Final Results
888 Holdings plc
16 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, this
unaudited figure is based on management estimates
Commenting, John Anderson, CEO, said:
'We have announced record results today. We continue to grow whilst keeping our
costs under control. Our company is more diversified both in products and
geographically and we are in prime position to benefit from the industry
consolidation that is inevitable.
Since the Company's inception in 1997, 888 has always been at the forefront of
responsible gaming and industry self-regulation and will continue to be so.
I am delighted to report that 2006 has started well. The Company is seeing
continued growth in new member recruitment, average daily deposits and poker
rake and in addition has experienced a positive start in Casino following the
new product roll out. Trading is in line with management's expectations and we
remain confident in the outlook for the rest of the year, which will see, via a
policy of organic growth and selective acquisition, the continued growth of this
Company. I am extremely proud of our brand and management which will be key to
our 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. It
operates the world's leading online casino, Casino-on-Net.com and its poker
site, Pacific Poker.com, the world's number four online poker room(2). The 888
brand 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 the
Company's flotation in October 2005 - a major step forward and the successful
result of a long-term growth plan for the business.
In the year to 31 December 2005, 888 has achieved record results, reporting an
underlying Profit after tax*, of US$65 million (2004: US$41.1 million) on total
Net Gaming Revenue (NGR) of US$271 million (2004: US$177.9m). Growth accelerated
over the second half of the year, with NGR and Profit after tax* increases, in
comparison to the first half, up by 19% and 66% respectively. Basic earnings per
share* was 19.3c, a 58% increase over 2004.
The Group is highly cash generative with net cash generated from operating
activities 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 was
US$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 registered
member accounts were opened (2004: 4.7 million) of which 1.8 million were real
money member accounts (2004: 1.2 million). Active(4) members in Casino, in Q4
2005, were up 48% to 98,000 (Q4 2004: 66,000). Active members in Poker, in Q4
2005, 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 in
a real money account in the relevant quarter
By the end of the year the Company had more than 23 million registered member
accounts (2004: 18 million), including 5.5 million real money member accounts
(2004: 3.7 million), representing 177 different countries and supporting 11
different languages for its Casino-on-Net offering - a testament to the strength
and global appeal of the 888 brand.
Geographic expansion
During 2005 the Group continued its geographic diversification, diluting its
concentration of NGR and first time depositors away from the US. NGR was split
between:
• 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-US
growth exceeded this at 64%. Europe, and the UK in particular (at 103%), were at
the 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) and
active Casino members increased by 48% to 97,661. The Group's quarterly NGR per
active member indicator tends to fluctuate over time as a result of various
promotion and data mining activities. We are actively using these techniques to
re-activate dormant members in order to generate additional revenue at a far
lower incremental cost. Due to such promotion activities quarterly NGR per
active 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: 3.2
million) of which 0.9 million were real money member accounts (2004: 0.7
million). As at 31 December 2005 the Group had 18.9 million registered Casino
member accounts (2004: 16 million) including 4.1 million real money member
Casino accounts (2004: 3.2 million).
Poker
NGR for Poker rose dramatically by 179% to US$109.8 million (2004: US$39.3
million). Active Poker members increased by 89% to 233,301. In the final quarter
of 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 at
31 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 2005
achieving 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 decreasing
operating costs, as a percentage of NGR, to 26.9% (2004: 28.2%). Member
acquisition utilised a wide variety of marketing channels. These include online
media, affiliates and offline campaigns, as well as other innovative promotion
and 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 strategy
to offer innovative gaming products to its members, whilst CPA remained
competitive 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, this
unaudited figure is based on management estimates
The Company continues to invest in human capital and at year end had 886
employees (2004: 689) at the following locations: Gibraltar - 391; Israel - 369;
Antigua - 115; and London - 11. As part of this strategic investment, at the
time of flotation of the Company on the London Stock Exchange, eligible
management and employees received share awards (including share options) under
the 888 All-Employee Share Plan. In addition, the Principal Shareholder Trusts
made 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 a
charge of US$17.2m of which the grant to employees on IPO is a one-off charge of
US$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 its
exempt status in both Gibraltar and Antigua, and a transfer pricing agreement
with the tax authorities in Israel. As a result the tax charge in 2005 was
unchanged 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 to
holders of Ordinary Shares and Depositary Interests representing 50% of annual
profits in aggregate. Approximately one third of the amount for the year will be
declared as an interim dividend. The first dividend is expected to be declared
in relation to the results of the Group for the first six months of 2006 on the
basis 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 two
to three years and 888 has in place a strong expereienced management team to
exploit this - a key differentiator. In addition to the core management team the
Company has recruited three Non-executive Directors; Michael Constantine, a
former Inspector and Acting Commissioner of the Gibraltar Financial Services
Commission; Brian Mattingley, former Executive Director of Gala Group Plc; and
Amos Pickel, Chief Executive of Red Sea Hotels Ltd. This month Richard Kilsby,
former Non-executive Director, became Non-executive Chairman, replacing Marie
Stevens. 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 and
is key to building and maintaining the business. Strong branding is not only
critical in differentiating 888 but a recognisable brand builds trust which is a
key consideration affecting a consumer's choice of provider.
888's marketing strategy is unique in the industry in terms of its diversified
multi-channel approach. This includes industry leading sports sponsorship, such
as that of Middlesbrough Football Club where 888's shirt sponsorship deal has
been a huge success. Recently the Company also signed up to be the sponsor of
the iconic World Snooker Championship, the most important event in the snooker
calendar. This sponsorship is a major step and not only catapults 888 into
emerging markets such as China and the Far East, where snooker has a huge
following, but the brand will be fully exposed for hundreds of hours in the UK
and Europe.
Technology and Product Offering
888 is continually upgrading its proprietary products and since the year end has
launched 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 version
of Poker is due imminently. The Company has also introduced a new e-wallet
focusing on Spain, Germany, Netherlands, Italy and France, thereby expanding
further its geographical presence in non-USA markets.
This product roll-out will continue throughout 2006 with 5-6 new video slots and
card games planned for Casino. Poker will also be upgraded with a multi-hand
format, 'blackjack into poker' and a new platform also scheduled.
The Company believes that diversification to complement its core Casino and
Poker offering is vital. 888 also plans a shared wallet, an overall technology
upgrade, more games and a mobile phone initiative during 2006.
Payment processing systems
Payment systems are the lifeblood of the online gaming industry. 888 has
implemented 5 new payment methods during the year, to an overall total of 22, up
from 4 in 2000. The Company plans to continually upgrade and seek new systems in
order to give all of its members, in different markets, local methods enabling
them to pay and play seamlessly. The importance of making available a wide
variety of methods in different locations to members with different needs cannot
be over-emphasised. Their successful provision constitutes a significant barrier
to entry to potential competitors.
Member Relationship Management
888 has a first class reputation for its member relationship management. Its
member support is as international as the member base and currently provides
support in up to 11 languages, available 24/7. The Company's call centres offer
interactive services and support toll-free/free-phone numbers, email and
web-chat platforms as well as online self-help options. Staff are all highly
trained and undergo an ongoing training programme to ensure 888 remains at the
cutting edge of service excellence.
Regulation
The online gaming market is maturing and, whilst regulation of it is still in
its infancy, 888 welcomes the UK's entry into the online space through the 2005
Gambling Act. The Company believes the UK's position is the first domino in what
will become a legislative network throughout mainland Europe. Also of note is
the Gibraltar Gambling Ordinance which introduces a bespoke regulatory regime in
Gibraltar for remote gaming and further consolidates Gibraltar's position as a
first-class online gaming jurisdiction. 888 also continues to monitor the
legislative position in Europe and the USA.
Generally, there is a change in the emphasis of regulators, who are looking
beyond the grant of licences and are focusing more on compliance and codes of
conduct within the industry. This is an area where 888 has sought to take the
lead. 888 was one of the founding members of eCOGRA (e-Commerce Online Gaming
Regulation and Assurance), an independent body which has developed a series of
self-regulatory guidelines for the online gaming industry. As online gaming
develops into a mainstream leisure activity 888 believes further clarification
of the regulatory position in relation to online gaming would be a positive
driver for growth by enhancing consumer confidence and trust in the sector. The
Company 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 member
recruitment, average daily deposits, poker rake and in addition has experienced
a positive start in Casino following the new product roll out. Trading is in
line with management's expectations and we remain confident in the outlook for
the rest of the year.
Summary
888's strategy is clear. As stated at flotation, its goal is to become market
leader and offer a 'one stop shop' online leisure experience.
2006 will see 888 continue to invest in its brand through worldwide innovative
marketing initiatives and also expand into new geographic markets. It will
extend its range of products and continue to benefit from increasing Internet
penetration. Backed by a strong balance sheet, and a strong core of long-term
members this expansion will be achieved both organically and through selective
acquisition. The Company will continue to react to local regulatory
developments.
The 2005 results confirm that 888 is heading in the right direction. The Company
believes that the continued focus on its strategic goals, through a systematic
and evidence-based approach, will provide the opportunities to deliver further
positive results in the future.
Financial Information
Audited Consolidated Income Statement
for the year ended 31 December 2005
Year ended Year ended
31 December 31 December
2005 2004
Note US$'000 US$'000
Net Gaming Revenue 2(d) 271,031 177,904
Operating expenses 72,960 50,141
Research and development expenses 11,318 6,866
Selling and marketing expenses 100,009 64,488
Administrative expenses 4 37,328 13,586
-------------------
Operating Profit before share benefit charges 66,650 42,823
-------------------
Charges in respect of shares granted to 15,087 -
employees on IPO
Charges in respect of share and option awards 2,147 -
-------------------
Total share benefit charges 17,234 -
-------------------
Operating Profit 5 49,416 42,823
Finance income 735 266
-------------------
Profit before tax 50,151 43,089
Taxation 6 2,136 1,991
-------------------
Profit after tax for the year attributable to
equity holders of parent 48,015 41,098
===================
Earnings per share
Basic 7 14.2c 12.2c
Diluted 14.2c 12.2c
===================
All amounts relate to continuing activities.
Audited Consolidated Balance Sheet
at 31 December 2005
31 December 31 December
2005 2004
Note US$'000 US$'000
Assets
Non-current assets
Intangible assets 9 - -
Property, plant and equipment 10 8,341 7,242
Deferred taxes 11 361 -
------------------
8,702 7,242
Current assets
Cash and cash equivalents 12 62,202 40,335
Trade and other receivables 13 15,013 15,225
Amounts due from related parties 19 1,649 2,245
------------------
78,864 57,805
------------------
Total assets 87,566 65,047
==================
Equity and liabilities
Equity attributable to equity holders of the parent
Share capital 14 3,068 3,066
Share benefit reserve 2,147 -
Retained earnings 27,115 27,113
------------------
Total equity attributable to equity holders of the
parent 32,330 30,179
------------------
Liabilities
Current liabilities
Trade and other payables 15 25,593 15,346
Member deposits 29,325 19,141
Amounts due to related parties 19 318 381
------------------
Total liabilities 55,236 34,868
------------------
Total equity and liabilities 87,566 65,047
==================
Audited Consolidated Statement of Changes in Equity
for the year ended 31 December 2005
Share Share benefit Accumulated
capital reserve profit Total
US$'000 US$'000 US$'000 US$'000
Balance at 1 January 2004 15,443 - 12,115 27,558
Net Profit for the year - - 41,098 41,098
Dividend paid - - (26,100) (26,100)
Capital reduction (12,442) - - (12,442)
Share capital issued 65 - - 65
-----------------------------------------------------
Balance at 1 January 2005 3,066 - 27,113 30,179
-----------------------------------------------------
Net Profit for the year - - 48,015 48,015
Dividend paid - - (63,100) (63,100)
Redemption of preference (1) - - (1)
share capital
Share benefit charge - 17,234 - 17,234
Transfer of shares - (15,087) 15,087 -
granted on IPO
Redenomination 3 - - 3
-----------------------------------------------------
translation effect
Balance at 31 December
2005 3,068 2,147 27,115 32,330
=====================================================
Audited Consolidated Statement of Cash Flows
for the year ended 31 December 2005
Year ended Year ended Year ended Year ended
31 31 31 31
December December December December
2005 2005 2004 2004
US$'000 US$'000 US$'000 US$'000
Cash flows from operating activities
Profit before income tax 50,151 43,089
Adjustments for
Depreciation 2,700 2,427
Loss on sale of property, plant and
equipment 32 19
Amortisation 20 -
Impairment 832 -
Translation effect of redenomination of
share capital 3 -
Interest received (683) (266)
Share benefit charges 17,234 -
---------------------------------------
70,289 45,269
Decrease/(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 10,751
Increase in other accounts payable 9,680 3,699
---------------------------------------
Cash generated from operations 91,413 52,455
Income tax paid (3,160) (1,016)
Net cash generated from operating
activities 88,253 51,439
Cash flows from investing activities
Purchase 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 - 78
Acquisition 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 activities
Reduction 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 10,749
Cash 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 holding
company domiciled in the British Virgin Islands. On 12 January 2000, the Company
was continued in Antigua and Barbuda as a corporation under the International
Business Corporation Act 1982 with registered number 12512. On 17 December 2003,
the Company redomiciled in Gibraltar with the Company number 90099. On 4 October
2005, the Company listed on the London Stock Exchange.
The Group has developed innovative proprietary software applications solutions
for virtual Casinos, Poker rooms, e-commerce, credit-card clearing services and
online advertising methodologies.
Cassava Enterprises (Gibraltar) Limited (a subsidiary) carried out the
operations of the Group during the year, principally under the name www.888.com
under 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 - 'Related
parties Party Disclosures'.
2 Significant accounting policies
The significant accounting policies applied in the preparation of the financial
statements are as follows:
(a) Basis of preparation
The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards, including
International Accounting Standards ('IAS') and Interpretations, adopted by the
International Accounting Standards Board ('IASB') and endorsed for use by
companies listed on an EU regulated market.
The financial information does not constitute the Group's statutory accounts for
the year ended 31 December 2005 or the year ended 31 December 2004, but is
derived from those accounts. Accounts for the year ended 31 December 2005 will
be made available following the Company's Annual General Meeting. The auditors
have reported on those accounts and their report was unqualified and did not
contain statements under section 10(2) of the Gibraltar Companies (Accounts)
Ordinance or section 182 (1) (a) of the Gibraltar Companies Ordinance 1930, as
amended.
The significant accounting policies applied in the financial statements of the
Group 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 and
its subsidiaries. The subsidiaries are companies controlled by 888 Holdings
Public Limited Company. Control exists where the Company has the power to govern
the financial and operating policies of an entity so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date the parent gained
control until such time as control ceases.
The financial statements of the subsidiaries are included in the consolidated
financial statements using the purchase method of accounting. On the date of the
acquisition, the assets and liabilities of a subsidiary are measured at their
fair values and any excess of the fair value of the acquisition over the fair
values 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 reporting
period as the parent company and using consistent accounting policies.
(c) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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 benefits
will 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 by
members 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 deduction
of certain bonuses granted to members.
(e) Foreign currency
Monetary assets and liabilities denominated in non-US dollar currencies are
translated into US dollar equivalents using year-end spot foreign exchange
rates. Non-monetary assets and liabilities are translated using exchange rates
prevailing at the dates of the transactions. Exchange rate differences on
foreign currency transactions are included in administrative expenses.
The results and financial position of all Group entities that have a functional
currency different from US dollars are translated into the presentation currency
as 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 as
incurred. IAS 38 'Intangible Assets' requires capitalisation of certain software
development costs, subsequent to technological and commercial feasibility being
established and the Group having sufficient resources to complete development.
Based on the Group's product-development process, technological feasibility and
therefore the creation of substantially improved product, is only established
upon the completion of a working model. The Group generally does not incur any
significant costs between the completion of the working model and the point at
which the product is ready for general release.
(g) Taxation
The tax expense represents tax payable for the year based on currently
applicable tax rates.
Deferred tax assets and liabilities are recognised where the carrying amount of
an asset or liability in the balance sheet differs from its tax base.
Recognition of deferred tax assets is restricted to those instances where it is
probable that taxable profit will be available against which the difference can
be utilised. The amount of the asset or liability is determined using tax rates
that have been enacted or substantially enacted by the balance sheet date and
are 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 the
charge is included within operating expenses. Intangible assets are reviewed
annually 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 accumulated
depreciation. Carrying amounts are reviewed
at each balance sheet date for impairment.
Depreciation is calculated using the straight-line method, at annual rates
estimated to write off the cost of the assets less their estimated residual
values over their expected useful lives. The annual depreciation rates are as
follows:
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 useful
economic 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 individual
asset, 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 value
and principally comprise amounts due from the credit-card companies and from
e-payment companies. An estimate for doubtful debts is made when collection of
the full amount is no longer probable. Bad debts are written off when
identified.
(l) Cash and cash equivalents
Cash comprises cash in hand and balances with banks. Cash equivalents are short
term, highly liquid investments that are readily convertible to known amounts of
cash. They include short-term bank deposits originally purchased with maturities
of three months or less.
(m) Equity
Equity issued by the Company is recorded as the proceeds received, net of direct
issue costs.
(n) Trade and other payables
Trade and other payables are recognised and carried at the original transaction
value.
(o) Chargebacks and returned e-cheques
The cost of chargebacks and returned e-cheques is included in operating
expenses.
(p) Leases
Leases are classified as finance leases wherever the terms of the lease transfer
substantially all the risks and rewards of ownership to the Group. All other
leases are classified as operating leases and rentals payable are charged to
income on a straight-line basis over the term of the lease.
(q) Provisions
Provisions are recognised when the Group has a present or constructive
obligation 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, trade
receivables, other accounts receivable, trade payables, member deposits and
other accounts payable approximate to their fair value.
The Group does not hold or issue derivative financial instruments for trading
purposes.
(s) Segment information
A business segment is a distinguishable component of the Group that is engaged
in providing an individual product or service or a Group of related products or
services and that is subject to risks and returns that are different from those
of other business segments. A geographical segment is a distinguishable
component of the Group that is engaged in providing products or services within
a particular environment and that is subject to risks and returns that are
different 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, less
management fees and charges applied to member accounts, along with full
provision 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$'000 US$'000
Net Gaming
Revenue 161,214 138,587 109,817 39,317 271,031 177,904
=====================================================================================
Result
Segment
result 79,555 77,207 55,169 13,218 134,724 90,425
===========================================
Unallocated
corporate
expenses1 85,308 47,602
-------------------
Operating
Profit 49,416 42,823
Finance
income 735 266
Income tax
expense (2,136) (1,991)
-------------------
Net Profit
for the
year 48,015 41,098
===================
Assets
Unallocated
corporate
assets 87,566 65,047
-------------------
Total
assets 87,566 65,047
===================
Liabilities
Segment
liabilities
- Poker 20,099 11,613
Segment
liabilities
- Casino 9,226 7,528
Unallocated
corporate
liabilities 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 Poker
segments above, the expenses, assets and liabilities relate jointly to both
segments. Any allocation of these items would be arbitrary.
Geographical segments
The Group's performance can also be reviewed by considering the geographical
markets and geographical locations within which the Group operates. This
information is outlined below:
Net Gaming Revenue by geographical market
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
USA 148,049 102,799
UK 53,871 26,585
Europe 47,289 35,654
Americas 12,007 6,118
Rest 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$'000 US$'000
Caribbean 235 457 72 -
Europe 74,589 53,661 1,731 709
Rest 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$'000 US$'000
Share 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$'000 US$'000
Operating Profit is stated after charging:
Staff costs 41,936 28,916
Audit fees 357 168
Other fees paid to auditors 104 4
Depreciation 2,700 2,427
Amortisation 20 -
Impairment 832 -
Chargebacks and returned e-cheques 18,643 12,910
Exchange losses/(gains) 423 (268)
Payment service providers' commissions 17,655 11,013
Share benefit charges - all equity settled 17,234 -
====================
During the year the auditors were paid fees for work done in respect of the
Company'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, of
US$41,936,000 (2004: US$28,916,000), are included within the following
expenditure categories.
2005 2004
US$'000 US$'000
Operating expenses 24,049 17,157
Research and development expenses 9,968 5,991
Administrative expenses 7,919 5,768
-----------------
41,936 28,916
=================
At 31 December 2005 the Company employed 886 (2004: 689) staff.
6 Taxation
Corporate taxes
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
Current tax 2,497 1,991
Deferred tax (361) -
--------------------
Taxation expense 2,136 1,991
====================
Analysis of current tax for the year
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
Profit before taxation 50,151 43,089
---------------------
Current tax at the effective tax rate for the year 2,497 1,991
Deferred tax (note 11) (361) -
---------------------
Taxation expense 2,136 1,991
=====================
Current tax is calculated with reference to the profit of the Company and its
subsidiaries in their respective countries of operation:
Gibraltar - 888 and its Gibraltar registered subsidiaries are subject to the
provisions of the Gibraltar Companies (Taxation and Concessions) Ordinance (the
'CTCO') as a tax-exempt Company. Subject to a change of ownership or activity of
a tax-exempt Company, the grandfathering of tax-exempt benefits in respect of
existing tax-exempt companies will extend up to 31 December 2010. Domestic
corporate tax in Gibraltar is 35% (2004: 35%).
Israel - 888's subsidiaries in Israel have entered into separate transfer
pricing agreements on an arm's-length basis with the Israeli Income Tax
Commissioner. Those agreements are effective until the end of 2007 in respect of
the Israeli branch of Intersafe Global Limited and 2010 in respect of Random
Logic Limited. Domestic corporate tax in Israel is 34% (2004: 35%).
UK - 888's subsidiary in the UK pays corporate tax in the UK at the applicable
rate of 30% (2004: 30%).
7 Earnings per share
Basic earnings per share
Basic earnings per share has been calculated by dividing the Net Profit
attributable to ordinary shareholders (profit for the year) by the weighted
average number of shares in issue during the year.
Diluted earnings per share
In accordance with IAS 33, 'Earnings per share', the weighted average number of
shares for diluted earnings per share takes into account all potentially
dilutive shares and share options granted, which are not included in the number
of shares for basic earnings per share.
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
(Adjusted)
Net Profit attributable to ordinary shareholders 48,015 41,098
Weighted average number of Ordinary Shares in issue1 337,096,320 337,096,320
Basic earnings per share 14.2c 12.2c
-------------------------
Diluted earnings per share 14.2c 12.2c
=========================
1 Comparative weighted average number of Ordinary Shares in issue has been
restated in order to reflect the share split that took place on 14 September
2005.
Earnings per share excluding share benefit charges
Reconciliation of Net Profit to Net Profit excluding share benefit charges:
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
Net Profit attributable to ordinary shareholders 48,015 41,098
Share benefit charges 17,234 -
-------------------------
Net Profit excluding share benefit charges 65,249 41,098
Weighted average number of Ordinary Shares in issue1 337,096,320 337,096,320
Basic earnings per share excluding share benefit
charges 19.3c 12.2c
-------------------------
Weighted average number of dilutive Ordinary Shares 338,419,476 337,096,320
Diluted earnings per share excluding share benefit
charges 19.3c 12.2c
=========================
1 Comparative weighted average number of Ordinary Shares in issue has been
restated in order to reflect the share split that took place on 14 September
2005.
8 Dividends
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
Dividends paid 63,100 26,100
=====================
9 Intangible assets
Domain
Goodwill names Total
US$'000 US$'000 US$'000
Cost
At 1 January 2005 - - -
Additions 452 400 852
-------------------------------------
At 31 December 2005 452 400 852
=====================================
Amortisation and impairment
At 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 cost
At 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$'000
Cost
At 1 January 2005 8,194 1,375 249 4,765 14,583
Additions 2,420 702 272 437 3,831
Disposals - - (62) - (62)
--------------------------------------------------------
At 31 December 2005 10,614 2,077 459 5,202 18,352
--------------------------------------------------------
Accumulated depreciation
At 1 January 2005 5,946 288 34 1,073 7,341
Charge for the year 1,630 330 57 683 2,700
Disposals - - (30) - (30)
--------------------------------------------------------
At 31 December 2005 7,576 618 61 1,756 10,011
--------------------------------------------------------
Depreciated cost
At 31 December 2005 3,038 1,459 398 3,446 8,341
========================================================
At 31 December 2004 2,248 1,087 215 3,692 7,242
========================================================
Prior year amounts
Depreciated cost at 1
January 2004 3,123 1,102 54 3,932 8,211
Additions in 2004 1,058 92 176 229 1,555
Disposals in 2004 (97) - - - (97)
Depreciation in 2004 (1,836) (107) (15) (469) (2,427)
---------------------------------------------------------
Depreciated cost at 31
December 2004 2,248 1,087 215 3,692 7,242
=========================================================
11 Deferred taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Group's deferred tax
assets resulting from temporary differences are as follows:
31 December 31 December
2005 2004
US$'000 US$'000
Accrued severance pay 195 -
Provision for vacation 154 -
Provision for convalescence 12 -
----------------------
361 -
======================
12 Cash and cash equivalents
31 December 31 December
2005 2004
US$'000 US$'000
Cash and cash equivalents 56,146 36,574
Restricted cash 6,056 3,761
----------------------
62,202 40,335
======================
Restricted cash primarily relates to deposits held by banks for guarantees.
13 Trade and other receivables
31 December 31 December
2005 2004
US$'000 US$'000
Trade receivables 12,535 12,605
Other receivables and prepayments 2,478 2,620
----------------------
15,013 15,225
======================
The carrying value of trade and other receivables approximates to their fair
value.
14 Share Capital
Share capital comprises the following:
Authorised
31 December 31 December 31 December 31 December
2005 2004 2005 2004
Number Number US$'000 US$'000
Ordinary 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 - 3,100
Redeemable preference 'B'
shares of US$1 each - 1,000 - 1
Ordinary Shares of £0.005
each 426,387,500 - 3,880 -
------------------------------------------------------
426,387,500 3,101,000 3,880 3,101
======================================================
Allotted, called up and fully paid
31 December 31 December 31 December 31 December
2005 2004 2005 2004
Number Number US$'000 US$'000
Ordinary 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 - 3,065
Redeemable preference 'B'
shares of US$1 each - 1,000 - 1
Ordinary 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$1
preference '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 were
redeemed in full.
The 100,000 authorised preference 'B' shares were subsequently converted into
and reclassified as 1,000 US$1 Ordinary Shares.
The 3,100,000 authorised Ordinary 'A' Shares were also reclassified into
3,100,000 US$1 Ordinary Shares.
On 14 September 2005 a share split of 110 to 1 was effected. 888's share capital
was also re-denominated from the US dollar to pounds sterling at a rate of
US$1.82/£1. In addition, the authorised share capital was increased by the
creation of 85,277,500 Ordinary Shares of £0.005 each. The combination of these
events resulted in 888 having an authorised share capital of 426,387,500
Ordinary Shares of £0.005 each (£2.1 million nominal value) and an issued share
capital of 337,096,320 Ordinary Shares of £0.005 each (£1.7 million nominal
value).
15 Trade and other payables
31 December 31 December
2005 2004
US$'000 US$'000
Trade payables 4,550 3,320
Corporate taxes 766 1,429
Other 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 business
Name
Intersafe Global Limited Gibraltar 100 100 Payment processor
Cassava Enterprises Limited Antigua 100 100 Member call centre
operator
Virtual Services Limited BVI 100 100 Advertising
Virtual Holdings Management
Services (Gibraltar)
Limited Gibraltar 100 100 Operates Group headquarters
Intersafe Global (Europe)
Limited Gibraltar 100 100 Payment processor
Cassava Enterprises
(Gibraltar) Limited Gibraltar 100 100 Gaming web site operator
Virtual Marketing Services
(UK) Limited UK 100 100 Advertising
Cassava Sports Limited Gibraltar 100 100 Domain site owner
through which a third
party operates a betting
exchange
Active Media Limited BVI 100 100 Member call centre
employer
Virtual Marketing Services
(Gibraltar) Limited UK 100 100 Marketing acquisition
Dixie Operation Limited Antigua 100 100 Member call centre
operator
Random Logic Limited Israel 100 100 Research, development
and marketing
17 Share-based payment
Prior to flotation, the Company adopted two equity-settled employee share
incentive plans - the 888 All-Employee Share Plan and the Long Term Incentive
Plan. Awards have been granted under the 888 All-Employee Share Plan conditional
upon flotation. The 888 All-Employee Share Plan is open to all employees and
Executive Directors of the Group who are not within six months of their normal
retirement age at the discretion of the Remuneration Committee. Awards under
this 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 employees
and Executive Directors of the Group at the discretion of the Remuneration
Committee. Awards under the Long Term Incentive Plan will be subject to
performance conditions imposed by the Remuneration Committee at the date of
grant. As at 31 December 2005 no awards were made under the Long Term Incentive
Plan.
Details of Shares and Share Options granted as part of the 888 All-Employee
Share Plan and shares granted vesting immediately on IPO and thereafter:
Share options granted
31 December 31 December
2005 2004
Number Number
Outstanding 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 Number
Outstanding 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 had
vested and were exercisable at the end of the year.
The following information is relevant in the determination of the fair value of
options granted during the year under the equity-settled 888 All-Employee Share
Plan:
Valuation information
2005 2004
Option 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 ten
years after grant date.
In accordance with International Financial Reporting Standards a charge to the
income statement in respect of any shares or options granted under the above
schemes will be recognised and spread over the vesting period of the shares or
options 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. This
charge has no cash impact.
Share benefit charges
Year ended Year ended
31 December 31 December
2005 2004
US$'000 US$'000
Charges in respect of shares granted to 15,087 -
employees on IPO
Charges in respect of share and option awards 2,147 -
--------------------
Charge for the year 17,234 -
====================
The source of the shares granted to employees on IPO was the shareholders
immediately before the IPO rather than the Company. An amount equalling the
charge in relation to these shares has therefore been transferred from the share
benefit reserve to accumulated profit.
The Group did not enter into any share-based payment transactions with parties
other than employees during the current or previous period.
18 Business Combination
On 20 December 2005, the Group took responsibility for the management of
ACTeCASH Limited, a company with common shareholders. From this date ACTeCASH
was managed as a unit of the Group and utilised staff employed by the Group. In
accordance with IAS 27 'Consolidated and Separate Financial Statements', the
Group is deemed to have control of ACTeCASH by virtue of the fact it has the
power to govern the financial and operating policies of this company and derives
economic benefit from doing so. As such ACTeCASH has been consolidated as part
of the Group.
The principal activity of ACTeCASH Limited is operating an e-wallet service as a
company registered in Gibraltar. There has been minimal activity since 20
December 2005.
Details of the fair value of the identifiable assets and liabilities acquired
are as follows:
US$'000
Cash at bank 263
Trade receivable 509
Balance 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 has
been 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 by
shareholders of the Group and by its shareholders (2004: US$2,245,000), of which
US$1,633,000 (2004: US$nil) is due from shareholders relating to flotation
expenses.
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$69,000) in respect of rent
and office expenses to Burford Holdings Limited and Cabot Property Partnership,
companies of which Mr John Anderson is a Director. At 31 December 2005 the
amount owed to Burford Holdings Limited and Cabot Property Partnership was
US$nil (2004: US$nil).
Remuneration paid to the Directors in the year totalled US$3,176,000 (2004:
US$1,858,000).
20 Commitments and contingencies
Lease commitments
Future minimum lease commitments under property operating leases for the year
ended 31 December 2005, are as follows:
31 December 31 December
2005 2004
Leases expiring within US$'000 US$'000
One year 1,985 1,386
One 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 first
break clause.
21 Financial risk management objectives and policies
The Group is exposed through its operations to currencies, interest rate and
credit risk. Policy for managing these risks is set by the Board following
recommendations from the Chief Financial Officer. Certain risks are managed
centrally, while others are managed locally following guidelines communicated
from 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 to
the Group is minimal as receipts and the majority of payments are transacted in
US dollars.
Interest rate risk
The Group's exposure to interest rate risk is limited to the interest bearing
deposits in which the Group invests surplus funds. Downside interest rate risk
is minimal as the Group has no borrowings. Management monitors liquidity to
ensure that sufficient liquid resources are available to the Group.
Credit risk
The Group's credit risk is primarily attributable to receivables from payment
service providers.
22 Events subsequent to the balance sheet date
On 7 March 2006, a Group company, Random Logic Limited, signed a new operating
lease agreement for its rental facilities ('The Agreement') for a period of 10
years. As a result, Random Logic's previous operating lease agreements will be
terminated.
End
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