Total company handle fell 5% to $205.8 million, according to financial results reported by the company, including a 26% decrease in handle for IRG, which is involved in the federal investigation in what Youbet describes as being focused on certain customers and employees of the telephone rebate shop.
Youbet reported total revenue for the quarter improved 3% to $38.1 million, citing improved handle at Youbet Express, the company’s online advance deposit wagering platform, which increased 12.6% to $133 million.
IRG, which handled $72 million in wagers during the quarter, is facing a suspension of its license in Oregon over non-compliance issues after agents in early October seized $1.5 million in three Bank of America accounts affiliated with the company. Oregon statutes state an ADW entity must have an active bank account.
It is believed that few if any of IRG’s estimated 200 customers are able to deposit or withdraw funds from their accounts because of the seizure. And Youbet appears unable – at least for the moment – to be able to fund IRG accounts due to an Oct. 30 waiver of default agreement announced by lender Wells Fargo Foothill, which extended a $19-million line of credit to the company in July 2006.
The waiver of default contains language in an accompanying “side agreement” that states Youbet shall “not make or accept any investments, distributions, dividends or otherwise any other intercompany transfers to or from IRG,” except for up to $80,000 every two weeks to fund IRG’s payroll and operations, according to a Securities and Exchange Commission filing.
Youbet chief executive officer Chuck Champion, while often talking in broad terms about the impact of the IRG investigation during the conference call, did not discuss the waiver in any fashion, nor did analysts ask about it.
The Blood-Horse was cued to ask a question about the waiver situation and its impact on IRG funding, but did not receive the opportunity before the conference call ended (a press release announcing the conference call said questions would be “reserved for call-in analysts and investors”).
Youbet spokesman Hud Englehart, when asked in an earlier interview about the ability of the company to make good on funds owed to IRG customers in light of the waiver of default, said the issue was “complicated,” and could possibly be rectified when IRG comes into compliance with Oregon statutes.
“I can only guess at the answer,” he said. “Once the accommodation is made, once the mechanisms are in place, my guess is that we can go back to normal. But I can tell you that Youbet is going to do whatever they can do to make IRG customers whole.”
Also as part of the side agreement to keep the credit agreement from going into default, Youbet agreed to pay a $100,000 “accommodation fee” to Wells Fargo Foothill, and keep company liquidity at $4 million, among other requirements.
Oregon Racing Commission executive director Randy Evers declined to comment Nov. 7 on the development of the waiver of default agreement, other than to reiterate the ORC’s concern of lack of payment to IRG customers. It was earlier reported Youbet and IRG have until Nov. 12 to either come into compliance or seek to challenge the license suspension in an independent court of law.
Champion said new on-shore accounts had been opened at IRG, and that deposits and withdrawals “are in the process of being made.”
“We are using extraordinary efforts to ensure that it is all being done — not in anyway shape or form to provide money to anyone that the government may be interested in for other reasons,” he said. “We don’t want to interfere in their investigations … and not inadvertently cause any problems in that regard.”
Champion also said company payables to tracks are all current, and noted that in some cases, IRG is a “net-cash receiver … so it’s really the tracks paying IRG.”
The CEO said 2007 has been a year filled with challenges – some legal, some competitive – which have overshadowed the many accomplishments of the company.
“(They) detract from the truly extraordinary story of our business model and its growth since 2002,” he said, citing a four-fold increase in handle during the period. “These distractions have cost us money… but more importantly, the consistency of these distractions has cost us the opportunity to show how robustly our ADW business performs.”
Youbet also announced the departure of Joseph F. Barletta from its board of directors. Barletta, who had served on the board since 2002, leaves his position just days after it was announced company co-founder David Marshall resigned his post as vice-chairman.
Youbet's third-quarter report can be viewed here.
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