06/05/2005 11:00PM

Signal fees, rebates help put offshore bet outfits in red

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Recently disclosed documents from two offshore betting companies that offer rebates on horse racing show that the companies lost money in 2004 and also shed some light on the inner workings of rebate shops, many of which are privately held and do not disclose financial information.

The documents are from International Racing Group, a private company recently purchased by Youbet.com, which is publicly traded, and from Betinternet.com, a publicly traded company on the Isle of Man that operates as Euro Off-Track.

The documents from IRG were disclosed to the Securities and Exchange Commission as part of Youbet's purchase of the company. Not only do they show that IRG lost money in 2004, but they also provide data on the rates paid by IRG for racetrack signals and on the percentage of wagers that could be rebated to IRG's customers.

According to the documents, IRG lost $32,058 on revenues of $17.8 million in 2004. The shop, which is incorporated in Curacao, had a betting handle of $215 million in 2004, up from $133 million in 2003.

IRG spent $10,955,827 in 2004 on track fees, a reference to the amount paid for signals from U.S. horse and dog tracks. Based on those fees and dividing by handle, IRG paid an average of 5 percent of its handle for betting signals in 2004. The average rate for betting signals in the U.S. is said to be approximately 3 percent.

Using a blended takeout rate of 20.25 percent - the industry standard - IRG's revenues of $17.8 million on $215 million in handle in 2004 meant that the company retained approximately 3 percent of each bet after subtracting the $10.9 million in signal fees. That would leave an average of 12 percent of each wager for use in IRG's rebate program. Industry figures have estimated that rebate programs award anywhere from 5 to 15 percent of each wager back to the bettor.

In notes accompanying the financial documents, Youbet said that a "significant portion" of IRG's bets came from jurisdictions in which Youbet does not currently take bets. Many states have restrictions that prevent domestic account-wagering operators from accepting bets from residents, and Youbet said in the note that it may have to cut off customers from those states "following a review by Youbet's independent wagering compliance committee" and its legal counsel. Youbet set up the compliance committee earlier this year.

Although IRG's handle dipped considerably in the first quarter of 2005, to $108 million on an annualized basis, the company had net income of $200,760, according to the documents. Track fees again added up to 5 percent of handle, and revenues increased to a total of 9 percent of handle, or a 4 percent retention.

Many racetracks, including those owned by the New York Racing Association and Churchill Downs Inc., cut off IRG early this year after the site was named in a federal indictment released in January. IRG was not charged with a crime.

Youbet's chief executive officer, Chuck Champion, said in a recent interview that Churchill Downs had resumed sending its signals to IRG in May, along with the New Jersey Sports and Exposition Authority, the owner of Monmouth Park and The Meadowlands. He said that the loss of signals from other tracks earlier in the year had led many of IRG's customers to open accounts with other offshore betting sites that relied on booked odds.

Youbet paid $2 million in cash for IRG, along with 166,000 shares of the company's stock. IRG's former owners will be eligible to receive as much as $9.7 million in payments over the next three years depending on IRG's performance.

Betinternet.com, an Isle of Man site that was also named in the federal indictment, took in $32.3 million in parimutuel bets during six months in 2004, according to financial documents released earlier this year. Betinternet's handle figures were derived from the wagers it took after the company purchased the remaining 50 percent share of its parimutuel business held by U.S. Off-Track, a collection of dog tracks that was Betinternet's partner until June 30, 2004, when the transaction closed.

The documents, which do not disclose specific expenses, said that Betinternet paid back $31.6 million in winnings or "bets laid off" from the $32.3 million in handle. For the six months of operations, the parimutuel unit had a gross profit of $676,000, for a retention of 2 percent on handle. Overall, including Betinternet's sports-betting operation, the company lost $720,000 during the six-month period it took parimutuel wagers, according to the documents, and $1.9 million from May 30, 2003, to May 30, 2004.