Audited full year results for the year ended 31 December 2008
Playtech (AIM: PTEC), the international designer, developer and licensor of software for the online, mobile and land-based gaming industry announces its audited full year results for the year ended 31 December 2008.
Financial highlights
- Total revenues up by 70% to €111.5 million (2007: €65.7 million)
- Casino revenues up by 68% to €79.4 million (2007: €47.4 million)
- Poker revenues up by 73% to €30.1 million (2007: €17.4 million)
- Adjusted net profit* of €78.6 million (2007: €43.9 million) an increase of 79%, resulting in an adjusted net profit margin* of 70% (2007: 67%). Net profit of €40.7million (2007: €26.3 million), an increase of 55%, resulting in a net profit margin of 37% (2007: 40%)
- Adjusted EBITA* (earnings before interest tax and amortization expenses) of €73.0 million (2007: €42.0 million), an increase of 74%, resulting in an adjusted* EBITA margin of 66% (2007: 64%)
- Cash generated from operating activities of €68.7 million (2007: €39.7 million) was 94.1% (2007: 94.5%) of the Group's adjusted EBITA
- Cash and cash equivalents as at 31 December 2008 were €31.6 million (2007: €54.8 million)
- Adjusted basic EPS* of 34.5 cents per share (2007: 20.4 cents per share)
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Recommended Final Dividend of 7.6 € cents per share, making a total of approximately €18.1 million. Once approved and paid this will result in shareholders receiving an aggregate dividend for 2008 of 15.2 € cents per share or approximately €40.5 million (2007: 10.2 € cents per share or approximately €21.9 million), an increase of 49% on the previous year
(*) Adjusted EBITA and adjusted net profit are calculated after adding back certain items in relation to the investments in CY Foundation Group Limited, AsianLogic Limited, Tribeca, the exchange loss relating to the investment in William Hill Online which are not part of the Group's core business and the employee stock option plan.
Operational highlights:
- Successful completion of the series of transactions, announced in October 2008, with William Hill and a former customer together with certain affiliates of Playtech
- Playtech now providing William Hill Online ("WHO") with Casino and Poker software
- 15 new license agreements signed with high quality operators such as Betsson, Vista Global Limited and Genting Stanley Alderney
- Asset acquisition of MIXTV Ltd, a subsidiary of Win Gaming Media, in August 2008
- Entry into the regulated Italian poker market with four new license agreements with market leading operators Snai S.r.l, Sisal SpA, Eurobet Italia and Cogetech SpA.
- Reporting currency changed to Euros, reflecting the fact that the majority of the Group's revenues and expenses are now settled in Euros
- Raised £112 million, (€141 million) before expenses, by way of a Placing of 21,620,946 new Ordinary Shares at a price of 520p per share
- Continued strong growth in the Asia-Pacific region
- Continued expansion of product offering:
- full launch of Asian P2P Games with selected licensees
- launch of a live gaming platform for the European marketplace
- new version of Bingo released
- launch of flash poker
Current trading
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Encouraging start to the year with average daily overall earnings up by 8% on Q4 2008
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Daily average revenues in first 11 weeks of 2009 up 2.3% on Q4 2008 (excluding William Hill Online revenues in Q1 2009 and former customer revenues in Q4 2008)
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William Hill Online delivering approximately 40% greater revenues and profits in first eight weeks than generated by former customer in Q4 2008
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New regulated market entered in Spain with Casino Gran Madrid license
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Gamenet recently became the fifth operator to join the Italian poker network
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Solid progress made towards entering other jurisdictions and MOUs agreed with several leading operators
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MGM Interactive Inc licenses the "Rocky" and "Pink Panther" motion picture brands to the Company
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Acquisition of Player2Players, adding Sports betting to the Company's portfolio of gaming products
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Strong pipeline of new licensees and exciting business opportunities ahead in 2009
Roger Withers, Non-executive Chairman, commented:
"Playtech continues to perform extremely well delivering healthy growth for shareholders and meeting management's demanding expectations.
"Our landmark agreement with William Hill Online is on course to offer significant benefits to the Company's earnings in 2009 and further strengthens Playtech's position.
"Management's strategy to focus on growing its presence in regulated markets has enabled the Group to enter Italy, signing-up four leading Italian licensees in the process; and we expect to announce further developments in this regard
"Our successful share placing in June 2008 demonstrated the faith investors have in the Company and its management. Despite the difficult macroeconomic outlook for 2009 I am confident that the Group will successfully navigate these challenges. As a result, the Board is highly confident of its prospects for 2009 and beyond."
- Ends -
There will be a meeting and presentation for analysts today commencing at 9.30 am in the City Presentation Centre, 4 Chiswell Street, Finsbury Square, London, EC1Y 4UP.
Access number: +44 (0)20 8609 0581
A combined audiocast and slide presentation of the meeting will be available on the Group's website later today.
For further information contact:
| Mor Weizer, CEO, Playtech Ltd Shuki Barak, CFO, Playtech Ltd c/o Bell Pottinger Corporate & Financial | Tel: +44 (0) 20 7861 3232 |
| Piers Coombs / Bruce Garrow Collins Stewart | Tel: +44 (0) 20 7523 8000 |
| Mumtaz Naseem Deutsche Bank | Tel: +44 (0) 20 7545 8000 |
| David Rydell / Olly Scott / Helen Tarbet Bell Pottinger Corporate & Financial | Tel. +44 (0) 20 7861 3232 |
Chairman's report
I am very pleased to report Playtech's financial results for the year ended 31 December 2008. Now in its third year as a listed entity, Playtech continues to outperform its competition. The Group has delivered significant growth across all divisions, generating record revenues and profits for shareholders.
In the course of the year Playtech's management has continued to deliver upon its goal to enhance the Group's position as the world's leading software provider to the gaming industry. Management has relentlessly focused on being responsive to customer needs and investing in research and development that will provide new and exciting high quality products for its licensees.
Playtech's market leading position has been strengthened by the addition of 15 new licensees coupled with strong organic growth from its existing customer base, further demonstrating the success of Playtech's strategy to migrate licensees from competitors, target new and existing operators in newly created and lucrative regulated markets and diversify geographically.
Total revenues for the year rose by 70% to €111.5 million (2007: €65.7million), whilst net profit rose 55% to €40.7 million (2007: €26.3). Adjusted net profit* rose by 79 % to €78.6 million, (2007: €43.9 million) representing a margin of 70% of total revenues. The Board recommends the payment of a final dividend of 7.6 € cents per share which is payable, subject to shareholder approval, on 15 May 2009 to all shareholders on the register at 3 April 2009. This follows the interim dividend payment of 7.6 € cents per share (12 US cents) announced in September 2008 making a total dividend of 15.2 € cents per share. The overall dividend reflects the Board's confidence in the Group's business and prospects.
Playtech's Board and management took great comfort from the positive response investors demonstrated to the Group's placement of new ordinary shares in June 2008 raising £112 million before expenses (€141 million) and underlining confidence in the Group's ability to deliver high quality sustainable growth. Given the state of financial markets at the time of the placement, this was an impressive achievement and clearly demonstrated Playtech's value proposition. At the time of fundraising the Company earmarked the proceeds for future acquisitions. The Company subsequently utilised the proceeds of the fundraising to undertake its transaction with William Hill Online, which involved Playtech's acquisition of certain online gaming marketing assets, businesses and contracts from affiliates and other third parties for a total consideration of US$250 million (€177.7 million) in cash and the immediate injection of those assets in return for a 29% interest in William Hill Online.
As well as the William Hill transaction the other major business development of 2008 was Playtech's entry into the newly regulated Italian market. Four of the Group's 15 new licensees were derived from this major development. Regulated markets remain an important target for Playtech's expansionary ambitions in 2009 and we anticipate a continuing trend of operational start-up in new jurisdictions.
Playtech has continued to work closely with its partner customers to develop and launch new products tailored to particular markets. The Group constantly seeks to improve the products on offer to licensees; accordingly, a dedicated new games software development unit has been established which will significantly increase the number of games released to our licensees.
I would like to thank my colleagues on the Board and every employee within Playtech for the outstanding contribution they have made to another successful year. In December 2008 Avigur Zmora resigned from his position as non executive director of the Company, having steered through the final stages of the William Hill transaction. Avigur's contribution to Playtech's success is well known and appreciated and Avigur will continue to provide consultancy services to the Board on strategic matters. I would also like to thank former Finance Director Guy Emodi for his contribution to the Group throughout the year and to express my appreciation to Shuki Barak who has taken on the role of Interim Chief Financial Officer.
We are all aware of current global economic conditions and no industry is escaping the effects of the slowdown. Notwithstanding this the Group's market leading position as a software provider and its diversified business model should ensure that it should continue to deliver in terms of its financial performance.
To conclude, Playtech has enjoyed an excellent year of progress. We will continue to follow our successful strategy of organic and acquisitive growth as we take full advantage of the opportunities that lie ahead. There are new geographic markets to break into, new products to launch, new licensees to migrate and, if appropriate, acquisitions to make. As a result, the Board is highly confident of its prospects for 2009 and beyond.
Roger Withers
Chairman
(*) Adjusted EBITA and adjusted net profit are calculated after adding back certain items in relation to the investments in CY Foundation Group Limited, AsianLogic Limited, Tribeca, the exchange loss relating to the investment in William Hill Online which are not part of the Group's core business and the employee stock option plan.
Chief Executive Officer's report
Introduction
I am delighted to report another excellent year for Playtech. The Group made strong financial progress, again delivering record levels of revenue and profit. This year saw some important achievements, two of which I am particularly proud. The first was the equity placing in June 2008 to institutional investors in the Company which raised £112 million before expenses (€141 million). The second achievement was the transaction with William Hill which involved the acquisition by Playtech of online gaming marketing assets, businesses and contracts from affiliates and other third parties for a total consideration of US$250 million (€177.7 million) in cash and the immediate injection of those assets in return for a 29% interest in a new operation created with William Hill ("William Hill Online") which will operate on Playtech's market leading software platform under a five year licence agreement. I am confident that William Hill Online will be highly successful and will bring financial benefits to both William Hill and Playtech.
There were several other notable achievements. Pursuant to our strategy to target regulated markets, in the last week of the year we launched our Italian poker network, of which SNAI, SISAL, Eurobet Italy and COGETECH are members. The network is already showing significant player growth despite only being in its early stages. We believe that regulated markets have a significant potential and anticipate that further markets will be opened up in the future. Accordingly, Playtech is focused on regulated markets and will continue to invest efforts and resources in them. We are closely monitoring the development of regulations within Europe and elsewhere and as demonstrated in Italy, we aim to be well placed to take advantage of any opportunities that present themselves in this area.
In 2008 we continued to attract well known and established operators to the Playtech stable, such as Betsson, Mansion Poker, Hollywood Poker and Genting Stanley. This will further enhance and strengthen Playtech's diversification both in terms of revenue generation and geographic exposure. We continued our strategy of expanding the Group's product portfolio by the acquisition of the assets of MixTV, a developer and provider of advanced user experience and quality live streaming products accessible via a unique combination of TV and internet media.
Playtech's iPoker network strengthened its position as the world's largest online poker network, providing our licensees with the liquidity and expertise to offer their poker players a best of breed product and experience.
The Group's land based gaming division, Videobet, made significant progress during the year, executing an agreement with Sceptre Leisure for the deployment of 800 machines in the UK, obtaining AAMS approval of its machines in Italy and planning to deploy 300 machines in the country.
Review of Operations
The 2008 results show excellent growth over the previous year in all areas of the business. As previously announced, the Group has moved to reporting in Euros. Revenues have grown to €111.5 million (2007:€65.7 million), adjusted net profit* was up to €78.6 million (2007: €43.9 million) and adjusted basic earnings per share* was 34.5 € cents (2007: 20.4 € cents). Playtech's casino revenues increased by 68% and its poker revenues increased by 73%. In 2008, 80% of royalty revenues were derived from Europe, 10.7% from Asia, 2.3% from Africa and 7% from the rest of the world.
In 2008 Playtech's poker network, iPoker, became the world's largest poker network** and attracted several additional quality online poker operators such as Mansion and Boyles Sports. In December the iPoker network held the third European Championship of Online Poker ("ECOOP III") which saw over 27,000 players participating for an aggregate of $4.8 million in prize money.
During 2008, the Group undertook a review of its operations and processes. This has resulted in a move from a geographic based operational structure to a process based structure which the Company believes will allow faster delivery of products and services, and as a result a faster time to market. The Group currently employs approximately 800 talented and valued personnel, around the world, the majority of which are focussed on product research and delivery.
(*) Adjusted EBITA and adjusted net profit are calculated after adding back certain items in relation to the investments in CY Foundation Group Limited, AsianLogic Limited, Tribeca, the exchange loss relating to the investment in William Hill Online which are not part of the Group's core business and the employee stock option plan.
(**) www.pokerscout.com
Development
We continue to focus on offering existing and potential licensees the products and tools which will allow them to optimise their ability to grow organically, penetrate new markets and successfully launch new products.
During 2008 the Group fully launched its Asian P2P Games with selected licensees together with an enhanced set of management tools specifically for use with the Asian markets. This will allow the Group to further strengthen its position in Asia through existing and new Asian focused licensees.
We also released a new version of the bingo product, which will provide better player experience and a greater set of management tools to the operators. This is the first phase of a continuing process to develop our bingo product and we expect that additional versions will be released in the second half of 2009.
The Group's live games product offering is being expanded to include a European branded product located in a new live games facility in Riga, Latvia operated by a third party. This facility will have live streaming of local dealers which we expect will widen the appeal of this innovative and popular product offering.
During the year, the Group also launched a flash version of its poker product and is now in the process of rolling it out to all licensees.
As previously announced in our 2008 interim statement, Playtech has established a dedicated new games software development unit which is focused on delivering an increased number of card, table and slots games to its licensees. This has already shown good results with the release of an increased number of new games. A further demonstration of the Group's commitment was the four year exclusive licensing agreement with Paramount Digital Entertainment, as part of which the Group developed exciting new games featuring the well-known Paramount Pictures brand, "Gladiator" for its licensees. The "Gladiator" games are in the process of being released to licensees and we believe they will offer players an exciting and rewarding user experience.
We also continued to make improvements and enhancements to Playtech's world leading back-end system. This enables our licensees to have all the tools they need to maximise their revenues and provide their players with the best possible service.
Regulatory Environment
The Board considers it prudent to monitor and be as close as possible to the regulatory environment in which the Group operates. Accordingly our in-house Legal and Regulatory Department undertakes this on a regular basis and from time to time and where necessary we also seek external legal advice from leading experts in the industry.
Contract Wins
During 2008, the Group signed up 15 new licensees. These included well known names such as Betsson, Genting Stanley Alderney, Vista Global Limited, Poker Plex and Sun Poker as well as those operators who joined Playtech's Italian poker network, SNAI, SISAL Eurobet Italy and COGETECH. On top of this the landmark transaction with William Hill was signed and completed whereby Playtech is to supply William Hill Online with casino, poker and other gaming software products on a phased basis and culminating in an exclusive relationship for casino and poker from 1 January 2010.
Strategy
We will continue with our previous stated strategy of supporting the organic growth of our licensees through additional product developments as well as cross selling to existing licensees, new and existing products and acquiring new licensees in strategic geographic markets with a particular emphasis on regulated markets. Playtech, as a public company, is ideally placed to take advantage of the opportunities that will present themselves as such markets are established. In addition we will also continue to look at acquiring complementary businesses which will enhance the Group's ability to provide a full range of gambling products and services.
Current Trading and Outlook
The year has started positively with average daily overall earnings up by 8% compared to the fourth quarter of 2008. Revenues during the first 11 weeks of 2009 up 2.3% against the average during the fourth quarter of 2008 (excluding revenues from William Hill Online and Playtech's former customer, whose assets were injected into William Hill Online in Q1 09 and in Q4 08, respectively). The average daily income to the Group from the joint venture with William Hill (which is a combination of royalty revenue and a share of the profits of William Hill Online) during the first eight weeks of 2009 is approximately 40% greater than the daily average income Playtech generated from its former customer during the previous quarter. We are very pleased with the way that the integration is working and look forward to a profitable relationship with William Hill in the coming year and beyond.
We are pleased to say that Playtech has a strong pipeline of new potential licensees. New markets are opening up for the Company and operators in existing markets are approaching us to improve their product offering and business potential. Below we outline a number of new and exciting developments in the business.
Regulated markets
We are delighted to be able to announce that the Company had finalised the terms of agreement for Gamenet S.P.A. to join its Italian poker network. Gamenet is owned by CRIGA, the third largest network provider for regulated slot machines in Italy. It is a leader in its core business of New Slot gaming and has a network of over 50,000 machines in approximately 20,000 public domains.
On 16 March 2009 we announced that Playtech had signed a new licence agreement to supply its market leading online casino and poker products to Casino Gran Madrid ("CGM"), one of the largest and most prestigious land based gaming operators in Europe. Under the terms of the licence agreement, Playtech will provide CGM with its casino platform and poker product, through the iPoker network, as the operator launches its online operations.
We continue to make solid progress in other jurisdictions towards adding new countries to our stable of regulated markets. Playtech has been heavily active and has signed a number of MOUs with several leading operators in anticipation of regulatory developments and is encouraged by the progress it is making in the country.
Elsewhere around the world we continue to work industriously towards meeting the requirements of other regulated markets and will provide further updates as new opportunities develop.
Branded games
We recently announced a landmark exclusive multi-year licensing agreement with Marvel Characters B.V., a wholly owned subsidiary of Marvel Entertainment, Inc., to use its motion picture brands. Under the terms of the licensing agreement, Playtech will have the right to use iconic Marvel film brands such as "The Incredible Hulk", "Fantastic Four", "X-Men", "Iron Man" and "Blade", amongst others. We expect that the release of these new games, along with the recent release of the "Gladiator" branded games, will enhance the player's gaming experience, enabling our licensees to offer a wide variety of compelling games.
In a new development we are delighted to be able to announce a major, exclusive multi-year licensing agreement with MGM interactive Inc to use all of its "Rocky" and "Pink Panther" motion picture brands. Playtech will be able to use these brands across all of its gaming products, including casino, poker, bingo; and on all of its platforms - online, mobile and T.V., as well as on stand alone and server-based gaming terminals, via Videobet. The games will be developed to appeal to adult gamers in all age groups and across all geographical territories.
P2P
Another exciting new development which we announce today is our entry into an asset acquisition of sports betting and betting exchange software from Player2Players.
Under the terms of the agreement Player2Players' software will be integrated into Playtech's existing platforms and will be available to Playtech licensees. The important acquisition means that Playtech will now offer to its licensees a full suite of gaming products: casino, poker, bingo, mobile gaming, live gaming, sports betting and land based gaming. Sports betting offers important growth opportunities for Playtech in those regulated jurisdictions where it is permitted and we are confident that our entry into regulated sports betting markets will create new cross-selling opportunities, allow our licensees to diversify their businesses and enable us to attract new licensees.
We are all aware of the general conditions impacting the global economy, however we believe that Playtech's diversified business model and market leading position will enable it to outperform and continue to create value for our shareholders.
Mor Weizer
Chief Executive Officer
Financial and Operational Review
I am pleased to present Playtech's financial results for the year ended 31 December 2008. Once again Playtech has continued to grow from strength to strength both in terms of revenues and profits. The Company's record revenues for 2008 can be attributed to two main factors - the strong organic growth of Playtech's existing licensees and the expansion of Playtech's portfolio through additional licensees.
The number of the Company's licensees targeting the European market increased substantially during 2008 and hence the majority of the Group's revenues and expenses were generated in Euros. With effect from 1 July 2008, the Group has changed its functional currency from United States dollars to Euros. Accordingly, the financial information of the Company and its subsidiaries are prepared in Euro (the measurement currency), which is the currency that best reflects the economic substance of the underlying events and circumstances relevant to the Group. Comparative numbers for all primary statements, the balance sheet and the income statement for the period to 30 June 2008, were converted to Euros based on the EURO:USD rate as at 1 July 2008, being 1.57777.
Total revenues for the year were €111.5 million, representing an increase of 70% on the €65.7 million achieved in 2007. Casino revenues totalled €79.4 million, an increase of 68% from €47.4 million in 2007. Poker revenues for the year totalled €30.1 million, an increase of 73% from the €17.4 million in 2007.
The net profit for the year ended 31 December 2008 amounted to €40.7 million, representing an increase of 55% on the €26.3 million in 2007. This has resulted in the earnings per share ("EPS") for the period being 17.9 cents (based on the weighted average number of shares), compared to 12.3 cents per share in 2007. The diluted EPS for the year ended 31 December 2008 was 17.3 cents compared to 11.7 cents in 2007. The net profit figure was reached after charging various significant charges relating to the investments in CY Foundation Group Limited and AsianLogic Limited, the acquisition of the assets of Tribeca, the employee stock option plan and an exchange loss relating to funds held to finance the acquisition of the Group's 29% interest in William Hill Online.
Adjusted Net profit and adjusted earnings per share
Management believes that the adjusted net profit better presents the underlying results of the Group. Adjusted net profit for the year ended 31 December 2008 totalled €78.6 million (2007: €43.9 million), an increase of 79% over 2007. Adjusted net profit margin in 2008 was 70% compared to 67% in 2007. The adjusted EPS for the year, based on the weighted average number of shares is 34.5 cents, compared to 20.4 cents in the same period in 2007.
| 2008 | 2007 | |
| €000 | €000 | |
| Net profit | 40,691 | 26,307 |
| Loss on disposal of available for sale investment in CY Foundation | - | 415 |
| Decline in fair value of available for sale investment in CY Foundation and AsianLogic | 16,698 | 11,579 |
| Discounting of deferred consideration of Tribeca acquisition | 748 | 1,026 |
| Amortisation of customer list on acquisition of Tribeca | 3,173 | 2,684 |
| Exchange rate differences related to the investment in William Hill Online | 13,126 | - |
| Impairment of software on acquisition of Tribeca | - | 174 |
| Employee stock option expenses | 4,125 | 1,676 |
| Adjusted net profit | 78,561 | 43,861 |
Adjusted net profit margin | 70% | 67% |
Adjusted basic EPS (in Euro cents) | 34.5 | 20.4 |
Adjusted diluted EPS (in Euro cents) | 33.4 | 19.5 |
Adjusted EBITA
EBITA (Earnings Before Interest Taxation and Amortization) is an indicator of the Group's financial performance. Adjusted EBITA is calculated after adding back certain expenses in relation to the investments in CY Foundation Group Limited, AsianLogic Limited, Tribeca,which are not part of the Group's core business and the employee stock option plan. Adjusted EBITA for the year ended 31 December 2008 totalled €73.0 million (2007: €42.0 million), an increase of 74% over 2007. Adjusted EBITA margin in 2008 was 66% compared to 64% in 2007.
| 2008 | 2007 | |
| €000 | €000 | |
| Operating Profit | 47,977 | 24,784 |
| Amortization | 4,234 | 3,362 |
| EBITA | 52,211 | 28,146 |
| Loss on disposal of available for sale investment in CY Foundation | - | 415 |
| Decline in fair value of available for sale investment in CY Foundation and AsianLogic | 16,698 | 11,579 |
| Impairment of software on acquisition of Tribeca | - | 174 |
| Employee stock option expenses | 4,125 | 1,676 |
| Adjusted EBITA | 73,034 | 41,990 |
| Adjusted EBITA margin | 66% | 64% |
M&A activity and Investment in William Hill Online
Following the successful transaction with Tribeca Tables Europe Limited, the Group took the strategic decision to continue to evaluate potential acquisitions that will produce benefits to Playtech and its shareholders.
To enable Playtech to fund such transactions, the Group successfully raised €141 million (?112 million) before expenses of €2.9 million during the first half of the year, by way of a placing of 21,620,946 new ordinary Shares at a price of 520 pence per placing share. The placing shares represented approximately 9.9% of Playtech's issued Ordinary Shares immediately prior to the placing. The proceeds from this transaction were designated for the investment into WH Online, as detailed above.
In October 2008, Playtech entered into an agreement with William Hill PLC (hereinafter "WH"), for the establishment of two new jointly owned entities (hereinafter "WH Online" or "JVCOs"), to facilitate the integration of the online businesses of WH and the businesses and contracts comprising an affiliate marketing business, customer services operation and gaming brands and websites ("the Purchased Assets") which were purchased by Playtech as detailed below. The transaction completed on 30 December 2008.
Immediately prior to the transaction, Playtech acquired from a significant shareholder and other third parties, various online gaming businesses, marketing assets and contracts for a total consideration of US$250 million (€177.7 million) in cash. In consideration for the injection of such Purchased Assets into WH Online, Playtech received a 29% interest in WH Online. Playtech's ownership interest can increase up to 32% depending on certain conditions relating to the integration of the activities. William Hill has an option to acquire Playtech's interest in WH Online on an independent fair value basis, exercisable after four or six years from completion of the transaction (the "Option"). Upon exercise of the Option, Playtech has the right to receive a portion of the proceeds in William Hill shares, not exceeding 10% of William Hill's outstanding share capital at the time of issue.
WH Online has also entered into a software licence agreement with Playtech for a minimum term of five years for the provision of Playtech's online poker and casino gaming software. In addition, Playtech will provide advisory and consultancy services to WH Online.
The consideration for the acquisition was denominated in US dollars. Accordingly the Group held the equivalent amount of the consideration in US dollars currency following the initial agreement of terms in October 2008 until completion of the transaction on 30 December 2008. The strengthening of the Euro against the US dollar during this period resulted in an exchange rate expense in the amount of €13.1 million, which has been reflected in the income statement for the year.
Investment in CY Foundation Group Limited and AsianLogic Limited
In 2007, the Group entered into a 10 year software licence agreement with CY Foundation Group Limited ("Foundation") in conjunction with obtaining Foundation convertible notes and an investment into Foundation shares. In May 2008, the Group converted the convertible notes into shares in Foundation.
In December 2007, the Group entered into a share purchase agreement to acquire shares of AsianLogic Limited ("ALL") and received additional shares in ALL, in conjunction with a new five year term licence agreement.
In accordance with accounting standards the Group evaluated the benefit arising from the above shareholdings and records such benefit as deferred revenues, which are being recognised as revenue over the respective license periods. Deferred revenues of €2.8 million have been recognized as revenue during the year and €21.5 million are included in liabilities and will be released in future periods.
The closing price of Foundation and ALL shares on 31 December 2008 was HK$0.124 (2007: HK$0.65) and ?0.335 (2007: ?1.12) respectively, resulting in a decrease in the value of the investment in Foundation and ALL in the period and a non-cash charge of €9.2 million (2007: €11.6 million) and €7.5 million (2007: € nil) respectively, which has been accounted for in the Group's income statement.
Cash Flow
Cash and cash equivalents as at 31 December 2008 amounted to €31.6 million (2007: €54.9 million), representing 11% (2007: 42%) of the Group's total assets.
During the year 2008, the Group generated €68.7 million from its operating activities (2007: €39.7 million).
The Group's cash usage in investing activities was €197.1 million (2007: €34.6 million), the majority of which was derived from the investment in WH Online transaction, the conclusion of the Tribeca asset deal, capitalised development costs and the acquisition of property, plant and equipment.
Of the €197.1 million spent, approximately 73% was paid to companies related to Playtech's significant shareholder, €14 million was paid to Playtech's former customer and €0.2 million was paid to a third party providing marketing services in consideration for an option to purchase its business for a total cost of €5.4 million.
The Group generated €105 million (2007: cash used of €14.5 million) from financing activities, €141 million of which was from the proceeds of the share placing which was reduced by the €35.9 million paid to shareholders for the final dividend of 2007 (€13.6 million) and the interim dividend for the first half of 2008 (€22.3 million) in accordance with the Group's policy.
Cost of Operations
The Group's ongoing revenues rely on in its investment into research and development which allows the Group to improve its product offering, penetrate new markets, facilitate future organic growth and increase the portfolio of its licensees and thereby gain additional market share and increase revenues
The Group also continues to seek additional strategic acquisitions and investments in joint ventures. Such activities have resulted in an increase in administrative expenses.
Total distribution costs for the year ended 31 December 2008, excluding the above mentioned non-cash charges totalling €7 million (2007: €4.5 million), were €28.4 million (2007: €18.9 million), representing an increase of 50% over 2007. The increase is mainly due to employee related costs. The average number of employees increased by 164, which represents an increase of 32% from the average in 2007. As a result of this increase, additional offices were rented and additional office maintenance and equipment expenses were incurred.
Total administrative expenses, excluding the above mentioned non-cash charges totalling €18 million (2007: €12.7x million), were €10 million (2007: €4.8 million), an increase of 176% over 2007. The increase was mainly due to employee related costs. The average number of administrative employees increased by 33 employees, representing an increase of 75% over 2007. In addition, we experienced increases in other administrative expenses such as legal fees and expenses related to the Group being a public company.
Financial Income and Tax
Cash is generally held in short-term deposits, which generated a financial income of €4.8 million in 2008 compared to €2.4 million in 2007.
The Group is tax registered, managed and controlled from the Isle of Man where the corporate tax rate is set at zero. The Group's subsidiaries are located in different jurisdictions and are operating on a cost plus basis. The subsidiaries are taxed on their residual profit. Tax charges for the 2008 year totalled €0.8 million (2007: €0.5 million), resulting in a 1.8% effective tax rate (2007: 2.0%).
Balance Sheet
Cash and cash equivalents as at 31 December 2008 were €31.6 million (2007: €54.8 million).
The majority of the trade receivables balance as at 31 December 2008 was due to amounts payable by licensees for the month of December 2008.
Intangible assets as at 31 December 2008 totalled €43.1 million (2007: €38.9 million), the majority of which comprised the customer list purchased from Tribeca, goodwill, patent and intellectual property rights and development costs of products such as new slot games, Mahjong, the mobile platform etc.
Available for sale investments totalling €4.9 million (2007: €22.1 million) are due to the equity investments in both Foundation and AsianLogic.
Deferred consideration in the amount of €13.4 million (net of discount of €0.8 million) as at 31 December 2008, represents the present value of the remaining consideration to be paid for the investment in the WH Online transaction.
Investments accounted for using the equity method relate to the investment in WH Online.
Dividend
In October 2008, the Group distributed an interim dividend of 7.6 € cents per share, totalling approximately €22.3 million.
On 18 March 2009, the Board recommended the distribution of dividend of 7.6 € cents per share resulting in approximately €18.1 million. Subject to shareholder approval at the Company's AGM, the final dividend will be paid on 15 May 2009 to the Shareholders and Depositary Interest holders.
Moshe (Shuki) Barak
Chief Financial Officer
AUDITED CONSOLIDATED INCOME STATEMENT
For the year ended 31 December, | |||
2008 | 2007* | ||
Note | €000 | €000 | |
| Revenues | 4 | 111,450 | 65,665 |
| Distribution costs | (35,423) | (23,369) | |
| Administrative expenses | (28,050) | (17,512) | |
(63,473) | (40,881) | ||
| Operating profit before the following items: | 73,034 | 41,990 | |
| Employee stock option expense | 9 | (4,125) | (1,676) |
| Amortization of intangible assets | 11 | (4,234) | (3,362) |
| Impairment of software on acquisition | 12 | - | (174) |
| Decline in fair value of available for sale investments | 14 | (16,698) | (11,579) |
| Loss on disposal of available for sale investment | 14 | - | (415) |
| Total | (25,057) | (17,206) |
| Operating profit | 5 | 47,977 | 24,784 |
| Financing income | 4,839 | 2,411 | |
| Exchange rate differences - other | 2,841 | 750 | |
| Total financing income | 6a | 7,680 | 3,161 |
| Financing cost - discounting of deferred consideration | (748) | (1,026) | |
| Financing cost - other | (330) | (83) | |
| Exchange rate differences - Investments accounted for using equity method | 13 | (13,126) | - |
| Total financing cost | 6b | (14,204) | (1,109) |
| Profit before taxation | 41,453 | 26,836 | |
| Tax expense | 7 | (762) | (529) |
| Profit for the year attributable to the equity holders of the parent | 40,691 | 26,307 | |
| Earnings per share (in Cents) | 8 | ||
| Basic | 17.9 | 12.3 | |
| Diluted | 17.3 | 11.7 |
(*) Details of changes in presentation to the consolidated income statement are given in note 2B.
AUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Additional paid in capital | Available for sale reserve | *Retained earnings | Total | |
€000 | €000 | €000 | €000 | |
| For the year ended 31 December, 2007 | ||||
| Balance at 1 January 2007 | 35,728 | - | 30,712 | 66,440 |
| Changes in equity for the year | ||||
| Adjustments for change in fair value of available for sale investments | - | 196 | - | 196 |
| Profit for the year | - | - | 26,307 | 26,307 |
| Total recognized income and expense for the year | - | 196 | 26,307 | 26,503 |
| Dividend paid | - | - | (17,825) | (17,825) |
| Exercise of options | 3,337 | - | - | 3,337 |
| Employee stock option scheme | - | - | 1,676 | 1,676 |
| Balance at 31 December 2007 | 39,065 | 196 | 40,870 | 80,131 |
| Changes in equity for the year ended 31 December, 2008 | ||||
| Adjustments for change in fair value of available for sale investments | - | (196) | - | (196) |
| Profit for the year | - | - | 40,691 | 40,691 |
| Total recognized income and expense for the year | - | (196) | 40,691 | 40,495 |
| Dividend paid | - | - | (35,893) | (35,893) |
| Public offering proceeds | 140,989 | - | - | 140,989 |
| Share issue costs | (2,874) | - | - | (2,874) |
| Exercise of options | 2,917 | - | - | 2,917 |
| Employee stock option scheme | - | - | 4,441 | 4,441 |
| Balance at 31 December 2008 | 180,097 | - | 50,109 | 230,206 |
(*) Details of reclassifications to the consolidated statement of changes in equity are given in note 2B.
AUDITED CONSOLIDATED BALANCE SHEET
As of 31 December, | |||
2008 | 2007* | ||
Note | €000 | €000 | |
| NON-CURRENT ASSETS | |||
| Property, plant and equipment | 10 | 4,823 | 3,230 |
| Intangible assets | 11 | 43,082 | 38,887 |
| Investments accounted for using equity method | 13 | 181,072 | - |
| Available for sale investments | 14 | 4,887 | - |
| Other non-current assets | 15 | 1,340 | 256 |
235,204 | 42,373 | ||
| CURRENT ASSETS | |||
| Trade receivables | 16 | 10,082 | 7,923 |
| Other receivables | 17 | 2,802 | 3,560 |
| Available for sale investments | 14 | - | 22,086 |
| Cash and cash equivalents | 19 | 31,558 | 54,819 |
44,442 | 88,388 | ||
| TOTAL ASSETS | 279, 646 | 130,761 | |
| EQUITY | |||
| Additional paid in capital | 20 | 180,097 | 39,065 |
| Available for sale reserve | 14 | - | 196 |
| Retained earnings | 50,109 | 40,870 | |
| Equity attributable to equity holders of the parent | 230,206 | 80,131 | |
NON-CURRENT LIABILITIES | |||
| Deferred consideration | 13 | 13,378 | - |
| Deferred revenues | 18,136 | 22,000 | |
| Other non-current liabilities | 184 | 66 | |
| 31,698 | 22,066 | ||
| CURRENT LIABILITIES | |||
| Trade payables | 21 | 7,038 | 3,334 |
| Tax liabilities | 104 | 578 | |
| Deferred revenues | 3,352 | 3,119 | |
| Other accounts payables | 22 | 7,248 | 21,533 |
| 17,742 | 28,564 | ||
| TOTAL EQUITY AND LIABILITIES | 279,646 | 130,761 | |
(*) Details of changes in presentation to the consolidated balance sheet are given in note 2B. | |||
The financial statements were approved by the board and authorized for issue on 19 March, 2009
Mor Weizer | Shuki (Moshe) Barak |
Chief Executive Officer | Chief Financial Officer |
AUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December, | |||
2008 | 2007* | ||
Note | €000 | €000 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Profit before tax | 41,453 | 26,836 | |
| Tax | (762) | (529) | |
| Adjustments to reconcile net income to net cash provided by operating activities (see below) | 28,051 | 13,367 | |
| Net cash provided by operating activities | 68,742 | 39,674 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | |||
| Long term deposits | (391) | (176) | |
| Long term loan | (692) | - | |
| Acquisition of property, plant and equipment | (3,389) | (1,661) | |
| Proceeds from sale of property, plant and equipment | - | 22 | |
| Proceeds from sale of available for sale investments | 311 | - | |
| Investments accounted for using equity method | 13 | (165,376) | - |
| Acquisition of intangible assets | (1,925) | (1,061) | |
| Acquisition of business | 12 | (19,542) | (17,454) |
| Investment in available for sale equity shareholding | 14 | - | (12,035) |
| Capitalized development costs | 11 | (6,138) | (2,272) |
| Net cash used in investing activities | (197,142) | (34,637) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | |||
| Dividends paid | (35,893) | (17,825) | |
| Public offering proceeds | 140,989 | - | |
| Share issue costs | (2,874) | - | |
| Exercise of options | 2,917 | 3,337 | |
| Net cash/(used in) provided by financing activities | 105,139 | (14,488) | |
| DECREASE IN CASH AND CASH EQUIVALENTS | (23,261) | (9,451) | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 54,819 | 64,270 | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | 19 | 31,558 | 54,819 |
(*) Details of changes in presentation to the consolidated statement of cashflows are given in note 2B.
For the year ended 31 December, | |||
2008 | 2007 | ||
Note | €000 | €000 | |
| ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | |||
| Income and expenses not affecting operating cash flows: | |||
| Depreciation | 10 | 1,678 | 1,057 |
| Amortization | 11 | 4,234 | 3,362 |
| Impairment loss | 12 | - | 174 |
| Decline in fair value of available for sale investment | 14a | 16,698 | 11,579 |
| Loss on disposal on available for sale investment | 14a | - | 415 |
| Employee stock option plan expenses | 9 | 4,125 | 1,676 |
| Others | (6) | 32 | |
| Changes in operating assets and liabilities: | |||
| Increase in trade receivables | (2,159) | (3,957) | |
| Decrease in other receivables | 758 | (371) | |
| Increase/(decrease) in trade payables | 3,840 | (395) | |
| Increase in other payables | 2,514 | 687 | |
| Decrease in deferred revenues | (3,631) | (892) | |
28,051 | 13,367 | ||
NON-CASH TRANSACTIONS
For the year ended 31 December, | |||
2008 | 2007 | ||
Note | €000 | €000 | |
| Intangible assets | 9,12 | (316) | (19,491) |
| Other payables- deferred consideration | 12 | - | 19,473 |
| Trade payables | - | 136 | |
| Investments | 14 | - | (22,043) |
| Property, plant and equipment- accrued costs | - | (118) | |
| Trade receivables- deferred payment | 14 | - | (2,377) |
| Deferred revenues | 14 | - | 24,224 |
| Available for sale reserve | 14 | - | 196 |
| Retained earnings | 9 | 316 | - |
NOTE 1 - GENERAL
Playtech Limited (the "Company") was incorporated in the British Virgin Islands on 12 September, 2002 as an offshore company with limited liability.
Playtech and its subsidiaries (the "Group") develop unified software platforms for the online and land based gambling industry, targeting online and land based operators. Playtech's gaming applications - online casino, poker and other P2P games, bingo, mobile, live gaming, land-based kiosk networks, land based terminal and fixed-odds games - are fully inter-compatible and can be freely incorporated as stand-alone applications, accessed and funded by the operators' players through the same user account and managed by the operator by means of a single powerful management interface.
Except as described below, the full year results are prepared on the basis of the accounting policies stated in the Group's Annual Report 2007. The financial information does not constitute the Group's financial statements for the year ended 31 December 2008 or 31 December 2007, but is derived from those financial statements.
The audit report for both 2007 and 2008, without qualifying the opinion therein, draws attention to issues set out in note 25 to the financial information on contingent liabilities.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the financial information, on a consistent basis, are:
A. Accounting principles
This financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the European Union ("adopted IFRSs"). In the current year the Group has adopted all of the new and revised standards and interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting periods beginning on 1 January 2008.
Changes in accounting policies
The adoption of the following new and revised standards and interpretations has not resulted in any significant changes to the Group's accounting policies nor have they had a material effect on the amounts reported for the current or prior years.
IFRIC 11, IFRS 2 - Group and Treasury Share Transactions (effective for accounting periods beginning on or after 1 March 2007). IFRIC 11 requires share-based payment transactions in which an entity receives services as consideration for its own equity instruments to be accounted for as equity-settled. This applies regardless of whether the entity chooses or is required to buy those equity instruments from another party to satisfy its obligations to its employees under the share-based payment arrangement. It also applies regardless of whether: (a) the employee's rights to the entity's equity instruments were granted by the entity itself or by its shareholder(s); or (b) the share-based payment arrangement was settled by the entity itself or by its shareholder(s).
Standards, amendments and interpretations not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods and which the Group has decided not to adopt early. These are:
IFRS 8, Operating Segments (effective for accounting periods beginning on or after 1 January 2009). This standard sets out requirements for the disclosure of information about an entity's operating segments and also about the entity's products and services, the geographical areas in which it operates, and its major customers. It replaces IAS 14, Segmental Reporting whereby the current prescriptive approach will be replaced by a management approach based on the information reviewed by the 'chief operating decision maker'. The Group will apply this standard in the accounting period beginning on 1 January 2009. As this is a disclosure standard it will not have any impact on the results or net assets of the Group.
IAS 1, Presentation of Financial Statements (effective for accounting periods beginning on or after 1 January 2009). This is a comprehensive revision to the presentation of accounts. Key changes in the revised version of IAS 1 include: the requirement to aggregate information in the financial statements on the basis of shared characteristics; changes in the titles of some primary statements (non mandatory); introducing the requirement for a single Statement of Comprehensive income (combining the Income Statement and the Statement of Recognized Income and Expense); only the total of comprehensive income is to be shown in the Statement of Changes in equity. Management is currently assessing the impact of the Amendment on the accounts, but the effect is presentational and will not change the Group's result. As this is a disclosure standard it will not have any impact on the results or net assets of the Group.
IAS 23, Borrowing Costs (revised) (effective for accounting periods beginning on or after 1 January 2009). The main change from the previous version is the removal of the option of immediately recognizing as an expense borrowing costs that relate to qualifying assets, broadly being assets that take a substantial period of time to get ready for use or sale. IAS 23 is currently not relevant to the Group's operations due to the absence of such borrowing costs.
IAS 32, Financial Instruments: Presentation and associated amendment to IAS 1 (effective for accounting periods beginning on or after 1 January 2009). These amendments are still to be endorsed by the EU but are expected to be applicable for the Group's 2009 year end. These amendments relate to the disclosure of puttable instruments and obligations arising on liquidation and may result in certain financial instruments that have the characteristics of a liability but represent a residual interest in an entity being classified as equity. Currently management consider the Amendments will have little impact on the accounts.
IFRIC 13, Customer Loyalty Programs (effective for accounting periods beginning on or after 1 July 2008). IFRIC 13 addresses sales transactions in which the entities grant their customers award credits that, subject to meeting any further qualifying conditions, the customers can redeem in future for free or discounted goods or services. Management is currently assessing the impact of IFRIC 13 on the accounts.
Revised IFRS 3, Business Combinations and complementary Amendments to IAS 27, Consolidated and separate financial statements (both effective for accounting periods beginning on or after 1 July 2009). This revised standard and amendments are still to be endorsed by the EU. The revised IFRS 3 and amendments to IAS 27 arise from a joint project with the Financial Accounting Standards Board (FASB), the US standards setter, and result in IFRS being largely converged with the related, recently issued, US requirements.
There are certain very significant changes to the requirements of IFRS, and options available, in accounting for future business combinations, in particular all legal and professional fees are expensed immediately, and losses are attributed to non-controlling interests even if this results in a minority interest in net liabilities. No restatement of past business combinations is required. Management is currently assessing the impact of revised IFRS 3 and amendments to IAS 27 on the accounts.
Amendment to IFRS 2, Share-based payments: vesting conditions and cancellations (effective for accounting periods beginning on or after 1 January 2009). The Amendment to IFRS 2 is of particular relevance to companies that operate employee share save schemes. This is because it results in an immediate acceleration of the IFRS 2 expense that would otherwise have been recognized in future periods should an employee decide to stop contributing to the savings plan, as well as a potential revision to the fair value of the awards granted to factor in the probability of employees withdrawing from such a plan. Currently management consider the Amendment will have little impact on the accounts.
Improvements to IFRS (effective for accounting periods beginning on or after 1 January 2009). This improvements project is still to be endorsed by the EU but is expected to be applicable for the Group's 2009 year end. The 35 amendments take various forms, including the clarification of the requirements of IFRS and the elimination of inconsistencies between Standards. Management is currently assessing the full impact of the Amendment on the accounts, but those aspects that may be applicable are listed below:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - where a Group plans to sell its controlling interest in a subsidiary, but retain a non-controlling interest, then that subsidiary's assets and liabilities are classified as "held for sale" if these items meet the other criteria of IFRS 5;
IAS 1 Presentation of financial statements - Financial assets classified as held for trading are not automatically presented as current assets or liabilities;
IAS 16 Property, plant and equipment - Assets previously held for rental that are routinely sold at the end of their rental life are transferred to inventories prior to sale. Sale proceeds are recognized as revenue. IFRS 5 does not apply;
IAS 36 Impairment of assets - when discounted cash flows are used to assess the recoverable amounts of assets of cash generating units containing goodwill or other indefinite life assets, disclosure is required of the period covered by the cash flows, the growth rate used and discount rates applied;
IAS 38 Intangible Assets - Prepayments for promotional goods and services are only allowed to the point that the entity has right of access to the goods or receives the services. Thereafter these costs are expensed;
IAS 39 Financial Instruments: Recognition and Measurement - outlines circumstances in which items might be moved into or out of 'fair value through profit or loss' without being considered a reclassification.
IFRIC 17 Distributions of Non-cash Assets to Owners (effective for accounting periods beginning on or after 1 July 2009). IFRIC 17 is still to be endorsed by the EU. This IFRIC addresses distributions of non-cash assets to owners and clarifies that:
(a) A dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity.
(b) An entity should measure the dividend payable at the fair value of the net assets to be distributed.
(c) An entity should recognize the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss.
It does not have retrospective application.
The Group does not consider that any other standards or interpretations issued by the IASB, but not yet applicable, will have a significant impact on the financial statements.
B. Changes in presentation
B1. Changes in functional currency
During the second half of 2008, the majority of the Group's revenues and expenses were generated in Euros. With effect from 1 July 2008, the Group has changed it functional currency from United States dollars to Euros .Therefore, the financial information of the Company and its subsidiaries are prepared in Euro (the measurement currency), which is the currency that best reflects the economic substance of the underlying events and circumstances relevant to the Group.
Comparative numbers for all primary statements, the balance sheet and the income statement for the period to 30 June 2008, were converted to Euros based on the EURO:USD rate as at 1 July 2008, being 1.57777
Starting from 1 July 2008 all subsidiaries of the Group are reporting in the Euro currency in line with the Group policy.
Foreign currency
Transactions and balances in foreign currencies are converted into Euro in accordance with the principles set forth by International Accounting Standard (IAS) 21 ("The Effects of Changes in Foreign Exchange Rates"). Accordingly, transactions and balances have been converted as follows:
Monetary assets and liabilities - at the rate of exchange applicable at the balance sheet date; Income and expense items - at exchange rates applicable as of the date of recognition of those items. Non-monetary items are converted at the rate of exchange used to convert the related balance sheet items i.e. at the time of the transaction. Exchange gains and losses from the aforementioned conversion are recognized in the income statement.
B2. Changes in income statement
During the second half of 2008,management has decided to allocate its expenses presentation on the face of the income statement to comply with the Group's internal measurement of its business. The previously presented operating expenses, development costs and marketing expenses were combined to "Distribution costs" while administrative expenses remained as presented before.
B3. Reclassification
In 2008, the employee stock options reserve was reclassified to retained earnings.
C. Basis of consolidation
Where the Company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial information present the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.
D. Share capital
Ordinary shares are classified as equity and are stated at the proceeds received net of direct issue costs.
E. Dividend distribution
Final dividends are recorded in the Group's financial statements in the period in which they are approved by the Group's shareholders. Interim dividends are recognized when paid.
F. Provisions
Provisions, which are liabilities of uncertain timing or amount, are recognized when the Group has a present obligation as a result of past events, if it is probable that an outflow of funds will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.
G. Property, plant and equipment
Property, plant and equipment comprise computers, leasehold improvements, office furniture and equipment, and motor vehicles and are stated at cost less accumulated depreciation. Carrying amounts are reviewed on each balance sheet date for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.
Depreciation is calculated to write off the cost of fixed assets on a straight line basis over the expected useful lives of the assets concerned. The principal annual rates used for this purpose, which are consistent with those of the previous years, are:
| % | |
| Computers | 33.33 |
| Office furniture and equipment | 7.00 |
| Leasehold improvements | 10.00 |
| Motor vehicles | 15 |
Subsequent expenditures are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they incurred.
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement.
H. Long term liabilities
Long term liabilities are those liabilities that are due for repayment or settlement in more than twelve months from balance sheet date.
I. Revenue recognition
Royalty income receivable from contracting parties comprises a percentage of the revenue generated by the contracting party from use of the Group's intellectual property in online gaming activities and is recognized in the accounting periods in which the gaming transactions occur. Royalty and other income receivable under fixed-term arrangements are recognized over the term of the agreement on a straight line basis.
J. Distribution costs
Distribution costs represent the direct costs of the function of providing services to customers, costs of the development function and advertising costs.
K. Intangible assets
Intangible assets comprise externally acquired patents, domains, and customer lists. Intangible assets also include internally generated capitalized software development costs. All such intangible assets are stated at cost less accumulated amortization. Where intangible assets are acquired as part of a business combination they are recorded initially at their fair value. Carrying amounts are reviewed on each balance sheet date for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount.
Amortization is calculated using the straight-line method at annual rates estimated to write off the costs of the assets over their expected useful lives and is charged to operating expenses from the point the asset is brought into use. The principal annual rates used for this purpose, which are consistent with those of the previous years, are:
| % | |
| Domain names | Nil |
| Internally generated capitalized development costs | 33.33 |
| Technology IP | 33.33 |
| Customer list | 12.5 |
| Patents | Over the expected useful lives 10-33 |
Intangible assets identified under the investment accounted for using equity method
| % | |
| Software | 10 |
| Customer relationships | 71 |
| Affiliate contracts | 52 |
| WH Brands | 7 |
| Purchased assets brands | 10 |
| Covenant not to compete | 20 |
Management believes that the useful life of the domain names is indefinite. Domain names are reviewed for impairment annually.
Expenditure incurred on development activities including the Group's software development is capitalized only where the expenditure will lead to new or substantially improved products, the products are technically and commercially feasible and the Group has sufficient resources to complete development.
Subsequent expenditure on capitalized intangible assets is capitalized only where it clearly increases the economic benefits to be derived from the asset to which it relates. All other expenditure, including that incurred in order to maintain an intangible assets current level of performance, is expensed as incurred.
L. Income taxes
Provision for income taxes is calculated in accordance with the tax legislations and applicable tax rates in force at the balance sheet date in the countries in which the Group companies have been incorporated. Deferred tax is not material to the Group's operations.
M. Share-based payments
Certain employees participate in the Group's share option plan which commenced with effect from 1 December 2005. The fair value of the options granted is charged to the Income Statement on a straight line basis over the vesting period and the credit is taken to equity, based on the Group's estimate of shares that will eventually vest. Fair value is determined by the BlackScholes valuation model. The share options plan does not have any performance conditions other than continued service.
N. Business combinations
The consolidated financial information incorporate the results of business combinations using the purchase method. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognized at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained.
O. Goodwill
Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Cost comprises the fair values of assets given, liabilities assumed and equity instruments issued, plus any direct costs of acquisition. Goodwill is capitalized as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Goodwill is not amortized and is reviewed for impairment, annually or more specifically if events or changes in circumstances indicate that the carrying value may be impaired.
P. Impairment
Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually at the financial year end. Other non-financial assets are subject to annual 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 establish 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). Goodwill is allocated on initial recognition to each of the group's cash generating units that are expected to benefit from the synergies of the combination giving rise to the goodwill.
Impairment charges are included in the administrative expenses line item in the consolidated income statement, except to the extent they reverse gains previously recognized in the consolidated statement of recognized income and expense. An impairment loss recognized for goodwill is not reversed.
Q. Associates
Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recognized in the consolidated balance sheet at their fair value. The Group's share of post-acquisition profits and losses is recognized in the consolidated income statement, except that losses in excess of the Group's investment in the associate are not recognized unless there is an obligation to make good those losses.
Profits and losses arising on transactions between the Group and its associates are recognized only to the extent of unrelated investors' interests in the associate. The investor's share in the associate's profits and losses resulting from these transactions is eliminated against the carrying value of the associate.
Any premium paid for an associate above the fair value of the Group's share of the identifiable assets, liabilities and contingent liabilities acquired is capitalized as goodwill and included in the carrying amount of the associate. The carrying amount of investment in associate is subject to impairment in the same way as goodwill arising on a business combination described above.
R. Financial assets
The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group has not classified any of its financial assets as held to maturity.
Receivables
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary asset. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortized cost using the effective interest rate method, less provision for impairment.
The Group's receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet.
Trade receivables which principally represent amounts due from licensees are carried at original invoice value less an estimate made for bad and doubtful debts based on a review of all outstanding amounts at the year-end. An estimate for doubtful debts is made when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of receivables. Bad debts are written off when identified.
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short term highly liquid investments with original maturities of three months or less.
Available-for-sale financial assets
Non-derivative financial assets classified as available-for-sale comprise the Group's strategic investments in entities not qualifying as subsidiaries, associates or jointly controlled entities. They are carried at fair value with changes in fair value recognized directly in equity. In accordance with IAS 39, a significant or prolonged decline in the fair value of an available-for-sale financial asset is recognized in the income statement.
Purchases and sales of available for sale financial assets are recognized on settlement date with any change in fair value between trade date and settlement date being recognized in the available for sale reserve. On sale, the amount held in the available for sale reserve associated with that asset is removed from equity and recognized in the income statement.
R. Financial liabilities
Trade payables and other short-term monetary liabilities are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method.
NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The areas requiring the use of estimates and critical judgments that may potentially have a significant impact on the Group's earnings and financial position are impairment of goodwill, the recognition and amortization of development costs and the useful life of property, plant and equipment, the fair value of financial instruments, share based payments, legal proceedings and contingent liabilities, determination of fair values of intangible assets acquired in business combinations and income tax.
Estimates and assumptions
A. Impairment of goodwill
The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Such estimates are based on management's experience of the business, but actual outcomes may vary.
B. Recognition and amortization of development cost and other intangible assets and the useful life of property, plant and equipment
Intangible assets and property, plant and equipment are amortized or depreciated over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the amounts charged to the consolidated income statement in specific periods. More details including carrying values are included in notes 10 and 11.
C. Fair value of financial instruments
The Group determines the fair value of financial instruments that are not quoted using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates for future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately.
D. Share based payments
The Group has a share based remuneration scheme for employees. The fair value of share options is estimated by using the Black-Scholes model, on the date of grant based on certain assumptions. Those assumptions are described in note 9 and include, among others, the dividend growth rate, expected share price volatility, expected life of the options and number of options expected to vest. During 2008 the Group has reassessed the fair value of the options granted, in order to provide reliable and more relevant information by taking into account historical forfeiture rates, relevant risk free interest rates and re-measurement of volatility per each grant.
E. Legal proceedings and contingent liabilities
Management regularly monitors the key risks affecting the Group, including the regulatory environment in which the Group operates. Provision will be made if it is probable that there will be an outflow of economic benefit. More details are included in note 25.
F. Determination of fair value of intangible assets acquired
The fair value of the intangible assets acquired is based on the discounted cash flows expected to be derived from the use of the asset.
G. Income taxes
The Group is subject to income tax in two jurisdictions and judgment is required in determining the provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Group recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. The Group believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. More details including carrying values are included in note 7.
The preparation of financial information in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial information and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates.
NOTE 4 - SEGMENT INFORMATION
The directors consider that the Group has one business segment. Segmentation by geographical regions is made according to the jurisdiction of the gaming license of the licensee. This does not reflect the region of the end users of the Group's licensees whose locations are worldwide.
Revenues are derived from the following geographic regions:
31 December, | ||
2008 | 2007 | |
| €000 | €000 | |
| Canada | 52,983 | 33,637 |
| Philippines | 4,501 | 5,683 |
| Curacao and Antigua | 28,884 | 14,143 |
| Rest of World | 25,082 | 12,202 |
| 111,450 | 65,665 | |
Revenues are derived from the following products:
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Casino | 79,396 | 47,371 |
| Poker | 30,073 | 17,392 |
| Other | 1,981 | 902 |
111,450 | 65,665 | |
The assets, liabilities and capital additions of the Group arise in the following countries:
December 31, | ||
2008 | 2007 | |
Assets €000 | Assets €000 | |
| Estonia | 3,018 | 3,001 |
| Israel | 2,409 | 987 |
| Philippines | 586 | 331 |
| Isle of Man | 370 | 340 |
| Bulgaria | 364 | 334 |
| Cyprus | 1,295 | - |
| India | 719 | - |
| British Virgin Islands | 270,885 | 125,768 |
279,646 | 130,761 | |
December 31, | ||
2008 | 2007 | |
Liabilities €000 | Liabilities €000 | |
| Estonia | 358 | 514 |
| Israel | 1,054 | 774 |
| Philippines | 49 | 2 |
| Isle of Man | 74 | 61 |
| Bulgaria | 42 | 90 |
| Cyprus | 81 | - |
| India | 57 | - |
| British Virgin Islands | 47,725 | 49,189 |
49,440 | 50,630 | |
December 31, | ||
2008 | 2007 | |
Capital additions €000 | Capital additions €000 | |
| Estonia | 1,212 | 850 |
| Israel | 323 | 206 |
| Philippines | 265 | 61 |
| Isle of Man | 7 | 8 |
| Bulgaria | 163 | 143 |
| Cyprus | 281 | - |
| India | 383 | - |
| British Virgin Islands | 9,066 | 40,789 |
11,700 | 42,057 | |
NOTE 5 - OPERATING PROFIT
Operating profit is stated after charging:
For the year ended 31 December, | ||
2008 | 2007 | |
| Directors compensation | €000 | €000 |
| Short term benefits of directors | 1,596 | 1,107 |
| Share based benefits of directors | 1,130 | 650 |
| Bonuses to executive directors | 484 | 326 |
3,210 | 2,083 | |
For the year ended 31 December, | ||
2008 | 2007 | |
| Auditor's remuneration | €000
| €000
|
| Audit services | ||
| Parent company and Group audit | 168 | 125 |
| Audit of overseas subsidiaries | 46 | 23 |
| Total audit | 214 | 148 |
| Non-audit services | ||
| Other acquisition and assurance services | 324 | 119 |
| 538 | 267 | |
For the year ended 31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Development costs | 5,255 | 2,384 |
NOTE 6 - FINANCING INCOME AND COSTS
For the year ended 31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| A. Finance income | ||
| Bank interest received | 4,676 | 2,411 |
| Dividend received from available for sale investments | 163 | - |
| Exchange differences | 2,841 | 750 |
7,680 | 3,161 | |
| B. Finance cost | ||
| Interest paid | - | (13) |
| Finance cost- discounting of deferred consideration | (748) | (1,026) |
| Exchange rate differences - Investments accounted for using equity method (note 13) | (13,126) | - |
| Bank charges | (330) | (70) |
(14,204) | (1,109) | |
| Net financing (expense)/income | (6,524) | 2,052 |
NOTE 7 - TAXATION
For the year ended 31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Current income tax | ||
| Income tax on profits of subsidiary operations | 762 | 328 |
| Provision for prior periods | - | 201 |
| Total tax charge | 762 | 529 |
The majority of profits arise in the British Virgin Islands. No tax is assessed in the British Virgin Islands, the Company's country of incorporation. The tax charge shown above arises from the different tax rates applied in subsidiaries jurisdictions.
The Group is tax registered, managed and controlled from the Isle of Man where the corporate tax rate is set at zero. The Group's subsidiaries are located in different jurisdictions and are operating on a cost plus basis. The subsidiaries are taxed on their residual profit.
NOTE 8 - EARNINGS PER SHARE
A. Earnings per share have been calculated using the weighted average number of shares in issue during the relevant financial periods. The weighted average number of equity shares in issue and the earnings, being profit after tax is as follows:
For the year ended 31 December, | ||
2008 | 2007 | |
In euro cents | In euro cents | |
| Basic | 17.9 | 12.3 |
| Diluted | 17.3 | 11.7 |
€000 | €000 | |
| Profit for the year | 40,691 | 26,307 |
| Number | Number | |
| Denominator - basic | ||
| Weighted average number of equity shares | 227,696,037 | 214,715,335 |
| Denominator - Diluted | ||
| Weighted average number of equity shares | 227,696,037 | 214,715,335 |
| Weighted average number of option shares | 7,413,260 | 10,476,036 |
| Weighted average number of shares | 235,109,297 | 225,191,371 |
B. Adjusted earnings per share
The adjusted earnings per share present the profit for the year before certain significant expenses included in the income statement, being the decline in fair value of available for sale investments, the loss on disposal on available for sale investment, the impairment of software on acquisition, the amortization of the customer list on acquisition, the finance cost on discounting of deferred consideration, the employee stock option expense and the exchange rate differences related to the investment in associates using the equity method, as the directors believe that the adjusted profit represents more closely the underlying trading performance of the business.
| For the year ended December 31 | |||
| 2008 | 2007 | ||
| In cents | In cents | ||
| Basic - adjusted | 34.5 | 20.4 | |
| Diluted - adjusted | 33.4 | 19.5 | |
| €000 | €000 | ||
| Profit for the year | 40,691 | 26,307 | |
| Decline in fair value of available for sale investments | 16,698 | 11,579 | |
| Loss on disposal of available for sale investment | - | 415 | |
| Impairment of software on acquisition | - | 174 | |
| Amortization on acquisition | 3,173 | 2,684 | |
| Finance cost on discounting of deferred consideration | 748 | 1,026 | |
| Employee stock option expense | 4,125 | 1,676 | |
| Exchange differences - Investments accounted for using equity method | 13,126 | - | |
| Adjusted profit for the year | 78,561 | 43,861 | |
The loss on disposal of the available for sale investment and the impairment of software on acquisition, whilst not individually material, have been included above as they are linked to larger transactions (see note 12 and 14). | |||
| Number | Number | ||
| Denominator - basic | |||
| Weighted average number of equity shares | 227,696,037 | 214,715,335 | |
| Denominator - diluted | |||
| Weighted average number of equity shares | 227,696,037 | 214,715,335 | |
| Weighted average number of option shares | 7,413,260 | 10,476,036 | |
| Weighted average number of shares | 235,109,297 | 225,191,371 | |
NOTE 9- EMPLOYEE BENEFITS
Total staff costs comprise the following:
31 December, | |||
2008 | 2007 | ||
€000 | €000 | ||
| Salaries and wages costs | 24,212 | 13,501 | |
| Employee stock option costs | 4,441 | 1,676 | |
28,653 | 15,177 | ||
31 December, | |||
2008 | 2007 | ||
Number | Number | ||
Average Number of employees | |||
Distribution | 674 | 503 | |
General and administration | 77 | 43 | |
751 | 546 | ||
The Group has an employee share option plan ("ESOP") for the granting of non transferable options to certain employees. Options granted under the plan vest on the first day on which they become exercisable which is typically between one to four years after grant date. The overall term of the ESOP is five years. These options are settled in equity once exercised. Option prices are either denominated in USD or GBP, depending on the option grant terms.
At 31 December 2008, options under this scheme were outstanding over:
2008 | 2007 | |
Number | Number | |
| Shares vested on 30 November 2008 at an exercise price of $2.5 per share | 1,823,127 | 2,844,977 |
| Shares fully vested on 30 November 2008 at an exercise price of $4.00 per share | 66,668 | 66,668 |
| Shares vesting on 6 February 2009 at an exercise price of $4.50 per share | 1,000,000 | 1,000,000 |
| Shares vesting between 1 December 2006 and 6 February 2009 at an exercise price of $4.50 per share | 1,279,712 | 1,603,667 |
| Shares vesting between 1 December 2006 and 1 December 2009 at an exercise price of $4.00 per share | 200,000 | 200,000 |
| Shares vesting between 28 March 2007 and 28 March 2009 at an exercise price of £2.57 per share | 200,000 | 200,000 |
| Shares vesting between 21 June 2007 and 21 June 2009 at an exercise price of $5.75 per share | 148,220 | 263,034 |
| Shares vesting between 11 October 2007 and 11 October 2009 at an exercise price of $3.24 per share | 900,000 | 900,000 |
| Shares vesting between 11 December 2007 and 11 December 2009 at an exercise price of $4.35 per share | 990,805 | 1,127,500 |
| Shares vesting between 31 December 2007 and 31 October 2010 at an exercise price of $7.48 per share | 550,000 | 550,000 |
| Shares vesting between 16 May 2008 and 16 May 2010 at an exercise price of $7.50 per share | 1,413,000 | 1,453,000 |
| Shares vesting between 18 June 2008 and 18 June 2010 at an exercise price of $7.79 per share | 372,327 | 543,400 |
| Shares vesting between 13 August 2008 and 13 August 2010 at an exercise price of $6.19 per share | - | 40,000 |
| Shares vesting between 18 June 2008 and 18 June 2010 at an exercise price of $6.63 per share | 10,000 | 10,000 |
| Shares vesting between 3 October 2008 and 3 October 2011 at an exercise price of $6.90 per share | 300,000 | 300,000 |
| Shares vesting between 10 October 2008 and 10 October 2011 at an exercise price of $7.12 per share | 350,000 | 350,000 |
| Shares vesting between 20 November 2008 and 20 November 2011 at an exercise price of $7.19 per share | 230,000 | 250,000 |
| Shares vesting between 31 December 2008 and 31 December 2010 at an exercise price of $7.68 per share | 86,000 | 92,000 |
| Shares vesting between 25 April 2009 and 25 April 2012 at an exercise price of $8.61 per share | 1,010,000 | - |
| Shares vesting between 21 May 2009 and 21 May 2012 at an exercise price of $10.54 per share | 500,000 | - |
| Shares vesting between 28 November 2009 and 28 November 2012 at an exercise price of £3.20 per share | 2,035,345 | - |
| Shares vesting between 31 December 2008 and 31 December 2011 at an exercise price of £3.1725 per share | 200,000 | - |
| 13,665,204 | 11,794,246 |
Total number of shares exercisable as of 31 December is 6,964,611 and 4,665,385 for 2008 and 2007 respectively.
The fair value of the options that were granted in respect of equity settled schemes for 2008 is €4.4m (2007 - €1,7m). During 2008, €4.1m (2007 - €1.7m) has been recognized as an expense in the income statement and €0.3m (2007 - €nil) has been capitalized as part of development costs.
The following table illustrates the number and weighted average exercise prices of shares options for the ESOP.
31 December, | 31 December, | |||
2008 | 2007 | 2008 | 2007 | |
Number of options | Number of options | Weighted average exercise price | Weighted average exercise price | |
| Outstanding at the beginning of the year | 11,794,246 | 10,096,737 | $4.82, £2.57 | $
3.49, £2.57 |
| Granted during the year | 3,745,893 | 3,588,400 | $9.25, £3.2 | $7.42 |
| Forfeited | (573,845) | (70,334) | $5.01, £3.2 | $4.82 |
| Exercised | (1,301,090) | (1,820,557) | $3.43 | $2.81 |
| Outstanding at the end of the year | 13,665,204 | 11,794,246 | $5.56, £3.15 | $4.82, £2.57 |
The weighted average share price at the date of exercise of options was £4.36 and £3.53 in 2008 and 2007 respectively.
The weighted average fair value of options granted during the year at the date of grant was £3.80 and £3.72 in 2008 and 2007 respectively.
Share options outstanding at the end of the year have the following exercise prices:
Expiry date | Exercise price | 2008 | 2007 |
| Number | Number | ||
| December 1 2010 | Between $2.5 and $4.5 | 2,889,795 | 3,911,645 |
| Between 6 February 2011 and 11 December 2011 | Between $3.24 and $5.75 | 3,718,737 | 4,294,201 |
| Between 15 May 2012 and 31 December 2012 | Between $6.19 and $7.79 | 3,311,327 | 3,588,400 |
| Between 25 April 2013 and 31 December 2013 | Between $8.61 and $10.54 and between £3.1725 and £3.2 | 3,745,345 | - |
13,665,204 | 11,794,246 |
The fair value of the options granted under the ESOP is estimated as at the date of grant using the Black-Scholes model. The following table gives the assumptions made during the years ended 31 December 2007 and 2008:
| For options granted on 15 May 2007, 16 May 2007, 18 June 2007, 13 August 2007, 26 September 2007, 3 October 2007, 10 October 2007, 20 November 2007 and 31 December 2007
| |
| Dividend yield (%) | 2% |
| Expected volatility (%) | 4.69% to 39.25% |
| Risk free interest rate (%) | 3.07% to 5.07% |
| Expected life of options (years) | 2.82 to 4.5 |
| Weighted average exercise price | $7.42 |
| For options granted on 25 April 2008, 21 May 2008, 28 November 2008 and 31 December 2008 | |
| Dividend yield (%) | 2% |
| Expected volatility (%) | 43.21 to 52.58% |
| Risk free interest rate (%) | 2.64% to 3.26% |
| Expected life of options (years) | 3 to 4.5 |
| Weighted average exercise price | $9.25, £3.20 |
The volatility assumption, measured at the standard deviation of expected share price return, is based on a statistical analysis of daily share price over a period starting from the initial date of flotation through to the grant date.
NOTE 10 -PROPERTY, PLANT AND EQUIPMENT
Computers | Office furniture and equipment | Motor vehicles | Leasehold improvements | Total | |
€000 | €000 | €000 | €000 | €000 | |
| Cost - | |||||
| As of 1 January, 2007 | 2,162 | 248 | 96 | 165 | 2,671 |
| Additions | 1,552 | 146 | - | 81 | 1,779 |
| Assets acquired on business combinations (note 12) | 490 | 110 | - | 15 | 615 |
| Disposals | (3) | - | (20) | - | (23) |
| As of 31 December, 2007 | 4,201 | 504 | 76 | 261 | 5,042 |
| Accumulated depreciation- | |||||
| As of 1 January, 2007 | 724 | 21 | 7 | 8 | 760 |
| Charge | 941 | 58 | 15 | 43 | 1,057 |
| Disposals | (1) | - | (4 ) | - | (5) |
| As of 31 December, 2007 | 1,664 | 79 | 18 | 51 | 1,812 |
| Net Book Value - | |||||
| As of 31 December, 2007 | 2,537 | 425 | 58 | 210 | 3,230 |
Computers | Office furniture and equipment | Motor vehicles | Leasehold improvements | Total | |
€000 | €000 | €000 | €000 | €000 | |
| Cost - | |||||
| As of 1 January, 2008 | 4,201 | 504 | 76 | 261 | 5,042 |
| Reclassification | 63 | (63) | - | - | - |
| Additions | 2,710 | 326 | - | 235 | 3,271 |
| Disposals | - | - | (4) | - | (4) |
| As of 31 December, 2008 | 6,974 | 767 | 72 | 496 | 8,309 |
| Accumulated depreciation- | |||||
| As of 1 January, 2008 | 1,664 | 79 | 18 | 51 | 1,812 |
| Reclassification | 20 | (20) | - | - | - |
| Charge | 1,553 | 79 | 12 | 34 | 1,678 |
| Disposals | - | - | (4) | - | (4) |
| As of 31 December, 2008 | 3,237 | 138 | 26 | 85 | 3,486 |
| Net Book Value - | |||||
| As of 31 December, 2008 | 3,737 | 629 | 46 | 411 | 4,823 |
NOTE 11 - INTANGIBLE ASSETS
Patents | Domain names | Technology IP | Development costs (internally generated) | Customer list | Goodwill | Total | |
€000 | €000 | €000 | €000 | €000 | €000 | €000 | |
| Cost - | |||||||
| As of 1 January, 2007 | 1,141 | 119 | 63 | 1,945 | - | 166 | 3,434 |
| Additions | 1,077 | 2 | 2,272 | - | - | 3,351 | |
| Assets acquired on business combinations (note 12) | - | - | 174 | - | 25,554 | 10,584 | 36,312 |
| Disposals | - | - | (174) | - | - | - | (174) |
| As of 31 December, 2007 | 2,218 | 121 | 63 | 4,217 | 25,554 | 10,750 | 42,923 |
| Accumulated amortization - | |||||||
| As of 1 January, 2007 | 170 | 51 | 63 | 390 | - | - | 674 |
| Provision | 188 | - | - | 491 | 2,683 | - | 3,362 |
| As of 31 December, 2007 | 358 | 51 | 63 | 881 | 2,683 | - | 4,036 |
| Net Book Value - | |||||||
| As of 31 December, 2007 | 1,860 | 70 | - | 3,336 | 22,871 | 10,750 | 38,887 |
Patents | Domain names | Technology IP | Development costs (internally generated) | Customer list (*) | Goodwill | Total | |
€000 | €000 | €000 | €000 | €000 | €000 | €000 | |
| Cost - | |||||||
| As of 1 January, 2008 | 2,218 | 121 | 63 | 4,217 | 25,554 | 10,750 | 42,923 |
| Additions | 803 | - | 1,122 | 6,453 | - | - | 8,378 |
| Assets acquired on business combinations | - | - | - | - | - | 51 | 5 1 |
| As of 31 December, 2008 | 3,021 | 121 | 1,185 | 10,670 | 25,554 | 10,801 | 51,352 |
| Accumulated amortization - | |||||||
| As of 1 January, 2008 | 358 | 51 | 63 | 881 | 2,683 | - | 4,036 |
| Provision | 209 | - | - | 852 | 3,173 | - | 4,234 |
| As of 31 December, 2008 | 567 | 51 | 63 | 1,733 | 5,856 | - | 8,270 |
| Net Book Value - | |||||||
| As of 31 December, 2008 | 2,454 | 70 | 1,122 | 8,937 | 19,698 | 10,801 | 43,082 |
Management believes that Domain names are stated at fair value and have an indefinite life due to their nature.
Amortization of intangible assets is included in the distribution costs.
(*) The remaining amortization period for the customer list assets as of 31 December, 2008 is approximately 6 years.
In accordance with IAS 36, the Group regularly monitors the carrying value of its intangible assets, including goodwill. Goodwill is allocated to one cash generating unit ("CGU") which is Tribeca (see note 12). At 31 December 2008 the recoverable amount of the CGU has been determined from value in use calculations based on cashflow projections from the formally approved budget for 2009 and detailed projections covering the following four year period to 31 December 2013.
Key assumptions are as follows:
Discount rate of 14% which is based on the Group's WACC to reflect management's assessment of specific risks related to the goodwill.
Annual growth rate of 11% for 2009, 7% for 2010 and 5% for 2011-2013. Growth rates beyond the first three years are based on prudent estimates using historic growth rates.
The results of the review indicated that there was no impairment of goodwill at 31 December 2008. Management has also reviewed the key assumptions and forecasts for the customer list, applying the above same key assumptions. The results of the review indicated that there was no impairment of the intangible assets at 31 December 2008.
NOTE 12 - ACQUISITIONS IN PRIOR PERIOD
In November 2006, the Group signed an asset purchase agreement with Tribeca Tables Europe Limited ("Tribeca") in respect of certain non US assets.
The contingent consideration for the acquisition was calculated according to a formula based on the future earnings of the acquired assets. The final consideration was €37,870,000.
The conditions required to acquire control and complete the agreement were satisfied in January 2007. Therefore the agreement was accounted for as a business combination under IFRS 3 in the year ended 31 December 2007.
The value of the assets in the Tribeca books was not disclosed to the Group. Accordingly, the book value on acquisition is unknown. The fair value of the net assets acquired is as below.
The intangible assets relate to the recognition of the customer lists and other intangibles acquired as part of the acquisition. These intangibles are being amortized over their estimated useful lives of 8 years. The directors reassessed the fair value of the assets acquired based on their value in use and as a result the software valued at €174,000 on acquisition was charged to the income statement as an impairment in the year ended 31 December 2007.
€000 | |
| Cash consideration to Tribeca | 37,870 |
| Expenses | 854 |
| Total cash consideration | 38,724 |
| Finance cost arising on discounting of cash consideration | (1,746) |
| Present value of consideration including expenses | 36,978 |
| Fair value of customer lists | 25,554 |
| Fair value of Property Plant and Equipment | 615 |
| Fair value of software | 174 |
| Goodwill | 10,635 |
| Present value of the consideration including expenses | 36,978 |
The consideration of €19.5 million and €17.5 million was paid in 2008 and 2007 respectively.
NOTE 13- INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
On 19 October 2008, the Group entered into an agreement with William Hill Organization Limited, a subsidiary of William Hill PLC (hereinafter "WH"), a provider of fixed odds bookmaking services in the UK, for the establishment of two jointly owned entities (hereinafter "WH Online" or "JVCOs"), to facilitate the integration of the online businesses of WH together with the businesses and contracts (comprising of an affiliate marketing business, customer services operation with gaming brands and websites) which were purchased and then contributed by the Group. The transaction completed on 30 December 2008.
Immediately prior to the transaction, the Group acquired from a significant shareholder and other third parties, various online gaming businesses, marketing assets and contracts ("the Purchased Assets") for a total cash consideration of $250 million (€177.7 million). In consideration for the injection of the Purchased Assets into WH Online, the Group received 29% interest in WH Online. The Group's ownership interest can increase up to 32% depending on certain conditions relating to the integration of the activities as further detailed below. The acquisition of the Purchased Assets by the Group was solely for the purpose of contributing them directly to WH Online in consideration for the Group's 29% interest therein, hence the Group has treated the transaction as a single acquisition of a 29% interest in an associate.
The investment in WH Online is accounted for using the equity method in the consolidated financial statements and has been recognized initially at cost being the Group's 29% share of the fair value of the total net assets of the associate together with the goodwill on acquisition. In accordance with IAS 28, profits distributed to the Group in proportion of their respective shareholding will be recognized as share of profits of associates. Software license royalties fees charged to WH Online will be recognized as revenues only to the extent of the 71% external interest in WH Online. The residual profits of 29% will be recorded as part of the share of net profits of associates.
WH has an option to acquire the Group's interest in WH Online on an independent fair value basis, exercisable after four or six years from completion of the transaction (the "Option"). Upon exercise of the Option, the Group has the right to receive a portion of the proceeds in WH shares, not exceeding 10% of WH's outstanding share capital at the time of issue.
Out of the total consideration of USD 250 million (€177.7 million), payable for the Purchased Assets (and hence the Group's interest in WH Online) USD 202.2 million (€143.8 million) was paid to companies related to the Group's significant shareholder (hereinafter "Affiliates"), USD 40 million (€28.4 million) was payable to the Group's former customer (out of which USD 20 million (€14.2 million) was paid in cash and the remaining amount is to be paid by 30 December 2010) and USD 0.3 million (€0.2 million) was paid to a third party providing marketing services to the Affiliates in consideration for an option to purchase their business for a total cost of USD 7.5 million (€5.4 million). The option is exercisable until 31 December 2009.
WH Online has also entered into a contract with the Group for a minimum term of five years for the provision of online gaming software for poker and casino. In addition, the Group will provide advisory and consultancy services to WH Online until the businesses are fully integrated.
The Group has assessed the fair value of its interest in WH Online by reviewing the underlying identifiable tangible and intangible assets in WH Online and their value in use supported by the net present value of forecast cash flows, based on approved budgets and plans. These assets are being amortized in the Group's interest in WH Online over their estimated useful lives as follows:
Useful life | |
| Software | 10 years |
| Customer relationships | 17 months |
| Affiliate contracts | 23 months |
| WH Brands | 15 years |
| Purchased assets brands | 10 years |
| Covenant not to compete | 5 years |
€000 | |
| Cash consideration to vendor of the purchased assets | 161,209 |
| Deferred consideration | 16,505 |
| Expenses paid in cash | 4,167 |
| Total cash consideration | 181,881 |
| Finance cost arising on discounting of cash consideration | (809) |
| Present value of consideration including expenses | 181,072 |
| Group share of fair value of net assets of WH Online: | |
| Customer relationships | 5,114 |
| Affiliate contracts | 2,177 |
| Brands | 40,104 |
| Software | 5,600 |
| Covenant not to compete | 10,351 |
| Acquired net assets | 2,823 |
66,169 | |
| Goodwill | 114,903 |
| Present value of the consideration including expenses | 181,072 |
Included in the above cash consideration is deferred consideration of €13.4 million (net of discount of €0.8 million) that is due for payment on 30 December 2010 and €2.3 million that is due for payment in the beginning of 2009.
The main factors leading to the recognition of goodwill are the synergistic growth and revenues created by the combined highly complementary business activities and the strengthening of the Group's position in comparison to its competitors in the market. In accordance with IAS36, the Group will regularly monitor the carrying value of its interest in WH Online.
The key assumptions used by management to determine the value in use of the brands, affiliate
contracts and customer relationships within WH Online are as follows:
-
The income approach, in particular, the relief of royalty approach was applied for the valuation, considering projected revenues derived from the brands.
-
The royalty rate was based on a third party market participant assumption for use of the brands, considering age of the brands, market competition, market share, profitability and prevailing rates for similar properties.
-
The discount rate assumed is equivalent to the WACC plus 1% for the customer relationships and WACC plus 2% for the affiliate contracts
-
The growth rates and attrition rates were based on market analysis
Management has reviewed the key assumptions and forecasts for the above mentioned assets and the result of the review indicated that there was no impairment of the Group's investment in WH Online at 31 December 2008.
Due to the fact that the consideration for the acquisition of the Purchased Assets was in US dollars, the Group decided to hold the equivalent amount of the consideration in US dollars. This resulted in an exchange rate expense in the amount of €13.1 million that has been reflected in the income statement for the year 2008.
NOTE 14 - AVAILABLE FOR SALE INVESTMENTS
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Available for sale investments comprise: | ||
| A. Investment in Foundation Group Limited | ||
| Shares | 2,434 | 1,419 |
| Convertible notes | - | 10,563 |
| 2,434 | 11,982 | |
| B. Investment in AsianLogic | 2,453 | 10,104 |
4,887 | 22,086 | |
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Decline of fair value of available for sale investments from the time of acquisition: | ||
| A. Foundation Group Limited | ||
| Shares | 941 | 1,372 |
| Convertible notes | 8,299 | 10,207 |
| 9,240 | 11,579 | |
| B. AsianLogic | 7,458 | - |
16,698 | 11,579 | |
During 2008 the Group reclassified the available for sale investments from current assets to non-current assets in accordance with management estimation that the Group will not sell the shares in the near future due to the low share price
A. During 2007 the Group entered into a 10 year software licence agreement with Foundation Group Limited ("Foundation"), a company incorporated in Bermuda which during March 2007 re-listed on the Hong Kong Stock Exchange at a price of HK$1.28 ("Flotation Price"). In connection with the software licence agreement the Group also entered into the following agreements in respect of ordinary shares in Foundation:
- a share sale and purchase agreement with Luck Continent Limited to acquire 53,750,000 ordinary shares of HK$0.001 each in Foundation;
- a share sale and purchase agreement with Emphasis Services Limited ("ESL") to purchase 50% of the ordinary shares in Copernicus Trading Limited ("Copernicus"), a private company incorporated in the British Virgin Islands. Copernicus' only asset was a convertible note convertible into 400,000,000 shares in Foundation.
The 53,750,000 shares in Foundation were acquired for €4.8 million, which represented an aggregate discount of 15% to the Flotation Price. These shares have been classified as an available for sale asset. The Group also entered into an agreement to sell 50% of the 53,750,000 shares it acquired in Foundation to ESL for a consideration of €2.4 million payable in September 2007. As a consequence, the loss from the disposal of €415,000 was reflected in the income statement in 2007. The fair value of 50% of the shares at time of acquisition was €2.8 million.
In July and August 2008 the Group sold 12,150,000 of Foundation shares for total consideration of €311,000 based on the average share price of HK$0.31. The fair value of the remaining 14,725,000 shares at 31 December 2008 amounted to €167,000. In accordance with IAS 39, the decrease in value has been reflected in the income statement.
The Group acquired the shares in Copernicus for a consideration of €4.1 million. Based on Foundation's share price at this time, the underlying value of the Group's interest in the convertible note amounted to €20.8 million. The Group's interest in the convertible note was transferred in November 2007 to Evermore Trading Limited, a 100% subsidiary of Playtech Software Limited. In May 2008, the Group converted the convertible note into shares in Foundation. The Group's interest at 31 December 2008 was €2.3 million. In accordance with IAS 39, the decrease in value has been reflected in the income statement.
The Directors consider the fair value of the consideration received by way of discount to the market value of the 53,750,000 Foundation shares of €828,000 and the fair value of the convertible notes in excess of consideration paid of €16.7 million, to represent deferred income of the software licence agreement. As a consequence, €17.5 million was included in deferred revenues. The Group has commenced recognition of revenues from the software license agreement following the delivery of the software which occurred on 1 April 2008. The revenues are recognized over the remaining life time of the software license agreement. An amount of €1.5 million was recognized in the year ended 31 December 2008.
As at 15 March 2009, the closing price of Foundation shares was HK$0.08 compared to HK$0.124 as at 31 December 2008. This has resulted in a decrease in the fair value of the total available for sale equity shareholding and convertible notes of €694,000. This reduction in value is a non-adjusting post balance sheet event and has not therefore been accounted for as at 31 December 2008.
Tom Hall, a non-executive director of the Group, is also a director and shareholder of ESL.
B. In December 2007 the Group entered into a share purchase agreement to acquire 246 shares of ESL for a total consideration of €3.2 million. Following the completion of such agreement, AsianLogic Limited ("ALL"), the parent company of ESL incorporated in the British Virgin Islands was admitted to the AIM market at a price of £1.1162 ("Flotation Price"). Separately and in connection with the entry into a new software license agreement with ESL for a 5 year term, the Group received 467 shares in ESL for no consideration. In addition, the Group entered into a Share Exchange Agreement with ALL. Pursuant to the Share Exchange Agreement, ALL acquired all 713 of the Group's shares in ESL in consideration for the issue of 7,130,000 shares in ALL.
The 246 shares in ESL were acquired for €3.2 million, which represented an aggregate discount of 15% to the Flotation Price, the same discount which a number of other pre IPO investors were offered. These shares have been classified as an available for sale asset. The fair value at 31 December 2008 amounted to €846,000. The decrease in value of €2.3 million has been reflected in the income statement.
The Group received the 4,670,000 shares in ALL in consideration for agreeing a lower licence fee percentage in the software licence agreement with ESL. Based on ALL's share price at this time, the underlying value of the Group's interest in the shares amounted to €6.8 million. The Group's interest at 31 December 2008 was €1.6 million. In accordance with IAS 39, the decrease in value has been reflected in the income statement.
The Directors consider the fair value of the consideration received by way of discount to the market value of the 4,670,000 shares, to represent deferred income of the software licence agreement. As a consequence, €6.8 million was included in deferred revenues. The Group has commenced recognition of revenues from the software license agreement following the delivery of the software which occurred in December 2007. The revenues are recognized over the remaining life time of the software license agreement. An amount of €1.3 million was recognized in the year ended 31 December 2008.
The total value of available for sale investments in ALL at 31 December 2008 amounted to €2.4 million.
As at 15 March 2009, the closing price of ALL shares was £0.1225 compared to £0.335 as at 31 December 2008. This has resulted in a decrease in the fair value of the total available for sale shareholding of €1.5 million. This reduction in value is a non-adjusting post balance sheet event and has not therefore been accounted for as at 31 December 2008.
During 2008 the Group received a dividend of €163,000 that has been reflected in the income statement.
NOTE 15 - OTHER NON-CURRENT ASSETS
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Loan to customer | 692 | - |
| Rent and car lease deposits | 648 | 256 |
1,340 | 256 | |
NOTE 16 - TRADE RECEIVABLES
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Customers | 9,805 | 6,909 |
| Related party receivable | 277 | 1,014 |
10,082 | 7,923 | |
NOTE 17 - OTHER ACCOUNTS RECEIVABLE
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Prepaid expenses | 523 | 543 |
| VAT and other taxes | 266 | 455 |
| Short term investment | 29 | 24 |
| Advances to suppliers | 71 | 107 |
| Funds receivable due to options exercised | 38 | - |
| Related party receivable | 464 | 2,377 |
| Loan to customer | 966 | - |
| Others | 445 | 54 |
| 2,802 | 3,560 | |
NOTE 18 - RELATED PARTIES AND SHAREHOLDERS
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party's making of financial or operational decisions, or if both parties are controlled by the same third party.
Tech Corporation, Oriental Support Services, Gamepark Trading Ltd and 800pay Ltd are related by virtue of a common significant shareholder. Emphasis Services Limited ("ESL"), AsianLogic Limited ("ALL"),S-tech Limited, Uniplay International Limited and Six Digits Trading Limited are related by virtue of the former chief executive officer and current director interest in those Companies. WH Online and Laserstorm Services Ltd are associates of the Group.
The following transactions arose with related parties:
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Revenue | ||
| ESL | 2,925 | 2,344 |
| S-tech Ltd | 173 | 167 |
| Operating expenses | ||
| ESL | 1,362 | 1,032 |
| Loans | ||
| Laserstorm Services Ltd | 464 | - |
| ESL | (634) | 634 |
| Acquisition of assets from related parties (note 13) | ||
| Six Digits Trading Limited | 108,417 | - |
| Uniplay International Limited | 35,336 | - |
| Investment in related parties | ||
| ESL (note 16b) | - | 3,176 |
| Sale of assets to a related party | ||
| ESL (note 16a) | - | 2,377 |
The following are year-end balances:
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Gamepark Trading Limited | 3,578 | - |
| ESL | 37 | - |
| Deferred revenues - ESL | 5,263 | 6,732 |
| Total related party creditors | 8,878 | 6,732 |
| S tech Ltd. | 265 | 11 |
| Tech Corporation | 12 | - |
| ESL | - | 3,379 |
| Laserstorm Services Ltd | 464 | - |
| Total related party debtors | 741 | 3,390 |
| ALL | 2,453 | 10,104 |
| Total investment in related party | 2,453 | 10,104 |
The details of key management compensation (being the remuneration of the directors) are set out in note 5.
NOTE 19 - CASH AND CASH EQUIVALENTS
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Cash at bank | 30,122 | 10,137 |
| Deposits | 1,436 | 44,682 |
31,558 | 54,819 | |
The Group held cash balances which includes monies held on behalf of operators in respect of operators' jackpot games and poker operation. The balances held at the year-end are set out below and the liability is included in trade payables:
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Funds attributed to jackpots | 1,429 | 1,985 |
| Poker security deposits | 68 | - |
1,497 | 1,985 | |
NOTE 20- SHAREHOLDERS EQUITY
31 December, | ||
2008 | 2007 | |
| A. Share Capital | Number of Shares | |
| Share capital is comprised of no par value shares as follows: | ||
| Authorized | N/A(*) | N/A(*) |
| Issued and paid up | 238,483,378 | 215,561,342 |
(*) The Group has no authorized share capital but is authorized under its memorandum and article of association to issue up to 1,000,000,000 shares of no par value.
Share issue
In June 2008, the Group raised additional cash of €140,989,000 by means of a share placing. The total number of shares issued amounted to 21,620,946 at a price of 520 pence per share.
Share option exercised
During the year 1,301,090 share options were exercised.
B. Distribution of Dividend
In May 2008, the Group distributed €13,570,039 as a final dividend for 2007.
In October 2008, the Group distributed €22,322,323 as an interim dividend for 2008.
No dividends were waived.
C. Reserves
The following describes the nature and purpose of each reserve within owners equity:
| Reserve | Description and purpose |
| Additional paid in capital | Share premium (i.e. amount subscribed for share capital in excess of nominal value) |
| Available for sale reserve | Changes in fair value of available for sale investments (note 14) |
| Retained earnings | Cumulative net gains and losses recognized in the consolidated income statement |
NOTE 21 - TRADE PAYABLES
31 December, | ||
2008 | 2007 | |
| €000 | €000 | |
| Suppliers | 1,875 | 1,050 |
| Progressive and other operators' jackpots | 1,429 | 1,985 |
| Customer in credit | 14 | 299 |
| Related parties (Note 18) | 3,615 | - |
| Other | 105 | - |
7,038 | 3,334 | |
NOTE 22 - OTHER ACCOUNTS PAYABLE
31 December, | ||
2008 | 2007 | |
€000 | €000 | |
| Payroll and related expenses | 3,350 | 1,965 |
| Accrued expenses | 1,487 | 68 |
| Deferred consideration (note 12) | - | 19,472 |
| Other payables | 2,411 | 28 |
7,248 | 21,533 | |
NOTE 23 - SUBSIDIARIES
Details of the Group's subsidiaries as at the end of the year are set out below:
Name | Country of incorporation | Proportion of voting rights and ordinary share capital held | Nature of business |
| Playtech Software Ltd | British Virgin Islands | 100% | Main trading company of the Group, owns the intellectual property rights and licenses the software to customers. |
| OU Playtech (Estonia) | Estonia | 100% | Designs, develops and manufactures online software |
| Techplay Marketing Ltd | Israel | 100% | Marketing and advertising |
| Video B Holding Ltd | British Virgin Islands | 100% | Trading company for the Videobet software, owns the intellectual property rights of Videobet and licenses it to customers. |
| OU Videobet | Estonia | 100% | Develops software for fixed odds betting terminals and casino machines (as opposed to online software) |
| Playtech Bulgaria | Bulgaria | 100% | Designs, develops and manufactures online software |
| PTVB Management Ltd | Isle of Man | 100% | Management |
| Playtech (Cyprus) Ltd | Cyprus | 100% | Dormant |
| Playtech Live Ltd | British Virgin Islands | 100% | Dormant |
| Networkland Ltd | British Virgin Islands | 100% | Dormant |
| Playtech Bingames Ltd | British Virgin Islands | 100% | Technical support |
| Evermore Trading Ltd | British Virgin Islands | 100% | Holder of convertible notes in Foundation |
| Playtech Software India Ltd | India | 100% | Designs, develops and manufactures online software |
| Genuity Services Ltd | British Virgin Island | 100% | Holder of investment in WH Online |
| Playtech Services (Cyprus) Ltd | Cyprus | 100% | Activates the Italian ipoker Network |
| VB (Video) Cyprus Ltd | Cyprus | 100% | Trading company for the Videobet product to Romanian companies |
| Guideview Trading Limited | Cyprus | 100% | Licenses Software to companies |
NOTE 24 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Group is exposed to a variety of financial risks, which result from its financing, operating and investing activities. The objective of financial risk management is to contain, where appropriate, exposures in these financial risks to limit any negative impact on the Group's financial performance and position. The Group's financial instruments are its cash, available-for-sale financial assets, trade receivables, loan receivables, accounts payable and accrued expenses. The main purpose of these financial instruments is to raise finance for the Group's operation. The Group actively measures, monitors and manages its financial risk exposures by various functions pursuant to the segregation of duties and principals. The risks arising from the Group's financial instruments are credit risks and market price risks, which include interest rate risk, currency risk and equity price risk. The risk management policies employed by the Group to manage these risks are discussed below.
A. Interest rate risk
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group's income and operating cash flows are substantially independent of changes in market interest changes. The management monitors interest rate fluctuations on a continuous basis and acts accordingly.
Where the Group has generated a significant amount of cash, it will invest in higher earning interest deposit accounts. These deposit accounts are short term and the Group is not unduly exposed to market interest rate fluctuations.
A 1% change in deposit interest rates would impact on the profit before tax by between €0.3 million and €0.6 million
B. Credit risk
Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date.
The Group closely monitors the activities of its counterparties and controls the access to its intellectual property which enables it to ensure the prompt collection of customers' balances.
The Group's main financial assets are cash and cash equivalents as well as trade and other receivables and represent the Group's maximum exposure to credit risk in connection with its financial assets. Trade and other receivables are carried on the balance sheet net of bad debt provisions estimated by the Directors based on prior year experience and an evaluation of prevailing economic circumstances.
Wherever possible and commercially practical the Group invests cash with major financial institutions that have a rating of A- as defined by Standard & Poors. The Group maintains monthly operational balances with banks that do not meet this credit rating in Estonia and the Philippines to meet local salaries and expenses. These balances are kept to a minimum and typically do not exceed €2 million at any time during the monthly payment cycle.
In thousands of Euro | Total | Financial institutions with A- and above rating | Financial institutions below A- rating |
As at 31 December 2008 | 31,558 | 30,467 | 1,091 |
As at 31 December 2007 | 54,819 | 53,509 | 1,310 |
The ageing of trade receivables that are past due but not impaired can be analyzed as follows:
In thousands of Euro | Total | Not past due | 1-2 months overdue | More than 2 months past due |
As at 31 December 2008 | 10,175 | 8, 289 | 1,588 | 298 |
As at 31 December 2007 | 8,066 | 6,932 | 449 | 685 |
The above balances relate to customers with no default history.
A provision for doubtful debtors is included within trade receivables that can be reconciled as follows:
2008 €000 | 2007 €000 | |
Provision at the beginning of the year | 143 | 183 |
Charged to income statement | 784 | 75 |
Utilized | (834) | (115) |
Provision at end of year | 93 | 143 |
C. Currency risk
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates.
Foreign exchange risk arises because the Group has operations located in various parts of the world. However, the functional currency of those operations is the same as the Group's primary functional currency (Euro) and the Group is not substantially exposed to fluctuations in exchange rates in respect of assets held overseas.
Foreign exchange risk also arises when Group operations are entered into in currencies denominated in a currency other than the functional currency. During 2008, the Group has reflected a foreign exchange loss in the income statement due to the cash held in US Dollars in relation to the consideration for the WH Online investment (note 13).
The Group's policy is not to enter into any currency hedging transactions.
D. Equity price risk
The Group's balance sheet is exposed to market risk by way of holding some investments in other companies on a short term basis (note 14). Variations in market value over the life of these investments have or will have an impact on the balance sheet and the income statement.
The directors believe that the exposure to market price risk is acceptable in the Group's circumstances.
The Group's balance sheet at 31 December 2008 includes available for sale investments with a value of €4.9 million which are subject to fluctuations in the underlying share price.
A change of 1% in shares price will have an impact of €0.05 million on the income statement and the fair value of the available for sale investments will change by the same amount.
E. Capital risks
Given the Group's position with no borrowings and significant retained earnings, capital risk is not considered significant.
F. Liquidity risk
Liquidity risk arises from the Group's management of working capital and the financial charges on its debt instruments.
The Group's policy is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due.
The following are the contractual maturities of the Group's financial liabilities:
Year ended 31 December, 2008 In thousands of Euro | Total | Within 1 year | 1-2 years | More than 2 years |
Trade payables | 7,038 | 7,038 | - | - |
Other accounts payable | 6,775 | 6,775 | - | - |
Deferred consideration | 14,047 | - | 14,047 | - |
Other non-current liabilities | 184 | - | 184 | - |
Year ended 31 December, 2007 In thousands of Euro | Total | Within 1 year | 1-2 years | More than 2 years |
Trade payables | 3,334 | 3,334 | - | - |
Other accounts payable | 2,639 | 2,639 | - | - |
Deferred consideration | 19,472 | 19,472 | - | - |
Other non-current liabilities | 66 | - | 66 | - |
G. Total financial assets and liabilities
The fair value together with the carrying amount of the financial assets and liabilities shown in the balance sheet are as follows:
For the year ended 31 December | ||||
2008 | 2007 | |||
€000 | €000 | |||
Fair Value | Carrying amount | Fair Value | Carrying amount | |
Cash and cash equivalent | 31,558 | 31,558 | 54,819 | 54,819 |
Available for sale investments | 4,887 | 4,887 | 22,086 | 22,086 |
Other assets | 13,701 | 13,701 | 11,197 | 11,197 |
Deferred consideration | 14,047 | 14,047 | 19,472 | 19,472 |
Other liabilities | 13,997 | 13,997 | 25,511 | 25,511 |
NOTE 25 - CONTINGENT LIABILITIES
A. Regulatory
The Group is not a gaming operator and does not provide gaming services to players.
From 13 October, 2006, following the approval by the US President of the Unlawful Internet Gambling Enforcement Act 2006 (the "UIGEA"), the Group requested all of its licensees to cease their US facing activity. Such request was accepted and implemented by all licensees. The directors believe that the Group has taken all measures necessary to be in full compliance with the UIGEA.
The directors are aware of activity by certain regulatory authorities creating uncertainty as to further actions that may occur, if any. Accordingly, the directors have considered any residual risk arising in an indirect manner from the Group's activities and the potential impact on the financial statements, and no provision has been made in the financial statements in respect of the likelihood of any adverse impact that may arise from such activities.
B. Other
Management is not aware of any contingencies that may have a significant impact on the financial position of the Group in addition to the above mentioned. Management is not aware of any additional material, actual, pending or threatened claims against the Group.
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