16th Mar 2006 07:04
888 Holdings plc16 March 2006 888 Holdings Public Limited Company ("888" or the "Company") Preliminary Results for the year ended 31 December 2005 888, one of the world's most popular online gaming entertainment companies,announces its preliminary results for the year ended 31 December 2005. Financial Highlights • Net Gaming Revenues ("NGR") up 52% to $271m (2004: $178m) • Profit after tax* up 59% to $65m (2004: $41m) • Net cash generated from operating activities up 72% to $88m (2004: $51m) • Profit before tax margin* up to 25% (2004: 24%) • Cash at year end US$62.2m - Group has no debt • Adjusted EPS* up 58% to 19.3c (2004: 12.2c) * 2005 - excluding share benefit charges Operating Highlights •Over 23 million registered member accounts at 31 December 2005 (2004: 18 million) from 177 countries out of which 5.5 million are real money member accounts (2004: 3.7 million) €18.9 million registered Casino accounts (2004: 16 million) of which 4.1 million were real member money accounts (2004: 3.2 million) €4.3 million registered Poker accounts (2004: 2.0 million) of which 1.5 million were real member money accounts (2004: 0.6 million) •Geographic diversification - Concentration of NGR and first time depositors diversified away from the US. US NGR share down to 55% (2004: 58%) •Rapid growth in NGR in the UK (103%) and non-US (64%) •Operating expenses decreased - as a percentage of NGR down to 26.9% (2004: 28.2%) •Cost per acquisition (CPA) down to US$183 (2004: US$192)(1) (1) Excluding members recruited by affiliates on a revenue share basis, thisunaudited figure is based on management estimates Commenting, John Anderson, CEO, said: "We have announced record results today. We continue to grow whilst keeping ourcosts under control. Our company is more diversified both in products andgeographically and we are in prime position to benefit from the industryconsolidation that is inevitable. Since the Company's inception in 1997, 888 has always been at the forefront ofresponsible gaming and industry self-regulation and will continue to be so. I am delighted to report that 2006 has started well. The Company is seeingcontinued growth in new member recruitment, average daily deposits and pokerrake and in addition has experienced a positive start in Casino following thenew product roll out. Trading is in line with management's expectations and weremain confident in the outlook for the rest of the year, which will see, via apolicy of organic growth and selective acquisition, the continued growth of thisCompany. I am extremely proud of our brand and management which will be key toour continued success." Contacts and enquiries 888 John Anderson Chief Executive Officer +350 49800 Aviad Kobrine Chief Financial Officer +350 49800 Bell Pottinger Corporate & Financial Stephen Benzikie/Nick Lambert +44 (0)20 7861 3232 Introduction 888 is one of the world's most popular online gaming entertainment companies. Itoperates the world's leading online casino, Casino-on-Net.com and its pokersite, Pacific Poker.com, the world's number four online poker room(2). The 888brand is also the most recognised online gaming brand in the UK(3). (2) Source: Poker Pulse (3) Source: Milward Brown UK, September 2005. "Understanding consumers,Marketing activity, and brand equity in the UK" Results The Board is pleased to present its first full set of results since theCompany's flotation in October 2005 - a major step forward and the successfulresult of a long-term growth plan for the business. In the year to 31 December 2005, 888 has achieved record results, reporting anunderlying Profit after tax*, of US$65 million (2004: US$41.1 million) on totalNet Gaming Revenue (NGR) of US$271 million (2004: US$177.9m). Growth acceleratedover the second half of the year, with NGR and Profit after tax* increases, incomparison to the first half, up by 19% and 66% respectively. Basic earnings pershare* was 19.3c, a 58% increase over 2004. The Group is highly cash generative with net cash generated from operatingactivities in 2005 of US$88.3 million (2004: US$51.4 million) representing 132%of Operating Profit* for the year. The group's cash position at year end wasUS$62.2 million (2004: US$40.3 million). The Group has no debt. The Group further increased its member base in 2005. 5.3 million new registeredmember accounts were opened (2004: 4.7 million) of which 1.8 million were realmoney member accounts (2004: 1.2 million). Active(4) members in Casino, in Q42005, were up 48% to 98,000 (Q4 2004: 66,000). Active members in Poker, in Q42005, were up 89% to 233,000 (Q4 2004: 123,000). (4) An active member is a member who has made a game-related balance movement ina real money account in the relevant quarter By the end of the year the Company had more than 23 million registered memberaccounts (2004: 18 million), including 5.5 million real money member accounts(2004: 3.7 million), representing 177 different countries and supporting 11different languages for its Casino-on-Net offering - a testament to the strengthand global appeal of the 888 brand. Geographic expansion During 2005 the Group continued its geographic diversification, diluting itsconcentration of NGR and first time depositors away from the US. NGR was splitbetween: • USA 55% (2004: 58%) • UK 20% (2004: 15%) • Rest of Europe 17% (2004: 20%) • Other countries 8% (2004: 7%) Whilst growth of NGR in the USA market achieved 44% over 2004 levels, non-USgrowth exceeded this at 64%. Europe, and the UK in particular (at 103%), were atthe heart of this. This trend was evident in both casino and poker. Casino NGR for Casino increased by 16% to US$161.2 million (2004: US$138.6 million) andactive Casino members increased by 48% to 97,661. The Group's quarterly NGR peractive member indicator tends to fluctuate over time as a result of variouspromotion and data mining activities. We are actively using these techniques tore-activate dormant members in order to generate additional revenue at a farlower incremental cost. Due to such promotion activities quarterly NGR peractive Casino member in the final quarter of 2005 was US$419 (Q4 2004: US$521). 2.9 million new registered Casino member accounts were opened (2004: 3.2million) of which 0.9 million were real money member accounts (2004: 0.7million). As at 31 December 2005 the Group had 18.9 million registered Casinomember accounts (2004: 16 million) including 4.1 million real money memberCasino accounts (2004: 3.2 million). Poker NGR for Poker rose dramatically by 179% to US$109.8 million (2004: US$39.3million). Active Poker members increased by 89% to 233,301. In the final quarterof 2005 quarterly NGR per active member was US$156 (Q4 2004: US$124). 2.3 million new registered Poker member accounts were opened (2004: 1.5 million)of which 0.9 million were real money member accounts (2004: 0.5 million). As at31 December 2005 the Group had 4.3 million registered Poker member accounts(2004: 2.0 million) including 1.5 million real money Poker member accounts(2004: 0.6 million). The rake from ring games plus tournament fees for Poker grew rapidly during 2005achieving a rake in December 2005 that was 108% higher than in December 2004. Cost control and investment - Marketing / R&D / Employees 888's growth in 2005 in Casino and Poker was achieved whilst decreasingoperating costs, as a percentage of NGR, to 26.9% (2004: 28.2%). Memberacquisition utilised a wide variety of marketing channels. These include onlinemedia, affiliates and offline campaigns, as well as other innovative promotionand marketing activities. Selling and Marketing costs were US$100.0 million(2004: US$64.5 million), representing 36.9% of NGR (2004: 36.2%, 2003: 29.2%)) R&D increased 65% to US$11.3 million (2004: US$6.9m) underpinning 888's strategyto offer innovative gaming products to its members, whilst CPA remainedcompetitive in 2005 at US$183 (2004: US$192)(5). Administrative expenses,excluding share benefit charges, were US$20.1 million (2004: US$13.6 million)representing a slight reduction to 7% of NGR (2004: 8%). (5) Excluding members recruited by affiliates on a revenue share basis, thisunaudited figure is based on management estimates The Company continues to invest in human capital and at year end had 886employees (2004: 689) at the following locations: Gibraltar - 391; Israel - 369;Antigua - 115; and London - 11. As part of this strategic investment, at thetime of flotation of the Company on the London Stock Exchange, eligiblemanagement and employees received share awards (including share options) underthe 888 All-Employee Share Plan. In addition, the Principal Shareholder Trustsmade a one-time grant of immediately vested shares to management and employees.The grants had no cash impact on the Group, but under IFRS 2 this results in acharge of US$17.2m of which the grant to employees on IPO is a one-off charge ofUS$15.1m. The majority of the charge has already been released to reserves. Tax and dividends The Group continued to benefit from a low effective tax rate as a result of itsexempt status in both Gibraltar and Antigua, and a transfer pricing agreementwith the tax authorities in Israel. As a result the tax charge in 2005 wasunchanged on the prior year at approximately US$2 million. During the year dividends paid totalled US$63.1 million (2004: US$26.1 million).The Group has adopted a dividend policy whereby it intends to pay dividends toholders of Ordinary Shares and Depositary Interests representing 50% of annualprofits in aggregate. Approximately one third of the amount for the year will bedeclared as an interim dividend. The first dividend is expected to be declaredin relation to the results of the Group for the first six months of 2006 on thebasis as set out in the Prospectus. Business Development The main strengths of the company and its catalysts for growth continue to be: • A strong experienced management team who are pioneers of the industry • A truly global brand, synonymous with online gaming, in which it invests heavily • Fully integrated, proprietary software and a scalable technology platform • First class member relationship management, 24/7, in 11 languages • A variety of sophisticated payment methods • Industry leading data mining capabilities Management The online gaming industry is poised to experience rapid changes in the next twoto three years and 888 has in place a strong expereienced management team toexploit this - a key differentiator. In addition to the core management team theCompany has recruited three Non-executive Directors; Michael Constantine, aformer Inspector and Acting Commissioner of the Gibraltar Financial ServicesCommission; Brian Mattingley, former Executive Director of Gala Group Plc; andAmos Pickel, Chief Executive of Red Sea Hotels Ltd. This month Richard Kilsby,former Non-executive Director, became Non-executive Chairman, replacing MarieStevens. Richard, a former executive Director of the London Stock Exchange,brings a wealth of experience to the role. Brand The 888 brand is the other core aspect to the Company's marketing strategy andis key to building and maintaining the business. Strong branding is not onlycritical in differentiating 888 but a recognisable brand builds trust which is akey consideration affecting a consumer's choice of provider. 888's marketing strategy is unique in the industry in terms of its diversifiedmulti-channel approach. This includes industry leading sports sponsorship, suchas that of Middlesbrough Football Club where 888's shirt sponsorship deal hasbeen a huge success. Recently the Company also signed up to be the sponsor ofthe iconic World Snooker Championship, the most important event in the snookercalendar. This sponsorship is a major step and not only catapults 888 intoemerging markets such as China and the Far East, where snooker has a hugefollowing, but the brand will be fully exposed for hundreds of hours in the UKand Europe. Technology and Product Offering 888 is continually upgrading its proprietary products and since the year end haslaunched an entirely new Casino product and introduced an updated,multi-language Poker product which is now operational in English, German,Italian and Swedish. The addition of French and Danish and a new Jackpot versionof Poker is due imminently. The Company has also introduced a new e-walletfocusing on Spain, Germany, Netherlands, Italy and France, thereby expandingfurther its geographical presence in non-USA markets. This product roll-out will continue throughout 2006 with 5-6 new video slots andcard games planned for Casino. Poker will also be upgraded with a multi-handformat, 'blackjack into poker' and a new platform also scheduled. The Company believes that diversification to complement its core Casino andPoker offering is vital. 888 also plans a shared wallet, an overall technologyupgrade, more games and a mobile phone initiative during 2006. Payment processing systems Payment systems are the lifeblood of the online gaming industry. 888 hasimplemented 5 new payment methods during the year, to an overall total of 22, upfrom 4 in 2000. The Company plans to continually upgrade and seek new systems inorder to give all of its members, in different markets, local methods enablingthem to pay and play seamlessly. The importance of making available a widevariety of methods in different locations to members with different needs cannotbe over-emphasised. Their successful provision constitutes a significant barrierto entry to potential competitors. Member Relationship Management 888 has a first class reputation for its member relationship management. Itsmember support is as international as the member base and currently providessupport in up to 11 languages, available 24/7. The Company's call centres offerinteractive services and support toll-free/free-phone numbers, email andweb-chat platforms as well as online self-help options. Staff are all highlytrained and undergo an ongoing training programme to ensure 888 remains at thecutting edge of service excellence. Regulation The online gaming market is maturing and, whilst regulation of it is still inits infancy, 888 welcomes the UK's entry into the online space through the 2005Gambling Act. The Company believes the UK's position is the first domino in whatwill become a legislative network throughout mainland Europe. Also of note isthe Gibraltar Gambling Ordinance which introduces a bespoke regulatory regime inGibraltar for remote gaming and further consolidates Gibraltar's position as afirst-class online gaming jurisdiction. 888 also continues to monitor thelegislative position in Europe and the USA. Generally, there is a change in the emphasis of regulators, who are lookingbeyond the grant of licences and are focusing more on compliance and codes ofconduct within the industry. This is an area where 888 has sought to take thelead. 888 was one of the founding members of eCOGRA (e-Commerce Online GamingRegulation and Assurance), an independent body which has developed a series ofself-regulatory guidelines for the online gaming industry. As online gamingdevelops into a mainstream leisure activity 888 believes further clarificationof the regulatory position in relation to online gaming would be a positivedriver for growth by enhancing consumer confidence and trust in the sector. TheCompany will continue to be at the forefront of the industry's self regulation. Current trading 2006 started well. The Company is seeing continued growth in new memberrecruitment, average daily deposits, poker rake and in addition has experienceda positive start in Casino following the new product roll out. Trading is inline with management's expectations and we remain confident in the outlook forthe rest of the year. Summary 888's strategy is clear. As stated at flotation, its goal is to become marketleader and offer a "one stop shop" online leisure experience. 2006 will see 888 continue to invest in its brand through worldwide innovativemarketing initiatives and also expand into new geographic markets. It willextend its range of products and continue to benefit from increasing Internetpenetration. Backed by a strong balance sheet, and a strong core of long-termmembers this expansion will be achieved both organically and through selectiveacquisition. The Company will continue to react to local regulatorydevelopments. The 2005 results confirm that 888 is heading in the right direction. The Companybelieves that the continued focus on its strategic goals, through a systematicand evidence-based approach, will provide the opportunities to deliver furtherpositive results in the future. Financial Information Audited Consolidated Income Statementfor the year ended 31 December 2005 Year ended Year ended 31 December 31 December 2005 2004 Note US$'000 US$'000Net Gaming Revenue 2(d) 271,031 177,904Operating expenses 72,960 50,141Research and development expenses 11,318 6,866Selling and marketing expenses 100,009 64,488Administrative expenses 4 37,328 13,586 ------------------- Operating Profit before share benefit charges 66,650 42,823 ------------------- Charges in respect of shares granted to 15,087 - employees on IPO Charges in respect of share and option awards 2,147 - ------------------- Total share benefit charges 17,234 - ------------------- Operating Profit 5 49,416 42,823Finance income 735 266 -------------------Profit before tax 50,151 43,089Taxation 6 2,136 1,991 -------------------Profit after tax for the year attributable to equity holders of parent 48,015 41,098 ===================Earnings per shareBasic 7 14.2c 12.2cDiluted 14.2c 12.2c =================== All amounts relate to continuing activities. Audited Consolidated Balance Sheetat 31 December 2005 31 December 31 December 2005 2004 Note US$'000 US$'000AssetsNon-current assetsIntangible assets 9 - -Property, plant and equipment 10 8,341 7,242Deferred taxes 11 361 - ------------------ 8,702 7,242Current assetsCash and cash equivalents 12 62,202 40,335Trade and other receivables 13 15,013 15,225Amounts due from related parties 19 1,649 2,245 ------------------ 78,864 57,805 ------------------Total assets 87,566 65,047 ================== Equity and liabilitiesEquity attributable to equity holders of the parentShare capital 14 3,068 3,066Share benefit reserve 2,147 -Retained earnings 27,115 27,113 ------------------Total equity attributable to equity holders of the parent 32,330 30,179 ------------------LiabilitiesCurrent liabilitiesTrade and other payables 15 25,593 15,346Member deposits 29,325 19,141Amounts due to related parties 19 318 381 ------------------Total liabilities 55,236 34,868 ------------------Total equity and liabilities 87,566 65,047 ================== Audited Consolidated Statement of Changes in Equityfor the year ended 31 December 2005 Share Share benefit Accumulated capital reserve profit Total US$'000 US$'000 US$'000 US$'000 Balance at 1 January 2004 15,443 - 12,115 27,558Net Profit for the year - - 41,098 41,098Dividend paid - - (26,100) (26,100)Capital reduction (12,442) - - (12,442)Share capital issued 65 - - 65 -----------------------------------------------------Balance at 1 January 2005 3,066 - 27,113 30,179 -----------------------------------------------------Net Profit for the year - - 48,015 48,015Dividend paid - - (63,100) (63,100)Redemption of preference (1) - - (1)share capitalShare benefit charge - 17,234 - 17,234Transfer of shares - (15,087) 15,087 -granted on IPORedenomination 3 - - 3 -----------------------------------------------------translation effectBalance at 31 December 2005 3,068 2,147 27,115 32,330 ===================================================== Audited Consolidated Statement of Cash Flowsfor the year ended 31 December 2005 Year ended Year ended Year ended Year ended 31 31 31 31 December December December December 2005 2005 2004 2004 US$'000 US$'000 US$'000 US$'000 Cash flows from operating activitiesProfit before income tax 50,151 43,089Adjustments forDepreciation 2,700 2,427Loss on sale of property, plant and equipment 32 19Amortisation 20 -Impairment 832 -Translation effect of redenomination of share capital 3 -Interest received (683) (266)Share benefit charges 17,234 - --------------------------------------- 70,289 45,269Decrease/(increase) in trade receivables 579 (2,080)Increase in related party balances (638) (1,286)Decrease/(increase) in other accounts receivable 142 (1,548)Increase/(decrease) in trade payables 1,177 (2,350)Increase in member deposits 10,184 10,751Increase in other accounts payable 9,680 3,699 ---------------------------------------Cash generated from operations 91,413 52,455Income tax paid (3,160) (1,016)Net cash generated from operating activities 88,253 51,439Cash flows from investing activitiesPurchase of intangibles (400) -Cash acquired on combination with ACTeCASH 263 -Purchase of property, plant and equipment (3,831) (1,555)Proceeds from sale of property, plant and equipment - 78Acquisition of Random Logic Limited net of cash acquired - (937)Interest received 683 266 -----------------------------------------Net cash used in investing activities (3,285) (2,148)Cash flows from financing activitiesReduction in share capital (1) (12,442)Dividends paid (63,100) (26,100) -----------------------------------------Net cash used in financing activities (63,101) (38,542) -----------------------------------------Net increase in cash and cash equivalents 21,867 10,749Cash and cash equivalents at the beginning of the year 40,335 29,586 -----------------------------------------Cash and cash equivalents at the end of the year 62,202 40,335 ========================================= Notes to the Consolidated Financial Statements 1 General information (a) 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 listed on the London Stock Exchange. The Group has developed innovative proprietary software applications solutionsfor virtual Casinos, Poker rooms, e-commerce, credit-card clearing services andonline 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 license issued in Gibraltar. (b) 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 As defined in International Accounting Standard 24 - "Relatedparties Party Disclosures". 2 Significant accounting policies The significant accounting policies applied in the preparation of the financialstatements are as follows: (a) 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 financial information does not constitute the Group's statutory accounts forthe year ended 31 December 2005 or the year ended 31 December 2004, but isderived from those accounts. Accounts for the year ended 31 December 2005 willbe made available following the Company's Annual General Meeting. The auditorshave reported on those accounts and their report was unqualified and did notcontain statements under section 10(2) of the Gibraltar Companies (Accounts)Ordinance or section 182 (1) (a) of the Gibraltar Companies Ordinance 1930, asamended. 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 operates in. The consolidated financial statements comply with the Gibraltar Companies(Accounts) Ordinance 1999, the Gibraltar Companies (Consolidated Accounts)Ordinance 1999 and the Gibraltar Companies Ordinance 1930, as amended. (b) 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. (c) 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. (d) 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 hand played. 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. (e) 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 are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at an average exchange rate (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii)exchange rate differences on translation of Group entities that have functional currencies different from US dollars are included in administrative expenses. (f) 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. (g) 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 substantially enacted by the balance sheet date andare expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Deferred tax balances are not discounted. (h) 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 rates are as follows: Domain names: 10% (i) Property, plant and equipment Property, plant and equipment is stated at historic cost less accumulateddepreciation. Carrying amounts are reviewedat each balance sheet date for impairment. 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. (j) Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite usefuleconomic lives are undertaken annually on 31 December. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), 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 are separately identifiable cash flows). (k) 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. (l) Cash and cash equivalents Cash comprises cash in hand and balances with banks. Cash equivalents are shortterm, highly liquid investments that are readily convertible to known amounts ofcash. They include short-term bank deposits originally purchased with maturitiesof three months or less. (m) Equity Equity issued by the Company is recorded as the proceeds received, net of directissue costs. (n) Trade and other payables Trade and other payables are recognised and carried at the original transactionvalue. (o) Chargebacks and returned e-cheques The cost of chargebacks and returned e-cheques is included in operatingexpenses. (p) 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. (q) 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 will result in an outflow of economic benefits that can be reasonably estimated. (r) 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. (s) 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 (t) 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, lessmanagement fees and charges applied to member accounts, along with fullprovision for casino jackpots. These amounts are repayable on demand. 3 Segment information Business segments Casino Poker Consolidated Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2005 2004 2005 2004 2005 2004 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Net Gaming Revenue 161,214 138,587 109,817 39,317 271,031 177,904 =====================================================================================Result Segmentresult 79,555 77,207 55,169 13,218 134,724 90,425 =========================================== Unallocated corporateexpenses1 85,308 47,602 -------------------Operating Profit 49,416 42,823Finance income 735 266Income tax expense (2,136) (1,991) -------------------Net Profit for theyear 48,015 41,098 ===================AssetsUnallocated corporateassets 87,566 65,047 -------------------Total assets 87,566 65,047 ===================LiabilitiesSegment liabilities- Poker 20,099 11,613Segment liabilities- Casino 9,226 7,528Unallocated corporateliabilities 25,911 15,727 -------------------Total liabilities 55,236 34,868 =================== 1 Including share benefit charges of US$17,234,000 (2004: US$nil). 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 2005 2004 US$'000 US$'000USA 148,049 102,799UK 53,871 26,585Europe 47,289 35,654Americas 12,007 6,118Rest of World 9,815 6,748 ----------------------- 271,031 177,904 ======================= Assets by geographical location Carrying amount Additions to of segment assets property, plant by location and equipment Year ended Year ended Year ended Year ended 31 31 31 31 December December December December 2005 2004 2005 2004 US$'000 US$'000 US$'000 US$'000Caribbean 235 457 72 -Europe 74,589 53,661 1,731 709Rest of World 12,742 10,929 2,028 846 ---------------------------------------- 87,566 65,047 3,831 1,555 ======================================== 4 Administrative expenses Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Share benefit charges - all equity settled 17,234 -Other administrative expenses 20,094 13,586 --------------------Administrative expenses 37,328 13,586 ==================== 5 Operating Profit Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Operating Profit is stated after charging:Staff costs 41,936 28,916Audit fees 357 168Other fees paid to auditors 104 4Depreciation 2,700 2,427Amortisation 20 -Impairment 832 -Chargebacks and returned e-cheques 18,643 12,910Exchange losses/(gains) 423 (268)Payment service providers' commissions 17,655 11,013Share benefit charges - all equity settled 17,234 - ==================== During the year the auditors were paid fees for work done in respect of theCompany's listing on the London Stock Exchange. Those fees totalled US$2,759,000(2004: US$nil) and were reimbursed to the Group by the selling shareholders. In the income statement total staff costs, excluding share benefit charges, ofUS$41,936,000 (2004: US$28,916,000), are included within the followingexpenditure categories. 2005 2004 US$'000 US$'000Operating expenses 24,049 17,157 Research and development expenses 9,968 5,991 Administrative expenses 7,919 5,768 ----------------- 41,936 28,916 ================= At 31 December 2005 the Company employed 886 (2004: 689) staff. 6 Taxation Corporate taxes Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Current tax 2,497 1,991Deferred tax (361) - --------------------Taxation expense 2,136 1,991 ==================== Analysis of current tax for the year Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Profit before taxation 50,151 43,089 ---------------------Current tax at the effective tax rate for the year 2,497 1,991Deferred tax (note 11) (361) - ---------------------Taxation expense 2,136 1,991 ===================== Current tax is calculated with reference to the profit of the Company and itssubsidiaries in their respective countries of operation: Gibraltar - 888 and its Gibraltar registered subsidiaries are subject to theprovisions of the Gibraltar Companies (Taxation and Concessions) Ordinance (the"CTCO") as a tax-exempt Company. Subject to a change of ownership or activity ofa tax-exempt Company, the grandfathering of tax-exempt benefits in respect ofexisting tax-exempt companies will extend up to 31 December 2010. Domesticcorporate tax in Gibraltar is 35% (2004: 35%). Israel - 888's subsidiaries in Israel have entered into separate transferpricing agreements on an arm's-length basis with the Israeli Income TaxCommissioner. Those agreements are effective until the end of 2007 in respect ofthe Israeli branch of Intersafe Global Limited and 2010 in respect of RandomLogic Limited. Domestic corporate tax in Israel is 34% (2004: 35%). UK - 888's subsidiary in the UK pays corporate tax in the UK at the applicablerate of 30% (2004: 30%). 7 Earnings per share Basic earnings per share Basic earnings per share has been calculated by dividing the Net Profitattributable to ordinary shareholders (profit for the year) by the weightedaverage number of shares in issue during the year. Diluted earnings per share In accordance with IAS 33, "Earnings per share", the weighted average number ofshares for diluted earnings per share takes into account all potentiallydilutive shares and share options granted, which are not included in the numberof shares for basic earnings per share. Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000 (Adjusted)Net Profit attributable to ordinary shareholders 48,015 41,098Weighted average number of Ordinary Shares in issue1 337,096,320 337,096,320Basic earnings per share 14.2c 12.2c -------------------------Diluted earnings per share 14.2c 12.2c ========================= 1 Comparative weighted average number of Ordinary Shares in issue has beenrestated in order to reflect the share split that took place on 14 September2005. Earnings per share excluding share benefit chargesReconciliation of Net Profit to Net Profit excluding share benefit charges: Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Net Profit attributable to ordinary shareholders 48,015 41,098Share benefit charges 17,234 - -------------------------Net Profit excluding share benefit charges 65,249 41,098Weighted average number of Ordinary Shares in issue1 337,096,320 337,096,320Basic earnings per share excluding share benefit charges 19.3c 12.2c -------------------------Weighted average number of dilutive Ordinary Shares 338,419,476 337,096,320Diluted earnings per share excluding share benefit charges 19.3c 12.2c ========================= 1 Comparative weighted average number of Ordinary Shares in issue has beenrestated in order to reflect the share split that took place on 14 September2005. 8 Dividends Year ended Year ended 31 December 31 December 2005 2004 US$'000 US$'000Dividends paid 63,100 26,100 ===================== 9 Intangible assets Domain Goodwill names Total US$'000 US$'000 US$'000CostAt 1 January 2005 - - -Additions 452 400 852 -------------------------------------At 31 December 2005 452 400 852 =====================================Amortisation and impairmentAt 1 January 2005 - - -Amortisation charge for the year - (20) (20)Impairment charge for the year (452) (380) (832) -------------------------------------At 31 December 2005 (452) (400) (852) =====================================Amortised costAt 31 December 2005 - - - =====================================At 31 December 2004 - - - ===================================== Goodwill relates to the business combination detailed in note 18. 10 Property, plant and equipment Office furniture IT and Motor Leasehold equipment equipment vehicles improvements Total US$'000 US$'000 US$'000 US$'000 US$'000CostAt 1 January 2005 8,194 1,375 249 4,765 14,583Additions 2,420 702 272 437 3,831Disposals - - (62) - (62) --------------------------------------------------------At 31 December 2005 10,614 2,077 459 5,202 18,352 --------------------------------------------------------Accumulated depreciationAt 1 January 2005 5,946 288 34 1,073 7,341Charge for the year 1,630 330 57 683 2,700Disposals - - (30) - (30) --------------------------------------------------------At 31 December 2005 7,576 618 61 1,756 10,011 --------------------------------------------------------Depreciated costAt 31 December 2005 3,038 1,459 398 3,446 8,341 ========================================================At 31 December 2004 2,248 1,087 215 3,692 7,242 ======================================================== Prior year amountsDepreciated cost at 1 January 2004 3,123 1,102 54 3,932 8,211Additions in 2004 1,058 92 176 229 1,555Disposals in 2004 (97) - - - (97)Depreciation in 2004 (1,836) (107) (15) (469) (2,427) ---------------------------------------------------------Depreciated cost at 31 December 2004 2,248 1,087 215 3,692 7,242 ========================================================= 11 Deferred taxes Deferred income taxes reflect the net tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. The Group's deferred taxassets resulting from temporary differences are as follows: 31 December 31 December 2005 2004 US$'000 US$'000Accrued severance pay 195 -Provision for vacation 154 -Provision for convalescence 12 - ---------------------- 361 - ====================== 12 Cash and cash equivalents 31 December 31 December 2005 2004 US$'000 US$'000Cash and cash equivalents 56,146 36,574Restricted cash 6,056 3,761 ---------------------- 62,202 40,335 ====================== Restricted cash primarily relates to deposits held by banks for guarantees. 13 Trade and other receivables 31 December 31 December 2005 2004 US$'000 US$'000Trade receivables 12,535 12,605Other receivables and prepayments 2,478 2,620 ---------------------- 15,013 15,225 ====================== The carrying value of trade and other receivables approximates to their fairvalue. 14 Share Capital Share capital comprises the following: Authorised 31 December 31 December 31 December 31 December 2005 2004 2005 2004 Number Number US$'000 US$'000Ordinary Shares of US$1 each 3,101,000 - 3,101 -Effect of share split (3,101,000) - (3,101) -Ordinary "A" shares of US$1 each - 3,100,000 - 3,100Redeemable preference "B" shares of US$1 each - 1,000 - 1Ordinary Shares of £0.005 each 426,387,500 - 3,880 - ------------------------------------------------------ 426,387,500 3,101,000 3,880 3,101 ====================================================== Allotted, called up and fully paid 31 December 31 December 31 December 31 December 2005 2004 2005 2004 Number Number US$'000 US$'000Ordinary Shares of US$1 each 3,064,512 - 3,065 -Effect of share split (3,064,512) - (3,065) -Ordinary "A" shares of US$1 each - 3,064,512 - 3,065Redeemable preference "B" shares of US$1 each - 1,000 - 1Ordinary Shares of £0.005 each 337,096,320 - 3,068 - ----------------------------------------------------- 337,096,320 3,065,512 3,068 3,066 ===================================================== On 10 February 2005 the Company passed a resolution to reclassify the 1,000 US$1preference "B" shares in issue into 100,000 US$0.01 preference "B" shares. On 31 March 2005 the 100,000 US$0.01 preference "B" shares in issue wereredeemed in full. The 100,000 authorised preference "B" shares were subsequently converted intoand reclassified as 1,000 US$1 Ordinary Shares. The 3,100,000 authorised Ordinary "A" Shares were also reclassified into3,100,000 US$1 Ordinary Shares. On 14 September 2005 a share split of 110 to 1 was effected. 888's share capitalwas also re-denominated from the US dollar to pounds sterling at a rate ofUS$1.82/£1. In addition, the authorised share capital was increased by thecreation of 85,277,500 Ordinary Shares of £0.005 each. The combination of theseevents resulted in 888 having an authorised share capital of 426,387,500Ordinary Shares of £0.005 each (£2.1 million nominal value) and an issued sharecapital of 337,096,320 Ordinary Shares of £0.005 each (£1.7 million nominalvalue). 15 Trade and other payables 31 December 31 December 2005 2004 US$'000 US$'000Trade payables 4,550 3,320Corporate taxes 766 1,429Other payables and accrued expenses 20,277 10,597 --------------------- 25,593 15,346 ===================== The carrying value of trade and other payables approximates to their fair value. 16 Investments in subsidiaries Percentage Percentage of equity of equity interest interest Country of 2005 2004 Incorporation % % Nature of businessName Intersafe 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 (Gibraltar) Limited Gibraltar 100 100 Gaming web site 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 UK 100 100 Marketing acquisitionDixie Operation Limited Antigua 100 100 Member call centre operatorRandom Logic Limited Israel 100 100 Research, development and marketing 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. It is intended that the Long Term Incentive Plan will be open to all employeesand Executive Directors of the Group at the discretion of the RemunerationCommittee. Awards under the Long Term Incentive Plan will be subject toperformance conditions imposed by the Remuneration Committee at the date ofgrant. As at 31 December 2005 no awards were made under the Long Term IncentivePlan. 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 2005 2004 Number NumberOutstanding at the beginning of the year - -Market value options granted during the year 3,578,287 -Outstanding at the end of the year 3,578,287 - -----------------------Weighted average exercise price £1.75 - ======================= Shares granted 31 December 31 December 2005 2004 Number NumberOutstanding at the beginning of the year - -Shares granted - future vesting 5,292,622 -Shares granted - immediate vesting 5,078,357 -Shares vested during the year (5,078,357) - -------------------------Outstanding at the end of the year 5,292,622 - ========================= Of the total number of options outstanding at the end of the year none hadvested and were exercisable at the end of the year. 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 2005 2004Option pricing model used Binomial -Share price at grant date £1.75 -Weighted exercise price £1.75 - ===================== Exercise period of the market value options is from vesting until expiry of tenyears 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 2005 2004 US$'000 US$'000Charges in respect of shares granted to 15,087 -employees on IPOCharges in respect of share and option awards 2,147 - --------------------Charge for the year 17,234 - ==================== The source of the shares granted to employees on IPO was the shareholdersimmediately before the IPO rather than the Company. An amount equalling thecharge in relation to these shares has therefore been transferred from the sharebenefit reserve to accumulated profit. The Group did not enter into any share-based payment transactions with partiesother than employees during the current or previous period. 18 Business Combination On 20 December 2005, the Group took responsibility for the management ofACTeCASH Limited, a company with common shareholders. From this date ACTeCASHwas managed as a unit of the Group and utilised staff employed by the Group. Inaccordance with IAS 27 "Consolidated and Separate Financial Statements", theGroup is deemed to have control of ACTeCASH by virtue of the fact it has thepower to govern the financial and operating policies of this company and deriveseconomic benefit from doing so. As such ACTeCASH has been consolidated as partof the Group. The principal activity of ACTeCASH Limited is operating an e-wallet service as acompany registered in Gibraltar. There has been minimal activity since 20December 2005. Details of the fair value of the identifiable assets and liabilities acquiredare as follows: US$'000Cash at bank 263Trade receivable 509Balance with related party (1,171)Creditors (53) -------Total (452) ======= No purchase consideration was paid in respect of ACTeCASH Limited. Therefore goodwill of US$452,000 arose on the transaction. This goodwill hasbeen fully impaired as of 31 December 2005. 19 Related party transactions At 31 December 2005, the Group was owed US$1,649,000 by companies controlled byshareholders of the Group and by its shareholders (2004: US$2,245,000), of whichUS$1,633,000 (2004: US$nil) is due from shareholders relating to flotationexpenses. At this date the Group owed to its shareholders US$318,000 (2004: US$381,000). During the year the Group paid US$198,768 (2004: US$69,000) in respect of rentand office expenses to Burford Holdings Limited and Cabot Property Partnership,companies of which Mr John Anderson is a Director. At 31 December 2005 theamount owed to Burford Holdings Limited and Cabot Property Partnership wasUS$nil (2004: US$nil). Remuneration paid to the Directors in the year totalled US$3,176,000 (2004:US$1,858,000). 20 Commitments and contingenciesLease commitments Future minimum lease commitments under property operating leases for the yearended 31 December 2005, are as follows: 31 December 31 December 2005 2004Leases expiring within US$'000 US$'000One year 1,985 1,386One to five years 2,617 1,563 ------------------- 4,602 2,949 =================== The amount paid in the year was US$2,052,463 (2004: US$1,419,000). Lease commitments on the Group's property are shown to the date of the firstbreak clause. 21 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. Certain risks are managedcentrally, while others are managed locally following guidelines communicatedfrom the centre. The policy for each of these risks is detailed below. Currency risk The Group's overall financial risk arising from exchange rate fluctuations tothe Group is minimal as receipts and the majority of payments are transacted inUS dollars. 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. 22 Events subsequent to the balance sheet date On 7 March 2006, a Group company, Random Logic Limited, signed a new operatinglease agreement for its rental facilities ("The Agreement") for a period of 10years. As a result, Random Logic's previous operating lease agreements will beterminated. End This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
888.L