30th Apr 2007 07:04
888 Holdings plc30 April 2007 888 Holdings Public Limited Company ("888" or the "Company") Preliminary Results for the twelve months ended 31 December 2006 888, one of the world's most popular online gaming entertainment companies,announced its preliminary results for the twelve months ended 31 December 2006. Financial Highlights • Profit before tax* up 34% to US$90.5m (2005: US$67.4m) • Net Gaming Revenues ("NGR") up 7% to US$289.9m (2005: US$271m) • Net Gaming Revenues from continuing operations** up 28% to US$157m (2005: US$123m) • Operating expenses % of NGR stable at 27% • Cash at year end US$114.4m (2005: US$62.2m) - Group has no debt • Net cash generated from operating activities of US$85m (2005: US$88m) • Basic EPS*** up 29%% to 24.8c (2005: 19.3c) • Profit before tax* margin up to 31% (2005: 25%) Operating Highlights • Further diversification of product offering via landmark acquisition of the Bingo business from Globalcom Limited in Q1 2007 • Ground-breaking partnership with Rileys, the UK's largest chain of snooker, pool and poker clubs • Customer experience enhanced by introduction of: - Multi-hand poker - New casino games including Mobile Casino - Blackjack in Poker - Backgammon • Sports betting licence in Italy, applied for, and successfully granted • Customer acquisition underpinned by further investment in 888 brand; a vital contributor to the company's resilience after the passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in October 2006 * Excluding share benefit charges of US$8.8m (2005: US$17.2m) and reorganisationcosts of US$4.0m (2005: US$nil) ** Continuing operations relates to all non-US facing operations ***Excluding share benefit charges of US$8.8m (2005: US$17.2m) Commenting, Gigi Levy, CEO of 888 said: "2006 was a significant year for 888, not least because of the signing of theUIGEA bill in October which meant we had to cease all activity in the US market- 55% of our business. Against this background, I am delighted to report recordfinancial results for 2006. Our continued success is based on the principle ofproviding our customers a compelling, localised, innovative unique customerexperience. I am also pleased to report that our financial and operational recovery sinceOctober 2006 continues with NGR growth of 16% in Q1 2007 compared to Q4 2006.Given this start to 2007, the release of new products, our Bingo acquisition andour clear business strategy we are confident of delivering future growth in2007." < ends > An audio replay of the presentation to analysts will be available from theinvestor relations section of 888's website (http://www.888holdingsplc.com) fromlate afternoon today. Contacts and enquiries 888Gigi Levy Chief Executive Officer +350 49800Aviad Kobrine Chief Financial Officer +350 49800 Bell Pottinger Corporate & FinancialAnn-marie Wilkinson/Nick Lambert/Chris Hamilton +44 (0) 20 7861 3232 Chairman's Statement On behalf of the Board of 888 Holdings I am pleased to present the financialresults for the year ended 31December 2006. The year proved to be a watershed for the online gaming industry following thepassing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in the UnitedStates on 29 September 2006 as a consequence of which we ceased all activitywith US based customers. We were particularly disappointed by this developmentas we believe in a global regulated online industry. 888 has been at theforefront of self-regulation since its inception. This is with a view to bothprotecting our customers and ensuring they have a safe environment in which theycan enjoy their chosen entertainment experience. The enactment of this law radically altered the landscape of the online gamingindustry and had a significant impact on 888's business performance. However,the broad international reach of the Group's business, especially in Europe,meant that the impact of our withdrawal from the US market left us with a viablecash flow positive business on which we have built significantly. Management rose to the significant operational challenge this placed on thebusiness and proved that this Group has a robust and flexible business model.The results are testament to all our staff who continue to operate with bothprofessionalism and commitment. Financial results Despite our withdrawal from the US in October 2006, we have achieved recordturnover of US$289.9 million, an increase of 7% above 2005, driven by 28%turnover growth from operations outside the US and profit before tax* of US$90.5million, an increase of 34% compared to previous year. Dividends In line with our policy, and despite the negative effect of the UIGEA, given thestrong financial performance, the Board has recommended a final dividend of8.88c per share. Board changes There have been a number of changes during the year under review. In June Gigi Levy joined the Group as COO and Shay Ben-Yitzak, a foundingshareholder, stepped down from his executive role to take up a non-executivedirectorship. On behalf of the Board I would like to thank Shay for his valuablecontribution and wish him every success in the future. Gigi brought with him astrong technology and customer service background, having worked in theinternational communications, broadband cable and satellite industry, and thisexperience has proved invaluable to the business as it focuses on the customeroffering. Having led the business for six years and taken it through its successfulflotation on the London Stock Exchange, John Anderson stepped down as CEO on 31December 2006 and was succeeded by Gigi Levy. On behalf of the Board I wouldlike to thank John for his valuable contribution and wish him every success inthe future. The Group continues to benefit from John's vast experience in hisrole as a Non-executive Director. I would like to thank my Board colleagues for their continued support and onyour behalf to express my thanks to all the 888 team. They are a fantastic groupof people whose dedication and commitment has been outstanding. Outlook The Group has worked hard to continue expanding its non-US business, a strategywe have pursued as core to our objectives and we are especially pleased with theresults and our performance since ceasing the US business. Our ability tosucceed in the new environment is the outcome of a strategy that encompassesvision, new products and enhanced customer experience. We have continued tobuild our brand and business in new geographic areas, expand our innovativeproduct offering and extend our multi-channel customer acquisition and retentionthrough our market-leading customer service. Quarter 1 2007 started well, driven by the rollout of innovative products suchas localised Video Slots, Blackjack in Poker and Crazy Blackjack, to name a few.We are confident that these initiatives together with the release of our all newhome-grown Backgammon, coupled with the Bingo acquisition, will deliver furthergrowth. Your Board believes we are well positioned to develop and grow our business inthis exciting and expanding space for the foreseeable future. Richard KilsbyChairman Chief Executive Officer's Review When I joined 888 as COO in June 2006 I joined one of the world's foremostinternet companies, a leader in the online gaming entertainment market, with oneof the strongest brands in the industry and my focus was to ensure thecontinuance and acceleration of the company's spectacular growth. 888, is known for its unique marketing capabilities, its strong global brand,the high quality service and support it provides its customers and thestate-of-the-art technology it develops and uses. My challenges for 2006 weremostly related to the refinement of the company's strategy, the need to continueto innovate and introduce additional games and the desire to continue to expandgeographically, a long declared strategy of the Group. Everything was set foranother record year. The UIGEA bill was signed into law on October 13 and we ceased all activity inthe US market. This was not an easy change to make, losing the majority of our26 million registered customers at the time and 55% of our revenue could havepotentially delivered a lethal blow to the business. However I am pleased to saythat we already had the infrastructure and plans in place to ensure oursurvival. The impact was immediate, with revenue falling by 55%, new customer acquisitionnumbers by almost 40% and active customer numbers by 35%. The company's coststructure was inappropriate for such reduced revenue levels, and we had to actswiftly, taking appropriate action including the regrettable but necessaryheadcount reduction and a refocus of our marketing activity on new markets. Wemade a bold and conscious decision not to reduce headcount by similarpercentages to the revenues we lost. It was - and still is - our belief thatgrowth will only come from an innovative offering and cutting-edge marketing.Thus the number of Research & Development and marketing professionals was hardlychanged, ensuring we can continue performing on our declared product andmarketing strategy. Current trading suggests that this was the right strategy,which enabled us to remain a profitable and fast growing business. Our 2006 results, despite the UIGEA setback, prove again the attractiveness ofour business model and the resilience of our Group. Altogether, our revenuesgrew by 7% year on year, and based on our improved operational performance andlarger scale, our PBT* grew 34% making 2006 the group's most successfulfinancial year ever. More importantly, our revenue from non-US markets grew by28%, in line with our strategy to continue reducing exposure to the US market. * Excluding share benefit charges of US$8.8 million (2005: US$17.2 million) andreorganisation costs of US$4.0 million (2005: US$nil). Delivering on our strategy Our success in 2006 was based on the same strategic principles that made ussuccessful during our 10 years of operation, namely acquiring and retainingcustomers by delivering a compelling, localised, innovative, unique customerexperience while being mindful of the complex regulatory environment that weoperate in and the necessary social responsibilities that come with ourindustry. To achieve the desired customer experience, we continued our investment in ourEnhanced and Innovative Offering - 2006 saw the largest investment we have evermade in Research and Development to date, more than US$19 million. This resultedin a whole new Casino version - our best-ever online entertainment arena, theintroduction of our multi-hand Poker and a significant investment in gaminginfrastructure which will be the basis for rapid games introduction in 2007.This infrastructure enabled us to introduce an average of one new game a monthin our Casino offering in the last quarter of 2006 as well as Blackjack in Pokerand most recently the all new home-grown Backgammon. 2006 was a record year in terms of marketing activity, in which we kept ourfocus on delivering State of the art Integrated Marketing. We did more thanbefore in every aspect of our marketing activities in 2006; more onlinemarketing campaigns in more countries; more affiliates working with us; moreoffline campaigns; more promotions and retention activities with our customers;the first 888 Magazine ('Eight' which has become a huge success); and moresponsored sports events. In 2006 we continued developing our 888.com brand,which became the most recognized online gaming brand in the UK. It is thisunique marketing capability which enabled us to turn the business around soquickly when we had to abruptly cease US activities and which will continue todrive our customer acquisition and retention. A common thread in our activities, we ensured we are Thinking Global whileActing Local. The winning customer experience always has a local flavour to it,and we kept pushing to deliver the most localised experience available. Withcampaigns in more than 15 languages, Casino software in 11 languages, Poker in 7languages and customer service available in 11 languages, we continueddelivering one of the most localised gaming experiences in the industry. One of our core capabilities, we kept providing our customers Market-Leadingcustomer service. Taking care of our customers has been one of the cornerstonesof our success, and through 2006 we kept delivering a phenomenal Service LevelAgreement answering the vast majority of customers' calls and chat requests inless than 18 seconds and responding to e-mails in less than 20 minutes. This isvisibly the best customer service in the industry and we constantly receivepositive feedback on our service levels from our customers. As part of our investment in improving our Customer Intimacy, we met more of ourcustomers in 2006, asked a larger sample of them to answer our satisfaction andresearch surveys and invested even more in our data mining and analyticalcapabilities. In 2006 we also completed our new Data Warehouse, which isproviding a far better insight into our customers' behaviours and needs. Thisresulted in more personalised promotions to customers in 2006, which assisted inmaintaining and increasing customers' lifetime value. With all the challenges we had to overcome in 2006, it became even more criticalthen ever to act as a Focused, Efficient and Effective Organisation. We havemanaged to reduce a considerable part of our cost base throughout the year andcompleted a quick cost reduction plan following UIGEA without which we would nothave been able to secure our margins in 2007. To complete our recovery, it wasour proactive Employer of Choice philosophy which enabled us to retain ourprofessional, dedicated and motivated employees in the midst of the storm ourindustry went through. Responsible gaming Responsible gaming has always been at the heart of our activity. As a foundingmember of eCogra, the self-regulating industry body, we have continuously aimedto set an example when it comes to acting responsibly. 2006 was no different. Wecontinued to restrict hundreds of customers whom we suspected had a gamingproblem and direct them to seek help and support; we enabled customers to imposelimits on their activities and when appropriate proposed they do so; we offerself-exclusion tools to all customers and continue to utilise all availablemethods and work with industry experts to detect underage gamblers and preventthem from playing. In 2006 we continued to train our staff to recognize signs ofproblem gamers and act accordingly; we have further developed our automaticprotocols looking for gaming problems in customers' behaviours. We have alsorecruited an experienced executive (who previously worked at Gamcare) asDirector of Responsible Gaming. She acts at the most senior levels in theCompany and focuses all of her time on this most important issue. The regulatory landscape While the regulatory landscape has always been a key focus for us, this hasintensified following UIGEA and other anti-online gaming legislation in variousjurisdictions. Managing regulatory compliance is a vital task for an onlinegaming company, and we continue investing significant effort, both internallyand through our network of advisors worldwide, to better understand regulatorydevelopments and ensure appropriate actions are taken. It has always been ourbelief that there will be a growing regulatory clarity in the coming years,mostly in the form of a regulatory framework in the various markets, and wecontinue to see this as the most sensible evolution for this highly popular formof online entertainment. Clearly, regulatory developments can have both positiveand negative impacts on our business, and when faced with the rightopportunities to reduce regulatory risk we would do so. In line with thisstrategy we applied in 2006 for, and were successfully granted, a Sports Bettinglicence in Italy. We will keep monitoring regulatory changes throughout 2007 andtake appropriate steps to reduce risk. Our employees I cannot overstate the importance of our employees to our success, especially inlight of UIGEA and the changes we had to implement immediately.Had it not beenfor our professional, motivated and committed employees all around the world, wecould not have refocused as quickly and effectively as we did. We will continueinvesting in our employees, developing their skills and ensuring we provide thema professional and challenging working environment keeping 888 one of the bestcompanies to work for world wide. Our success is based on excellent people andwe will continue bringing on board and promoting key talent wherever we find it. Our strategy for 2007 and beyond While our core strategy remains unchanged, our management team has significantlyrefined our strategy to meet the new challenges in the newly formed, post-UIGEAmarket. The new emphasis in our strategy set out below aims to further enhanceour customers' experience, ensuring that we provide our customers the widestvariety of relevant games, better and more rewarding opportunities to play andwin wherever and whenever they wish. Unified offering - from different games to a single multi-dimensional gamingenvironment In order to provide our customers with a wider selection and a completeentertainment experience, we have decided to move all of our offering into asingle software client, using a single wallet which will make all gamesavailable to all customers. This is a unique approach in the market, and incoming months our customers will enjoy the ability to play Poker, Casino andBackgammon all from the same software client and wallet. The process has alreadystarted with the successful introduction of Blackjack into our Poker offering,which was an instant success. Early in Quarter 2 2007 our customers will be ableto access Video Slots, Video Poker and Roulette (comprising a total of 19 newgames) and our new Backgammon game in the same software client and later duringthe year they will be able to access directly all of our additional Casinogames. This is a unique offering which is more exciting than what is currentlyavailable in the market as it makes it a lot easier for customers to enjoy theirdeposited funds in a large variety of games without the need to downloaddifferent software clients for each game. Coupled with our newly acquired Bingooffering and our anticipated Sports Betting proposition we aim to have the bestoffering in the market by the end of 2007. Entertainment focus - from just gaming to additional forms of entertainment Whilst online gaming remains the core of our offering, to ensure our customersenjoy their membership of 888 even more, we will be adding Video and Audioentertainment to our proposition throughout the year. Following extensivestudies of our customers' interest areas and given our ability to personaliseour offering, we are confident we can deliver relevant content which willfurther delight our customers. Community tools - from individuals playing at the same table to a community ofpeople looking to have fun We believe that our customers are looking for the best entertainment availableonline. Growth of social networks in recent years, demonstrates clearly thatcommunication and networking is key in creating a sense of belonging andloyalty. We have always had chat available for customers playing Poker as wellas forums, but we are now taking this further so our customers can interactbetter with each other, use messaging technologies, know when their friends areonline and even be able to 'set appointments' to play with these friends. Thesefeatures which will be available throughout 2007 will ensure that our customersnot only enjoy the games but also enjoy being part of the 888 community. Mobile and TV - from a single platform to multi platform access As the worlds of the PC, mobile phone and television are converging, ourcustomers want to be able to access their favourite games not only from theircomputer but also from their mobile phone and television. In 2006 we launchedour mobile Casino, which currently features our most popular games on mosthandsets and enables users to play the same games using the same account andwallet as online. In 2007 we will seek to expand our mobile reach and extend ouroffering to additional platforms such as television. More localisation - from localising games to adding local games While our offering is already localised today, we aim to do even more, and willintroduce in 2007 not only further localised versions of our games but alsolocal games which are relevant for target markets. Asian games, South Americangames and others will be added to our offering to accommodate local gamingpreferences in each market. To accelerate the pace of adding new games, we haveopened our platform for integration, and will be choosing key partners worldwideto provide games which will operate in our proprietary gaming environment. Sowhile we will be able to integrate new third party games rapidly into our frontline we will continue to have a single integrated financial, transactional andback office system. Strategic partnerships - from just an operator to service provider to virtualoperators Following significant technological investment, the Group has embarked on a newventure, partnering with key brands to deliver specific propositions to targetsegments. These partnerships will enable the Group to reach new customersrapidly, leveraging the partners' assets and sharing the revenue from thesecustomers. We have already announced our first such partnership, an innovativecooperation with Rileys, the UK's leading chain of 168 Snooker, Pool and Pokerclubs. In this partnership, we use our online Poker capabilities to powerwww.rileyspoker.com. This Poker site is promoted by Rileys in their clubs totheir 525,000 customers and externally in new club customer recruitment givingus immediate reach to these new potential customers. We are currently in thefinal stages of negotiating additional similar partnerships, which will furtherbroaden our potential audience and accelerate our customer recruitment. New Customers Club - from a 2-tier VIP club to a state of the art Customers Club 2007 will see the launch of The Max, our newly formed loyalty club which willgive customers an unparalleled membership experience. With a simple, 4-tiermembership level, innovative prizes, quicker points accumulation and lots ofsurprises, The Max, which will be launched mid year, will aim to be the bestmembership club in online gaming and the major one to offer points collectionfrom all types of online games into a single account. As can be seen, we plan to have an exciting year, in which we will continue todeliver on our successful strategy. Our first acquisition We recently announced the first acquisition in the history of the Group, inwhich we acquired the Bingo business and assets from Globalcom Limited*. Bingois a fast growing segment of online gaming, and we are certain this acquisitionwill assist us in delivering quick growth. We are constantly looking foradditional opportunities to enhance our strong organic growth with selectiveacquisitions. Current trading and outlook We had a good start to 2007 with record turnover in March 2007 for non-USoperations with 16% NGR growth in Quarter 1 2007 compared to Quarter 4 2006.During the period 1 March to 21 April 2007 average daily turnover as well asPoker rake plus tournament fees were both 20% higher than during the last weekof October 2006, while average daily Poker and Casino active customers were 28%and 11% higher respectively, than the last week of October 2006. Given this start to 2007, the release of new products, our Bingo acquisition andour clear business strategy, we are confident of delivering future growth in2007. Gigi LevyChief Executive Enhanced Business Review Introduction 888 Holdings plc is one of the world's most popular online gaming entertainmentcompanies. 888 owns and operates various websites including www.888.com,www.Casino-on-Net.com and www.PacificPoker.com which are amongst the most wellknown online brands. We are the home of online gaming entertainment. In 2005, 888.com was the proud recipient of Best Online Casino and Best OnlineOperator of the Year at the e-gaming Awards. 888.com was also voted "Best OnlineCasino 2005" in the Inside Edge magazine and in 2006 888.com received "BestOnline Casino 2006" award at the UK Gambling Awards and the "2006 CasinoOperator of the Year" award at the e-gaming Awards. 2006 was a year of change for the Group. Externally the passing of the UIGEA inthe United States in October 2006 has had a major impact on the financialperformance and share price of the Group. 888 was the first public company toannounce its withdrawal from US-facing operations on 2 October 2006 as a resultof UIGEA and the new regulatory reality necessitated determined swift action. Asa result, the Group underwent an internal restructuring process following adetailed review of its cost base in order to adapt its operations to the newenvironment. In addition 888 underwent a significant change in operatingstructure and management focus which will allow it to better align its resourcestowards the challenge of growing in a more diverse and rapidly changing market. In accordance with accounting standards and to provide a clear understanding ofthe Group's continuing operations, the financial results for 2006 and thecomparative 2005 period have been segmented into Continuing and Discontinuedoperations. Discontinued operations represent activities undertaken by the Groupthat were US customer facing, while Continuing operations are those activitiesoffered to non-US customers. All costs which could not be specifically allocatedwere attributed to the continuing operations, see also note 2 of the financialstatements. While the financial statements show the consolidated performance all referencesto financial performance or Key Performance Indicators ("KPIs") throughout thisdocument refer to the Continuing operations unless expressly stated otherwise. Results - GroupFinancial summary** Year ended 31 December 2006 Year ended 31 December 2005 Continuing Discontinued Total Continuing Discontinued Total US$m US$m US$ US$m US$m US$mNet Gaming RevenueCasino 88.8 72.0 160.8 85.2 76.0 161.2Poker 68.2 60.9 129.1 37.8 72.0 109.8Total Net Gaming Revenue 157.0 132.9 289.9 123.0 148.0 271.0Operating expenses 49.4 28.1 77.5 43.3 29.7 73.0Research and development expenses 19.4 0.0 19.4 11.3 0.0 11.3Selling and marketing expenses 51.0 33.3 84.3 54.9 45.1 100.0Administrative expenses* 19.8 3.3 23.1 17.0 3.1 20.1Operating profit* 17.3 68.3 85.6 (3.5) 70.2 66.7Profit (loss) before tax* 22.2 68.3 90.5 (2.8) 70.2 67.4*Excluding share benefit charges of US$8.8 million (2005: US$17.2 million) and reorganisation cost of US$4.0 million (2005: US$nil). ** Rounded. Results - Group (continuing and discontinued operations) Revenue Total Net Gaming Revenue ("NGR") of the Group in 2006 was up almost 7% atUS$289.9 million (2005: US$271.0 million) driven by 28% turnover growth fromoperations outside the US. NGR from the US was down by 10% reflecting thecessation of all real-money games to US customers in October 2006 followingUIGEA. Expenses Operating expenses increased 6.2% to US$77.5 million (2005: US$73.0 million)slightly lower than the NGR percentage growth. This was primarily as a result ofexpansion of the customer facing employee base and maintaining the overalloperating expense ratio of NGR at 27%, despite considerable decline in NGRfollowing the withdrawal of US operations in October 2006. Research and development expenses increased 71.2% to US$19.4 million (2005:US$11.3 million) due to the expansion of our product development, a directresult of our strategic decision to accelerate development and release of ourinnovative product range. Marketing expenses fell 15.7% to US$84.3 million (2005: US$100.0 million) due tothe cessation of our marketing activities to US based customers in October 2006following the enactment of UIGEA and our tightened control over our marketingactivities focusing our efforts on attracting and retaining valuable customers. Administrative expenses* increased 14.8%** to US$23.1 million (2005: US$20.1million) as a result of an increase of US$6.7 million in salaries to US$14.6million (2005: US$7.9 million) and higher lobbying expenses partly offset byUS$4.7 million exchange gain (2005: US$0.4 million exchange loss). The increasedsalaries reflected the change in management structure required for a quotedcompany and the payment due to the outgoing Chief Executive Officer under hisagreement. Reorganisation costs For a number of years the Group sought to minimise its exposure to the US marketand as a result of the decision to cease real-money games offered to UScustomers in October 2006 the Group incurred relatively modest reorganisationcosts of only US$4.0 million (2005: US$nil). This amount primarily representsthe cost of regrettable but necessary redundancies of US facing employees acrossthe Group's three main operating units in Gibraltar, Antigua and Israel. Share benefit charges At the time of our IPO, as part of our commitment to investment in humancapital, eligible management and employees received equity awards under the 888All Employee Share Plan ("Share Plan") including a grant by the founders ofimmediately vested shares. These equity grants had no cash effect on the Group,but under the applicable Accounting Standard (IFRS 2) this results in a chargeagainst income calculated on a phased basis as set out in the accountingpolicies section of the financial statements. In 2006 the Group awarded shares and options to seven senior executives vestingover the period 14 April 2007 to 14 September 2010 and subject to certainperformance related targets being met. Finance income With the Group continuing to generate and retain cash surpluses throughout theyear net interest income increased to US$4.9 million (2005: US$0.7 million). Profit before tax* As a result of increased revenues, keeping expenditure under control and bettermanagement of resources, profit before tax increased 34% to US$90.5 million(2005: US$67.4 million). Reconciliation of profit before tax 2006 2005 US$m US$mProfit before tax 90.5 67.4Reorganisation costs (4.0) 0.0Share benefit charges (8.8) (17.2)Profit before tax after share benefit charges and reorganisation costs 77.6** 50.2 *2006 excluding share benefit charges of US$8.8 million (2005: US$17.2 million) and reorganisation costs of US$4.0 million (2005: US$nil).**Rounded. Cash flows and balance sheet In accordance with the Group's practice, customers are required to deposit fundsinto their accounts prior to participating in any real-money activity. As amatter of policy the Group keeps sufficient liquid resources to meet thepossible withdrawal of all customer balances at any time. The Group is highly cash generative with a net cash increase in 2006 of US$52.2million (2005: US$21.9 million) after the payment on 31 October of an interimdividend of 4.5c per share and a special dividend of 4.0c per share totallingUS$28.7 million (aggregate dividend 2005: US$63.1 million). Cash position at 2006 year end remained strong at US$114.4 million (2005:US$62.2 million) and represented 83.1% of total assets (2005: 71.0%). Out ofthis amount US$22.7 million was owed to customers (2005: US$29.3 million). TheGroup has no debt. Results - Continuing operations The continuing operations demonstrated strong growth in 2006 with NGR up 27.6%to US$157.0 million (2005: US$123.0 million) driven mainly by strong growth inour Poker product particularly in the EMEA region. Operating profit* increasedafter a loss in 2005 of US$3.5 million to a profit in 2006 of US$17.3 million.The table set out below includes a summary of the continuing operations. 2006 2005 US$m US$mNet Gaming RevenuePoker 68.2 37.8Casino 88.8 85.2Total 157.0 123.0Operating profit (loss)* 17.3 (3.5)Profit (loss) before tax* 22.2 (2.8)*2006 excluding share benefit charges of US$8.8 million (2005: US$17.2 million). Poker The Poker operations delivered the strongest growth in 2006 with NGR increasingby 81% to US$68.2 million (2005: US$37.8 million). The progressive developmentof our Poker product in combination with strong customer recruitment are themajor factors contributing to the success of our Poker offering. The Pokersegment result, after directly attributable costs but before allocation ofoverheads, increased by 196% to US$41.4 million (2005: US$14.0 million)reflecting the volume driven nature of this business. Poker now contributes 43%(2005: 31%) of the Group's NGR. Casino Growth in our Casino business was moderate with NGR up by 4% to US$88.8 million(2005: US$85.2 million). The introduction of Blackjack into Poker at the end of2006 was an instant success and the addition of further Casino games into Pokerand the migration into our unified platform planned for 2007 are expected toaccelerate Casino growth. Nonetheless the Casino segment result, after directlyattributable costs but before allocation of overheads, increased by 26% fromUS$41.2 million to US$52.1 million as the focus of the marketing expenditure wastightened. Expenses Operating expenses increased 14.1% to US$49.4 million (2005: US$43.3 million)primarily as a result of the increase in customer facing staff and communicationcosts which offset the reduction in the cost of chargebacks. The ratio ofoperating expenses to NGR reduced to 31.5% (2005: 35.2%). Research and Development expenses increased 71.2% to US$19.4 million (2005:US$11.3 million) due to the expansion of our product development, a directresult of our decision to accelerate development and the release of ourinnovative product range. Marketing expenses fell 7.1% to US$51.0 million (2005: US$54.9 million) as wefocused our marketing expenditure on attracting and retaining valuablecustomers. The ratio of marketing expenses to NGR reduced to 32.5% (2005:44.7%). Administrative expenses* increased 16.8% to US$19.8 million (2005: US$17.0million) as a result of an increase of US$6.5 million in salaries to US$13.9million (2005: US$7.3 million) offset by US$4.7 million exchange gain (2005:US$0.4 million exchange loss). Increased salaries reflect the change inmanagement structure required for a fully listed quoted company and payment dueto the outgoing Chief Executive Officer under his agreement. The ratio of administrative expenses* to NGR reduced to 12.6% (2005: 13.8%). Profit before tax* After finance income of US$4.9 million (2005: US$0.7 million) profit before taxgrew from a loss of US$2.8 million in 2005 to a profit of US$22.2 million in2006. * 2006 excluding share benefit charges of US$8.8 million (2005: US$17.2million). Our strategy We aim to achieve profitable growth through the acquisition and retention ofvaluable customers by providing our customers with a differentiated, intentionalcustomer experience. Our goal is to become the world leading onlineentertainment gaming company and exceed our pre-US shutdown annual revenue andprofit. To do this we must give our best customers the right customerexperience. The main cornerstones of our strategy are summarised below. •Thinking global while acting local: Providing a consistent, first class, relevant experience to our customers•Enhanced and innovative offering: Offering a full range of entertainment options to our customers•State of the art integrated marketing: Coordinating our marketing channels to provide a strong relevant marketing message using an integrated multi-channel approach to maximise the acquisition and retention of valuable customers•Customer intimacy: Using our customer knowledge to maximise their customer experience while prioritising our resource allocation to them•Market leading customer service: To provide the most positive customer interface possible•Focused, efficient and effective organisation: To remain competitive we must run the operation efficiently and maintain focus on our particular plans and goals•Employer of choice: Our aim is to be the employer of choice in the market in which we operate. Review of 2006 In 2006 the Group underwent two fundamental changes. The impact of UIGEA on the industry, competitive landscape and our business environment are well documented. The impact on our business was less severe than some of our competitors as in previous years one of our main strategic objectives had been to reduce our reliance on the US market and diversify into other geographical markets. We will continue to build on the strength of our brand and utilise our unique experience and know-how, gained over years of operating in non-US markets, to accelerate our geographical expansion and localisation focus. The other fundamental change has been our management re-focus designed to utilise our resources more efficiently in face of the changing business environment. The recruitment of several key senior management team members signified a shift in our execution capabilities necessitated by the changes wefaced. This in turn led to a change in our management and regional operational focus which has allowed us to withstand the adverse effect of UIGEA. The key aspects of this are set out below. Organisation structure The new organisation structure is aimed at re-focusing the core elements of our organisation; marketing, R&D, product offering and support, but at the same time improving interfaces and communication between them. Marketing and CRM is now focused on a regional basis with the goal of recruiting the customer segment of our choice and providing the smoothest route from initial brand awareness to playing real-money games. R&D is focused on developing and integrating our gaming and back office systems to ensure a shorter time to market of our innovative offering. Product offering is focused on ensuring that we offer the best set of games andthe widest selection of payment methods available in all locations. The final element is our support function that is tasked with ensuring that weprovide world class customer support, maintaining close, intimate contact withour customers and thereby ensuring we leverage and deliver through all corefunctions. Player growth Attracting valuable new customers is a key driver of our business growth. Duringthe year our continuing operations recruited more than 260,000 new First TimeDepositors ("FTDs") from more than 920,000 new real play registrations despitethe normal seasonal slowdown during the summer months which this year sufferedparticularly from the World Cup effect. Total customer registrations increasedby 34.7% in 2006. Player retention The ability to retain customers is as an important factor in the success of ourbusiness as is the ability to recruit them in the first place. High churn ratescan mean that the cost of recruiting new customers outweighs their value, sorecruiting and retaining customers with high lifetime values is a key componentto profitability. We measure retention by tracking the revenue generated by groups of customerspooled together according to the quarter they joined, over successive quarters.Poker exhibited steady performance for the Poker product during the last twoyears. A considerable portion of our revenue in each given period is derived bydedicated customers who joined more than a year ago representing the monetary"stickiness" of our revenue stream. Another method to measure retention is by comparing the level of revenuereceived from customers active over a specific period, over the followingmonths. We compare the rake and tournament fees received from Poker customers active inJanuary 2005 and January 2006 over the following 12 months. As can be seen fromthe two sample populations, on average customers tend to play more during thefirst few months after joining with spend profile decaying over time. Inaddition, revenue is generally higher for 2006 customers until the last threemonths of the year when the loss of American customers reduced liquidity onhigher value tables with the result that customers contributed 46% of theirJanuary levels in December 2006 compared with 59% for the 2005 customers inDecember 2005. Nevertheless overall NGR from our Poker offering rose 17% inQuarter 4 2006 compared to Quarter 3 2006 due to successful customer acquisitionefforts coupled with increased yield per customer as described in the KPIanalysis on the opposite page. Similarly the Casino revenue retention compares the net deposits (a close proxyto NGR) received from Casino customers active in January 2005 and January 2006over the following 12 months. As can be seen from the two sample populations therevenue is generally higher for 2006 customers than 2005. However, by year end2006 customers contribute 38% of their January levels in December compared with44% for the 2005 customers. KPIs - Continuing operations The performance of the business is reviewed on the basis of a number of keydeterminants. These are analysed below on a quarterly basis for the last twoyears for the Casino and Poker operations and for the business in total. Casino Year 2005 2006Quarter 1 2 3 4 1 2 3 4NGR ('000) 20,227 21,856 21,647 21,498 21,496 22,531 22,646 22,088Active customers 50,565 56,812 56,553 62,933 54,053 48,425 46,444 41,307NGR per active custom 400 385 383 342 398 465 488 535 The Casino has delivered a steadily increasing NGR per quarterly activecustomer in 2006 reaching US$535 in Quarter 4 2006. This follows thedevelopments of the offering with greater localisation and the rollout ofnew games, particularly the higher margin Video Slots introduced in early2006, and the migration of customers to these games. Casino NGR increasedfurther in Quarter 1 2007 with the introduction of Blackjack into Poker.This growth has compensated for, on an NGR basis, a decline in activecustomer levels after strong growth in 2005. Nevertheless the Casino offering has seen a steady annual growth in NGR witha similar seasonal pattern of quarter by quarter movement within each year. PokerYear 2005 2006Quarter 1 2 3 4 1 2 3 4NGR ('000) 5,254 7,808 10,166 14,527 17,857 16,322 15,686 18,374Active customers 61,710 92,489 105,714 119,116 134,710 122,087 132,995 147,805NGR per active customer 85 84 96 122 133 134 118 124 Poker has seen constant strong growth across all KPIs since Quarter 1 2005demonstrating the value of the enhancements made to the product over the period.NGR per quarterly active customer has once again resumed its climb aided by thegrowth in liquidity from the continuing increase in active customers. Customergrowth remained strong despite the seasonal pattern and the competition from theWorld Cup. The combination of these two factors have resulted in impressive NGR growth overthe period which has continued in Quarter 1 2007. Total Year 2005 2006Quarter 1 2 3 4 1 2 3 4NGR ('000) 25,481 29,664 31,813 36,025 39,353 38,853 38,332 40,463Active customers 112,275 149,301 162,267 182,049 188,763 170,512 179,439 189,112NGR per active customer 227 199 196 198 208 228 214 214 The combined KPIs reveal a healthy increase in NGR over the period which hascontinued with 16% growth in Quarter 1 2007. Active customer growth has beensteady, coupled with a stable total NGR per active customer. Our products Casino Founded in 1997, Casino on Net, our major Casino brand, has consistently beenranked as the leading online Casino brand in the world. The Casino continues togenerate substantial business, and represented more than 55% of the Group's NGRin 2006. In our non-US business from Quarter 1 2005 to Quarter 4 2006 weexperienced 9% NGR growth. 2006 has seen consistent development of our Casino offering. January 2006 saw amajor update with new games, added promotional features and a more contemporarydesign. The Video Slot offering gives a unique playing experience and has proveda hugely popular feature with a growth rate of 227% from January to December fornon-US customers. To capitalise on this we aim to add one new slot machine amonth and with its greater margins we are actively promoting the feature acrossour customer base and across languages. The integration of Blackjack into our Poker client in December 2006 was anovernight success. Poker customers can now play our exciting and innovativeBlackjack while enjoying our successful Poker games. With 18% of 888's Pokercustomers in the first two months of 2007 playing Blackjack, this enhancement ofour offering has proven to be both popular and profitable, supporting our plansto integrate more Casino games into our Poker client. As part of our localisation strategy, we will be releasing our new Casinoversion in further languages. In October 2006, the new French version wasreleased and has already shown significant increase in revenue and first timedepositors compared to the previous version. In January 2007, the new versionwas released in German and Spanish and will soon be available in 12 languages intotal. Our commitment to provided our diverse membership base with unique games,features and more convenient payment methods to support local markets, willfurther our international growth and our plan is to add more languages in 2007. Poker 2006 has been in many ways a transition year for our Poker brand, Pacific Poker.The growth phase from a new, young and raw Poker room into a mature, competitiveand influential Poker room has been achieved by addressing previous gaps in ouroffering. In January 2006 the Jackpot features "Bad Beat" and "Royal Jackpot", wereintroduced and have created additional activity and excitement. Multi-table, theability to play at more than one table at the same time, was introduced in March2006, and was probably the most influential positive product upgrade of theyear. 27% of the customers at any given time are using this feature, playing intwo or more ring games and/or tournaments. This feature aids retention of ourmore experienced customers and obviously increases liquidity and profitability. In Quarter 3, in an effort to increase our growing global reach and to connectbetween big offline tournaments and our online experience, we created a sectiondedicated to sending our customers to exciting offline tournaments around theworld; customers can find online qualifying tournaments to the WSOP in LasVegas, Aussie Millions in Melbourne, the European Poker Tour and World PokerTour tournaments among others. In October, following UIGEA and feedback from our customers, a major effort wasmade to revamp all our tournaments; sit and go and multi-table tournaments,reviewing buy-in amounts, fees, playing times, and guaranteed amounts. Initialresults suggest this has had a positive effect, creating a more excitingenvironment for customers and increasing the appeal of our tournaments to ourcustomers. December marked a big step in our quest to become a one stop shop for gaming bythe addition of Blackjack to the Poker client, generating significant interestfrom our customers and adding NGR by complementing the Poker product. As one of the market leaders, we cannot rest on our laurels and we plan tocontinue our progress in two directions; improving our Poker offering andcontinuing the progress towards a one stop entertainment shop. 2007 will see theintroduction of further uplifts, enhancements, updates and new games. Bingo Since the year end we have announced the acquisition of our online Bingobusiness from Globalcom Limited. The Bingo business operates its own leadingnetwork of 45 online Bingo sites or "skins" including Bingoballroom.com,UK-Bingo.net, Bingofabulous.com and Twofatladies.com. In addition it providesBingo solutions to business partners operating their own networks and otherthird party sites. This acquisition is a landmark step forward in delivering ourstrategy of a one stop shop - providing our customers with all of their onlinegaming needs. This is already a well established market leader, highly cashgenerative and profitable which uses its own proven and scalable software. Bingo will be a valuable addition to our entertainment services, and we expectto be able to provide excellent cross-selling opportunities for customersworldwide. This is a great acquisition which is expected to be earningsenhancing for us in the current financial year. It also supports our newlyestablished partnership approach, as the Bingo business today provides servicesto many licensees and skins. Sports licence - Italy In December 2006 the Group was awarded one of the Italian Sports Bettinglicences issued by the Italian Government. This gives us the right to provideonline betting facilities to the Italian market. The Group is currentlynegotiating for the provision of odds setting facilities from the approved listof vendors and intends to launch its full online Sports Betting service in Italylater this year. The licence process also represents a step forward in relationto the e-gaming industries' relationship with the jurisdictions in which theyoperate. Sportsbook The Group continues to investigate opportunities to add a Sportsbook propositionto its offering to fulfil our one stop shop strategy. While this processcontinues we will continue to offer a sports betting option through our Betmatebetting exchange. Customer service Excellent customer service continues to be a central tenet of the Company'sproposition. Our dedicated contact centres in Gibraltar and Antigua offer firstclass customer support 24/7 to our customers around the world. We offer supportin 11 languages. During the year we further upgraded our call routeing and callmonitoring systems in Antigua to ensure the consistency of our global service. The termination of real-money games to customers in the US resulted in anadjustment to staff numbers in the contact centres but we are committed tomaintaining the high standards of service previously enjoyed by our customers.During the year the following performance was attained by the Gibraltar contactcentre: Casino • 98.9% of all phone calls in English answered within, on average, 18 seconds. • 81.4% of all e-mails received in English replied to within, on average 20 minutes. Poker • 98.6% of all phone calls in English answered within, on average, 16 seconds. • 76.5% of all e-mails received in English replied to within, on average 20 minutes. The ongoing dialogue with customers is maintained by a dedicated CustomerRelationship Management team whose aim is to enrich the customer experience. TheGroup has developed sophisticated data mining tools that assist in identifyingand predicting customer behaviour, based on data collected since the Group wasfounded, which allows the Group to offer its customers tailor made incentives tosuit their profile and thus maximise their lifetime values. The level of servicegiven to individual customers is also differentiated, with our best customersreceiving a more personalised service. Payments and Risk Management In 2006 customers were offered a total of 21 different depositing and 10different withdrawal methods. When customers enter 888.com they areoffered a range of payment options tailored to suit their local marketbased on their physical location and from which they can choose theirpreferred method. The aim is to offer a wide selection of secure paymentmethods in each location so as not to restrict the ease of customerdeposit or withdrawal. Credit cards and debit cards are the most popular method of paymentrepresenting 86.7% of total deposits in 2006 (2005: 87.7%) followed byonline wallets representing 11.7% (2005: 11.1%). Deposits and withdrawals are carefully monitored by our in-house Fraudand Payment Risk Management department. This department has a depth ofexperience in fraud prevention from many years' operation and hasintegrated their internally developed prevention and verificationprocedures with conventional commercially available measures. Marketing We have created a world leading brand through multi-channel integratedmarketing across all media channels worldwide. Our vision for marketing is: • to find every person worldwide, who wants to play games and to bring them to the 888 lobby to play; • to let them play more games, to play more often and to play more of the time; and • in a safe, responsible and trustworthy environment. The Group leads the industry in online marketing including search engineoptimisation, advertising banners, pop-ups on websites and portals and the newtools of viral advertising, RSS and others. The Group is constantly copied as itpioneers the use of all media including traditional advertising, direct mail,sponsorships and public relations activities. Indirectly the Group also partnerswith affiliate sites to generate traffic and drive new customers to the site bypaying a commission or revenue share to the affiliate. Finally, effective use ofCRM tools, loyalty and VIP programmes allow a personalised brand experience fornew and existing customers. Employees At the year end the Group had 736 employees (2005: 886) at the followinglocations; Gibraltar, Israel, Antigua, London. The UIGEA had a dramatic effect on our financial performance. However, due toour diversified customer base and internal structure the readjustment tocompensate for this lost revenue was not too significant. It did, however,require an adjustment to those US facing parts of the operation and redundancieswere unfortunate but inevitable. Overall headcount was reduced by 210 with thelargest percentage losses being in the Antigua and Gibraltar support centres. Dividend The Group's stated policy at the time of IPO was that it intended to paydividends to holders of Ordinary Shares and depositary interests representing atleast 50% of annual profit. On 31 October 2006 the Group paid an interimdividend of 4.5c per share and also a special dividend of 4.0c per share, in alltotalling US$28.7 million. Given the Group's strong financial performance, anddespite the negative effect of the UIGEA, the Board recommends a final dividendof 8.88c per share. Responsible gaming The Group is dedicated and committed to a policy of social responsibility. TheGroup has taken a proactive role in setting, maintaining and improving highstandards of protection for its customers. This is essential for shaping futureregulation through industry best practice, improving communications withcustomers and eradicating the incidence of problematic and underage gambling.The Group recognise that while most people gamble for entertainment and eventhough studies suggest that only a very small percentage of the adult populationencounters compulsive gambling problems the problem does exist. We take thismatter seriously and have accordingly implemented a number of measures toaddress this matter. The Group has sought to take the lead in setting industry standards for selfregulation to ensure customer protection, fair gaming, and responsibleconduct are met. It was one of the founding members of eCOGRA (e-CommerceOnline Gaming Regulation and Assurance), an independent body, which hasdeveloped a rigorous series of self-regulatory guidelines. These guidelineshave been adopted by our Casino and Poker businesses and they are subject toindependent review to ensure compliance with these guidelines. The Group hasbeen awarded a seal of approval by eCOGRA for the Casino and Pokerbusinesses following examination of its procedures and controls. The Groupis also an active participant in the Interactive Gaming Council and hasadopted their Code of Conduct which requires fairness, honesty and integrityin members' operating procedures. John Anderson, while CEO, was a key driver of industry self-regulation andis a board member of the IGC and a founder of eCOGRA. The Group does not rely solely on external certification and continues toupdate its policies and practices to ensure a safe environment is provided toits customers. The Group has developed, and continues to update, its proceduresto address underage and compulsive gaming. The Group's contact centre staffreceive training on a regular basis on all issues of social responsibility andproblem gambling. The Group enables customers to set their own stringent depositlimits and upon request to self exclude themselves should they feel the need to.In order to protect minors, verification systems are used wherever available toverify and identify the age and identity of our customer before they are able toplay for real money. In Quarter 3 2006 the Group appointed a dedicated Directorof Responsible Gaming, whose role is to manage the internal and externalresponsible gaming policy. She brings considerable relevant experience to theGroup including working at Gamcare. The Group has recently finalised its Gamcare audit and will soon bereceiving the Gamcare certificate. Gamcare is a UK recognised charity whichhas a commitment to promote responsible attitudes to gambling and to workfor the provision of proper care for those who are vulnerable. Gamcare withits pro-responsible stance maintains a dialogue with all sectors of thegambling industry, including regulators and governments. In addition, the Group has also added the GamAid button to the site toprovide information and support for those customers who feel that theirgambling habit is a matter of concern. The "GamAid Safety Net" is accessedthrough a link from the 888.com home page and also the responsible gamblingpage. The GamAid link supplies core services to the customers; one to onelive online advice, an e-mail advice service, a full support database (whichincludes a directory for local services in 13 countries including the UK)and a self help information section where the problem gambler can educateand assist themselves. In 2006 the Group formalised its Corporate Social Responsibility programmewhich replaces the charitable donations previously made by the individualsubsidiary companies. Through this global scheme it provides the means toencourage employees to become actively involved in their local community.The new programme's success will rely on the initiative, involvement, skillsand knowledge of our employees. During 2007 the Group aims to developprogrammes with a broader global reach. The aim is also to judge results notjust by the input but also by outcomes: the difference the Group makes tothe world of which it is a part. Principal risks The Group operates in a new and dynamic business environment. In addition to theday to day commercial risks faced by most enterprises the online gaming industrypresents particular risks of which regulatory and compliance risks arehighlighted in the review below. Regulatory and Compliance Review The regulatory framework of online gaming in different countries around theworld remains as dynamic and rapidly evolving as ever. While some jurisdictionshave moved to curtail the activities of online gaming sites, others arecurrently contemplating liberalisation and regulation of the industry. The Boardnotes that there are significant risks, unique to the online gaming industry,including from past activity in the US where customers of 888 generated in 200646% of its NGR. The Board remains committed to monitoring closely and addressingregulatory changes as they occur, and to fostering, so far as possible, thetrend towards liberalisation and regulation of online gaming throughout theworld. 888 is licensed and regulated in Gibraltar. In December 2005, the Government ofGibraltar enacted a new Gambling Act. The Act introduces a tailor-made regimefor the regulation of remote gaming. 888 has actively supported the introductionof such legislation and the Board looks forward to its continued implementationin the coming months, which will include the appointment of a new regulator. In the US, UIGEA added a new section to the United States Code making it illegalfor anyone engaging in the business of betting or wagering to knowingly acceptany credit, electronic funds transfer, check, draft etc. in connection with theparticipation of another person in unlawful Internet gaming. In essence, thebill prohibits online gambling operators from receiving the proceeds offinancial transactions in connection with Internet gaming if the gaming isillegal in the state where the bettor is located. In addition, the United StatesSecretary of Treasury and Federal Reserve are directed under UIGEA to promulgateregulations which will require financial institutions to block transactions inconnection with Internet gaming. In October 2006 the Group stopped taking betsfrom US customers. It was recently found by the World Trade Organisation that the US legislativeposition with respect to Internet gambling violates US trade commitments. Theeffect of this ruling, and whether any further action will be taken, is at thiscurrent time unclear. The EU Commission is challenging the online gambling regulatory regime ofvarious European states, as the Commission holds that these regimes mightinfringe the enshrined freedom to provide services and freedom of establishment.This effort is reflected in, inter alia, the infringement proceedings initiatedagainst several EU States. While these proceedings may, in the end, cause theEuropean States to liberalise their gambling markets, it should be noted thatthey could last for a very long time before (if at all) resolutions orjudgements are reached. Recently, the European Court of Justice issued its ruling in the Placanica case,involving criminal proceedings initiated against agents of Stanley InternationalBetting placed in Italy. The court, although not calling for a liberalisation ofthe European gambling market, placed heavier burdens on the European states ifthey maintain their restrictive policies toward online gambling. It remains tobe seen what impact this judgement will have. In Italy, the Group received a Sports Betting licence, which allows it to offerSports Betting services (supervised by the State Monopoly Authority). In France,during March 2007, 888's Non-executive Director and former Chief ExecutiveOfficer, John Anderson, attended an interview with the French authorities. 888is in consultation with its legal advisers with regards to this matter andclosely monitors the situation for any developments. In Israel, law enforcement authorities have raided the offices of severalInternet portals and arrested several individuals on the suspicion that they hadadvertised online gaming sites in Israel, in contravention of the Israeli PenalLaw. The Group does not allow Israelis to wager on its websites and has systemsto prevent them doing so. 888 has been advised that since it does notfacilitate, offer or provide gaming activities prohibited under the Penal Law toIsraeli residents, the Penal Law will not be applicable to the Group since nooffence is committed wholly or in part within Israeli territory. The Board continues to monitor these developments closely and is alert tochanges as they may occur in areas where the Group operates. The Group also has potential risk relating to: Taxation The Group benefits from favourable fiscal arrangements in the jurisdictions inwhich it operates without which its results would be adversely affected. Allgaming activities are based in Gibraltar where the Group currently benefits froma tax exempt status. The tax exempt status is due to be removed in 2010 when theGovernment of Gibraltar intends to introduce a fiscal regime that complies withEU requirements. The replacement regime is still to be unveiled although theGibraltar Government has pledged its commitment to maintain fiscalcompetitiveness. The Group is required to pay a gaming duty currently set at 1%of the gaming yield with an annual maximum cap of £425,000. The Group'ssubsidiary in Israel, Random Logic Limited, and the Israeli branch of IntersafeGlobal Limited have each entered into separate transfer pricing agreements on anarm's length basis with the Israeli Income Tax Commissioner. The arrangementsfor Random Logic Limited are effective until 2010 while the position for theIntersafe Global Limited branch after 2007 has yet to be agreed. The operation in Antigua also benefits from a low tax regime and the currentscale of the operation there mitigates against a significant exposure to anychange. 2007 Plans This year will see full implementation of our strategy which will provide theinfrastructure for future growth. The Group will continue to expand itsinnovative product offering, platforms, diversify its geographical footprint andlocalisation, and extend its multi-channel customer acquisition campaignsincluding by striking additional strategic alliances with business partners.Finally, we will continue to offer the same, excellent, customer service as wealways have. Our offering Poker - our Poker offering has already benefited from a further uplift releasedat the end of March 2007 with enhanced graphics and significantly improved gameplay features. We have also introduced additional Casino games as well as ourBackgammon game into the Poker environment. Casino - in Quarter 1 2007 the Casino offering has been updated with two newVideo Slots and the introduction of Crazy Blackjack featuring side bets and aspecial jackpot. In addition, our Casino product underwent additionallocalisation with the release of the new Casino-on-Net in four additionallanguages. Future upgrades in 2007 will include new languages, more Video Slotsand new Casino games. Backgammon - 888's Backgammon game is being launched in Quarter 2 2007 and willbe available to all customers, initially from the Poker client. We believe thatBackgammon will become an important anchor in our P2P games offering. Bingo - following the aforementioned acquisition of the Bingo assets ofGlobalcom Limited, the Group will be able to immediately launch an 888 Bingobrand in the second half of the year. Sports book - the Group will be adding a Sports Betting proposition to itscustomers in 2007. Unified offering - to enhance the customer entertainment experience, we will bemoving all our offerings into a single software client making all the gamesavailable in one location. This process has already started with the successfulintroduction of Blackjack into Poker and customers will soon be able to accessall our Casino games and our new Backgammon offering in the same softwareclient. Additional products (Bingo and Sports Betting) will be integrated intothe client later on to create a full one stop shop. New platforms - in February 2006, the Group successfully launched its mobileCasino, offering customers easy, secure, and entertaining access to three of ourmost popular Casino games; Blackjack, Roulette, and Slots all available in funor real-money play. The mobile software is compatible with over 340 modelsrepresenting approximately 85% of the European market. In 2007 we will seek toexpand our mobile reach and extend our offering to additional platforms such astelevision. New entertainment and community features and tools - We will be adding video andaudio entertainment to our proposition throughout the year, with the specificcontent selected based on studies of our customers' interest areas conducted in2006. We will also be creating an 888 virtual community to allow greaterinteraction between customers to enhance the entertainment experience. Our local focus In 2007 we will aim to continue investing in localising our offering, not onlyby introducing localised versions of our offerings but also by adding gameswhich are relevant to that specific target market. While we will push to grow in various markets worldwide, some markets will getspecial attention in 2007. One such market would be Italy, where we plan toleverage our recently obtained Italian Sports Betting licence to generate rapidgrowth. Adding new payment methods in each country is a key factor in the ability toexpand geographically. In 2007, the Group will be performing the first phase ofupdating its back office payments system. This upgrade would increase ease ofuse for customers, and will significantly speed up the integration of newpayment methods into our offering, ensuring better penetration to new markets. Our integrated marketing The Group plans to continue investing in its brand and use integrated marketingcampaigns to acquire new customers. In addition, in 2007 we will commencepartnering with key brands to deliver specific online gaming propositions totarget segments. These partnerships will enable us to reach new customersrapidly through a "white label", leveraging the partners' assets and sharing therevenues. In February, the Group announced a pioneering cooperation agreementwith the owner of Rileys, the UK's leading chain of Snooker and Pool clubs.888.com will power and support a www.rileyspoker.com website which will bepromoted by Rileys to their members. This deal provides the blueprint for futureonline expansion via business partnerships with a carefully selected set ofcapable partners. We expect to reach agreement on a few similar additionalpartnership deals in 2007. A further key part of our 2007 marketing plan includes The Max, our state of theart Members Club, which will give customers an improved membership experience.The club will have simple, "airline-like" 4-tier membership levels, innovativetangible prizes, quicker points accumulation to the higher-tier members and manyadditional features important to our customers. The Max will be soft-launchedmid year. Effective and efficient organisation In March 2007 the Group's operation in Israel moved from the two central TelAviv locations it operated from to new offices located near Tel Aviv. The newoffices provide a significant upgrade and should increase the integrationbetween the various units of the Company and ensure better coordination byimproving ease of communication. Consolidated Income Statementfor the year ended 31 December 2006 Year ended Year ended 31 December 31 December 2006 2005 Note US$'000 US$'000Continuing operationsNet Gaming Revenue 3 157,000 122,982Operating expenses 49,448 43,308Research and development expenses 19,381 11,318Selling and marketing expenses 51,037 54,920Administrative expenses 4 28,653 34,208 Operating profit (loss) before share benefit charges 17,310 (3,538) Charges in respect of shares granted to employees on IPO - 15,087 Charges in respect of share and option awards 8,829 2,147 Total share benefit charges 8,829 17,234 Operating profit (loss) 5 8,481 (20,772)Finance income 4,883 735Profit (loss) before tax 13,364 (20,037)Taxation 6 3,117 2,136Profit (loss) from continuing operations 10,247 (22,173)Profit from discontinued operations 21 4,254 70,188Profit after tax for the year attributable to equity holders of parent 74,501 48,015Earnings per share 7 Basic 3.0c (6.6)cDiluted 3.0c (6.6)cDiscontinued operations 21fBasic 19.1c 20.8cDiluted 18.8c 20.8cTotal 7Basic 22.1c 14.2cDiluted 21.8c 14.2c Consolidated Balance Sheetat 31 December 2006 31 December 31 December 2006 2005 Note US$'000 US$'000AssetsNon-current assetsIntangible assets 9 - -Property, plant and equipment 10 13,033 8,341Deferred taxes 11 546 361 13,579 8,702Current assets Cash and cash equivalents 12 114,356 62,202Trade and other receivables 13 9,669 15,013Amounts due from related parties 18 - 1,649 124,025 78,864Total assets 137,604 87,566Equity and liabilitiesEquity attributable to equity holders of the parentShare capital 14 3,073 3,068Share benefit reserve 9,332 2,147Retained earnings 74,597 27,115Total equity attributable to equity holders of the parent 87,002 32,330LiabilitiesCurrent liabilitiesTrade and other payables 15 27,931 25,593Member deposits 22,671 29,325Amounts due to related parties 18 - 318Total liabilities 50,602 55,236Total equity and liabilities 137,604 87,566 Consolidated Statement of Changes in Equity for the year ended 31 December 2006 Share Share benefit Accumulated capital reserve profit Total US$'000 US$'000 US$'000 US$'000Balance at 1 January 2005 3,066 - 27,113 30,179Profit for the year - - 48,015 48,015Dividend paid - - (63,100) (63,100)Redemption of preference share capital (1) - - (1)Share benefit charge - 17,234 - 17,234Transfer of shares granted on IPO - (15,087) 15,087 -Redenomination translation effect 3 - - 3 Balance at 1 January 2006 3,068 2,147 27,115 32,330Profit for the year - - 74,50 74,501Dividend paid - - (28,658) (28,658)Issue of shares 5 (5) - -Lapsed share benefit charge - (1,639) 1,639 -Share benefit charge - 8,829 - 8,829Balance at 31 December 2006 3,073 9,332 74,597 87,002 Consolidated Statement of Cash Flowsfor the year ended 31 December 2006 Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2006 2005 2005 US$'000 US$'000 US$'000 US$'000Cash flows from operating activitiesProfit before tax 77,618 50,151Adjustments forDepreciation 3,801 2,700Loss on sale of property, plant and equipment 29 32Amortisation - 20Impairment - 832Translation effect of redenomination of share capital - 3Interest received (4,879) (683)Share benefit charges 8,829 17,234 85,398 70,289Decrease in trade receivables 6,346 579Decrease (increase) in related party balances 1,331 (638)(Increase) decrease in other accounts receivable (1,002) 142(Decrease) increase in trade payables (1,439) 1,177(Decrease) increase in member deposits (6,654) 10,184Increase in other accounts payable 3,527 9,680Cash generated from operations 87,507 91,413Tax paid (3,052) (3,160)Net cash generated from operating activities 84,455 88,253Cash flows from investing activitiesPurchase of intangibles - (400)Cash acquired on combination with ACTeCASH - 263Purchase of property, plant and equipment (8,621) (3,831)Proceeds from sale of property, plant and equipment 99 -Interest received 4,879 683Net cash used in investing activities (3,643) (3,285)Cash flows from financing activitiesIssue/redemption of shares - (1)Dividends paid (28,658) (63,100)Net cash used in financing activities (28,658) (63,101)Net increase in cash and cash equivalents 52,154 21,867Cash and cash equivalents at the beginning of the year 62,202 40,335Cash and cash equivalents at the end of the year 114,356 62,202 Notes to the Consolidated Financial Statements 1 General information Company description and activities 888 Holdings Public Limited Company (the "Company") and its subsidiaries(together the "Group") was founded in 1997 and originally operated as a holdingcompany domiciled in the British Virgin Islands. On 12 January 2000, the Companywas continued in Antigua and Barbuda as a corporation under the InternationalBusiness Corporation Act 1982 with registered number 12512. On 17 December 2003,the Company redomiciled in Gibraltar with the Company number 90099. On 4 October2005, the Company was admitted to the Official list of the UKLA and admitted totrading on the London Stock Exchange. The Group has developed innovative proprietary software applications solutionsfor virtual Casinos, for Poker rooms, e-commerce, credit-card clearing servicesand online advertising methodologies. Cassava Enterprises (Gibraltar) Limited (a subsidiary) carried out theoperations of the Group during the year, principally under the name www.888.comunder the terms of a gaming licence issued in Gibraltar. Definitions In these financial statements: The Company 888 Holdings Public Limited Company.The Group 888 Holdings Public Limited Company and its subsidiaries.Subsidiaries Companies over which the Company has control (as defined in International Accounting Standard 27) "Consolidated and Separate Financial Statements" and whose accounts are consolidated with those of the Company.Related parties As defined in International Accounting Standard 24 - "Related Party Disclosures". 2 Significant accounting policies The significant accounting policies applied in the preparation of the financialstatements are as follows: Basis of preparation The consolidated financial statements of the Group have been prepared inaccordance with International Financial Reporting Standards, includingInternational Accounting Standards ("IAS") and Interpretations, adopted by theInternational Accounting Standards Board ("IASB") and endorsed for use bycompanies listed on an EU regulated market. The significant accounting policies applied in the financial statements of theGroup in the prior years are applied consistently in these financial statements. The financial statements are presented in thousands of US dollars (US$'000)because that is the currency the Group primarily trades with its customers in. The consolidated financial statements comply with the Gibraltar Companies(Accounts) Act 1999, the Gibraltar Companies (Consolidated Accounts) Act 1999and the Gibraltar Companies Act 1930. The following interpretations, issued by the International Financial ReportingInterpretations Committee (IFRIC), are effective for the first time in thecurrent financial year and have been adopted by the Group with no significantimpact on its consolidated results or financial position: IFRIC 4 - Determining whether an arrangement contains a lease (effective forannual periods beginning on or after 1 January 2006). IFRIC 5 - Rights to interests arising from decommissioning, restoration andenvironmental rehabilitation funds (effective for annual periods beginning on orafter 1 January 2006). IFIRC 6 - Liabilities arising from participating in a specific market, wasteelectrical and electronic equipment (effective for annual periods beginning onor after 1 December 2005). The following standards and interpretations, issued by the IASB or IFRIC, havenot been adopted by the Group, and the Group is currently assessing the impactthese standards and interpretations will have on the presentation of itsconsolidated results in future periods: IFRS 7 - Financial instruments: disclosure (effective for annual periodsbeginning on or after 1 January 2007). IFRS 8 - Operating segments (effective for annual periods beginning on or after1 January 2009). IFRIC 7 - Applying the restatement approach under IAS 29 - Financial reportingin hyperinflationary economies (effective for annual periods beginning on orafter 1 March 2006). IFRIC 8 - Scope of IFRS 2 - Accounting for share-based payments (effective forannual periods beginning on or after 1 May 2006). IFRIC 9 - Reassessment of embedded derivatives (effective for annual periodsbeginning on or after 1 June 2006). IFRIC 10 - Interim financial reporting and impairment (effective for annualperiods beginning on or after 1 November 2006). IFRIC 11 - Group and treasury share transactions (effective for annual periodsbeginning on or after 1 March 2007). IFRIC 12 - Service concession arrangements (effective for annual periodsbeginning on or after 1 January 2008). IAS 23 (revised) - Borrowing costs (effective for annual periods beginning on orafter 1 January 2009). IFRS 8 contains requirements for the disclosure of information about an entity'soperating segments and also about the entity's products and services, thegeographical areas in which it operates, and its major customers. The standardis concerned only with the disclosure and replaces IAS 14 - Segment reporting. Critical accounting policies, estimates and adjustments The preparation of consolidated financial statements under IFRS requires theGroup to make estimates and judgements that affect the application of policiesand reported amounts. Estimates and judgements are continually evaluated and arebased on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances. Actualresults may differ from these estimates. Included in this note are accounting policies which cover areas that theDirectors consider require estimates and assumptions which have a significantrisk of causing a material adjustment to the carrying amount of assets andliabilities within the next financial year. These policies together withreferences to the related notes to the financial information can be found below: Taxation Note 6Share-based payments Note 17Discontinued operations Note 21Contingent liabilities Note 22 Presentation of continuing and discontinued operations As a result of enactment of the UIGEA in October 2006, the Group withdrew fromoffering real-money activity to the US facing market. Although the Group did not operate the US facing business as a separatebusiness, it is a separate geographical segment of the Group's business and inaccordance with IFRS 5 - "Non-Current Assets Held for Sale and DiscontinuedOperations" the income statement and related notes are required to showcontinued and discontinued operations separately. Net Gaming Revenue and certain direct costs associated with the discontinuedoperations, which are of distinct nature, were allocated accordingly. Othercosts (such as R&D expenses, IT expenses, Share benefit charges, office rent andassociated cost, depreciation of fixed assets, gaming duty, Directors andOfficers insurance, Directors' fees and tax), which are not distinguishable,were all allocated to the continuing operations and not to the discontinuedbusiness. In allocating the rest of the costs of the Group between the twooperations, management has applied reasonable estimates in accordance withapplicable accounting standards. However, as estimates have necessarily beenused in disclosing a geographical segment as a discontinued operations, theresults do not necessarily reflect the financial performance which would havebeen achieved had the discontinued operations been managed as a stand-alonebusiness. Basis of consolidation The consolidated financial statements include the accounts of the Company andits subsidiaries. The subsidiaries are Companies controlled by 888 HoldingsPublic Limited Company. Control exists where the Company has the power to governthe financial and operating policies of an entity so as to obtain benefits fromits activities. Subsidiaries are consolidated from the date the parent gainedcontrol until such time as control ceases. The financial statements of the subsidiaries are included in the consolidatedfinancial statements using the purchase method of accounting. On the date of theacquisition, the assets and liabilities of a subsidiary are measured at theirfair values and any excess of the fair value of the acquisition over the fairvalues of the identifiable net assets acquired is recognised as goodwill. Inter-company transactions and balances are eliminated on consolidation. The financial statements of subsidiaries are prepared for the same reportingperiod as the parent company and using consistent accounting policies. Use of estimates The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates. Net Gaming Revenue Revenue is recognised to the extent that it is probable that economic benefitswill flow to the Group and the revenue can be reliably measured. Net Gaming Revenue is defined as follows: Casino Casino winnings that are the differences between the amounts of bets placed bymembers less amounts won by members. Poker Ring games - Rake, which is the commission charged from each winning handplayed. Tournaments - Entry fees charged for participation in Poker tournaments. Casino winnings and revenues from the Poker business are stated after deductionof certain bonuses granted to members. Foreign currency Monetary assets and liabilities denominated in non-US dollar currencies aretranslated into US dollar equivalents using year-end spot foreign exchangerates. Non-monetary assets and liabilities are translated using exchange ratesprevailing at the dates of the transactions. Exchange rate differences onforeign currency transactions are included in administrative expenses. The results and financial position of all Group entities that have a functionalcurrency different from US dollars are translated into the presentation currencyas follows: (i) monetary assets and liabilities for each balance sheet presented aretranslated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at an averageexchange rate (unless this average is not a reasonable approximation of thecumulative effect of the rates prevailing on the transaction dates, in whichcase income and expenses are translated at the dates of the transactions); and (iii) exchange rate differences on translation of Group entities that havefunctional currencies different from US dollars are included in administrativeexpenses. Research and development costs Research and development expenditure is charged to the statement of income asincurred. IAS 38 "Intangible Assets" requires capitalisation of certain softwaredevelopment costs, subsequent to technological and commercial feasibility beingestablished and the Group having sufficient resources to complete development.Based on the Group's product-development process, technological feasibility andtherefore the creation of substantially improved product, is only establishedupon the completion of a working model. The Group generally does not incur anysignificant costs between the completion of the working model and the point atwhich the product is ready for general release. Taxation The tax expense represents tax payable for the year based on currentlyapplicable tax rates. Deferred tax assets and liabilities are recognised where the carrying amount ofan asset or liability in the balance sheet differs from its tax base.Recognition of deferred tax assets is restricted to those instances where it isprobable that taxable profit will be available against which the difference canbe utilised. The amount of the asset or liability is determined using tax ratesthat have been enacted or substantively enacted by the balance sheet date andare expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Intangible assets All intangible assets are initially recognised at cost. Amortisation is provided to write off the cost, less estimated residual values,of all intangible assets, evenly over their expected useful lives, and thecharge is included within operating expenses. Intangible assets are reviewedannually for evidence of impairment. The annual amortisation rate is as follows: Domain names - 10% Property, plant and equipment Property, plant and equipment is stated at historic cost less accumulateddepreciation. Carrying amounts are reviewed at each balance sheet date forimpairment. Depreciation is calculated using the straight-line method, at annual ratesestimated to write off the cost of the assets less their estimated residualvalues over their expected useful lives. The annual depreciation rates are asfollows: IT equipment 33%Office furniture and equipment 7-15%Motor vehicles 15% Leasehold improvements Over the shorter of the term of the lease or useful lives Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite usefuleconomic lives and other non-financial assets are subject to impairment testswhenever events or changes in circumstances indicate that their carrying amountmay not be recoverable. Where the carrying value of an asset exceeds itsrecoverable amount (i.e. the higher of value in use and fair value less costs tosell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individualasset, the impairment test is carried out on the asset's cash generating unit(i.e. the lowest group of assets in which the asset belongs for which there areseparately identifiable cash flows). Trade receivables Trade receivables are recognised and carried at the original transaction valueand principally comprise amounts due from the credit card companies and frome-payment companies. An estimate for doubtful debts is made when collection ofthe full amount is no longer probable. Bad debts are written off whenidentified. Cash and cash equivalents Cash comprises cash in hand and balances with banks. Cash equivalents areshort-term, highly liquid investments that are readily convertible to knownamounts of cash. They include short-term bank deposits originally purchased withmaturities of three months or less. Equity Equity issued by the Company is recorded as the proceeds received, net of directissue costs. Trade and other payables Trade and other payables are recognised and carried at the original transactionvalue. Chargebacks and returned e-cheques The cost of chargebacks and returned e-cheques is included in operatingexpenses. Leases Leases are classified as finance leases wherever the terms of the lease transfersubstantially all the risks and rewards of ownership to the Group. All otherleases are classified as operating leases and rentals payable are charged toincome on a straight-line basis over the term of the lease. Provisions Provisions are recognised when the Group has a present or constructiveobligation as a result of a past event from which it is probable that it willresult in an outflow of economic benefits that can be reasonably estimated. Financial instruments The carrying amounts of cash and cash equivalents, related parties, tradereceivables, other accounts receivable, trade payables, member deposits andother accounts payable approximate to their fair value. The Group does not hold or issue derivative financial instruments for tradingpurposes. Segment information A business segment is a distinguishable component of the Group that is engagedin providing an individual product or service or a group of related products orservices and that is subject to risks and returns that are different from thoseof other business segments. A geographical segment is a distinguishablecomponent of the Group that is engaged in providing products or services withina particular environment and that is subject to risks and returns that aredifferent from those of components operating in other economic environments. The Group operates in the following online gaming segments: • Casino • Poker Member deposits Member deposits are the amounts that clients place in the Group's electronic"wallet" or bankroll, including provision for bonuses granted by the Group,less management fees and charges applied to member accounts, along with fullprovision for Casino jackpots. These amounts are repayable on demand inaccordance with the applicable terms and conditions. Dividends Dividends are recognised when they become legally payable. In the case ofinterim dividends this is when declared by the Directors. In the case of finaldividends, this is when approved by the shareholders at the Annual GeneralMeeting. 3 Segment information Business segments - continuing operations Year ended 31 December 2006 Casino Poker Consolidated US$'000 US$'000 US$'000Net Gaming Revenue 88,760 68,240 157,000Result Segment result 52,101 41,374 93,475Unallocated corporate expenses1 84,994Operating profit 8,481Finance income 4,883Tax expense (3,117) Profit for the period - continuing operations 10,247Profit for the period - discontinued operations (Note 21a) 64,254Profit for the period 74,501AssetsUnallocated corporate assets 137,604Total assets 137,604LiabilitiesSegment liabilities - Poker 15,445Segment liabilities - Casino 7,226Unallocated corporate liabilities 27,931Total liabilities 50,602 1 Including share benefit charges of US$8,829,000. Year ended 31 December 2005 Casino Poker Consolidated US$'000 US$'000 US$'000Net Gaming Revenue 85,227 37,755 122,982Result Segment result 41,163 13,957 55,120Unallocated corporate expenses1 75,892Operating loss (20,772)Finance income 735Tax expense (2,136)Loss for the period - continuing operations (22,173)Profit for the period - discontinued operations (Note 21a) 70,188Profit for the period 48,015AssetsUnallocated corporate assets 87,566Total assets 87,566LiabilitiesSegment liabilities - Poker 20,099Segment liabilities - Casino 9,226Unallocated corporate liabilities 25,911Total liabilities 55,236 1 Including share benefit charges of US$17,234,000. Other than where amounts are allocated specifically to the Casino and Pokersegments above, the expenses, assets and liabilities relate jointly to bothsegments. Any allocation of these items would be arbitrary. Geographical segments The Group's performance can also be reviewed by considering the geographicalmarkets and geographical locations within which the Group operates. Thisinformation is outlined below: Net Gaming Revenue by geographical market Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000UK 70,562 53,871Europe 57,056 47,289Americas (excluding US) 17,601 12,007Rest of World 11,781 9,815Net Gaming Revenue - Continuing operations 157,000 122,982Net Gaming Revenue - Discontinued operations (Note 21c) 132,907 148,049Net Gaming Revenue 289,907 271,031 Assets by geographical location Carrying amount of segment Additions to property, plant assets by location and equipment Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 US$'000 US$'000 US$'000 US$'000Caribbean 357 235 281 72Europe 121,008 74,589 1,832 1,731Rest of World 16,239 12,742 6,508 2,028 137,604 87,566 8,621 3,831 4 Administrative expenses Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Share benefit charges - all equity settled 8,829 17,234Other administrative expenses 19,824 16,974Administrative expenses - Continuing operations 28,653 34,208Administrative expenses - Discontinued operations (Note 21a) 7,284 3,120Administrative expenses 35,937 37,328 5 Operating profit (loss) from continuing operations Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Operating profit (loss) is stated after charging:Staff costs 52,131 36,822Audit fees 434 357Other fees paid to auditors 179 104Depreciation 3,801 2,700Amortisation - 20Impairment - 832Chargebacks and returned e-cheques 2,507 3,226Exchange (gains) losses (4,742) 423Payment service providers' commissions 9,140 9,719Share benefit charges - all equity settled 8,829 17,234 In the income statement total staff costs, excluding share benefit charges ofUS$8,829,000 (2005: US$17,234,000), are included within the followingexpenditure categories. 2006 2005 US$'000 US$'000Operating expenses 23,810 19,507Research and development expenses 14,467 9,968Administrative expenses 13,854 7,347 52,131 36,822 At 31 December 2006 the Company employed 736 (2005: 886) staff. 6 Taxation Corporate taxes Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Current tax 3,663 2,497Deferred tax (546) (361)Taxation expense 3,117 2,136 Analysis of current tax for the year Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Profit before taxation 77,618 50,151Current tax at the effective tax rate for the year 3,663 2,497Effect of provisions (note 11) (546) (361)Taxation expense 3,117 2,136 Current tax is calculated with reference to the profit of the Company and itssubsidiaries in their respective countries of operation: Gibraltar - 888 and its Gibraltar registered subsidiaries are subject to theprovisions of the Gibraltar Companies (Taxation and Concessions) Act (the"CTCA") as a tax-exempt Company. Subject to a change of ownership or activity ofa tax-exempt company, the grandfathering of tax-exempt benefits in respect ofexisting tax-exempt companies will extend up to 31 December 2010. Domesticcorporate tax in Gibraltar is 35% (2005: 35%). Israel - 888's subsidiaries in Israel have entered into separate transferpricing agreements on an arm's-length basis with the Israeli Income TaxCommissioner. Those agreements are effective until the end of 2007 in respect ofthe Israeli branch of Intersafe Global Limited and 2010 in respect of RandomLogic Limited. Domestic corporate tax in Israel is 31% (2005: 33%). UK - 888's subsidiary in the UK pays corporate tax in the UK at the applicablerate of 30% (2005: 30%). 7 Earnings per share Basic earnings per share from continuing operations Basic earnings per share have been calculated by dividing the profit (loss)attributable to ordinary shareholders by the weighted average number of sharesin issue during the year. Diluted earnings per share In accordance with IAS 33, "Earnings per share", the weighted average number ofshares for diluted earnings per share takes into account all potentiallydilutive shares and share options granted, which are not included in the numberof shares for basic earnings per share. In addition, certain employee optionshave also been excluded from the calculation of diluted EPS as their exerciseprice is greater than the weighted averaged share price during the year andtherefore would not be advantageous for the holders to exercise the option. Thenumber of options excluded from the diluted EPS calculation is 3,230,182 (2005:US$nil). Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Profit (loss) from continuing operations attributable to ordinary shareholders 10,247 (22,173)Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476Continuing operationsBasic 3.0c (6.6)cDiluted 3.0c (6.6)cDiscontinued operations (Note 21f)Basic 19.1c 20.8cDiluted 18.8c 20.8cTotalBasic 22.1c 14.2cDiluted 21.8c 14.2c Earnings per share excluding share benefit charges Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Profit (loss) from continuing operations attributable to ordinary shareholders 10,247 (22,173)Share benefit charges 8,829 17,234Profit (loss) excluding share benefit charges 19,076 (4,939)Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476Continuing operationsBasic earnings per share excluding share benefit charges 5.7c (1.5)cDiluted earnings per share excluding share benefit charges 5.6c (1.5)cDiscontinued operations (Note 21f)Basic earnings per share excluding share benefit charges 19.1c 20.8cDiluted earnings per share excluding share benefit charges 18.8c 20.8cTotalBasic earnings per share excluding share benefit charges 24.8c 19.3cDiluted earnings per share excluding share benefit charges 24.4c 19.3c 8 Dividends Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Interim dividend 15,172 -Special dividends 13,486 63,100Dividends paid 28,658 63,100 The Board of Directors has recommended to the shareholders a final dividend inrespect of the year ended 31 December 2006, of 8.88c per share. 9 Intangible assets During 2005 there were additions to goodwill and domain names of US$452,000 andUS$400,000 respectively. During the course of 2005 these balances were amortisedand impaired to US$nil. Consequently the net book value of intangible assets at31 December 2005 was US$nil. There have been no movements in respect of intangible assets during the currentyear and hence the net book value of intangible assets at 31 December 2006 wasUS$nil. 10 Property, plant and equipment Office furniture and Motor Leasehold IT equipment equipment Vehicles Improvements Total US$'000 US$'000 US$'000 US$'000 US$'000CostAt 1 January 2006 10,614 2,077 459 5,202 18,352 Additions 3,163 254 - 5,204 8,621Disposals - - (163) - (163)At 31 December 2006 13,777 2,331 296 10,406 26,810Accumulated depreciationAt 1 January 2006 7,576 618 61 1,756 10,011 Charge for the year 2,085 208 128 1,380 3,801Disposals - - (35) - (35)At 31 December 2006 9,661 826 154 3,136 13,777Depreciated costAt 31 December 2006 4,116 1,505 142 7,270 13,033At 31 December 2005 3,038 1,459 398 3,446 8,341 Prior year amountsDepreciated cost at 1 January 2005 2,248 1,087 215 3,692 7,242Additions in 2005 2,420 702 272 437 3,831Disposals in 2005 - - (32) - (32)Depreciation in 2005 (1,630) (330) (57) (683) (2,700)Depreciated cost at 31 December 2005 3,038 1,459 398 3,446 8,341 11 Deferred taxes Deferred taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for tax purposes. The Group's deferred tax assets resultingfrom temporary differences are as follows: 31 December 31 December 2006 2005 US$'000 US$'000Accrued severance pay 141 195Provision for share option charges 176 -Provision for vacation 213 154Provision for convalescence 16 12 546 361 12 Cash and cash equivalents 31 December 31 December 2006 2005 US$'000 US$'000Cash and cash equivalents 106,811 56,146Restricted cash 7,545 6,056 114,356 62,202 Restricted cash primarily relates to deposits held by banks for guarantees. 13 Trade and other receivables 31 December 31 December 2006 2005 US$'000 US$'000Trade receivables 6,189 12,535Other receivables and prepayments 3,480 2,478 9,669 15,013 The carrying value of trade and other receivables approximates to their fairvalue. 14 Share capital Share capital comprises the following: Authorised 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Number Number US$'000 US$'000Ordinary Shares of US$1 each - 3,101,000 - 3,101Effect of share split - (3,101,000) - (3,101)Ordinary Shares of £0.005 each 426,387,500 426,387,500 3,880 3,880 426,387,500 426,387,500 3,880 3,880 Allotted, called up and fully paid 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Number Number US$'000 US$'000Ordinary Shares of US$1 each - 3,064,512 - 3,065Effect of share split - (3,064,512) - (3,065)Ordinary Shares of £0.005 each 337,096,320 337,096,320 3,068 3,068Issue of Ordinary Shares of £0.005 each 522,500 - 5 - 337,618,820 337,096,320 3,073 3,068 On 4 October 2006, the Company issued 522,500 Ordinary Shares of £0.005 each inrespect of shares issued and nil cost options exercised as part of the Company'semployee share option plan (see note 17). Shares issued are converted into US$ at the exchange rate prevailing on the dateof issue. The issued and fully paid share capital of the Group amounts toUS$3,073,000 (2005: US$3,068,000) and is split into 337,618,820 (2005:337,096,320) ordinary shares. The share capital in UK Sterling (GBP) is£1,688,094 (2005: £1,685,482) and translates at an average exchange rate ofUS$1.82 (2005: US$1.82) to GBP. 15 Trade and other payables 31 December 31 December 2006 2005 US$'000 US$'000Trade payables 3,111 4,550Corporate taxes 1,016 766Other payables and accrued expenses 23,804 20,277 27,931 25,593The carrying value of trade and other payables approximates to their fair value. 16 Principal investments in subsidiaries Percentage of Percentage of equity interest equity interest Country of 2006 2005Name incorporation % % Nature of businessIntersafe Global Limited Gibraltar 100 100 Payment processorCassava Enterprises Limited Antigua 100 100 Member call centre operatorVirtual Services Limited BVI 100 100 AdvertisingVirtual Holdings Management Services (Gibraltar) Limited Gibraltar 100 100 Operates Group headquartersIntersafe Global (Europe) Limited Gibraltar 100 100 Payment processorCassava Enterprises Services (Gibraltar) Limited Gibraltar 100 100 Gaming website operatorVirtual Marketing Services (UK) Limited UK 100 100 AdvertisingCassava Sports Limited Gibraltar 100 100 Domain site owner through which a third-party operates a betting exchangeActive Media Limited BVI 100 100 Member call centre employerVirtual Marketing Services (Gibraltar) Limited Gibraltar 100 100 Marketing acquisitionDixie Operation Limited Antigua 100 100 Member call centre operatorRandom Logic Limited Israel 100 100 Research, development and marketingACTeCASH Limited1 Gibraltar - - e-Wallet service 1 On 20 December 2005, the Group took responsibility for the management ofACTeCASH Limited, a company with common shareholders. From this date ACTeCASHwas managed as a unit of the Group and utilised staff employed by the Group. Inaccordance with IAS 27 "Consolidated and Separate Financial Statements", theGroup is deemed to have control of ACTeCASH by virtue of the fact it has thepower to govern the financial and operating policies of this company and deriveseconomic benefit from doing so. As such ACTeCASH has been consolidated as partof the Group. 17 Share-based payment Prior to flotation, the Company adopted two equity-settled employee shareincentive plans - the 888 All-Employee Share Plan and the Long-Term IncentivePlan. Awards have been granted under the 888 All-Employee Share Plan conditionalupon flotation. The 888 All-Employee Share Plan is open to all employees andExecutive Directors of the Group who are not within six months of their normalretirement age at the discretion of the Remuneration Committee. Awards underthis scheme will vest in instalments over a fixed period of up to four years. On 14 September 2006, the Company has granted awards to certain ExecutiveDirectors and members of its senior management. These awards are subject toperformance conditions imposed by the Remuneration Committee at the date ofgrant. Details of shares and share options granted as part of the 888 All-EmployeeShare Plan and shares granted vesting immediately on IPO and thereafter: Share options granted 31 December 31 December 2006 2005 Number NumberOutstanding at the beginning of the year 3,578,287 -Market value options granted during the year 2,224,131 3,578,287Market value options lapsed during the year (1,597,499) -Outstanding at the end of the year1 4,204,919 3,578,287Weighted average exercise price £1.67 £1.75 1 Of the total number of options outstanding at the end of the year 784,491 hadvested and were exercisable at the end of the year (2005: nil). Shares granted 31 December 31 December 2006 2005 Number NumberOutstanding at the beginning of the year 5,292,622 - Share granted - future vesting 5,595,219 5,292,622 Share granted - immediate vesting - 5,078,357 Lapsed future vesting shares (2,003,294) -Shares issued during the year1 (567,908) (5,078,357)Outstanding at the end of the year 8,316,639 5,292,622 1 Of the total number of shares issued, 45,408 shares were issued as part of theIPO. The following information is relevant in the determination of the fair value ofoptions granted during the year under the equity-settled 888 All-Employee SharePlan: Valuation information 2006 2005Option pricing model used Monte Carlo BinomialWeighted average share price at grant date £1.61 £1.75Weighted exercise price £1.67 £1.75 Exercise period of the market value options is from vesting until expiry of 10years after grant date. In accordance with International Financial Reporting Standards a charge to theincome statement in respect of any shares or options granted under the aboveschemes will be recognised and spread over the vesting period of the shares oroptions based on the fair value of the shares or options at the date at grant,adjusted for changes in vesting conditions at each balance sheet date. Thischarge has no cash impact. Share benefit charges Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Charges in respect of shares granted to employees on IPO - 15,087Charges in respect of share and option awards 8,829 2,147Charge for the year 8,829 17,234 The source of the shares granted to employees on IPO was the shareholders'immediately before the IPO rather than the Company. An amount equalling thecharge in relation to these shares has therefore been transferred from the sharebenefit reserve to accumulated profit in the prior year. 18 Related party transactions At 31 December 2006, the Group was owed US$nil by companies controlled byshareholders of the Group and by its shareholders (2005: US$1,649,000), of whichUS$nil (2005: US$1,633,000) was due from shareholders relating to flotationexpenses. At this date the Group owed to its shareholders US$nil (2005: US$318,000). During the year the Group paid US$212,464 (2005: US$198,768) in respect of rentand office expenses to companies of which Mr John Anderson is a Director. At 31December 2006 the amount owed to those companies was US$nil (2005: US$nil). Remuneration paid to the Directors in the year totalled US$9,258,000 (2005:US$3,176,000). Share benefit charge in respect of awards granted to the Directors totalledUS$4,544,000 (2005: US$6,059,000). 19 Commitments Lease commitments Future minimum lease commitments under property operating leases as at 31December for the year ended 31 December 2006, are as follows: 31 December 31 December 2006 2005 US$'000 US$'000Leases expiring withinOne year 3,060 1,985One to five years 8,204 2,617 11,264 4,602 The amount paid in the year was US$2,620,000 (2005: US$2,052,463). Lease commitments on the Group's property are shown to the date of the firstbreak clause. 20 Financial risk management objectives and policies The Group is exposed through its operations to currencies, interest rate andcredit risk. Policy for managing these risks is set by the Board followingrecommendations from the Chief Financial Officer. The policy for each of theserisks is detailed below. Currency risk The Group incurs foreign currency risk on sales and purchases that aredenominated in a currency other than US dollars. The Group continually monitorsthe foreign currency risk and takes steps to ensure that the net exposure iskept to an acceptable level. Interest rate risk The Group's exposure to interest rate risk is limited to the interest bearingdeposits in which the Group invests surplus funds. Downside interest rate riskis minimal as the Group has no borrowings. Management monitors liquidity toensure that sufficient liquid resources are available to the Group. Credit risk The Group's credit risk is primarily attributable to receivables from paymentservice providers. Management monitors those balances on a regular basis. 21 Discontinued operations (a) Consolidated Income Statement from discontinued operations Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Net Gaming Revenue 132,907 148,049Operating expenses 28,086 29,652Research and development expenses - -Selling and marketing expenses 33,283 45,089Administrative expenses 7,284 3,120?Operating profit before reorganisation costs 68,287 70,188?Charges in respect of reorganisation costs 4,033 - Operating profit 64,254 70,188Finance income - -Profit from discontinued operations 64,254 70,188 (b) Segment informationBusiness segments Year ended 31 December 2006 Casino Poker Consolidated US$'000 US$'000 US$'000Net Gaming Revenue 71,972 60,935 132,907Result Segment result 40,186 37,678 77,864Unallocated corporate expenses 13,610Operating profit 64,254Finance income -Tax expense -Profit for the period 64,254 Year ended 31 December 2005 Casino Poker Consolidated US$'000 US$'000 US$'000Net Gaming Revenue 75,987 72,062 148,049Result Segment result 38,392 41,212 79,604Unallocated corporate expenses 9,416Operating profit 70,188Finance income -Tax expense -Profit for the period 70,188 Other than where amounts are allocated specifically to the Casino and Pokersegments above, the expenses relate jointly to both segments. Any allocation ofthese items would be arbitrary. (c) Geographical segments Net Gaming Revenue by geographical market Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000US 132,907 148,049 132,907 148,049 (d) Profit from discontinued operations Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Profit from discontinued operations is stated after charging:Staff costs 6,638 5,114Chargebacks and returned e-cheques 15,465 15,417Payment service providers' commissions 5,821 7,936 In note 21(a) total staff costs, are included within the following expenditurecategories: 2006 2005 US$'000 US$'000Operating expenses 5,842 4,542Administrative expenses 796 572 6,638 5,114 (e) Cash flows from discontinued operations Year ended Year ended 31 December 31 December 2006 2005 US$'000 US$'000Net cash from operating activities 53,506 79,496Net cash generated from investing activities 2,244 376Net cash used in financing activities (14,951) (34,705)Net increase in cash and cash equivalents 40,799 45,167 (f) Earnings per share Year ended Year ended 31 December 31 December 2006 2005Profit from discontinued operations attributable to ordinary shareholders 64,254 70,188Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476Basic earnings per share 19.1c 20.8cDiluted earnings per share 18.8c 20.8c 22 Contingent liabilities From time to time the Group is subject to legal claims and actions against it.The Group takes legal advice as to the likelihood of success of such claims andactions. Regulatory issues As part of the Board's ongoing regulatory compliance and operational riskassessment process, the Board continues to monitor legal and regulatorydevelopments, and their potential impact on the business, and continues to takeappropriate advice in respect of these developments. Following the enactment ofthe UIGEA on 13 October 2006, the Group stopped taking any deposits fromcustomers in the US and barred such customers from wagering real-money on all ofthe Group's sites. Notwithstanding this, there remains a residual risk of an adverse impact arisingfrom the Group having had customers in the US prior to the enactment of theUIGEA. The Board is not able to identify reliably at this stage what if anyliability may arise and accordingly no provision has been made. 23 Events subsequent to the balance sheet date On 29 March 2007, the Company announced the acquisition of the online Bingobusiness of Globalcom Limited, a privately owned company registered in Belize,by way of an asset acquisition for an all cash consideration of US$32.4 million(less amounts payable to customers). A further earn-out payment of up to US$11.0million may be payable in cash 12 months from completion on the basis of actualperformance during the financial year ended 31 December 2007. The considerationis broken down as follows: US$10.8 million, initial consideration, payable atcompletion, US$5.4 million (less amounts payable to customers) payable 90 daysfrom completion and the balance, payable on the first anniversary of completionof the acquisition. The majority of the consideration pertains to goodwill.Certain conditions must be met prior to acquisition being finalised. It isexpected that the transaction will be completed during 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
888.L