11/03/2005 12:00AM

Oregon licenses Youbet rebate shop


Youbet.com, the online wagering company, will seek to expand the roster of racetracks for customers of its offshore rebate shop, International Racing Group, in the wake of IRG's licensing on Wednesday by Oregon regulators, Youbet's chief executive officer, Charles Champion, said Thursday.

IRG, which is located in Curacao, was approved as an Oregon hub on Wednesday at a meeting of the Oregon Racing Commission. Oregon is also the hub site for Youbet.com, Television Games Network, XpressBet, and AmericaTab, four of the most popular domestic account-wagering companies in the U.S.

IRG was one of four rebate shops named but not charged in an indictment released early this year accusing 17 individuals of running $200 million in illegal bets through rebate operations. The indictment led some racetracks, including the New York Racing Association-run sites and Keeneland, to sever ties with the company and prohibit IRG's customers from wagering on their races, citing concerns about a lack of regulation in offshore countries.

Youbet.com purchased IRG shortly after the indictment was released, for $2 million in cash, 166,000 shares of Youbet stock, and as much as $9.7 million in future payments to the group's former owners.

Champion said in an interview on Thursday morning that the licensing in Oregon should answer any criticisms from the industry about whether IRG's business is conducted in a "transparent manner."

"IRG is now under the same regulatory scheme as every other large ADW company," Champion said of advance-deposit wagering, or account-wagering, companies. "There's no more debate, there's no more argument, there's no more controversy. We wanted to respond to the industry's legitimate concerns about oversight, transparency, and compliance. This was our plan from the beginning, and we've executed our plan."

According to documents Youbet has filed with the SEC, IRG lost $32,000 in 2004 on revenues of $17.8 million. The company had handle of $215 million in 2004. In the first six months of 2005, IRG had net income of $200,000 on an annualized handle of $108 million. The handle decline was in part because of the loss of signals as a result of the indictment.

Youbet officials have said that IRG will continue to award rebates to its customers, though the company will not market IRG's rebates to existing Youbet customers. The SEC documents indicated that IRG was awarding an average of 12 percent of each bet back in the form of a rebate. The documents also indicated that IRG paid an average of 5 percent for each track signal, a much higher rate than the 3 percent industry average.

After NYRA made the decision to cut off IRG and nine other rebate shops, the New York State Racing and Wagering Board approved a rule prohibiting any New York track from taking bets from the 10 sites NYRA had already cut off. Champion said that Youbet would now seek to get an exemption for IRG.

"We absolutely intend to go back to every individual who has cut us off to explain that they will not be doing business with an offshore, unregulated entity," Champion said.

A spokesman for the racing and wagering board, Dan Toomey, said Thursday that board officials were aware that IRG had been licensed in Oregon, but Toomey said that the board would have no comment on whether the licensing would change IRG's status under the rule.

Charles Hayward, president and CEO of NYRA, did not return a phone call Thursday.

The hub was licensed one day prior to Youbet reporting third-quarter results for 2005 incorporating IRG's operations. In the quarter, Youbet had net income of $1.8 million on revenues of $26.1 million, compared with net income of $4.0 million on revenues of $17.5 million in the third quarter last year. During the third quarter last year, Youbet reported a non-cash income-tax benefit of $3.3 million.

While revenues were sharply higher in the third quarter this year, expenses matched pace. Operating expenses increased from $16.7 million in the third-quarter last year to $24.4 million this year, an increase of 46.1 percent. Track fees - the amount of money Youbet and IRG paid for signals - rose from $6.6 million last year to $11.2 million this year. Expenses for network operations and sales and marketing also increased sharply.

Youbet said that IRG had handle of $43.2 million in the quarter, or approximately $172.8 million on an annualized basis. Handle through Youbet was $108.1 million in the quarter, compared with $83.7 million last year in the third quarter.

Youbet said that its "yield" - net revenue as a percentage of handle - declined from 7 percent in the third quarter last year to 5 percent in the third quarter this year, primarily because IRG's operations "carry a lower overall yield."