prorated, allocated and spread throughout the full period (including
any renewal or extension) until payment in full of the principal so that the
interest hereon for such full period shall not exceed the maximum amount
permissible under Applicable Law. Holder, by its acceptance hereof, expressly
disavows any intent to contract for, charge or receive interest in an amount
which exceeds the maximum amount permissible under Applicable Law. This Section
9.11 shall control agreements between Maker and Holder. This covenant shall
survive the payment in full of this Note.
9.12 ORIGINAL ISSUE DISCOUNT. For purposes of Section 1272 et seq. of
the Internal Revenue Code of 1986, as amended, the issue price with respect to
each $1,000.00 of principal at maturity of this Note is $807.22, the amount of
original discount is $192.78, the issue date is April 5, 1999, and the yield to
maturity is 11.00%.
11
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note as of the date first above
written.
"MAKER" YOUBET.COM, INC.,
a Delaware corporation
By:
------------------------------
Name:
------------------------------
Its:
------------------------------
By:
------------------------------
Name:
------------------------------
Its:
------------------------------
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1998
<CASH> 0 52,895 1,540,616 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 6,158 2,150,364 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 112,656 3,724,641 0
<PP&E> 0 1,260,411 1,700,211 0
<DEPRECIATION> 0 423,177 820,535 0
<TOTAL-ASSETS> 0 1,003,853 4,653,249 0
<CURRENT-LIABILITIES> 0 2,851,840 1,799,954 0
<BONDS> 0 0 60,134 0
0 0 0 0
0 0 107 0
<COMMON> 0 9,604 13,970 0
<OTHER-SE> 0 (1,838,383) 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 1,003,853 2,793,161 0
<SALES> 0 0 263,793 263,793
<TOTAL-REVENUES> 0 0 0 0
<CGS> 0 0 0 0
<TOTAL-COSTS> 3,940,551 6,917,887 11,096,330 22,507,511
<OTHER-EXPENSES> (80,446) 12,489,307 2,762,817 15,019,532
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> (3,860,105) (19,407,194) (13,859,147) (37,527,043)
<INCOME-TAX> 4,629 9,644 2,400 19,073
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (3,864,734) (19,416,838) (13,861,547) (37,546,116)
<EPS-PRIMARY> (0.67) (3.06) (1.32) 0
<EPS-DILUTED> (0.67) (3.06) (1.32) 0
</TABLE>
