888
Annual Report 2011

Plain-text annual report

l 8 8 8 H o d n g s p l c i A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 Annual Report & Accounts 2011 03 21273-04 888 Holdings Cover(20).indd 3 10/04/2012 11:43:39 www.888holdingsplc.com21273-04 10/04/2012 Proof 20 888 Holdings plc Annual Report & Accounts 2011 Welcome to 888 one of the world’s most popular online gaming entertainment and solutions providers. 888 is one of the world’s most popular online gaming entertainment companies 888 is a global gaming entertainment destination, with localised offerings providing players the games they want in the language they speak with significant functionality and interactivity. The 888 gaming experience is now available in 19 languages to over 150 countries and provides something for players of all abilities. Our highly sophisticated marketing suite of tools identifies the best way to target people with the offering that will be of most interest to them. Dragonfish, 888’s standalone business to business arm, continues to offer clients a best in class Total Gaming Services solution. The quality of the offering, coupled with a refocus of this business has given us a strong position in which to enter newly regulating jurisdictions. 888 is a leader in corporate responsibility, with specialist websites dedicated to both responsible gaming and corporate responsibility so that customers can play in a safe and secure environment. Enjoy casino 04 21273-04 888 Holdings Cover(20).indd 4 10/04/2012 11:43:39 888 Holdings plc Annual Report & Accounts 201021273-04 10/04/2012 Proof 20350 300 250 200 150 100 50 0 80 70 60 50 40 30 20 10 0 www.888holdingsplc.com Highlights 300 250 200 150 100 50 0 60 50 40 30 20 10 0 Revenue Revenue — B2C Revenue — B2B 331 262 50 40 30 20 10 0 284 222 150 120 90 60 30 0 47 40 Revenue — B2C Casino 148 117 2010 2011 2010 2011 2010 2011 2010 2011 up 26%* US$ million up 28% US$ million up 16% US$ million up 27% US$ million Revenue — B2C Poker Revenue — B2C Bingo EBITDA1 Real money registered customer accounts2 61 38 60 50 40 30 20 10 0 50 54 12 10 8 6 4 2 0 29 56 10.6 8.7 2010 2011 2010 2011 2010 2011 2010 2011 up 58% US$ million up 8% US$ million up 94% US$ million up 22% million * Percentages are calculated on actual figures. 1 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million), goodwill impairment charges of US$20.7 million (H1 2010: nil) and restructuring costs of US$4.9 million (2010: US$2.2 million). 2 Casino, Poker and Sport. Contents 01 Highlights 02 Chairman’s Statement 04 Chief Executive’s Review 08 Enhanced Business Review 08 Financial Review 11 B2C 15 Dragonfish 17 Technological Infrastructure 18 Customer Support and Service Regulation and General 19 Regulatory Developments 22 Corporate Social Responsibility/ Responsible Gaming 25 Risk Report 26 Board of Directors 27 Corporate Governance 31 Directors’ Remuneration Report 38 Directors’ Report Independent Auditors’ Report 41 43 Consolidated Income Statement 44 Consolidated Statement of Comprehensive Income 45 Consolidated Balance Sheet 46 Consolidated Statement of Changes in Equity 47 Consolidated Statement of Cash Flows 48 Notes to the Consolidated Financial Statements 82 Company Balance Sheet 83 Company Statement of Changes in Equity 84 Company Statement of Cash Flows 85 Notes to the Company Financial Statements 87 Shareholder Information 11 21273-04 888 Holdings.indd 1 10/04/2012 11:44:02 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Chairman’s Statement 2011 has been a year of significant change, both for 888 as We have refocused the business and, in doing so, created a a business and in the ever-shifting landscape in which we strong and sustainable base for long-term growth. operate. Changes made to the focus of the business and By continuing our customer-centric approach and offering ongoing improvements to our market-leading offering, innovative products and services that are both exciting and have helped to increase player numbers, build revenues and relevant, we expect to continue to be successful and deliver produce this excellent set of results. European regulation benefit to you, our shareholders. continued apace and there are a number of exciting initiatives in the United States seeking to regulate internet poker at both a federal and a state level. Which route will Financial Results Group revenue increased significantly by 26% to US$331 be undertaken and exactly when this will happen remains million (2010: US$262 million) driven in the main by the B2C unclear, but the wheels are in motion and 888 is positioned performance of casino and our stand out poker offering, to take advantage of any and all outcomes. Poker 6. EBITDA* was US$56 million (2010: US$29 million). There were a number of changes to the Board and the and cash equivalents of which US$45 million represented senior management team in the period under review. Gigi Levy stepped down as CEO in April and I would like liabilities to customers. In February 2012 the Group prepaid £20 million of the Wink deferred consideration to reduce to thank Gigi for the contribution he made to the business interest costs. This resulted in a balance of £3.8 million As at 31 December 2011 the Group had US$82 million of cash during his tenure. The Board invited Brian Mattingley, our payable on 21 May 2012. Deputy Chairman, to step into a more hands-on role within the business to help provide more focus on key areas of We will continue to review the dividend policy with a view performance and deliver on our immediate objectives, to reinstating payment of dividends as appropriate. following the outstanding achievements of the Group and his excellent performance during this period. I am delighted that Brian Mattingley has, in March 2012, been appointed B2C As part of our strategic refocus we have concentrated on as our full time Chief Executive Officer. I look forward to our core product groups of Casino, Poker and Bingo. continuing to work closely with him in his new role. This includes focusing our attention on our B2C customers, It was also appropriate to undertake a review of the customer service, and a true value-for-money proposition. business requirements in terms of personnel and restructure This compelling offering, supported by highly successful the senior management team. As part of that restructuring, targeted marketing campaigns, has resulted in a strong we appointed Itai Frieberger as Chief Operating Officer. trading performance across our B2C division. ensuring we deliver a ‘best in class’ product, excellence in * Excluding share benefit charges of US$2.4 million (2010: US$2.3 million), goodwill write off US$20.7 million (2010: nil) and restructuring costs of US$4.9 million (2010: US$2.2 million). Itai has a wealth of experience in the online world and has spent the last seven years with 888 in various senior management roles covering the full spectrum of disciplines within our Company. After the macroeconomic shocks of the previous financial year and the business challenges that accompanied them, the operating environment for 888 improved during 2011. There were also a number of notable strategic achievements which we believe will underpin our growth in the coming years: the finding of suitability by the Nevada Gaming Control Board and the Nevada Gaming Commission in respect of our relationship with Caesars Interactive Entertainment (Caesars), the significant upgrade to our back office systems and the expansion of our agreement with Caesars to enter the US market when regulation is enacted. In addition the launch of Poker 6 which won industry accolades fuelled tremendous growth in our poker business. 2 21273-04 888 Holdings.indd 2 10/04/2012 11:44:04 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 In July 2011, the Italian regulated market opened for Casino following which we launched our own casino offering and the Dragonfish-powered casinos of several customers in that market. Dragonfish continued to receive industry accolades and won two of the most prestigious awards at the eGaming Review B2B Awards: Poker software of the year and Bingo supplier of the year. Board At the year end one of our Independent Non-Executive Directors, Michael Constantine, retired from the Board. I would like to express on behalf of the Board and all at the Company our appreciation of Michael’s contribution to 888 for over five years. We are actively seeking new Non-Executive Directors with the experience and skill-set to help the Group continue its next phase of growth. Outlook 2012 is set to be a year of major opportunity for 888, with the opening of several newly regulated markets across Europe and the US potential. The Group intends to invest in these markets in order to establish and build market share and, whilst the impacts of regulatory changes are difficult to predict, we believe that we have now created a great platform for the future and are confident about the Group’s full year prospects. Poker has had an exceptional year, and since the launch of our award-winning Poker 6 platform we have significantly outperformed the industry. New player recruitment in Poker has increased by 77% compared to last year and we now rank 4th in the global liquidity rankings. Casino has also enjoyed a strong performance and this year we have made a significant investment in our back office systems. In July we launched into the newly regulated Italian market and have already gained more than 5% market share. We also developed an exciting new casino product, casino 50, which was launched in February 2012. Whilst the bingo market is maturing we continue to focus on our core strengths of product innovation and promotion initiatives. Dragonfish This year has seen a change of approach as we have worked on fewer deals concentrating on those which are substantially revenue and profit enhancing. Richard Kilsby Chairman In March 2011 we became the first ever foreign-based internet gaming operator to come before the Nevada Gaming Control Board and the Nevada Gaming Commission when, following a year long process and public hearings, they approved the suitability of our commercial relationship with Caesars. This enabled us to continue working with Caesars, one of America’s pre-eminent gaming groups, in the UK. Since the year end we have announced an extension of the Caesars agreement to cover the US. This is the first strand of our US online strategy and gives us a strong platform to develop the US and sign with further potential partners. We are amongst the first applicants for the new class of licence in Nevada as an internet gaming service provider. 21273-04 888 Holdings.indd 3 10/04/2012 11:44:05 3 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Chief Executive's Review Introduction We have enjoyed a highly successful year of trading driven by continuous improvements in our offering, and renewed focus on our core strengths, resulting in a 26% increase in Group revenue to US$331 million (2010: US$262 million). First, we will concentrate on our core product groups, which are Casino, Poker, Bingo, and to a lesser extent Sport, where we depend upon partners to operate a sportsbook in a highly competitive market. These products will be delivered via our B2C offering and through our Dragonfish to B2B clients. 2011 was about going back to basics and I have reiterated in this statement our refocused strategy. From a financial perspective we delivered a record performance: EBITDA* reached US$56 million (2010: US$29 million) with our EBITDA* margin increasing to 16.8% (2010: 10.9%). As at 31 December 2011 the Group had Second, we will continue to focus our attention on our B2C customers, ensuring we deliver a ‘best in class’ product, excellence in customer service, and a real value-for-money proposition. Our back-office is a key asset of the Company and truly world class, ensuring maximum returns on investment from our marketing and customer recruitment US$82 million of cash and cash equivalents of which US$45 campaigns, monitoring and improving lifetime value of million represented liabilities to customers. On 23 February 2012 the Group prepaid £20 million of the Wink deferred consideration to reduce interest costs. This resulted in a balance of £3.8 million payable on 21 May 2012. our customers whilst fulfilling high standards of social and corporate responsibility. Moreover this is done using world class fraud detection, player monitoring and excellent CRM practices. We will continue to develop this key asset as it is a true competitive advantage that benefits both customers As online gaming evolves, 888 continues to innovate and and clients alike. change with it. By providing players of all ability with a compelling offering, and promoting the offering with targeted marketing campaigns, we have grown our active B2C casino and poker customer numbers to almost half a million — an increase of 69% since Q4 2010. Further Third, we have appraised our Dragonfish B2B contracts and where they were sub optimal, renegotiated or terminated them. We will continue to develop a pipeline of new opportunities which will be fewer but have a greater positive improvements are in the pipeline, and potential significant impact on our revenues and profit. regulatory opportunities, leaving us very well positioned for the future. Strategy As I set out in our interim results last August, following a review of the business we reaffirmed our commitment to maximising revenues and taking the company forward. This strategy is made up of a number of key strands. Fourthly, we will work to improve margins, by maximising operational efficiencies and driving volume and where necessary cutting costs. There was some impact on the 2011 results but we have yet to see the full benefit of savings made to head count and other operational efficiencies. It is our short-term goal to return to levels of margin achieved in 2009, and then to further improve on these. * Excluding share benefit charges of US$2.4 million (2010: US$2.3 million), goodwill write off US$20.7 million (2010: nil) and restructuring costs of US$4.9 million (2010: US$2.2 million). 4 21273-04 888 Holdings.indd 4 10/04/2012 11:44:06 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Finally, it is a clear strategic imperative that we concentrate on locally regulated markets. We view these markets in three specific categories which have individual characteristics: ●● Implementational — For example, in Italy and France, where regulation has been introduced and we have already commenced trading. ●● Formational — As in Spain where governments have announced regulation and are working towards a framework. Here we will decide on a trading strategy, start dialogue with local partners either for B2C or B2B tie- ups, and lobby governments in an attempt to assist in shaping the framework. ●● Developmental — Where there is a strong indication that at some time in the near future, the market will open. Here we talk to local enterprise with a view to forming partnerships with whom we can jointly explore opportunities and attempt to influence the regulatory framework; currently we are focusing primarily on the USA. B2C The B2C offering remains our core area, and the bedrock of the success of the business. Performance across the offering has been excellent in 2011, with revenue up 28% to US$284 million (2010: US$222 million), as a result of our focused investment in order to provide the best possible customer experience, and improved and targeted marketing. We have pursued a volume-led strategy, aimed at attracting a large number of players through providing an entertaining and accessible platform on which customers enjoy playing. The strategy has lead to Customer lifetime value preserved over time with retention programmes performing well, so that churn rate is lower than it has been in the past. 2011 was a phenomenal year for 888’s poker business with revenue increasing 58% to US$61 million (2010: US$38 million). Our Poker 6 platform has transformed our poker network and we have risen from 13th to 4th in the global liquidity rankings in little over 12 months. In Q4 alone the number of active poker customers increased by 58%. We have already delivered against and realised the benefit of this renewed focus. Our focus on driving key product areas has significantly increased player sign-ups leading to significant growth in volumes. We will continue to focus on maximizing the potential of our existing core offering augmented with innovations in both product and customer interaction and service. The Poker 6 network is carefully managed. We aim to attract players in to enjoy the game which has a more recreational feel with players placing smaller initial stakes. We have worked hard over the last year on the software suite which is dedicated to targeted marketing — almost targeting players individually with specific incentives and promotions, and we are now reaping the benefits of that investment. In Casino this ‘smart marketing’ also worked for us, with revenues up 27% to US$148 million (2010: US$117 million). The success of Casino has been driven both by the highly successful marketing campaigns and significant back- office improvements. Our efforts were recognised with 888 winning Best Online Casino of the Year at the ICE Totally Gaming Awards. 21273-04 888 Holdings.indd 5 10/04/2012 11:44:06 5 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Chief Executive's Review As I said above a key focus for us is newly regulated The most significant step this year was the Nevada Gaming markets. Our fully localised Casino helps penetration into Control Board and the Nevada Gaming Commission new markets. We launched into the Italian market in July, voting unanimously to grant a finding of suitability of with more than 30 games, and with the introduction of the the commercial agreement between Caesars Interactive first live casino in Italy — Live Dealer on 888. Initial trading Entertainment and Dragonfish. This finding, which was has been encouraging and we have already achieved more the result of a rigorous and lengthy process of scrutiny, than 5% market share. underlines the integrity, sophistication and professionalism that the Company maintains as its core tenets of its We have just launched a new Casino offering, a state-of- business model. the-art platform similar to Poker 6, with a number of new features, and we will continue to invest in functionality, After the period ended we announced an extension of our customisation and localisation of features such as payment agreement with Caesars into the US — the first strand of methods. our US strategy. Dragonfish is now in a very strong position to explore the potential of the US market. We have a strong Bingo is becoming a mature market but we continue to hold our own. We added 15 new Instant Games on our platform to roll out our cutting edge, turnkey solution to other potential partners as the market opens. Bingo platform including a number of global brands. We will continue to invest in new features such as progressive jackpots, new games and Mini Games to keep the platform People It’s not just the offering that makes 888 stand out, it is our refreshed and relevant. people. I am a true believer in teamwork and we have a fantastic team of people working at 888. There is no doubt 888sport, while relatively small, is an important part of the we have some of the most gifted technological staff in customer offering, particularly around significant sporting the industry. I would like to take this opportunity to thank events which in 2012 will be dominated by the London everyone for their hard work this year. The more I get to Olympics and football’s Euro 2012. Dragonfish This year we undertook a widespread appraisal of the Dragonfish business — reviewing existing contracts and evaluating the right deals to pursue. Revenue was up 16% at US$47 million (2010: US$40 million). As a result we know the employees, the more impressed I am with their enthusiasm and commitment to the business. It is their drive, innovation and effectiveness that has helped deliver such a successful year. Regulation Regulation of online gaming continued to present both also have a more profitable B2B business by successfully opportunities and challenges to the Group during 2011, renegotiating and terminating suboptimal contracts. and this is likely to be the case during 2012. A growing number of jurisdictions (most notably in Europe) have adopted legislation regulating the Group’s business, often in widely divergent manners. While regulation in various jurisdictions has the effect of providing legal certainty, contributing to stability and bolstering the long-term value of the Group’s various markets, it is also inevitably accompanied by the burden of local taxation and costly compliance requirements. The Group continues to remain actively engaged in regulatory developments worldwide and continues to seek opportunities for growth presented by regulation while facing the accompanying challenges. 6 21273-04 888 Holdings.indd 6 10/04/2012 11:44:06 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Two notable regulatory developments that are likely to have a significant impact on the Group during 2012 are the possible reform of the UK online gaming regime (with the imposition of UK gaming duty on foreign operators) and the emergence of a US online poker market (initially in Nevada, where the Group continues to pioneer the developing online market). 888 is investing effort to averting or minimise the potentially adverse impact of a UK reform, taking all steps to maximise the benefit of the potential for growth presented by a regulated US online poker market. While market liberalisation offers new growth opportunities Responsible Gaming As a global leader in online gaming entertainment, 888 is for regulated businesses such as ours it also means investment in marketing to position the brand and acquire committed to a pro-active policy of corporate and social customers. We will continue to invest in regulated markets responsibility. Conducting our business responsibly is fundamental to our future success and the sustainability to secure our future for the long term. of our business. Our values place the community and We continue to exceed our customers’ expectations both the customer at the centre of our endeavours. We are in terms of offering and service. We will continue to pursue constantly exploring new and innovative ways to create our strategy of focusing on recreational players and as well a caring, responsible gaming environment and to ensure as major product enhancements during the year, such as under age, addictive or other inappropriate customers the launch of our new Casino offering, we will focus on the are unable to access our gaming sites. We work closely continuous improvement of the customer experience at with organisations such as GamCare and Gambling every point. Therapy to enhance the training of our customers support representatives. Current Trading and Outlook 2011 marked a new chapter in 888’s history. We have realigned the business to focus on its core strengths under a team that is steeped in online gaming. We are more than ready to take advantage of liberalisation in the industry and we are well positioned to achieve first mover advantage. We have a unique position in the US to allow the launch of a real money offering promptly in either federal or state based once regulation is finalized by gaming authorities. Our markets are changing and evolving and we are moving fast to ensure we continue to innovate and expand our horizons. Brian Mattingley* Chief Executive * Brian Mattingley was appointed CEO on 27 March 2012. 21273-04 888 Holdings.indd 7 10/04/2012 11:44:12 7 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Enhanced Business Review FInanCIal REvIEw Financial Summary Revenue B2C  Casino  Poker  Bingo  Emerging Offering Total B2C B2B Revenue Operating Expenses2,3 Gaming taxes and duties Research and Development Expenses3 Selling and Marketing Expenses Administrative Expenses3,4 EBITDA3,4 Exchange Losses and Net Finance Costs Depreciation and Amortisation Impairment Charges Release of Contingent Consideration Profit Before Tax3,5 Year ended Year ended 31 December 20111 $ million 31 December 20101 $ million 148.0 60.6 54.0 21.6 284.2 46.9 331.1 108.6 7.3 29.9 102.3 27.5 55.6 (13.1) (13.0) (20.7) 4.2 13.0 116.9 38.4 50.1 16.2 221.7 40.4 262.1 97.2 1.4 21.8 91.5 21.6 28.6 (1.2) (12.3) — — 15.1 1 Figures may not cast due to rounding. 2 Excluding depreciation of US$9.0 million (2010: US$8.5 million) and amortisation of US$4.0 million (2010: US$3.8 million). 3 Excluding restructuring costs totalling US$4.9 million (2010: US$2.2 million) US$1.0 million from operating expenses and US$3.9 million from administrative expenses (2010: US$1.2 million from operating expenses, US$0.6 million from research and development and US$0.4 million from administrative expenses). 4 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million) and impairment charges of US$20.7 million (2010: nil). 5 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million). 888’s Financial position remains strong with cash and cash equivalents at year end at US$82 million, out of which US$45 million represented liabilities to customers. At the year end the Group still had a deferred consideration liability of US$37 million relating to the Wink Bingo acquisition. On 23 February 2012 the Group paid ahead of contractual due date £20 million of this liability resulting in a balance of £3.8 million payable on 21 May 2012. FInanCIal RESulTS General 888 delivered record financial performance in 2011: total revenue increased 26% to US$331 million (2010: US$262 million), EBITDA1 increased 94% to US$56 million (2010: $29 million) and EBITDA1 margin expanded to 16.8% (2010: 10.9%). Profit before tax2 was US$13 million (2010: US$15 million) and basic earnings per share1 was 8.7¢ (2010: 3.7¢). Net cash generated from operating activities was US$79 million (2010: US$16 million). 1 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million), goodwill impairment charges of US$20.7 million (2010: nil) and restructuring costs of US$4.9 million (2010: US$2.2 million). 2 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million) and restructuring costs of US$4.9 million (2010: US$2.2 million). 8 21273-04 888 Holdings.indd 8 10/04/2012 11:44:12 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Geographical Segmentation 888’s turnover by geography is set out in the table below. Growth was achieved in each of the geographies and UK still remains our largest market with 46% of total revenues (2010: 49%). Revenue generated in Europe excluding UK has also increased this year by 28% driven primarily by poker and casino. Revenue by geographical market: UK Europe (excluding UK) Americas Rest of world Total Revenue Year ended 31 December, Revenue 2011 US$'000 153,090 124,187 26,488 27,385 331,150 2010 US$'000 127,371 96,759 17,110 20,873 262,113 Expenses Over the last twelve months, we have continued to invest in technological platform and in product adaptation to our platforms and our offering as well as investing in newly regulated markets. Nevertheless this expense remained at a regulated markets. stable ratio to revenue, at 9.0% (2010: 8.3%). Operating expenses1, which include mainly employment costs and volume-driven expenses such as chargebacks and Gaming duties incurred during the year were US$7 million (2010: US$1 million), primarily in respect of the activities in payment service providers’ commissions, totalled $109 million Spain during the second half of the year and Italy from Q4. (2010: US$97 million) representing a lower proportion to revenue of 33% compared to 37% in 2010. Chargebacks ratio Marketing expenses during the year were US$102 million remained stable at 1.0% (2010: 1.1%) and PSP commissions (2010: US$92 million). This was a result of an increased ratio increased slightly to 5.9% (2010: 5.5%) as a result of the number of high-profile campaigns aimed to drive record inclusion of the Mytopia business for the entire year which numbers of players to our new offerings. Despite the incurs a higher cost proportion than the core business. increase in marketing spend, marketing ratio reduced to 31% in 2011 compared to 35% in 2010, demonstrating enhanced Research and development expenses increased in 2011 marketing efficiency. to $30 million (2010: $22 million) as we invested in our 1 Excluding depreciation of US$9 million (2010: US$8.5 million), amortisation of US$4 million (2010: US$ 3.8 million) and restructuring costs of US$1 million (2010: US$1.2 million). 9 21273-04 888 Holdings.indd 9 10/04/2012 11:44:12 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Enhanced Business Review In 2011, the Group continued to focus on attracting and retaining customers and optimising the recruitment channel to cost. During the year, 888’s marketing team recruited more than 330,000 new Casino and Poker first time EBITDa EBITDA2 reached a record US$56 million (2010: US$29 million) representing an increase of 94%. EBITDA2 margin increased significantly to 16.8% from 10.9% in 2010. depositors (“FTDs”). Administrative expenses1 increased to US$28 million (2010: US$22 million). This increase is primarily associated with professional expenses arising from regulated markets and the refocusing of the B2B business. Impairment Review — Mytopia Given the financial performance of Mytopia, the social games development business acquired in 2010, a prudent accounting decision was taken to fully impair the Mytopia goodwill which has resulted in a full impairment charge of US$20.7 million. Share Benefit Charges Share benefit charges were US$2.9 million (2010: US$2.3 million). The increase was primarily a result of US$0.5 million of accelerated share benefit charges arising on termination following the departure of the former Chief executive on 30 April 2011. Finance Income Given the low interest rate environment net interest income was US$0.2 million (2010: US$0.2 million). Finance Expenses Finance expenses during the year totalled US$13.3 million (2010: US$1.5 million). This amount comprises (a) US$3.7 Taxation The tax charge for 2011 was US$3.9 million (2010: US$2.7 million) reflecting the Group’s efficient tax position. Out of this amount US$0.9 million (2010: nil) was payable in respect of the new corporation tax in Gibraltar. Earnings Per Share Basic earnings per share was 0.6¢ in 2011 (2010: 2.3¢). Adjusted basic earnings per share excluding share benefit charges, restructuring costs, impairment charges and release of contingent consideration better reflects the underlying performance of the business and assists in providing a clearer view of the performance of the Group. Adjusted basic earnings per share was 7.4¢ in 2011 (2010: 3.6¢). Dividend Given our cash requirements we did not pay a dividend in 2011. However we will continue to review the dividend policy with a view to reinstate payment of dividends as appropriate. Cash Flow The Group’s profitability during the year was matched by strong cash generation with net cash generated from operating activities reaching US$79 million (2010: US$16 million). This surplus cash was used primarily to pay Wink and Mytopia earn-outs at US$ 40 million and US$6 million million (2010: nil) interest paid to the Wink bingo vendors respectively. in relation to the deferred consideration, (b) US$3.7 million (2010: US$1.1 million) a non cash charge representing the difference between the discounted present value and future Balance Sheet The Group’s cash position as at 31 December 2011 was nominal value of the Wink deferred consideration, (c) US$1.6 US$82 million (31 December 2010: US$62 million). Liabilities million (2010: nil) representing fair value adjustment in respect of the open forward contract entered into in 2011 in order to hedge the Sterling denominated Wink deferred owed to customers were US$45 million (2010: US$35 million). This increase reflects the natural healthy growth of the business in terms of customer numbers and revenue consideration following the March 2011 agreement and (d) during 2011. US$4.3 million (2010: US$0.3 million) representing the result of closing forward contracts entered into during the year aimed to hedge costs which are not denominated in US$ (such as ILS, Euro and Sterling) and revaluation of various balance sheet assets which are not denominated in US$. 1 Excluding restructuring costs of US$3.9 million (2010: US$0.4 2 Excluding share benefit charges of US$2.4 million (2010: US$2.3 million), share benefit charges of US$ 2.4 million (2010: US$2.3 million) and impairment charges of US$ 20.7 million (2010: nil). million), goodwill write off US$20.7 million (2010: nil) and restructuring costs of US$4.9 million (2010: US$2.2 million). 10 21273-04 888 Holdings.indd 10 10/04/2012 11:44:12 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 B2C 888 is a global gaming entertainment destination, with localised offerings providing players the games they want in the language they speak. The 888 gaming experience is now available in a total of 19 languages to over 150 countries. Casino 888’s casino offering is a significant growth driver for the business, and has benefited from ongoing improvements in the customer experience and successful marketing to deliver record results. Our focus has been on player acquisition, and we have been very successful in this area. By continuing to offer the best possible online gaming experience, we aim to continue to drive record player numbers and revenues, while building brand loyalty and successfully increasing lifetime value as we go forward. A key way to build this loyalty is by ensuring that the 888 offering remains at the forefront of the online gaming experience. To do so means continuously providing new content and innovative ways of playing the games that customers want. The ever-growing portfolio of top notch games offered was bolstered through the addition of more than two dozen third party games to our suite of casino products. Dedicated teams were built to make integration more streamlined as we start to release more games into the market. Itai Friberger Chief Operating Officer Optimisation of the Live platform has seen the introduction of additional tables for high rollers and VIPs, more types of games (London Roulette with UK dealers, Venetian Roulette with Italian dealers, Auto roulette) and an enhanced user interface. A key focus continues to be newly regulated markets, and our fully localised casino helps penetration into these new markets. In August, 888 launched in the Italian market, with more than 30 games that passed certification by the Italian regulator. The introduction of Live Dealer on 888.it was the first live casino in Italy. Following increased marketing spend in Italy, 888 now enjoys market share of over 5%. In 2012, 888 will look to build on this position in Italy, while also opening in Spain, which has the potential to be a significant market, and a licence has also been applied for to offer online gaming in the smaller Danish market. The first quarter of 2012 saw the launch of our revamped casino offering, Casino 50, which reconstructs the casino platform to provide an industry leading casino product. Utilising state-of-the-art web and design technology, the new 888casino software is simpler and faster than ever before. From easy tab-based navigation, to opening multiple games in parallel, 888casino provides a sleek, smooth transition which now includes a higher screen resolution and allows a perfect platform for crisp, vibrant graphics and clear wide & HD screen viewing. With personalisation at the heart of the new design, 888casino allows players to create the lobby of their choice and create shortcuts to their favourite games. The intuitive features of the new 888casino adapt to each individual player, allowing players to play online casino ‘their way’. 11 21273-04 888 Holdings.indd 11 10/04/2012 11:44:13 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Enhanced Business Review In addition, 888 has also entered into the mobile gaming We are continually improving our poker offering, and during sector with the launch of our first Android application the year, we introduced some additional innovative features. for 888roulette, and further mobile opportunities are in These included PokerCam, a feature that allow players to development. interact via webcam while playing on the 888poker tables, and more social features, such as Team-Play and Private The success of the 888casino platform was publicly Games (where players can personalize their own private acknowledged, with 888 winning Best Online Casino poker games and invite their friends to join the game). of the Year at the ICE Totally Gaming Awards. Poker The success of 888poker was recognised at awards ceremonies, with 888 being awarded the 2011 Poker Operator of the Year at the eGaming Review Awards, and 888poker being named Best Online Gaming Product of the Year at the ICE Totally Gaming Awards. Bingo Poker has had an exceptional year, achieving significant growth despite a declining online poker market through effectively pursuing our strategy of focusing on recreational players. The launch of Poker 6 in June 2010 has been transformational, and we have reaped the rewards across 2011. 888’s poker offering is now an accepted industry leader. It has been a challenging year for 888bingo. The market is With an intuitive usability that targets the casual player, maturing and is highly competitive. Nonetheless, we saw and innovative features that appeal to a broad demographic, year on year improvement, as 888 continues to provide the increase in number of active customers in 888poker led our customers with a first class offering, including regular the industry in 2011. With 318,000 active customers in Q4, promotions, attractive prizes and a host of interactive features. this has moved 888poker up to fourth, from thirteenth, in the public liquidity rankings. Instant games remain a key revenue stream, dramatically enhancing the gaming experience, customer retention and This surge in activity has been the result of constant yield. These were embellished throughout 2011 with more than investment in our poker strategy to build a platform that a dozen new Instant Games launched on the Bingo platform. appeals to players of all abilities. 888 has developed a Games include brands such as ‘Roland Rat’, progressive diverse network in which players can enjoy the game jackpots games and Mini Games. regardless of skill level and offers customized promotions and communications targeted for every stage of a Other notable features introduced throughout the year player's journey. This leads to higher player retention and, included enhanced ‘Invite a Friend’ capabilities — whereby in turn, increased lifetime value. Poker 6 is a technically friends from Facebook, Gmail, Hotmail and social networks sophisticated product that can manage a host of activities: can be invited to join games — and Side Bets — enabling bingo matching marketing campaigns; monitoring product players to place a bet on an event that will happen during performance and delivering bespoke customer interfaces. a Bingo game. 12 21273-04 888 Holdings.indd 12 10/04/2012 11:44:14 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 We will continue to launch innovative new products, and look for new ways to bring new customers to the business. In partnership with Endemol, Big Brother Bingo was exclusively launched in the UK at the end of 2011 to take advantage of the high-profile Celebrity Big Brother series. The performance of this product has been very encouraging, with promotions for exclusive Big Brother prizes including behind-the-scenes access, task props & VIP passes to eviction nights attracting new customer numbers. Sport 888sports is a small percentage of our total business, but is nevertheless important for our customers, particularly at the time of significant sporting events, and we will continue to invest in this offering in order to drive more revenue and improve margins. In 2011, the focus was on retaining those high value customers that have been acquired during recent high- profile events, and in promoting Casino and Poker to our 888sports customers via the ability to share wallet across 888’s core platforms. Following prominent and successful marketing campaigns, the business grew year on year — this is especially pleasing as 2010 saw the impact of the FIFA World Cup. With both the London Olympics and football’s Euro 2012 taking place in the summer and offering significant opportunity for growth, marketing activities are being prepared to take advantage of these major events. 21273-04 888 Holdings.indd 13 10/04/2012 11:44:18 13 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Enhanced Business Review Marketing and Promotions The 888 offering provides something for players of all abilities and requirements, and our marketing suite identifies the best way to target people with the offering that will be of most interest to them. A significant area of investment in 2011 was in back-office systems. 888’s marketing suite is now amongst the best in the business, and allows us to better target offers and promotions. This helped boost conversion ratios and allowed marketing campaigns to be more focused. In turn, campaigns such as Free Spin and Millionaire were highly successful. 888poker is a different type of destination, and the communication of this has been integral to the surge in numbers over 2011. Our marketing campaigns reflect the focus of our offering, with our Poker advertising targeted at the casual player and emphasising the enjoyment factor. Shane Warne continues to successfully front our campaigns in several parts of the world, and has helped us to begin to build on an Ambassador-led marketing strategy as we enter into new markets. Using prominent sports players and celebrities rather than professional poker players as the face of our campaigns presents our brand to a larger audience and reinforces 888poker as a recreational, fun destination. Our advertisement campaigns and marketing in 2012 will continue to build on the positioning slogan, ‘We Play Different’, as we continue to offer players an entertaining poker experience that is unique from our competitors' and enjoyable for all players. In 2011, 888casino executed a very successful marketing campaign across several markets, focusing on 365 spins to win a million dollar jackpot. To continue to capitalise on this success, campaigns in 2012 will continue to build strong brand awareness of 888casino as a leading casino where players can win big and have fun. With the support of innovative, personalised software and a continually improving customer communication protocol, customer acquisition from these campaigns should see optimum conversion with increased player values and retention. Consistent with our strategy, we continued to invest heavily in marketing. Marketing spend in 2011 was larger in absolute terms than in 2010, but equalled only 31% of revenue compared to 35% in 2010. As our marketing improves and becomes more intelligent and targeted, we are achieving dollar for dollar growth in terms of marketing spend year on year. 14 Customer Relationship Management Strong customer relationships are the bedrock of our success. Whilst eye-catching promotions help to drive customer acquisition, customer retention comes from engendering loyalty through building bonds with players. This leads to people playing more games, more often, for more time. 888’s ongoing commitment to localisation strengthens relationships worldwide through speaking to people in their language and culture, while the market-leading usage of social features and interactivity with players strengthens brand loyalty. As the back-office suite improves, and allows all players to use a personalised product, with promotions targeted to their requirements, churn rate has reduced across 2011. Search Engine Optimisation (‘SEO’) The specialist Search and Web Optimisation Technologies (‘SWOT’) team continue to give 888’s websites prominence on worldwide search engines, maximising the impact of the product offering. Successful use of SWOT has helped to drive players to 888 brands, helping customer acquisition and ongoing growth. 2012 Focus We will continue to focus on our core strengths, and build on the excellent results achieved in 2011. Following the success of Poker 6, our new Casino offering has significant potential, and we will invest across our product line in order to provide players with cutting-edge games and innovative ways in which to play them. Targeted marketing campaigns will support our products, with the aim of attracting and retaining customers, growing lifetime value and reducing churn rate. We will also explore innovative avenues and ways to play on 888 gaming platforms in order to drive growth. 21273-04 888 Holdings.indd 14 10/04/2012 11:44:18 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Dragonfish Dragonfish, 888’s standalone-business to business arm, continues to offer clients a best in class Total Gaming Dragonfish further undertook a widespread appraisal of all its contracts, and looked to renegotiate or terminate deals that did not have the desired effect on the bottom line. The pipeline of new opportunities continues to develop towards deals that are more enhancing to revenue and profit. Services solution. The quality of the offering, coupled with The strength of the offering, coupled with increased a renewed focus has given us a strong position in which to marketing efforts by our partners, helped drive revenue up enter newly regulating jurisdictions. 16% to a record US$47 million. In 2011, Dragonfish successfully launched CasinoFlex in Italy We were delighted to see Dragonfish’s position as a leading in conjunction with some of the most popular established B2B provider recognised through the awarding of two of the online Italian brands, and focused on future regulated US most prestigious awards at the eGaming Review 2011 B2B markets by entering discussions with major US partners. In Awards — Poker Software of the Year and Bingo Supplier January 2012, Dragonfish extended its deal with Caesars Interactive Entertainment to include the US. of the Year. FREEDOM TO ENTER NEW MARKETS CUSTOMISABLE ONLINE GAMING SOLUTIONS. OPTIMISE YOUR OFFERING, EXPAND YOUR BUSINESS RUOY ROF TLIUB DLROW ENILNO Have you cracked the regulated market yet? With a breadth of offering unique to Dragonfish, you’ll be able to pick from our Total Gaming Services to create your own bespoke solution. You can combine any number of our products and services to complement your own, from as little as one gaming product with no back office to a full managed service. Just choose from our Games & Technology, Marketing, Operations and ePayments assets, or go for the full white label solution. Whatever your needs, Dragonfish provides you with flexible gaming solutions to help you capture regulated markets. We’re ready for your online world. The question is, are you? Dragonfish. Total Gaming Services. www.dragonfishtech.com • sales@dragonfishtech.com Technology Operations Marketing ePayments Casino Poker Bingo Sport Quickplay The Total Gaming Services Offering New entrants to the online gaming market require diverse gaming content delivered over a high performing technology platform, operational expertise and, above all, knowledge of how to leverage their assets and target the gaming consumer. The state-of-the-art Poker 6 platform provides a contemporary look and feel for poker clients, with enhanced usability, functionality and playability on the tables. The platform is a proven success, and has been a driving force behind the exceptional performance of 888’s global poker offering. The casino offering continues to reflect 888’s 14 years of experience as a leading online casino operator. This enables Dragonfish to provide a suite of games that helps its partners’ casino brands appeal to beginners and experts alike through the provision of a vast range of games, a user-friendly casino lobby with intuitive buttons for communicating promotions, tutorials, 24/7 customer help, wins and bonuses. In 2011, the successful launch of the CasinoFlex modular product specifically designed for regulated markets, allowed partners to choose to operate their own back-office under their own licence. The bingo platform achieved an important milestone in 2011, with the launch of the BingoFlex Modular Platform providing full integration with partners’ back-office systems. The new platform enables the offering of individual platform components to potential partners, and thus significantly strengthens the Bingo sales proposition by creating a broader spectrum of potential partners. 15 21273-04 888 Holdings.indd 15 10/04/2012 11:44:19 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Enhanced Business Review Each of our products is tailored for individual markets, and 888 is well placed to continue harnessing the many can take advantage of multi-platform compatibility. opportunities that the changing regulatory environment With the launch of our exciting new Casino 50 platform, the operator was demonstrated in March 2011, with the Nevada product offering to clients will remain at the forefront of the Gaming Control Board and the Nevada Gaming Commission will bring. Our reputation as a trusted, leading international online gaming experience. suitability finding for the commercial relationship between Caesars Interactive Entertainment and Dragonfish. This, the Our proprietary back-office services continue to be a core first deal ever approved between a state-licenced gaming part of our proposition. Our partners enjoy the benefits of company and a foreign-based Internet gaming operator, our industry-leading payment solutions and optimisation was a significant development enabling us to continue to services, Fraud and Risk Management, Business Analytics, work with Caesars to offer support for its UK product. CRM services and multi-lingual proactive and reactive customer operations. Regulated Markets Choosing the right partner is critical for success in regulated markets, and Dragonfish offers flexible best- The partnership with Caesars already covered a real-money World Series of Poker Casino offering to the UK market and a World Series of Poker Free Play Poker site in the United States. of-breed solutions that have been rigorously tested to More significantly, in January 2012, the partnership was meet the regulatory requirements across the international extended into the United States. The first strand of 888’s jurisdictions, such as Italy and Spain. We have developed US strategy, the agreement will allow the launch of a real a methodology which drives our solutions for regulated money offering as soon as either Federal or state based markets: tracking the new laws through drafting and regulation is finalised, upon licencing by gaming authorities. publication, adapting, testing and certifying our products and operations in parallel to the first new licences being Dragonfish is in pole position for the US market, and we issued. We also have the strength and depth to spread have a strong platform on which to roll out our cutting our focus across multiple jurisdictions so we maintain our edge, turnkey solutions to other potential partners as the leading position in all the largest markets as the regulations market opens. take effect. This means that Dragonfish licencees are first in line to receive their eGaming licences in newly regulated Another notable market in which Dragonfish is well territories. positioned is Italy. Following certification of 888 products by the Amministrazione Autonoma dei Monopoli di Stato We have also adapted our products to meet the new (AAMS), the Italian regulatory authority, we launched tax requirements of each market. We provide integral our Casino offering into the Italian market in August. The tax-compliant acquisition and retention tools, bonuses Dragonfish Italian casino offering includes both Download and cross-selling that maximise cost-effectiveness for and No-Download (Instant Play) clients, with a customized our partners while increasing the Lifetime Values of their and enhanced proposition presenting the Italian player with players. the most compelling and engaging gaming experience in Our track record is second to none and we have already clocked up invaluable experience launching hundreds of brands on our regulated gaming solutions. the regulated market. 2012 Focus Dragonfish will continue to focus on leveraging new opportunities in significant newly regulating markets, focusing on utilising the compelling offering to sign agreements that will enhance revenue and profit. 16 21273-04 888 Holdings.indd 16 10/04/2012 11:44:19 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 TECHnOlOGICal InFRaSTRuCTuRE 888’s success is built on the strength of its technological infrastructure, which provides the platform for the cutting- edge innovation for which we are renowned. The cutting- edge offering provided for our players, including the ground- breaking Poker 6, is all a result of the behind-the-scenes Other notable improvements to 888’s back-office systems in 2011 included: ●● Unified Offering Infrastructure: During 2011, B2C casino, poker and sport brands were transferred to the new unified offering infrastructure, which includes support expertise that is at the heart of 888. of the new bonus structure. The right technology for regulated markets Having the right technology is crucial to operating in newly regulated markets, as the platform must be tailored to conform to all specific requirements. During H2 2011, 888 In addition, the “My Account” site was launched, which includes tabs on bonuses and personal details to ensure that all customers are able to easily manage their 888 accounts. More content will be added to this site during launched a regulated Casino offering in Italy, both for B2C 2012. (888.it) and for B2B partners. In Q4, our platform was adjusted to support Gibraltar AML regulation for the .com brands. The ability to quickly make changes to our platform, while also ensuring that the customer experience remains at the cutting edge of online gaming, stands us in good stead to gain market share as new geographies are regulated. Based on the changes we made to our gaming systems to comply with Italian regulations, in 2012 we will adjust the platform in order to launch in Spain. Subject to successful conclusion of the licencing process in Nevada, tentatively expected in 2012, we are perfectly ●● Gaming Infrastructure Improvements: In order to support the growing load on our gaming infrastructure caused by the significant increase in player numbers, steps were taken in order to improve performance and enable a more robust and stable platform. ●● Registration Process Improvements: Optimising the usability of the registration process can be a major boost to 888, through maximizing the number of deposits made from visitors to the site. In 2011, we introduced an enhanced registration form with, amongst other things, an improved look and feel, more meaningful validations, and new password length requirements for increased positioned with the required infrastructure and platform security. changes in order to launch. ●● Real Time Segmentation (Queue Manager Improvements): During 2011, we added new abilities to the Queue Manager tool including the ability to retrieve population data based on data mining models, and the ability to perform automatic actions (in addition to manual actions that are already supported). ●● Affiliate System Improvements: A number of improvements to 888's internal Affiliates System were introduced during 2011, supporting the growing number of affiliates, enhancing reporting capabilities and optimising the billing process. The right technology for our customers The record numbers of concurrent users on 888 sites in 2011 demonstrate the robustness of our platform. Preparations to serve these incoming users began in Q2, and over the course of 2011 the data center was redesigned to improve the availability of the network infrastructure in the server room and allow for faster installations of new hardware. The networking hardware was also reconfigured to improve availability and network stability. This was done smoothly and ensured that all IT operating parameters were maintained. The backup software and hardware were also upgraded to support the increasing size of data, reduce backup window time frame and improve data retention. The updated systems and procedures were awarded level 1 PCI Certification in the yearly audit performed by the Qualified Security Assessors. The successful updating of systems meant all service level agreement performance parameters were met and surpassed. 17 21273-04 888 Holdings.indd 17 10/04/2012 11:44:19 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Enhanced Business Review unique Casino Games An essential part of 888’s strategy is its focus on the player experience. To fulfil this goal a new robust gaming platform — the Generic Gaming Platform or GGP was introduced. 888’s GGP offers a simple way to develop or integrate Casino games. It is built over existing infrastructure and back-office systems and contains a number of games engines: core Casino games (like Blackjack and Roulette) as well as unique Video Slots. 888 plans to utilise this platform to offer unique games in parallel to the already well-established games integration channel via the 888 Integration Platform. During 2011, a new French Roulette and American Roulette was launched over the GGP and we are planning to add a number of additional games and unique features during 2012. GGP supports Flash games, and also new technologies such as HTML5. This enables 888Casino to deliver and integrate games easily on mobile platforms. ePayments The comprehensive Total Payment Services offering includes payment processing tailored for local markets, fully managed fraud detection and prevention services, and customer support. The ability for players to deposit and withdraw in their local currency via their preferred payment option is key to 888’s personalisation and localisation of the products offered. In 2011 we introduced new currencies and seven new payment options in key countries. Fraud prevention was also bolstered through the addition of major tools including 3D Secure Code (offered as Verified by Visa and MasterCard SecureCode to Visa and MasterCard card users respectively), and the payment platform was amended to be compliant with those jurisdictions in which a new regulatory regime was introduced. Introducing new features and capabilities in the payment platform helped us to better convert customers in the cashier. These capabilities allow much shorter login time to the system from all over the world, and much more effective and reliable ways to process payments. 18 CuSTOMER SuPPORT anD SERvICE Customer Relationship Management Strong customer relationships are the bedrock of 888’s success, and the Group remains committed to its goal of providing the best customer support and service in the global online gaming industry. First class customer support is offered for each of the Group’s brands and White Labels via telephone, e-mail and chat to customers around the world, in 10 different languages. 888’s ongoing commitment to localisation strengthens relationships worldwide, through speaking to people in their language and cultural context, while the market-leading usage of social features and interactivity with players strengthens brand loyalty. The launch of 888.it, a tailor-made product for the newly regulated Italian market, in August 2011, marked a milestone for 888. To support this venture, a wholly new customer support team was recruited and trained to, for the first time, handle all aspects of the operation; successfully establishing a range of new processes and procedures. In 2011, 888’s support teams, on average, converted 20% of all incoming phone calls and 10% of relevant incoming chats to deposits; maintaining this convenient service to players and continuing to benefit the business. We see the forthcoming expansion of live telephone and chat deposit capabilities to our Bingo customers as exciting new developments. This feature was launched as a pilot project at the end of 2011 and is expected to boost revenues and open new marketing opportunities. The Telemarketing and Proactive Chat Department continued to deliver excellent performance as measured by the deposits generated by interaction with customers. The Department has increased its performance for the third successive year in all three key metrics — efficiency, productivity and revenue generated. The implementation of an easy-to-use newly customised layout, and improved design of the Online Web Self-Service tool, along with the continual evaluation and refinement of content, resulted in an increased usage of this tool by customers. Improvements helped to reduce customer issues while increasing people’s ability to find answers to their queries themselves, enabling 888 to further reduce its operational expenditure, improve agent efficiency and more effectively manage its resources. 21273-04 888 Holdings.indd 18 10/04/2012 11:44:19 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 As a result of well-received amendments to our offering, Review forums, customer surveys and feedback analysis the overall volume of queries coming in to our support assisted in the continual evaluation and refinement of the centres decreased by 6% in 2011. This result is especially Online Help content. In 2012, we plan to enhance the visual pleasing as it was achieved despite the significant increase representations of supplied information to reduce textual in active casino and poker customers and despite a 20% materials, adapting to customer needs and increasing increase in B2B Bingo contact volumes. user satisfaction. Total contact volumes handled at our Support Centres — all B2C/B2B Brands and languages: 2010 contacts handled via phone, e-mail and chat: 960,095 REGulaTIOn anD GEnERal REGulaTORy DEvElOPMEnTS The regulatory framework governing online gaming in 2011 contacts handled via phone, e-mail and chat: 900,741 different countries around the world remains as dynamic and rapidly evolving as ever. While some jurisdictions The main Gibraltar contact centre focuses on providing have moved to curtail the activities of online gaming support for 888’s principal markets in Europe, Asia Pacific sites, many others (including many European jurisdictions and Latin America, while the Antiguan contact centre focuses on supporting the English speaking markets in Europe, and even some US states) are currently contemplating liberalisation and regulation of the industry, and several have Australia, Asia Pacific and Canada. The fully established already taken this route. The Group remains committed to contact centre in Romania is providing mainly telemarketing monitoring closely and addressing regulatory changes as and proactive chat activities in several languages for 888 they occur, and to fostering, so far as possible, the trend and Dragonfish. towards liberalisation and regulation of online gaming throughout the world. Support teams in all operational locations aim to close the majority of issues during the first contact, as exemplified in the Service Level Achievement reached in 2011. Throughout Eu As the hopes for pan-European harmonization of online the year, we further improved the handling of customer gaming laws waned during 2011, a growing number of EU interactions by prioritising inbound queries according to Member States have introduced (or are in the process of customer statuses and specified business priorities. introducing) local legislation governing the offering of online Customer Satisfaction 888 monitors customer satisfaction at key points gaming. Several EU Member States are either contemplating or have already put in place, a liberalised (or partially liberalised) gaming regime: The UK, France, Italy, Spain, throughout their lifetime cycle in order to assist Denmark, Belgium, Estonia, Greece, Hungary, Romania and stakeholders in the Group to identify and understand habits others have already adopted a regulatory regime governing and expectations of loyal players, as well as to design online gaming. Other EU Member States, including Ireland, service initiatives and ongoing refresher training based on Germany, Bulgaria, the Netherlands, and Sweden are also the results. considering (or are already in the process of) revising their gaming laws, possibly to include liberalization of the online In 2011, the customary annual study conducted to gaming market. The proliferation of varying regulatory benchmark 888’s service level within its primary markets regimes throughout the EU Internal Market has inevitably included English, German and Spanish speaking casino and resulted in increased regulatory constraints and compliance poker players, as well as English speaking sport customers. challenges impacting the Group’s European business. 888 is pleased that, for the third year running, respondents from our main language markets gave their highest rating to In March 2011, the European Commission published a long- the level of professionalism of our support representatives. awaited Green Paper on online gaming. The Green Paper launched a public consultation between EU Member States, The survey also sought insight into customer awareness and EU institutions and other stakeholders regarding the legal usage of the Online Self-Help facility available to English, and technical challenges arising from the activities of both German and Spanish customers. In 2011, 80% of respondents “lawful” and “unlawful” online gambling operations. were aware of the Online Web Self-Service tool vs. 73% in 2010. 71% of customers who are aware of the tool reported using it. 19 21273-04 888 Holdings.indd 19 10/04/2012 11:44:19 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Enhanced Business Review In this context, rather than strongly advocating The regulation of online gaming in Germany continued to be harmonization of gaming laws across the EU Internal Market, characterized by legal ambiguity and chaos during 2011 and the Paper notes the existence of the two regulatory models early 2012. The Inter-State Gambling Treaty, struck down adopted by EU Member States — a liberalized licencing in 2010 by the European Court of Justice, was scheduled model and the restrictive national monopoly model. As to expire at the end of 2011. At that time, 15 of the German with the declaration adopted in late 2010 by the EU Council federal states (Lander) (not including the state of Schleswig- of Ministers, the Green Paper recognizes that the online Holstein) extended the treaty by six months to allow for gaming market has not been the subject of pan-European the adoption of a new treaty (expected to introduce a very regulation, indicating that this state of affairs is unlikely to limited online sports-betting regime, allowing for no more change in the immediate future. The Green Paper highlights than 20 licencees). The new treaty awaits the approval the need to identify ways in which cooperation between of the individual states’ parliaments. In a letter issued by national regulatory authorities at EU level will assist Member the European Commission in March 2012, the Commission States in achieving more effectively the objectives of their expressed serious doubts over the compliance of the new gambling policy, in line with the principles of the EU internal draft treaty with EU law, echoing criticism voiced regarding market. 888 responded to the Green Paper consultation process by filing a detailed position paper supporting pan- the previous treaties on earlier drafts of the new treaty. The EC indicated that it stood to the Lander to demonstrate how European regulation of the industry. the proposed treaty could be considered compliant with EU law (or risk having it struck down as the previous treaty had The end of 2011 saw France evaluating the online gaming been). This position by the EC is likely to further contribute regime put in place by a 2010 law (which introduced to the legal uncertainty already characterizing the German a licencing regime for online poker, sports betting and gaming market. horserace wagering). It remains unclear whether and to what extent this evaluation will lead to amendments of the In contrast, the German state of Schleswig-Holstein French legal regime, possibly including further liberalization introduced its own regulatory and licencing regime for of the market, or changes to the tax structure. online casino games (including poker, but excluding Also in 2011, Denmark launched the regulatory regime games remain under state monopoly). Despite granting established under a 2010 law (after a state aid claim against certain advantages to the incumbent land-based gambling this regime was rejected by the European Commission). operators, the Schleswig-Holstein regime was generally Under this new regime, the 888 Group has been issued an approved by the European Commission. The licencing online gaming licence by the Danish Gambling Commission. process for online gaming operators was scheduled to begin roulette, baccarat and blackjack) and online betting (lottery Spain also adopted a new regulatory and licencing regime for online gambling during 2011, and issued a time-restricted in March 2012, but has been delayed, as secondary legislation specifying the technical requirements is yet to be enacted. call for applications by the end of the year. Following There remains a certain degree of legal uncertainty national general elections, issuance of licences has been surrounding the ability of Schleswig-Holstein licencees postponed to 2012, and an overall review of the 2011 regime to accept players from throughout Germany. While the by the new administration cannot be ruled out. Until Schleswig-Holstein law does not prohibit the acceptance such time, the Group’s Spanish business continues to be of players nation-wide, and while strong legal arguments governed by an interim regime put in place by the 2011 law. are available to support the right of Schleswig-Holstein Italy, where the Group holds an online gambling concession, introduced new legislation in 2011, expanding the scope of licencable online activities, and significantly easing access to licencees to operate in such a manner, the issue is likely to be the subject of legal debate once the Schleswig-Holstein regime has been fully launched. the market by EU-based operators. The Group has updated As part of a broader austerity package, and with the its Italian licence concession in accordance with this new undisguised aim of generating significant tax revenue from legislation. Further expansion of the licencable online activities may occur during 2012. online gaming, Greece adopted a regulatory and licencing regime governing online gaming regime during 2011. 20 21273-04 888 Holdings.indd 20 10/04/2012 11:44:19 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 The new Greek legislation (which has not yet been fully Several legislative initiatives at state level seek to regulate intra- launched) has come under severe criticism due to its state online gaming (including in New Jersey, Iowa, Connecticut, incompatibility with EU law. This is primarily due to the Massachusetts, California, Ohio and Washington D.C.). fact that applicants for an online gaming licence must be established in Greece, locate their gaming infrastructure These initiatives come after the State of Nevada implemented, and store data in Greece and conduct payment processing during 2011, a new regime governing intra-state interactive in Greece. The law also subjects applicants to retroactive poker. The newly introduced Nevada regime allows licenced taxation. terrestrial gaming operators to offer online poker to patrons in Nevada, including through partnership with online operators Belgium’s licencing regime for online gaming activities in possession of an appropriate service provider licence. became effective on February 2012 after a year of “temporary The Group has already applied for a licence as an interactive test permits” granted to selected operators. Belgian licences gaming service provider and manufacturer in Nevada. may only be issued to terrestrial operators already operating In so doing, the Group continues to pioneer the Nevada online a casino or gaming arcade. In addition, servers containing gaming market. (as a minimum) the data pertaining to Belgian operations, are to be located in Belgium. For these reasons, the European Early in 2012, the New Jersey state legislature began debating Commission has declared the Belgian regulatory regime a bill seeking to allow the offering of online gaming by Atlantic to be incompatible with EU law. City licencees, possibly through partnerships with established online operators. Hungary also amended its gambling law during 2011 introducing a limited regulatory regime governing online Similar bills are being debated by the state legislatures of gaming. The implementation of these new regulatory regimes California, Iowa, Mississippi and Hawaii. Under the California awaits publication of secondary legislation, and is anticipated bill, terrestrial licencees and Indian tribes could obtain an during 2012. online poker licence, pursuant to which they could operate through partnership with online operators (subject to the In August 2011, Romania adopted secondary legislation condition that such operators did not accept wagers from necessary to implement the online gaming portion of its the United States after 31 December 2006). Similar bills have 2010 gaming legislation. Though formally in force, the regime been proposed in Iowa and Mississippi. In Hawaii a proposed established by this legislation has not yet been practically bill seeks to establish a single state online gaming operator implemented by the Romanian authorities and it is presently (monopoly). unclear when such implementation will commence. uK Following a review of the current online gaming licencing Other US jurisdictions, including Illinois, Maryland and New York, are considering launching online platforms for the sale of lottery products. These developments could all present regime, the DCMS is considering reforming the existing regime. potential business opportunities for the Group, which could act In March 2012, the Chancellor of the Exchequer formally as service provider to licencees and lottery corporations in the announced a consultation process aimed at introducing various states. legislation (in the form of a new Finance Act) which would subject all online operators accepting UK customers to UK Federal legislation governing online gaming (most likely online gaming duty (presently at 15% of Gross Gaming Revenue). poker, initially) remains a possibility in 2012. Late 2011 saw The announcement explicitly refers to December 2014 as the consensus between Senator Harry Reid (longtime supporter target date for implementation of the aforementioned reform, of online poker legislation) and Senator Jon Kyl (who has which would require a change of primary legislation. traditionally objected to federal legislation condoning online uSa Late in 2011, the US Department of Justice released a poker). This newly formed alliance greatly increases the odds in favour of federal legislation regulating online gaming, though the complex political landscape resulting from the memorandum reversing the Department’s long-standing position regarding the scope of the Wire Act. The Department 2012 general election may impact the likelihood of such development during 2012. of Justice concluded that the Wire Act does not apply to non- sports betting, and hence does not prohibit the intra-state sale online of lottery tickets by licenced state lotteries. 21 21273-04 888 Holdings.indd 21 10/04/2012 11:44:19 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Corporate Social Responsibility As a global leader in online gaming entertainment, 888 is committed to a pro-active policy of corporate and social responsibility that reflects the high professional and ethical standards we have set for ourselves. Conducting our business responsibly is fundamental to the Community Community Involvement 888 is committed to supporting both the various local communities in which it operates and also the broader global community. Our community investment program includes cash donations and long-standing community future success of 888 and the sustainability of the business. involvement in our key areas across the world. At 888, we understand that our responsible approach is both the correct way to do business and one that enhances our credibility, thereby supporting the development of the business. Our philosophy We aim to contribute to the global community in which we operate: ●● We sponsor and participate in activities in the neighbourhoods in which we live and work. ●● We create collaborative and rewarding work In addition, 888 employees are actively involved with the local community. In the first part of the year, employees in the Gibraltar office volunteered to raise money for the Alzheimer's foundation. Our employees in the Israel office also continue with their long-standing relationship with the national Derech Haetgar charity which focuses on enhancing the education of disadvantaged teenagers. The program allows volunteers to assist with homework and studies by combining fun and educational indoor and outdoor activities and workshops environments where new ideas can flourish and according to various public festivals. employees can grow. ●● We encourage responsible gaming practices to avoid the dangers of problem gambling, and we have taken rigorous steps at all our online sites to prevent under- age gambling. Our values At 888 we place the community and the customer at the centre of all our endeavours. We are constantly looking at new and innovative ways to create a caring, responsible gaming environment and to ensure that minors are unable to access our games. For any customers who suspect they have a problem, our Director of Responsible Gaming and our well-trained staff provide individual assistance that is As has been the case for the past few years, employees in Israel also joined the “Day of Good Will” national volunteering organization and for the third year, 888 employees dedicate this day to host Sudanese kids for a day of fun activities. Charity and our customers The annual 888 Charity Weekend was hosted on 9-12 December 2011. For the fifth consecutive year, 888.com donated 8% of the house profits during the entire weekend from across the business — casino, poker, bingo & sport. The charity donations were shared between three well know and deserving charities, Breast Cancer Care U.K., Bliss and considerate, supportive, and helpful. Sport Relief. As well as this general promotion, during the 888 Charity Weekend individual brands allowed players to contribute more through promotions like 888casino’s Santastic video slot, 888poker’s Charity Challenge and 888ladies £200 Good Cause. 22 21273-04 888 Holdings.indd 22 10/04/2012 11:44:19 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Environment As an online business 888’s activities have a relatively small impact on the environment, but 888 continues to develop its Protecting Customers ●● As a responsible, regulated gaming company we comply with both the GamCare and the eCOGRA commitment to environmental issues: guidelines. ●● Green IT: Recycling IT: all 888’s redundant IT equipment is now recycled. Virtualisation (VDI project): More than ●● GamCare is the leading authority on the provision of counselling, advice and practical help in addressing the social impact of gambling in the UK. 120 stations were transformed from a PC to the VDI ●● eCOGRA ensures that approved online casinos are system, enabling us to use less hardware. properly and transparently monitored to provide player ●● Energy consumption: Alongside these projects we protection. continuously monitor our energy consumption to help ●● Our site has links to helping agencies and we have us ensure we are being as energy efficient as possible. placed many safeguards for those who need help with ●● Recycling: We recycle as much as possible. Paper, bottles and cans are collected from all of our sites. ●● Water: We use only ecological detergents in our offices and use water saving devices in all our locations. ●● Travel: To minimise the impact of travel on the environment we encourage employees to either cycle controlling their gaming. ●● Self-assessment test: For gamblers who are worried about their gambling habits and want to know more about the signs of compulsive gambling, ●● Controlling deposit limits: Should clients feel the need to they can control their gambling by self limiting the to work and, in certain locations, provide buses for amounts they deposit per day, per week or per month. commuters. We also continue to invest in state-of-the- ●● Self exclusion: A customer can request to be self art technology to help meetings occur remotely. excluded for a chosen period, due to different concerns. Responsible gaming We are constantly creating new and innovative ways to Based on internal studies we decided to increase time periods available for clients to cool off. Clients can choose from six different exclusion periods from one create a caring, responsible gaming environment and to day to six months. During this period, 888 blocks the ensure children are unable to access our gaming sites. account and no promotional e-mails are sent to the client. 888 aims to provide responsible adults with the best online gaming entertainment experience. However, we In 2011, 888’s Director of CSR and Responsible Gaming acknowledge that gaming poses a potential danger to a worked with Gambling Therapy and GamCare, aiming small minority of people. We continuously train our staff to enhance the training of our customer support in how to provide a safe gaming experience. Our training representatives in order to help them identify potential program incorporates methods and techniques to help our compulsive players’ profiles and the most effective way employees to recognise and take appropriate actions if they that they can be helped before a problem arises. identify compulsive or underage gambling. Protecting minors Under-age gambling on our sites is prohibited and 888 takes the prevention of under-age gaming extremely seriously. Our offering is not designed to attract minors. We make every effort to prevent minors from playing on our sites and use sophisticated verification systems as well as a third party verification supplier to identify and track minors if they log into our software. The verification process today consists of two verification systems, both 192.com and URU. We train our staff to be highly sensitive to the possibility of underage gambling and make sure we suspend any account suspected to be an under-age account. 23 21273-04 888 Holdings.indd 23 10/04/2012 11:44:19 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Corporate Social Responsibility 888responsible Since 2007 a dedicated website, www.888responsible. Employee Care at 888 888 values its employees’ opinions and conducts regular com, has been available, providing information regarding pulse checks to gain an understanding regarding employees’ all aspects of responsible gaming. The site is available in working experiences. This year we conducted an online English, French, Spanish and German. staff opinion survey which included some of the following This year we upgraded and expanded the site so that ‘888 management’. The survey findings proved high levels of the content reflects our holistic CSR approach, while the employee satisfaction and provided excellent guidelines for topics: ‘me as an employee’, ‘my manager’, ‘my team’ and updated platform allows for greater flexibility in content ongoing efforts. changes as well as supporting more languages. united nations Global Compact (unGC) During 2009 888 entered into in the United Nations Global Compact. The UNGC is the largest global initiative to promote the learning and Development At 888 we invest in our employees’ professional development with regular and ongoing training and development programs. This year a number of new learning opportunities were devised and offered to our employees; including an internal learning program: ‘Up2Date with social responsibility of businesses. It is a voluntary initiative, 888’, teaching about our various products and offerings; which brings together thousands of businesses across a new training initiative for our sales team in Antigua more than 100 sectors worldwide. Representatives confirm which included new online marketing methods as well as their commitment to the UNGC in order to promote ten a number of leadership developmental courses including universally accepted principles in the field of human rights, a new program for General Managers in our Israel office workplace standards and anti-corruption. and a supervisory skills program for Team Leaders in our We believe that the activities of 888 are in line with the Gibraltar office. principles of the Global Compact, and it therefore seemed All 888 employees receive feedback about their work appropriate that we should publicly declare our support and performance during the annual talking@888 process. This ensure greater exposure to a wider public. By joining the year we incorporated an interactive feedback scheme, which UN Global Compact we are now in line with an established allowed managers to collect feedback online from different and globally recognised policy framework of environmental, stakeholders across the business, including employee’s social, and governance policies and practices. colleagues and indirect managers. A Company-wide grading scale was utilized to allocate scores and feedback sessions were then carried out. 24 21273-04 888 Holdings.indd 24 10/04/2012 11:44:20 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Risk Report The Group operates in a dynamic business environment. segmentation is also used to isolate and protect the Group’s In addition to the day-to-day commercial risks faced by networks and restrict malicious activities. The IT environment most enterprises, the online gaming industry faces particular is audited by independent auditors, such as PCI DSS security challenges in respect of Regulatory risk, Reputational risk, audit and eCOGRA audit. These audits ensure proper IT Information Technology risk and Taxation risk, each of which procedures and a high level of security. In order to ensure is detailed below. Regulatory risk The regulatory framework of online gaming is dynamic systems are protected properly and effectively, external security scans and assessments are carried out in a timely manner. The Group has a redundant storage solution to ensure storage availability and performance. All critical data and complex. Change in the regulatory regime in a specific is replicated to another storage device for disaster recovery jurisdiction could have a material adverse effect on business purposes and all data is stored off-site on a daily basis. volume and financial performance in that jurisdiction. A detailed regulatory review is set out in the Regulation and In order to minimise dependence on telecommunication General Regulatory Developments section above. The Group service providers, the Group invests in network infrastructure manages its regulatory risk by routinely consulting with legal advisors in the jurisdictions where its services are offered or redundancies whilst regularly reviewing its service providers. The Group has two internet service providers in Gibraltar in are accessible, where necessary obtaining formal legal opinions order to minimise reliance on one provider. from local counsel. Furthermore, the Group obtains frequent and routine updates regarding changes in the law that may As a part of its monitoring system, the Group deploys set be applicable to its operations, working with local counsel to user experience tests which measure performance from assess the impact of any changes on its operations. The Group different locations around the world. Network-related constantly adapts and moderates its services to comply with performance issues are addressed by rerouting traffic using legal and regulatory requirements. Finally, the Group blocks different routes or providers. 888 operates a 24/7 Network players from certain ‘blocked jurisdictions’ at various stages Operations Centre (NOC). The NOC’s role is to conduct and using various technological methods. real time monitoring of production activities using state- Reputational risk Under-age and problem gaming are inherent risks of-the-art systems. These systems are designed to identify and provide alerts regarding problems related to systems, key business indicators and issues surrounding customer associated with the online gaming industry. The Group usability experience. devotes considerable resources to putting in place prevention measures coupled with strict internal procedures The IT environment tracks changes, incidents and SLA designed to prevent under-aged players from accessing KPIs in order to ensure that client experience is consistent its real money sites. In addition, the Group promotes a and well managed. As part of these procedures, capacity safe and responsible gaming environment to its customers planning takes place and infrastructure is built accordingly. supplemented by its corporate culture. The Group has a System-wide availability and business-level availability is dedicated Director of CSR & Responsible Gaming tasked measured and logged in the IT information systems. with the responsibility of implementing such policies. Further details about the Group’s responsible gaming initiatives are set out in previous pages. Information Technology risks As a leading online business, the Group’s IT systems Taxation risk The Group aims to ensure that each legal entity within the Group is a tax resident of the jurisdiction in which it is incorporated and has no taxable presence in any other jurisdiction. While the Group’s customers are located are critical to its operation. The Group is reliant on the worldwide, certain jurisdictions may seek to tax the performance of these systems. Group’s activity which could have a material adverse effect on the amount of tax payable by the Group or on Cutting-edge technologies and procedures are implemented customers’ behaviour. Furthermore, jurisdictions in which throughout the Group’s technology operations and designed online gambling is regulated may impose gaming duties on to protect its networks from malicious attacks and other licenced operators. The Group actively monitors taxation such risks. These measures include traffic filtering, anti- risk in the relevant jurisdictions and takes such steps as it DDoS (Distributed Denial of Service) devices and Anti-Virus considers necessary to minimize such risks. protection from leading vendors. Physical and logical network 25 21273-04 888 Holdings.indd 25 10/04/2012 11:44:20 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Board of Directors Richard Kilsby Non-executive Chairman Chairman of 10 Tech Holdings Limited, Non-executive Director of Swiftstake Technologies Limited and Non- Richard Kilsby has been Chairman since March 2006, executive Director of Probability (Gibraltar) Limited which having previously been Deputy Chairman of the Group is a wholly owned subsidiary of Probability Plc. Previously, from August 2005. Since 2002, he has held several Board he was a Board member of Ladbrokes plc from 1990 to and management positions in various private and venture 1996. Age 63. capital funded companies. In 2004, he acted as independent monitor for the SEC and USA Department of Justice in connection with Adecco. From 1999 to 2002, he was Chief amos Pickel Independent Non-executive Director Executive of Trade Point and subsequently Executive Amos Pickel was appointed in March 2006. Formerly the Vice-Chairman of virt-x plc. From 1995 to 1998, he was an Chief Executive Officer of Atlas Management Company Executive Director of the London Stock Exchange, prior to Limited and Chief Executive Officer and member of the which he was a Managing Director for Bankers Trust from Board of Directors of Red Sea Hotels Ltd. Previously a 1992 to 1995. He was also Vice-Chairman of Charterhouse Non-executive Director of Gresham Hotel Group Plc, he is Bank from 1988 to 1992, and spent the early part of his career with Price Waterhouse (now PwC) where he was a non-practising solicitor holding a Masters in Law from New York University and an LLB. from Tel Aviv University. a partner from 1984 to 1988. Age 60. Since September 2010, he has been the Chairman of the Board of Directors of Berggruen Residential Limited. Age 45. Brian Mattingley Chief Executive Officer Brian Mattingley has been Chief Executive Officer since Gigi levy Non-executive Director March 2012, having previously been Deputy Chairman of the Gigi Levy was Chief Executive Officer of the Group from Group and Senior Independent Non-executive Director since January 2007 until 30 April 2011. Prior to his appointment, March 2006. He joined the Board in August 2005. He was Gigi worked for Amdocs, one of the world’s largest software previously Chief Executive of Gala Regional Developments providers and systems integrators in the telecoms market Limited until 2005. From 1997 to 2003 he was Group (NYSE: DOX), most recently as Division President managing Finance and Strategy Director of Gala Group Plc, prior to Amdocs’ activity in Europe (except Eastern Europe), which he was Chief Executive of Ritz Bingo Limited. He has Central and Latin America. Before joining Amdocs, held senior executive positions with Kingfisher Plc and Dee Gigi held several interim management and consulting roles Corporation Plc. Age 60. aviad Kobrine Chief Financial Officer with various companies in Israel and the UK. Gigi also headed Giltek, a telecommunication systems integrator, and Girit Telecommunications, an Israeli Information and Communications Technology systems integrator. He holds Aviad Kobrine has been Chief Financial Officer of the an MBA from the Kellogg School of Management Group since June 2005, and was appointed to the Board in at Northwestern University. Age 40. August 2005. From October 2004 he was a consultant to 888. Previously, he was a banker with the Media Telecoms Investment Banking Group of Lehman Brothers and prior Michael Constantine Independent Non-executive Director to that, he was a senior associate with Slaughter and May. Michael Constantine was appointed in August 2005. He holds a Masters in Finance from the London Business From 1996 to 1998, he was Deputy Superintendent of the School (Distinction), a BA in Economics and an LLB from Turks and Caicos Islands Financial Services Commission, Tel Aviv University. Age 48. John anderson Non-executive Director and in 1995 was head of the Financial Supervision Unit of the Mauritius Offshore Business Activities Authority. From 1991 to 1995 he was Inspector of Licencees at the Gibraltar Financial Services Commission, latterly Acting John Anderson was the Chief Executive Officer of the Group Commissioner. He is a Chartered Accountant and for many from September 2000 to December 2006. He is currently years a partner in the firm of Spain Brothers & Company. Non-executive Chairman of Burford Holdings plc and was He served in the Royal Naval Reserve, reaching the rank Chief Executive Officer of Burford Holdings plc from 1996 of Commander. Mr Constantine stepped down from the to 2000. He is Chairman of the Interactive Gaming Council, Board as of 31 December 2011. Age 73. 26 21273-04 888 Holdings.indd 26 10/04/2012 11:44:20 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Corporate Governance 888 Holdings plc is admitted to the UK Official List and its Directors, Michael Constantine, stepped down from the shares are traded on the London Stock Exchange under Board as of December 31, 2011. The biographical details of a Premium Listing. As such, despite being incorporated in all of the Directors are given on page 26. The Company Gibraltar, the UK Corporate Governance Code (the ‘Code’) is actively seeking new Non-executive Directors with the applies to the Company. experience and skill-set to help the Group continue its next phase of growth. Statement of Compliance The Board remained committed to high standards of corporate governance which it considers to be central to the Strategic approach The Board focuses upon the Group’s long-term objectives, effective management of the business and to maintaining strategic and policy issues and formally and transparently the confidence of investors. During the year, the Board considers the management of key risks facing the Group, considers that it and the Group have complied with all as well as determining the nature and extent of significant relevant provisions of the UK Corporate Governance Code. risks it will take in achieving its strategic objectives, Business Model A discussion of the basis on which the Company generates systems and reviewing annually the effectiveness of the Company’s risk management and internal control systems. and preserves value over the longer term, together with The Board is responsible for acquisitions and divestments, its strategy for delivering its objectives, is set out in the major capital expenditure projects and considering Group Chairman’s Statement and Chief Executive’s review on budgets and dividend policy. The Board also determines maintaining sound risk management and internal control pages 2 to 7. The Board The Directors consider it essential that the Company should key appointments. The Board receives regular updates on shareholders’ views. The Board has established a calendar of business. This covers the financial calendar, strategic planning, annual budgets and performance self- be both led and controlled by an effective Board. assessments, as well as the conduct of standing business. Composition During 2011, the Board consisted of seven Directors as The calendar forms the basis for effective integration of business activities as between the Board and its principal Committees (see page 29), which individually consider their follows: three independent Non-executive Directors, two own operating frameworks against the Board’s business Non-independent Non-executive Directors, a Non-executive programme. The Board intends to establish a formal process Chairman, and one Executive Director, being the Chief for the annual evaluation of its performance, its committees Financial Officer. One of the former Executive Directors, and individual Directors. The evaluation process is to cover Gigi Levy, stepped down from his role as Chief Executive a range of issues such as Board processes, Board roles and Officer as of 30 April 2011 but has remained on the Board as responsibilities, Board agendas and committee processes. a Non-executive Director. From that date Brian Mattingley Whilst no evaluation was carried out in 2011, the Board took on certain Chairman duties. Brian Mattingley was intends to carry out such an evaluation in 2012. The Board appointed full-time Chief Executive Officer in March 2012. plans to meet six times a year. During 2011, the Board Following such appointment, the composition of the various met five times. Set out below are details of the Directors’ committees on which Mr Mattingley was a member is under attendance record at Board and Committee meetings review. In addition, one of the independent Non-executive in 2011. 21273-04 888 Holdings.indd 27 10/04/2012 11:44:20 27 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Corporate Governance Total held in year Richard Kilsby Gigi Levy Aviad Kobrine John Anderson Michael Constantine* Brian Mattingley Amos Pickel Total number of meetings held during the year ended December 2011 and the number of meetings attended by each Director Audit Remuneration Nominations Board committee committee committee 4 2 5 4 5 5 4 n/a n/a n/a n/a 3 3 3 n/a n/a n/a n/a 3 3 3 1 n/a n/a n/a 1 1 n/a * Michael Constantine stepped down from the Board with effect from 31 December 2011. The Chairman has responsibility for ensuring that agendas undertakings to ensure compliance within their business for Board meetings are set in advance. Board papers are operations with the Board’s formal schedule of matters issued to Directors sufficiently in advance of meetings to reserved to it for decision or approval. facilitate both informed debate and timely decisions. non-executive review and performance appraisal The Chairman holds meetings at least once per year with Division of responsibilities The responsibilities of the Chairman are clearly and formally defined, with the Chairman being responsible for the effective operation of the Board as a whole, leadership of the Non-executive Directors without the Executive Directors the Board in achieving a culture of constructive challenge being present. Led by the Senior Independent Director, the by Non-executives, regularly agreeing and reviewing each Non-executive Directors meet once per year without the Director’s training and development needs, and supporting Chairman present in order to appraise the performance of key external relationships. the Chairman. The Directors have wide-ranging business experience, and no individual, or group of individuals, dominates the Board’s decision making. Other issues All Directors have access to the advice and services of the Company Secretary and the Company’s nominated advisers, The Board considers that Brian Mattingley and Amos Pickel who are responsible for ensuring that Board procedures satisfy the independence criteria of the Code in 2011. The are followed. Directors are able to seek independent Board is satisfied that, upon his appointment as Chairman, professional advice, if required, at the Company’s expense Richard Kilsby met the independence criteria of the Code. provided that they have first notified their intention to do so. The other significant commitments of the Chairman during 2011 are detailed in his biography on page 26. It is noted that The appointment or removal of the Company Secretary is a Mr Kilsby resigned as a Non-executive Director of Tullett matter for the Board as a whole. Prebon plc in 2011. The Board considers that Mr Kilsby’s other commitments do not interfere with the discharge The Board accepts that there should be a formal, rigorous of his responsibilities to the Group and is satisfied that and transparent procedure for the induction of new he makes sufficient time available to serve the Company Directors, which has been formulated with the guidance of effectively. the Nominations Committee. Reserved powers and delegation A schedule of matters reserved to the Board has been The opportunity to hold office as Non-executive Directors of other companies enables Directors of 888 to broaden their adopted and its content is reviewed to align it with experience and knowledge, which will benefit the Company. operational needs and the Board’s preference to monitor Executive Directors may be allowed to accept Non- and, where appropriate, approve matters of substance to executive appointments with the Board’s prior permission, the Group as a whole. Senior Executives have given written so long as these are not likely to lead to any conflict of 28 21273-04 888 Holdings.indd 28 10/04/2012 11:44:20 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 interest. Executive Directors may be required to account for of a new Chief Executive Officer of the Company. Brian fees received from such other companies. Mattingley was appointed Chief Executive Officer in March 2012. Michael Constantine stepped down from the Board The Company has arranged insurance cover in respect of as of 31 December 2011, and the Nominations Committee is legal actions against its Directors. To the extent permitted by presently considering appointment of a new Chair. Gibraltar law, the Company also indemnifies the Directors. Neither the insurance nor the indemnity provides cover The Nominations Committee assists the Board in discharging where a Director has acted fraudulently or dishonestly. its responsibilities relating to the composition of the Board. Re-election of Directors All Directors are subject to reappointment by shareholders on an annual basis. audit Committee The Audit Committee comprised three independent Non-executive Directors: Brian Mattingley (Chair until 30 April 2011), Michael Constantine (Chair from 30 April 2011) and Amos Pickel. The Board is satisfied that both Brian Mattingley and Michael Constantine have sufficient The Nominations Committee is responsible for reviewing, from time to time, the structure of the Board, determining succession plans for the Chairman and Chief Executive Officer, and identifying and recommending suitable candidates for appointment as Directors. The Nominations Committee’s terms of reference are available on request to the Company Secretary and are included on the Company’s website, www.888holdingsplc.com. Remuneration Committee During the year, the Company’s Remuneration Committee recent and relevant financial experience to Chair the Audit comprised three independent Non-executive Directors: Brian Committee. Michael Constantine stepped down from the Mattingley (Chair until 30 April 2011), Michael Constantine and Board as of 31 December 2011, and the Audit Committee Amos Pickel (Chair from 30 April 2011). Michael Constantine is presently considering appointment of a new Chair. stepped down from the Board as of 31 December 2011. Normally, by invitation, the Chairman, Chief Executive Officer and Chief Financial Officer and, where appropriate, The Board has overall responsibility for determining the representatives of the Company’s external auditors attend framework of Executive remuneration and its cost. It is the Audit Committee meetings. required to take account of any recommendation made by the Remuneration Committee in determining the The Audit Committee’s terms of reference are available on remuneration, benefits and employment packages of the request to the Company Secretary and are included on the Executive Directors and senior management and the fees Company’s website, www.888holdingsplc.com. of the Chairman. In summary, the Audit Committee assists the Board in The Directors’ Remuneration Report, which outlines the discharging its responsibilities with regard to financial Remuneration Committee’s work and details of Directors’ reporting, external and internal audits and controls, including remuneration, is on pages 31 to 37. The Remuneration reviewing 888’s annual financial statements, considering Committee’s terms of reference are available on request to the scope of annual audit and the extent of non-audit work the Company Secretary and are included on the Company’s undertaken by external auditors, approving 888’s internal website, www.888holdingsplc.com. audit programme, advising on the appointment of external auditors and reviewing the effectiveness of internal control systems. Risk Management and Internal Control The Directors acknowledge that they are responsible for the Company’s system of internal control, for setting policy on nominations Committee During the year, the Nominations Committee comprised internal control and risk management, and for reviewing the effectiveness of internal control and risk management. It is three independent Non-executive Directors: Michael management’s role to implement Board policies on risk and Constantine (Chair), Brian Mattingley and Amos Pickel, control, including reporting. The system of internal control as well as Richard Kilsby, Chairman. The Nominations is designed to manage rather than eliminate the risk of Committee met in 2011 to discuss, amongst other matters, failure to achieve business objectives and can only provide the departure of Gigi Levy from his position as Chief reasonable, and not absolute, assurance against material Executive Officer of the Company and the recruitment misstatement or loss. 29 21273-04 888 Holdings.indd 29 10/04/2012 11:44:20 18:07 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Corporate Governance The Board has delegated responsibility to the Audit Committee to review the appropriateness and adequacy of systems of internal control and risk management in relation to the financial reporting process on an ongoing basis and to make recommendations to the Board. The Company has an Internal Auditor who reports to the Audit Committee. Compliance with Statutory Provisions As the Company is registered in Gibraltar, it is subject to compliance with Gibraltar statutory requirements. The main legislation relevant to companies in Gibraltar is the Gibraltar Companies Act, which is based on the UK Companies Act 1929. The Company is in full compliance with the Gibraltar The Company’s Internal Auditor resigned with effect from Companies Act. 14 December 2011, and the Company is in the process of appointing a suitable replacement. 888’s payment risk management team, based in Gibraltar, has developed stringent payment risk management and fraud control procedures. The team makes use of external and internal systems to manage the payment risks. Detailed procedures exist throughout the Company’s operations and compliance is monitored by operational management and the Internal Auditor. The Directors periodically review the effectiveness of the Group’s systems of internal control and risk management. The review considers individual risk control responsibilities, reporting lines and qualitative assessments of residual risks. Relations with shareholders and Key Financial audiences The Company maintains an active and regular dialogue Going Concern After careful review of the Group’s budget for 2012, its medium-term plans, liquid resources and all relevant matters, the Directors are confident that the Company and the Group have adequate financial resources to continue in operational existence for the foreseeable future. They have therefore continued to adopt the going concern basis in preparing the financial statements. The principal risks and uncertainties faced by the Group are disclosed in the Risk Report above. Corporate Social Responsibility Statement The Group’s Chief Executive Officer is the Director responsible for monitoring corporate social responsibility within 888. The Board receives periodic reports on the Group’s activities in this area from the Chief Executive Officer. Further details are set out in the Corporate Social with principal and institutional shareholders and sell-side Responsibility report on pages 22 to 24. analysts through a planned programme of investor relations and financial PR activity. The outcome of these meetings is reported to the Board. The programme includes formal presentations of full year and interim results, quarterly release of Interim Management Statements, analysts’ conference calls and periodic road shows. Diversity Policy Diversity is important to us as we believe that only through access to the most diverse pool of talent will we recruit and retain the most talented individuals to serve our customers. Presently, women comprise approximately 30% of the Group’s senior management, and we actively seek to recruit Shareholders are free to contact any Non-executive Director and advance women into our top management. to address any issues where contact with the Chairman and Chief Financial Officer is inappropriate or where such contact has failed to resolve the issue. All shareholders are welcome to attend the 2012 Annual General Meeting (scheduled to be held on 16 May 2012) and private investors are encouraged to take advantage of the opportunity given to ask questions. The Chairmen (or nominated members) of the Audit, Remuneration and Nominations Committees will attend the meeting and be available to answer questions. 30 21273-04 888 Holdings.indd 30 10/04/2012 11:44:20 18:07 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 The Board has delegated responsibility to the Audit Committee to review the appropriateness and adequacy of systems of internal control and risk management in relation to the financial reporting process on an ongoing basis and to make recommendations to the Board. The Company has an Internal Auditor who reports to the Audit Committee. The Company’s Internal Auditor resigned with effect from 14 December 2011, and the Company is in the process of appointing a suitable replacement. 888’s payment risk management team, based in Gibraltar, has developed stringent payment risk management and fraud control procedures. The team makes use of external and internal systems to manage the payment risks. Detailed procedures exist throughout the Company’s operations and compliance is monitored by operational management and the Internal Auditor. The Directors periodically review the effectiveness of the Group’s systems of internal control and risk management. The review considers individual risk control responsibilities, reporting lines and qualitative assessments of residual risks. Relations with shareholders and Key Financial audiences The Company maintains an active and regular dialogue with principal and institutional shareholders and sell-side analysts through a planned programme of investor relations and financial PR activity. The outcome of these meetings is reported to the Board. The programme includes formal presentations of full year and interim results, quarterly release of Interim Management Statements, analysts’ conference calls and periodic road shows. Shareholders are free to contact any Non-executive Director to address any issues where contact with the Chairman and Chief Financial Officer is inappropriate or where such contact has failed to resolve the issue. All shareholders are welcome to attend the 2012 Annual General Meeting (scheduled to be held on 16 May 2012) and private investors are encouraged to take advantage of the opportunity given to ask questions. The Chairmen (or nominated members) of the Audit, Remuneration and Nominations Committees will attend the meeting and be available to answer questions. Directors’ Remuneration Report In accordance with the Listing Rules, the Company presents its The Remuneration Committee is mindful that most of the Group’s report on the remuneration of its Directors for the year ended competitors are not UK listed companies and acknowledges 31 December 2011. The Company is incorporated in Gibraltar the unique risk profile associated with online businesses of the and, therefore, is not required to comply with the Directors’ nature of the Group’s, and takes these matters into account in Remuneration Report requirements in Schedule 8 to the UK determining appropriate remuneration levels. The components of Large and Medium sized Companies and Groups (Accounts the remuneration structure are set out below. and Reports) Regulations 2008, but in order to comply with the Listing Rules has prepared this Remuneration Report on At least half of the total potential remuneration of the the basis of those requirements, as appropriate. Chief Executive Officer and the Chief Financial Officer is represented by a variable element, dependent on the The report sets out the structure and details of the performance of the Group. The Remuneration Committee remuneration of the Directors for the year ended 31 December considers that these represent achievable and motivational 2011. It also describes the Board’s policy and approach to levels of personal rewards commensurate with stipulated the Principles of Good Governance relating to Directors’ levels of corporate performance. remuneration. BDO LLP and BDO Limited have audited the sections headed ‘Directors’ Remuneration Summary’ and The Remuneration Committee is mandated by the Board ‘Directors’ Interests in Share Awards and Share Options’. to satisfy itself that the level of the Directors’ and senior management’s remuneration is appropriate, having A resolution to approve the Directors’ Remuneration Report regard to pay and conditions throughout the sectors in is proposed, annually, to shareholders for approval. which the Group operates. It will further satisfy itself that This Remuneration Report will be put to shareholder vote at such remuneration aligns with the risks and rewards to the 2012 Annual General Meeting. shareholders. In this context the Remuneration Committee will regularly review individual and corporate performance Remuneration Committee During the year, the Remuneration Committee consisted targets. In the current economic climate, executive leadership is more important than ever. The Remuneration solely of independent Non-executive Directors, Brian Committee will continue to use careful and rigorous Mattingley (Chair until 30 April 2011), Michael Constantine judgement to match remuneration to achievements. and Amos Pickel (Chair from 30 April 2011). Michael Constantine stepped down from the Board as of The Remuneration Committee applies a remuneration policy 31 December 2011. Details of attendances at Committee which has at its core the following objectives: meetings are contained in the statement on Corporate Governance on page 28. The Remuneration Committee has ●● To align the interests of Executives with those of formal terms of reference (which are available on request shareholders. in writing to the Company Secretary and on the Company’s website, www.888holdingsplc.com). ●● To focus on top-line growth and margin improvement. ●● To link a significant proportion of remuneration to financial and individual performance, both in the short Independent advice The Board intends that Executive remuneration policies be term and long term. ●● To provide strong linkage between remuneration and both formal and transparent. It further acknowledges the performance. importance of taking into consideration independent advice ●● To ensure total remuneration is market-competitive in in setting remuneration policies and benefit levels. In 2011, the industry and helps attract and retain Executives the Remuneration Committee took advice from Compvision of the highest calibre. with regard to remuneration of Israeli Executives together with a remuneration survey as well as from Hewitt New Bridge Street with regard to acceleration of share awards. Remuneration Policy Executive Directors Remuneration packages must be sufficient to attract, retain and motivate Directors of the calibre appropriate to a global business in a competitive environment. It is the Company’s policy to take into account the pay and conditions of employees throughout the Group when determining Directors’ remuneration. In this respect, the Remuneration Committee takes note of both the average pay and conditions of employees and the range thereof, and gives substantial weight to the maintenance of a reasonable proportionality between the Directors’ remuneration and that of other employees of the Group. 21273-04 888 Holdings.indd 31 18:07 31 10/04/2012 11:44:20 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Directors’ Remuneration Report non-executive Directors The Chairman and the Non-executive Directors receive fees only, and are not eligible to participate in any bonus plan, pension plan, share plan, or long-term incentive plan of the Company. The Chairman and the Executive Directors determine the fees paid to the Non-executive Directors. The Chairman’s fees are determined by the Remuneration Committee. Fees paid to the Non-executive Directors are set by reference to an assessment of the time commitment and responsibility associated with each role. Levels take account of additional demands placed upon individual Non-executive Directors by virtue of their holding particular offices, such as Committee Chairman and/or Deputy Chairman, and travel time to Board meetings at the Group’s headquarters in Gibraltar. The fees paid to each Non-executive Director during 2011 are disclosed in the Directors’ remuneration summary on page 35. Resignation of Gigi levy as CEO Mr Gigi Levy stepped down from his role as Chief Executive Officer of the Company with effect from 30 April 2011. In connection with the termination of his employment, the Company agreed to make payments to Mr Levy totalling $2,981,400 (comprising $2,368,000 in lieu of salary and contractual benefits during Mr Levy’s notice period; $113,400 in lieu of pension contributions during his notice period; and an ex gratia payment of $500,000). Of this amount, Mr Levy has to date received $1,981,400. A further $1,000,000 will be paid on 22 May 2012, provided that Mr Levy remains a member of the Company’s Board of Directors on that date. The Company also agreed to make a conditional payment of $80,000 to Mr Levy on 22 May 2012, representing the amount of salary which Mr Levy waived in respect of his salary for 2010. The Company agreed to continue to provide health insurance and life assurance cover to Mr Levy until 30 April 2012 and allowed Mr Levy to retain his company car until 30 April 2012 (with the Company bearing the costs of insuring, repairing and maintaining the car), and in addition agreed to redeem Mr Levy’s accrued but untaken leave days by way of a payment made on 11 April 2011 in the amount of $45,000. In connection with Mr Levy’s unvested awards under the 888 All-Employee Plan, the Remuneration Committee exercised its discretion to treat Mr Levy as a good leaver, such that his awards over 167,352 shares granted on 8 April 2008 and over 10,500 shares granted on 14 January 2009 vested on 30 April 2011. The Remuneration Committee also agreed that the award over 167,351 shares made on 8 April 2008 should vest in accordance with the terms of Mr Levy’s service agreement. 32 Following the termination of his employment Mr Levy continued to provide services to the Company pursuant to an agreement with effect from 1 May 2011 in return for a monthly fee of $50,000. This arrangement terminated on 31 October 2011. Mr Levy agreed to remain as a Non-executive Director of the Company after the termination of his employment. His services as a Non-executive Director are made in return for an annual fee of £66,000. This arrangement took effect on and from 1 May 2011 and will continue for a period of three years, provided that Mr Levy is re-elected at each Annual General Meeting. Mr Levy is not eligible to receive a bonus or to participate in the Company’s share incentive arrangements in connection with his role as a Non-executive Director. Special Indemnity for Certain Directors and Key Personnel In connection with the Group undergoing various compliance and licencing procedures relating to its contemplated business in the United States, it has requested, and may in future request, that each of Brian Mattingley, Aviad Kobrine and Itai Frieberger, and each of their spouses, provide various personal information, documentation, consents, indemnities and waivers to various United States federal or state regulatory authorities. In this respect, the Company has executed on 23 March 2012 in favour of each such disclosing party an undertaking, pursuant to which such parties shall be indemnified (including advancement of expenses) in the event of any civil, criminal, administrative or investigative proceeding arising from the aforementioned disclosures and related documentation, provided the disclosing party acted in good faith, in a manner reasonably believed to be in or not opposed to the best interests of the Company, and had no reasonable cause to believe the Indemnitee’s conduct was unlawful. The undertaking is limited such that in no event shall the Company be liable to any disclosing party (taken together with such person’s spouse) in an aggregate amount exceeding US$528,000. Remuneration Structure Base Salary and Benefits The Executive Directors’ base salaries are subject to annual review. Gigi Levy’s salary until his departure from office as CEO in April 2011 was maintained at US$756,000 and Aviad Kobrine’s salary was increased with inflation from April 2011 to GBP315,000. *Benefits provided to Aviad Kobrine include a car allowance and health, disability and life insurance. * Part of which is paid by the Company and part by Cassava Enterprises (Gibraltar) Limited. 21273-04 888 Holdings.indd 32 10/04/2012 11:44:20 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17  annual Cash Bonus Aviad Kobrine is entitled to an annual cash bonus of up to 120% of annualised salary, subject to the achievement of pre-determined targets. The Remuneration Committee sets bonus targets and levels of eligibility each year. For the 2011 financial year, the performance target was 20% growth in revenue compared to 2010 and provided that the EBITDA* margin for 2010 was maintained. The payout levels were set at 50% of base salary for 80% performance, increasing on a linear basis up to 100% where targets were fully satisfied. In the event that revenue growth exceeded 20%, the percentage bonus entitlement increased by 4% for every 1% additional revenue growth, up to a maximum bonus entitlement of 120%. The pre-determined targets were achieved and Aviad Kobrine was entitled to his full annual cash bonus. Having considered the extraordinary achievements of the Group in 2011, the Remuneration Committee considered that it was appropriate to make an additional bonus payment such that the total bonus payment payable will be 170% of annualised salary. 30% of the bonus payment will be deferred and payable in January 2013 should Mr Kobrine still be employed by the Company (and not in a notice period) on 1 January 2013. Pensions Aviad Kobrine is entitled to a cash payment in lieu of an annual contribution to his personal pension scheme of 15% of his base salary. long-Term Incentives The Company has two employee share incentive plans: (i) the 888 All-Employee Share Plan, and (ii) the 888 Long- term Incentive Plan. The Company currently only grants awards under the 888 All-Employee Share Plan. Performance-dependent options and awards were granted under the 888 All-Employee Share Plan to the Executive Directors on 8 April 2008 and 24 May 2011. In addition, on 14 January 2009 an award was made to the Executive Directors in lieu of their waiver of a part of their annual cash bonus. Details of these awards and options are set out on pages 35 to 36. Other than the award in lieu of cash bonus no equity awards have been made to Executive Directors since April 2008. 888 all-Employee Share Plan All employees, exclusive consultants and Executive Directors of the Group who are not within six months of their normal retirement age are eligible to participate in the 888 All- Employee Share Plan at the discretion of the Remuneration Committee. Awards under the 888 All-Employee Share Plan can either be granted for no consideration (or with a nil exercise price for options) or at an exercise price that will normally be no less than the market value of an ordinary share at the time of grant or average share price during a period as determined by the Remuneration Committee at time of grant. In countries where an award or option involving real shares is not appropriate or feasible for legal, regulatory or tax reasons, a phantom award may be used. The maximum number of ordinary shares that an eligible employee may acquire pursuant to share awards or options granted to such person in any calendar year under the 888 All-Employee Share Plan and the 888 Long-term Incentive Plan may not have an aggregate market value, as measured at the date of grant, exceeding 200% of such person’s annual base salary or such higher limit as the Remuneration Committee may determine is appropriate in any individual case. Awards vest over a fixed period of up to four years. The Remuneration Committee may determine that the vesting and release or exercise of share awards and options under the 888 All-Employee Share Plan are subject to performance conditions imposed at the time of grant. 888 long-term Incentive Plan All employees and Executive Directors of the Group who are not within six months of their normal retirement age are eligible to participate in the 888 Long-term Incentive Plan at the discretion of the Remuneration Committee. As at the date of this report, no awards have been granted pursuant to the 888 Long-term Incentive Plan. As set out above, the Company has given long-term incentive awards to Executive Directors under the 888 All-Employee Share Plan. Scheme limits Awards and options granted under the 888 All-Employee Share Plan and the 888 Long-term Incentive Plan may be satisfied through the issue of new shares. It is intended that grants of options and awards are to be planned so as not to exceed 5% of the issued ordinary share capital in any rolling ten year period for the 888 Long-term Incentive Plan, and 10% of the issued ordinary share capital in any rolling ten year period for the 888 All-Employee Share Plan and the 888 Long-term Incentive Plan, in the aggregate. The Committee intends to have regard to appropriate annual flow-rates so as to ensure that these limits are not breached. * Excluding share benefit charges, goodwill write off and restructuring costs. 33 21273-04 888 Holdings.indd 33 10/04/2012 11:44:20 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Directors’ Remuneration Report Employee Trusts The Company established two Trusts to further the interests of the Company, its subsidiaries and shareholders by providing share incentives to employees (including Executive Directors) of any Group Company to enable the Group to attract, retain and motivate employees. The 888 IPO Share Award Trust and the 888 Holdings plc Share Plan Trust were created pursuant to Trust Deeds dated 14 September 2005. The 888 IPO Share Award Trust was terminated on 17 August 2010. The 888 Holdings plc Share Plan Trust currently holds 46,432 ordinary shares in the Company. Director appointments — Service Contracts and Directors’ Fees Executive Directors It is the Company’s policy that each Executive Director’s service agreement is terminable on no more than 12 months’ written notice by either party. Each Executive Director’s employment can be terminated by making a payment equal to the salary and pension contributions and the value of other contractual benefits due to the Executive Director in lieu of any unexpired notice period. The Executive Directors continue to be entitled to be paid a bonus during any unexpired part of the notice period even if the employment is terminated by making payment in lieu of notice. A Share Award granted under the 888 All-Employee Share Plan to Aviad Kobrine pursuant to his service agreement, on 15 January 2008, continues to vest during any unexpired part of the notice period and he shall be treated as a ‘good leaver’ under the terms of the 888 All-Employee Share Plan where his employment has been terminated by making a payment in lieu of notice. Furthermore, certain Share Awards granted under the 888 All-Employee Share Plan to Aviad Kobrine on 24 May 2011 are subject to accelerated vesting in the event his employment with the Group is terminated other than for cause prior to 24 May 2012. No other benefits upon termination of employment are payable. An Executive Director’s entitlement to share awards and share options under the 888 All-Employee Plan on termination of employment will be governed by the terms of that plan (and in the case of the initial awards made to Aviad Kobrine by the relevant provisions of his service agreement) as set out above. Name Gigi Levy1 Aviad Kobrine Chief Executive Officer Chief Financial Officer Aviad Kobrine Chief Financial Officer Position Contracting Party Service Contract Date The Company The Company Cassava Enterprises (Gibraltar) Limited2 18/6/2006 14/9/2005 14/9/2005 1 Mr Levy resigned as Chief Executive Officer of the Company as of 30 April 2011 and since such date has served as a Non-executive Director. 2 Wholly owned subsidiary of the Company. Chairman and non-executive Directors The Chairman and the Non-executive Directors do not have service contracts but have signed Letters of Appointment. Non-executive Directors’ appointments, which are for a term of three years, may be terminated by the Company without notice in accordance with the Company’s Articles of Association and the Gibraltar Companies Act, except for the Chairman who is required to be given six months’ prior written notice of termination. No compensation is payable on the termination of the appointment. As set out above, Gigi Levy has served as a Non-executive Director since 1 May 2011, following the termination of his employment as Chief Executive Officer of the Company. Name Richard Kilsby Brian Mattingley1 John Anderson Michael Constantine2 Amos Pickel Gigi Levy3 Position Chairman Chief Executive Officer Non-executive Director Non-executive Director Non-executive Director Non-executive Director Contracting Party Letter of Appointment Date The Company The Company The Company The Company The Company The Company 14/3/2009 14/3/2009 14/3/2009 14/3/2009 14/3/2009 1 /5/2 0 1 1 1 Mr Mattingley became Chief Executive Officer on 27 March 2012. 2 Mr Constantine stepped down from the Board as of 31 December 2011. 3 Mr Levy resigned as Chief Executive Officer of the Company as of 30 April 2011 and since such date has served as a Non-executive Director. 34 21273-04 888 Holdings.indd 34 10/04/2012 11:44:20 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Directors’ Remuneration Summary The cash emoluments or fees receivable by the Directors for 2011 are shown below: Base salary/ fees US$'0001 Bonus US$'0001 Benefits US$'0001 Pensions Allowance US$'0003 Compensation for loss of office Total 2011 Total 2010 US$’000 US$'000 US$'000 597 474 353 286 106 124 106 46 41 17 833 482 34 71 3,106 3,783 1,419 370 768 106 124 106 958 510 357 136 102 119 102 2,046 1,315 104 105 3,106 6,676 2,284 Executive Gigi Levy4 Aviad Kobrine2 Non-executive Richard Kilsby Brian Mattingley Michael Constantine5 John Anderson Amos Pickel Total 1 Where Directors’ remuneration is denominated in sterling, amounts have been converted into US$ at the average rate of exchange for the relevant month. 2 Part of Mr Kobrine’s remuneration is paid by one of his employers, Cassava Enterprises (Gibraltar) Limited, a wholly owned subsidiary of the Company. 3 In 2010 Pension allowance amounted to US$103,000 for Gigi Levy and US$62,000 for Aviad Kobrine. 4 Mr Levy resigned as Chief Executive Officer of the Company as of 30 April 2011 and since such date has served as a Non-executive Director. The figure for base salary/fees includes US$226,800 in respect of his salary to 30 April 2011, US$70,452 in respect of his fees as a Non- executive Director and US$300,000 in respect of fees for services provided between 1 May 2011 and 31 October 2011. 5 Mr Constantine stepped down from the Board as of 31 December 2011. Directors’ Interests in Ordinary Shares The notified interests of Executive and Non-executive Directors in the issued share capital of the Company are: Executive Gigi Levy1 Aviad Kobrine Non-executive Richard Kilsby Brian Mattingley2 Michael Constantine3 John Anderson Amos Pickel Ordinary shares 31 December 31 December 2011 2010 2,663,548 443,183 2,318,345 443,183 114,285 142,857 22,857 588,869 100,000 114,285 142,857 22,857 588,869 — 1 Mr Levy resigned as Chief Executive Officer of the Company as of 30 April 2011 and since such date has served as a Non-executive Director. 2 Mr Mattingley became Chief Executive Officer on 27 March 2012. 3 Mr Constantine stepped down from the Board as of 31 December 2011. Unless otherwise stated, all interests were held beneficially. 21273-04 888 Holdings.indd 35 10/04/2012 11:44:21 18:07 18:07 35 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Directors’ Remuneration Report Directors’ Interests in Share awards and Share Options The number of shares subject to Share Awards or Share Options granted to the Executive Directors and outstanding as at 31 December 2011 is set out below: Earliest exercise/ Exercise Awards at Market price at Awards at Date vesting period Exercise 31 Dec Awarded Vested vesting Lapsed 31 Dec of award date end date price 2010 2011 in 2011 date in 2011 2011 Gigi Levy1 888 All-Employee Share Plan2,4,5,6 8/4/2008 8/4/2011 8/4/2008 30/4/2011 888 All-Employee Share Plan2,6 14/01/2009 30/04/2011 n/a n/a n/a nil nil 167,351 167,352 167,351 167,351 0.46p 0.38p nil 10,500 10,500 0.38p — 15/01/2008 Aviad Kobrine 888 All-Employee 15/01/2008 15/01/2012 15/01/2018 Share Plan3 15/01/2008 15/01/2011 15/01/2018 15/01/2018 15/01/2011 15/01/2008 15/01/2012 15/01/2018 14/01/2009 13/01/2012 14/01/2019 888 All-Employee Share Plan3 888 All Employee 24/05/2011 24/05/2012 24/05/2021 Share Plan3 24/05/2011 24/05/2012 24/05/2021 24/05/2011 24/05/2013 24/05/2021 24/05/2011 24/05/2013 24/05/2021 24/05/2011 24/05/2014 24/05/2021 24/05/2011 24/05/2014 24/05/2021 24/05/2011 24/05/2015 24/05/2021 24/05/2011 24/05/2014 24/05/2021 888 All-Employee Share Plan3,4,5 nil nil nil nil nil nil nil nil nil nil nil nil nil 42,500 42,500 7,500 7,500 7,126 42,500 0.55p 7,500 0.55p 235,075 423,134 235,075 23,507 235,074 23,508 235,075 1,175,373 42,500 7,500 7,126 235,075 423,134 235,075 23,507 235,074 235,508 235,075 1,175,373 All awards were made through the 888 All-Employee Share Plan during the year. 1 Date of appointment, being 18 June 2006, for Gigi Levy. Mr Levy resigned as CEO of the Company as of 30 April 2011 and since such date has served as a Non-executive Director. 2 Awarded as a share award. 3 Awarded as a nil cost option. 4 Vesting subject to performance conditions, as described on pages 33 and 34. 5 The performance conditions were partly or not met with respect to the portion of the award capable of vesting in 2011. 6 In connection with Mr Levy’s unvested awards under the 888 All-Employee Plan, the Remuneration Committee exercised its discretion to treat Mr Levy as a good leaver, such that his awards over 167,352 shares granted on 8 April 2008 and over 10,500 shares granted on January 2009 vested on 30 April 2011. The Remuneration Committee also agreed that the award over 167,351 shares made on 8 April 2008 should vest in accordance with the terms of Mr Levy’s service agreement. The closing price of one ordinary share was 43p at 31 December 2011. The highest closing price during 2011 was 63.25p and the lowest was 28.5p. No Director was materially interested during the year in any contract which was significant in relation to the business of the Company. The parts of the Directors’ Remuneration Report from Directors’ Remuneration Summary to this point have been audited in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. 36 21273-04 888 Holdings.indd 36 10/04/2012 11:44:21 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Total shareholder return The chart below shows the value of an investment of £100 sterling in the Company’s shares and in the FTSE 250 Index over a five year period ended 31 December 2011. The Directors have chosen the FTSE 250 Index as the most appropriate comparator index. The Company has been a member of this index at various times over the past six years. VALUE of £100 STERLING IN 888 oVER fIVE YEAR PERIoD ENDED 31 DECEmBER 2011 V. fTSE 250 INDEx 160 140 120 100 80 60 40 20 0 7 0 0 2 / 2 / 1 7 0 0 2 / 2 / 4 7 0 0 2 / 2 / 7 7 0 0 2 / 2 / 0 1 8 0 0 2 / 2 / 1 8 0 0 2 / 2 / 4 8 0 0 2 / 2 / 7 8 0 0 2 / 2 / 0 1 9 0 0 2 / 2 / 1 9 0 0 2 / 2 / 4 9 0 0 2 / 2 / 7 9 0 0 2 / 2 / 0 1 0 1 0 2 / 2 / 1 0 1 0 2 / 2 / 4 0 1 0 2 / 2 / 7 0 1 0 2 / 2 / 0 1 1 1 0 2 / 2 / 1 1 1 0 2 / 2 / 4 1 1 0 2 / 2 / 7 1 1 0 2 / 2 / 0 1 888 FTSE All Share approval This report was approved by the Board and signed on its behalf by: amos Pickel Chairman of the Remuneration Committee 21273-04 888 Holdings.indd 37 10/04/2012 11:44:21 37 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 Directors’ Report The Directors submit to the members their Annual Report Except as noted above, none of the Directors had any and Accounts of the Group for the year ended 31 December interests in the shares of the Company or in any material 2011. The report on Corporate Governance and the Directors’ contract or arrangement with the Company or any of its Remuneration Report on pages 27 and 31 respectively, form subsidiaries. part of this Directors’ Report. Principal activities During 2011 the Group’s principal activities were the Share Capital Changes in the Company’s share capital during the financial year are given in the Consolidated Statement of Changes in provision of online gaming entertainment to customers and Equity. As at 31 December 2011, the Company’s issued share business partners. A review of the business is given in the capital comprised 347,687,468 ordinary shares of 0.005p Chairman’s Statement on pages 2 to 3, the Chief Executive’s each. Review on pages 4 to 7 and the Enhanced Business Review on pages 8 to 21. The principal subsidiary undertakings are listed on page 73. Results The Group’s Profit before tax for the financial year Rights attaching to Ordinary Shares The rights and obligations attaching to ordinary shares are set out in the Company’s Articles of Association. Holders of ordinary shares are entitled to attend and speak at General Meetings of the Company, to appoint one or more proxies and to exercise voting rights. Holders of ordinary shares (excluding impairment charges of US$ 20.7 million, release may receive a dividend and on liquidation may share in of contingent consideration of US$4.2 million, share benefit the assets of the Company. Holders of ordinary shares are charges of US$2.4 million and restructuring costs of US$4.9 entitled to receive the Company’s Annual Report. Subject million) of US$29.6 million is reported in the Consolidated to meeting certain thresholds, holders of ordinary shares Income Statement on page 43. The Directors do not may requisition a General Meeting of the Company or the recommend a dividend in respect of the financial year. proposal of resolutions at General Meetings. Directors and their Interests Biographical details of the current Board of Directors are Deadlines for Exercising voting Rights Electronic and paper proxy appointment and voting shown on page 26. The Directors who served during the instructions must be received by the Company’s registrars year are shown below. All Directors retire at each Annual not later than 48 hours before a General Meeting. General Meeting and, being eligible, offer themselves for re- election on an annual basis. Richard Kilsby (first appointed 30 August 2005). Restrictions on Transfer of Shares and limitations on Holdings There are no restrictions on transfer or limitations on the Gigi Levy (first appointed 18 June 2006). holding of ordinary shares other than under restrictions Aviad Kobrine (first appointed 30 August 2005). imposed by law or regulation (for example, insider trading Brian Mattingley (first appointed 30 August 2005). laws) or pursuant to the Company’s share dealing code. John Anderson (first appointed 30 August 2005). Michael Constantine (first appointed 30 August 2005; retired from the Board as of December 31, 2011). Substantial Shareholdings As at 31 December 2011 the Company had been notified of Amos Pickel (first appointed 14 March 2006). the following interests in 3% or more of its share capital: The beneficial and non-beneficial interests of the Directors in shares of the Company are set out in the Directors’ Remuneration Report on pages 31 to 37. Principal Shareholder Trust E Shaked Shares Trust O Shaked Shares Trust Ben-Yitzhak Family Shares Trust 38 Number % issued of shares share capital 86,283,534 86,283,534 37,122,358 24.82 24.82 10.68 21273-04 888 Holdings.indd 38 10/04/2012 11:44:21 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Shareholder agreements and Consent Requirements There are no known arrangements under which financial rights Change of Control Other than the Group’s gaming licences where change of control is subject to prior consent, and the Wink earn out are held by a person other than the holder of the shares. amendment announced in March 2011, there are no material contracts to which the Group is a party which would allow A Relationship Agreement governing the relationship the counterparty to terminate or alter those contractual between the above Principal Shareholder Trusts and arrangements in the event of a change of control of the Group. the Company was entered into in connection with the Company’s flotation. The Relationship Agreement provides that all transactions between the Group and the Charitable Contributions Contributions for charitable purposes were made during Principal Shareholder Trusts will be on a normal business the year amounting to US$198,726 (2010: US$223,075). basis, that the Group will be allowed to carry on business independently of them and that the Principal Shareholder Trusts will not cause the Company to contravene the Directors’ Responsibility Statement The Directors are responsible for keeping proper accounting Combined Code unless required by law or as contemplated in the Relationship Agreement. It further provides that records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding each of the Principal Shareholder Trusts will not solicit the assets, for taking reasonable steps for the prevention Group employees without consent, that only Independent and detection of fraud and other irregularities and for the Directors can vote on proposals to amend the Relationship preparation of a Directors’ report which complies with the Agreement, that the Principal Shareholder Trusts will consult Gibraltar Companies (Accounts) Act 1999, the Gibraltar the Group prior to disposing of a significant number of Companies (Consolidated Accounts) Act 1999 and the shares in order to maintain an orderly market and shall Gibraltar Companies Act. not disclose confidential information unless required to do so by law or relevant regulation or having first received Financial statements are published on the Group’s website the Company’s consent. The Relationship Agreement also in accordance with legislation in the UK governing the includes restrictions on the Principal Shareholder Trusts preparation and dissemination of financial statements, power to appoint Directors and includes obligations on the which may vary from legislation in other jurisdictions. trusts to ensure that the majority of the Board, excluding the The maintenance and integrity of the Group’s website is the Chairman, is independent. The Principal Shareholder Trusts responsibility of the Directors. The Directors’ responsibility can nominate a Non-executive Director for appointment also extends to the ongoing integrity of the financial to the Board. In the event that this right is exercised statements contained therein. and it results in fewer than half the Board (excluding the Chairman of the Board) being Independent Directors, The Directors are responsible for preparing the annual such appointment shall only become effective upon the report and the financial statements. The Directors are appointment to the Board of an additional Independent required to prepare financial statements for the Group Director acceptable to the Nominations Committee. in accordance with International Financial Reporting Such restrictions and obligations apply in respect of the Standards (IFRSs) and have also chosen to prepare financial E Shaked Shares Trust and O Shaked Shares Trust whilst statements for the Company in accordance with IFRSs. they collectively hold not less than 7.5% of the issued share capital of 888, and in respect of the Ben-Yitzhak Family Shares Trust whilst it individually holds not less than 7.5% of the issued share capital of 888. Corporate Governance The corporate governance statement is on pages 27 to 30 and is incorporated in this Directors’ Report by reference. 21273-04 888 Holdings.indd 39 10/04/2012 11:44:21 39 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Directors’ Report Group and Parent Company Financial Statements Company law requires the Directors to prepare financial auditors A resolution for the reappointment of BDO LLP and BDO Limited as auditors of the Company will be proposed at the statements in accordance with the Gibraltar Companies 2012 Annual General Meeting. (Accounts) Act 1999, the Gibraltar Companies (Consolidated Accounts) Act 1999 and the Gibraltar Companies Act. During the year ended 31 December 2011 BDO LLP were International Accounting Standard 1 requires that financial preparing financial statements as required pursuant to statements present fairly for each financial year the Group the Listing Rules of the UK Listing Authority. BDO Limited and Company’s financial position, financial performance have been appointed to act as auditors for the purposes and cash flows. This requires the faithful representation of of issuing an audit report pursuant to Section 10 of the the effects of transactions, other events and conditions in Gibraltar Companies (Accounts) Act 1999 to be filed with accordance with the definitions and recognition criteria the Gibraltar Companies Registry. On behalf of the Board: appointed auditors for the purposes of the Company Brian Mattingley Chief Executive Officer 27 March 2012 for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the Directors to: ●● Consistently select and apply appropriate accounting policies; ●● Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and ●● Provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable members to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. We confirm, to the best of our knowledge: (a) The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and (b) The Enhanced Business Review, includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. 40 21273-04 888 Holdings.indd 40 10/04/2012 11:44:22 888 Holdings plc Annual Report & Accounts 201121273-04 04/04/2012 Proof 17 Independent auditors’ Report to the members of 888 Holdings plc We have audited the financial statements of 888 Holdings We report to you our opinion as to whether the financial plc for the year ended 31 December 2011 which comprise statements give a true and fair view and whether the the Consolidated income statement, the Consolidated financial statements have been properly prepared in and Company balance sheets, the Consolidated and accordance with the Gibraltar Companies (Consolidated Company statements of changes in equity, the Consolidated Accounts) Act 1999, the Gibraltar Companies (Accounts) statement of comprehensive income, the Consolidated and Act 1999 and the Gibraltar Companies Act 1930 (as Company statements of cash flows and the related notes. amended), and the part of the Remuneration Report to be The financial reporting framework that has been applied audited has been properly prepared in accordance with in their preparation is applicable law and International Section 421 of the UK Companies Act 2006. We also report Financial Reporting Standards (IFRSs) as adopted by the to you whether in our opinion, the information disclosed European Union. in the Directors’ Report is consistent with the financial statements, if the Company has not kept proper accounting This report is made solely to the Company’s members, as a records, if we have not received all the information and body, in accordance with our engagement letter. Our audit explanations we require for our audit, or if information work has been undertaken so that we might state to the Company’s members those matters we are required to state specified by the Listing Rules and Gibraltar legislation regarding Directors’ remuneration and other transactions is to them in an Auditors' report and for no other purpose. not disclosed. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, Scope of the audit of the financial statements A description of the scope of an audit of financial for this report, or for the opinions we have formed. statements is provided on the APB’s website at www.frc.org. Respective responsibilities of Directors and auditors As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: ●● The financial statements give a true and fair view of the state of the Group’s and the Company’s affairs as responsibility is to audit and express an opinion on the 31 December 2011 and of the Group’s profit for the year financial statements in accordance with applicable law and then ended. International Standards on Auditing (UK and Ireland). Those ●● The Group and Parent Company financial statements standards require us to comply with the Auditing Practices have been properly prepared in accordance with IFRSs Board’s (APBs) Ethical Standards for Auditors. as adopted by the European Union. 888 Holdings plc has complied with the requirements of ●● The financial statements have been properly prepared in accordance with the Gibraltar Companies (Consolidated rules 9.8.6 and 9.8.8 of the Listing Rules of the UK Financial Accounts) Act 1999, the Gibraltar Companies Services Authority and in accordance with Section 421 of (Accounts) Act 1999 and the Gibraltar Companies Act the UK Companies Act 2006 in preparing its Annual Report, 1930 (as amended). as if it was incorporated in the United Kingdom. As auditors, ●● The part of the Directors’ Remuneration Report to be we have agreed that our responsibilities in relation to the audited has been properly prepared in accordance with Annual Report will be those as set out below. Section 421 of the Companies Act 2006. 21273-04 888 Holdings.indd 41 10/04/2012 11:44:22 41 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Independent auditors’ Report to the members of 888 Holdings plc Opinion on other matters prescribed by legal and regulatory requirements In our opinion information given in the Directors’ Report for the financial year ended 31 December 2011 for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under Gibraltar legal and regulatory requirements we are required to report to you if, in our opinion: ●● The Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other transactions is not disclosed. Under the Listing Rules we are required to review: ●● The Directors’ statement, in relation to going concern; ●● The part of the corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and ●● Certain elements of the report to shareholders by the Board of Directors’ remuneration. BDO LLP Chartered Accountants 55 Baker Street London W1U 7EU 27 March 2012 Desiree McHard (Statutory auditor) For and on behalf of BDO Limited Registered Auditors PO Box 1200 Regal House Queensway Gibraltar 27 March 2012 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). BDO Limited, a Gibraltar limited company, is registered in Gibraltar with company number 52200. 42 21273-04 888 Holdings.indd 42 10/04/2012 11:44:22 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Consolidated Income Statement For the year ended 31 December 2011 Revenue Operating expenses Gaming taxes and duties Research and development expenses Selling and marketing expenses Note 3 Administrative expenses (including goodwill impairment of $20.7 million, 2010: nil) 4 Operating profit before impairment charges, restructuring costs and share benefit charges Impairment charges Restructuring costs Share benefit charges Operating profit Finance income Finance expenses Release of contingent consideration Share of post-tax profit of equity accounted joint ventures Profit before tax before impairment charges, release of contingent consideration, restructuring costs and share benefit charges Impairment charges Release of contingent consideration Restructuring costs Share benefit charges Profit before tax Taxation Profit after tax for the year attributable to equity holders of the parent 5 7 21 14 12 12 24 8 Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 331,150 122,634 7,319 29,908 102,262 54,441 42,582 20,673 4,949 2,374 14,586 233 (13,281) 4,225 84 29,618 20,673 (4,225) 4,949 2,374 5,847 3,912 1,935 262,113 110,696 1,449 22,356 91,501 24,301 16,338 — 2,219 2,309 11,810 197 (1,462) — 19 15,092 — — 2,219 2,309 10,564 2,701 7,863 Earnings per share Basic Diluted The notes on pages 48 to 81 form part of these financial statements. Year ended Year ended 31 December 31 December 2011 US$’000 2010 US$’000 0.6¢ 0.6¢ 2.3¢ 2.3¢ Note 9 43 21273-04 888 Holdings.indd 43 10/04/2012 11:44:22 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Consolidated Statement of Comprehensive Income For the year ended 31 December 2011 Profit for the year Actuarial losses on defined benefit pension plan Total comprehensive income for the year attributable to equity holders of the parent The notes on pages 48 to 81 form part of these financial statements. 31 December 31 December 2011 2010 US$’000 US$’000 1,935 (443) 1,492 7,863 (366) 7,497 44 21273-04 888 Holdings.indd 44 10/04/2012 11:44:22 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Consolidated Balance Sheet At 31 December 2011 Assets Non-current assets Intangible assets Property, plant and equipment Investment in equity accounted joint venture Available for sale investment Deferred taxes Current assets Cash and cash equivalents Trade and other receivables Total assets Equity and liabilities Equity attributable to equity holders of the parent Share capital Share premium Capital Redemption Reserve Retained earnings Total equity attributable to equity holders of the parent Liabilities Current liabilities Trade and other payables Customer deposits Contingent and deferred consideration Non-current liabilities Contingent and deferred consideration Total liabilities Total equity and liabilities 31 December 31 December 2011 2010 Note US$’000 US$’000 12 13 14 15 16 17 18 19 20 22 21 21 141,900 17,059 1,243 175 435 162,291 21,547 1,297 175 586 160,812 185,896 81,852 26,468 108,320 269,132 3,163 65 24 118,067 121,319 65,462 44,954 37,397 147,813 — 147,813 269,132 61,520 24,344 85,864 271,760 3,145 65 24 113,716 116,950 37,814 34,725 78,033 150,572 4,238 154,810 271,760 The financial statements on pages 43 to 47 were approved and authorized for issue by the Board of Directors on 27 March 2012 and were signed on its behalf by: Brian mattingley Chief Executive Officer Aviad Kobrine Chief Financial Officer The notes on pages 48 to 81 form part of these financial statements. 21273-04 888 Holdings.indd 45 10/04/2012 11:44:23 45 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Consolidated Statement of Changes in Equity For the year ended 31 December 2011 Balance at 1 January 2010 Dividend paid Share buy-back Share benefit charges Issue of shares Total comprehensive income for the year Balance at 1 January 2011 Share benefit charges Share benefit charges (included within restructuring costs) Issue of shares Total comprehensive income for the year Balance at 31 December 2011 Share capital US$’000 3,152 Capital Share Redemption premium US$’000 65 Reserve US$’000 — — (24) — 17 — 3,145 — — 18 — 3,163 — — — — — 65 — — — — 65 — 24 — — — 24 — — — — 24 Retained earnings US$’000 117,883 (10,491) (3,465) 2,309 (17) 7,497 113,716 2,374 503 (18) 1,492 118,067 Total US$’000 121,100 (10,491) (3,465) 2,309 — 7,497 116,950 2,374 503 — 1,492 121,319 The following describes the nature and purpose of each reserve within equity. Share capital — represents the nominal value of shares allotted, called-up and fully paid for. Share premium — represents the amount subscribed for share capital in excess of nominal value. Capital redemption reserve — represents amounts transferred from the share capital reserve following the buy-back and cancellation of equity shares. Retained earnings — represents the cumulative net gains and losses recognized in the consolidated statement of comprehensive income. The notes on pages 48 to 81 form part of these financial statements. 46 21273-04 888 Holdings.indd 46 10/04/2012 11:44:23 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Consolidated Statement of Cash Flows For the year ended 31 December 2011 Cash flows from operating activities: Profit before income tax Adjustments for: Impairment charges Depreciation Amortization Interest received Interest expense Foreign exchange differences on deferred consideration Share of post-tax profit of equity accounted joint venture Release of contingent consideration Share benefit charges (Increase) decrease in trade receivables Decrease (increase) in other accounts receivables Decrease (increase) in trade payables Increase (decrease) in customer deposits Increase in other accounts payables Cash generated from operations Income tax paid Year ended 31 December Year ended 31 December 2011 2011 2010 2010 US$’000 US$’000 US$’000 US$’000 5,847 20,673 9,039 3,998 (221) 7,411 1,739 (84) (4,225) 2,877 47,054 (4,865) 2,741 23,128 10,229 4,794 83,081 (4,341) — — — — — — — — — — — 10,564 — 8,480 3,796 (197) 481 660 (19) — 2,309 26,074 1,050 (3,393) (1,060) (2,845) 48 19,874 (3,659) — — — — — — — — — — — — — — — — Net cash generated from operating activities 78,740 16,215 Cash flows from investing activities Acquisition of assets comprising the Mytopia social games development studio (see note 21) Consideration paid for the online Wink bingo business (see note 21) Purchase of property, plant and equipment Investment in equity accounted joint ventures Available-for-sale investments Interest received Acquisition of intangible assets Internally generated intangible assets Net cash used in investing activities Cash flows from financing activities Interest paid Share buy back Dividends paid Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes on pages 48 to 81 form part of these financial statements. (6,000) (40,080) (4,575) — — 221 (201) (4,079) (3,694) — — (12,320) — (8,610) (1,131) (175) 197 (341) (5,870) — — — — — — — — (54,714) (28,250) — (3,465) (10,491) (3,694) 20,332 61,520 81,852 — — — (13,956) (25,991) 87,511 61,520 47 21273-04 888 Holdings.indd 47 10/04/2012 11:44:23 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 1 General information Company description and activities 888 Holdings Public Limited Company (the ‘Company’) and its subsidiaries (together the ‘Group’) was founded in 1997 and originally operated as a holding company domiciled in the British Virgin Islands. On 12 January 2000, the Company was continued in Antigua and Barbuda as a corporation under the International Business Corporation Act 1982 with registered number 12512. On 17 December 2003, the Company redomiciled in Gibraltar with the Company number 90099. On 4 October 2005, the Company listed on the London Stock Exchange. The Group is the owner of innovative proprietary software solutions providing a range of virtual online gaming services over the internet including Casino, Poker, Bingo, Sport and games to end users and also provides these services through its business to business independent unit Dragonfish to business partners. In addition, the Group provides payment services, customer support and online advertising. Definitions In these financial statements: The Company 888 Holdings Public Limited Company. The Group 888 Holdings Public Limited Company and its subsidiaries. Subsidiaries Companies over which the Company has control (as defined in International Accounting Standard 27 ‘Consolidated and Separate Financial Statements’ and whose accounts are consolidated with those of the Company). Related parties As defined in International Accounting Standard 24 — ‘Related Party Disclosures’. 2 Significant accounting policies The significant accounting policies applied in the preparation of the financial statements are as follows: Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards (‘IAS’) and Interpretations, adopted by the International Accounting Standards Board (‘IASB’) and endorsed for use by companies listed on an EU regulated market. The significant accounting policies applied in the financial statements of the Group in the prior years are applied consistently in these financial statements. The financial statements are presented in thousands of US dollars (US$’000) because that is the currency the Group primarily operates in. The financial statements continue to be prepared on a going concern basis as explained in the Corporate Governance Report on page 30. The consolidated financial statements comply with the Gibraltar Companies (Consolidated Accounts) Act 1999, the Gibraltar Companies (Accounts) Act 1999 and the Gibraltar Companies Act 1930 (as amended). The following standards and interpretations, issued by the IASB or the International Financial Reporting Interpretations Committee (IFRIC), are effective from 1 January 2011 (current financial year) and have been adopted by the Group with no significant impact on its consolidated results or financial position. 48 21273-04 888 Holdings.indd 48 10/04/2012 11:44:23 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20112 Significant accounting policies continued Revised IAS 24 — Related Party Disclosures (effective for accounting periods beginning on or after 1 January 2011). Amendments to IFRIC 14 (IAS 19) — Limit on a Defined Benefit Asset Minimum Funding Requirements and their Interaction (effective for accounting periods beginning on or after 1 January 2011). Improvements to IFRSs. This annual improvement project clarifies the requirements of IFRSs and eliminate inconsistencies within and between standards. The relevant changes included amendments to IFRS 3 — Business Combinations, IFRS 7 — Financial Instruments: Disclosures, and IAS 1 — Presentation of financial statements. The following standards and interpretations issued by the IASB or IFRIC have not been adopted by the Group as they were not effective for the year 2011. The Group is currently assessing the impact of these standards and interpretations will have on the presentation of, and recognition in, its consolidated results in future periods. Amendments to IAS 1 — Presentation of items of Other Comprehensive Income (effective for accounting periods beginning on or after 1 July 2012). This amendment has not yet been endorsed for use in the EU. Amendments to IAS 12 — Deferred Tax: Recovery of Underlying Assets (effective for accounting periods beginning on or after 1 January 2012). This amendment has not yet been endorsed for use in the EU. Amendments to IAS 19 — Employee Benefits (effective for accounting periods beginning on or after 1 January 2013). This amendment has not yet been endorsed for use in the EU. Amendments to IAS 28 — Investments in Associates and Joint Ventures (effective for accounting periods beginning on or after 1 January 2013). This amendment has not yet been endorsed for use in the EU. Amendments to IAS 32 — Offsetting Financial Assets and Financial Liabilities (effective for accounting periods beginning on or after 1 January 2014). This amendment has not yet been endorsed for use in the EU. IFRS 10 — Consolidated Financial Statements (effective for accounting periods beginning on or after 1 January 2013). IFRS 10 has not yet been endorsed for use in the EU. It will supersede the consolidation requirements of IAS 27 Consolidated and separate financial statements, and SIC-12 Consolidation — Special Purpose Entities. IFRS 9 — Financial Instruments (effective for accounting periods beginning on or after 1 January 2015). IFRS 9 has not yet been endorsed for use in the EU. IFRS 11 — Joint Arrangements (effective for accounting periods beginning on or after 1 January 2013). IFRS 11 has not yet been endorsed for use in the EU. It will supersede IAS 31 Interests in Joint Ventures and SIC-13 — Jointly Controlled entities — Non-monetary Contributions by Ventures. IFRS 12 — Disclosure of Interests in Other Entities (effective for accounting periods beginning on or after 1 January 2013). IFRS 12 has not yet been endorsed for use in the EU. IFRS 13 — Fair Value Measurement (effective for accounting periods beginning on or after 1 January 2013). IFRS 13 has not yet been endorsed for use in the EU. The preparation of consolidated financial statements under IFRS requires the Group to make estimates and judgments that affect the application of policies and reported amounts. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. 49 21273-04 888 Holdings.indd 49 10/04/2012 11:44:23 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 2 Significant accounting policies continued Included in this note are accounting policies which cover areas that the Directors consider require estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. These policies together with references to the related notes to the financial statements can be found below: Taxation Contingent consideration Intangible assets Impairment of Goodwill and intangible assets Share-based payments Regulatory compliance and contingent liabilities Note 8 21 12 12 24 28 Presentation of accounts Following a review of the financial statements, the following amendments have been made to the consolidated statement of income. In light of the increased regulated markets in which the Group operates, the Directors believe it helpful to separately disclose those gaming duties and taxes not directly related to profit. Accordingly, these amounts have been separately disclosed on the face of the consolidated Income Statement under the heading “gaming taxes and duties”, and the comparatives amended accordingly. Foreign exchange gains and losses arising on foreign currency denominated assets and liabilities, and settlement of forward foreign exchange contracts are now included in finance income and finance charges as they relate to financing decisions made by the Group. Previously they were included in administrative expenses. The comparative figures, whilst immaterial, have been amended accordingly. A comparative prior year balance sheet for 31 December 2009 has not been presented as the new presentation has no effect on the reported profit or loss, nor on net assets. Basis of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. The subsidiaries are companies controlled by 888 Holdings Public Limited Company. Control exists where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are consolidated from the date the parent gained control until such time as control ceases. The financial statements of the subsidiaries are included in the consolidated financial statements using the purchase method of accounting. On the date of the acquisition, the assets and liabilities of a subsidiary are measured at their fair values and any excess of the fair value of the consideration over the fair values of the identifiable net assets acquired is recognised as goodwill. Inter-Company transactions and balances are eliminated on consolidation. The financial statements of subsidiaries are prepared for the same reporting period as the Parent Company and using consistent accounting policies. 50 21273-04 888 Holdings.indd 50 10/04/2012 11:44:23 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20112 Significant accounting policies continued Revenue Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is recognised in the accounting periods in which the transactions occurred. Revenue consists of revenue from online gaming and revenue generated from processing customers’ cross currency deposits and withdrawals. It comprises: Casino and Bingo Winnings which are represented by the differences between the amounts of bets placed by customers less amounts won by customers. Poker Ring games: Rake, which is the commission charged from each winning hand played. Tournaments: Entry fees charged for participation in Poker tournaments are recognised when the tournament has concluded. Emerging offerings Revenue from Emerging Offerings mainly comprise winnings from Sportsbook activity and revenue from social games. Casino and Bingo winnings, and revenues from the Poker business and Emerging Offerings are stated after deduction of certain bonuses granted to customers. B2B In the case of white label activity, revenue is the net commission charged. foreign currency Monetary assets and liabilities denominated in non-US dollar currencies are translated into US dollar equivalents using year-end spot foreign exchange rates. Non-monetary assets and liabilities are translated using exchange rates prevailing at the dates of the transactions. Exchange rate differences on foreign currency transactions are included in financial income or financial expenses as appropriate. The results and financial position of all Group entities that have a functional currency different from US dollars are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; and (ii) income and expenses for each income statement are translated at an average exchange rate (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions). 21273-04 888 Holdings.indd 51 10/04/2012 11:44:23 51 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 2 Significant accounting policies continued Taxation The tax expense represents tax payable for the year based on currently applicable tax rates. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base. It is accounted for using the balance sheet liability method. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. Such assets and liabilities are not recognised if the temporary differences arise from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the deferred tax liabilities/ assets are settled/recovered. Intangible assets Acquisitions Identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date. The identified intangibles are amortized over the useful economic life of the assets. This has ranged between three months to four years for acquisitions to date. The exception is acquisitions of trade names, which have an indefinite useful economic life and therefore an annual impairment test is conducted. Intangible assets are reviewed annually for evidence of impairment. Any impairment in carrying value is charged to the consolidated income statement. Internally generated intangible assets Expenditure incurred on development activities is capitalised only when the expenditure will lead to new or substantially improved products or processes, the products or processes are technically and commercially feasible and the Group has sufficient resources to complete development. All other development expenditure is expensed. Subsequent expenditure on capitalised intangible assets is capitalised only where it clearly increases the economic benefits to be derived from the asset to which it relates. The Group estimates the useful life of these assets as between three and five years, except for certain licence costs which are considered to have indefinite useful life and are reviewed annually for evidence of impairment. Goodwill Goodwill represents the excess of the cost of a business combination over the interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired. Cost comprises the fair value of any assets transferred, liabilities assumed and equity instruments issued, plus, for acquisitions completed prior to 1 January 2010, any direct costs associated with the acquisition. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated income statement. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated income statement on the acquisition. For business combinations completed prior to 1 January 2010 changes in the estimated value of contingent consideration post acquisition are treated as an adjustment to cost and therefore change the carrying value of goodwill. For business combinations completed after that date changes in the fair value of the contingent consideration are charged or credited to the income statement. In addition, for those business combinations completed after 1 January 2010, the direct costs of acquisition are treated immediately as an expense. 52 21273-04 888 Holdings.indd 52 10/04/2012 11:44:23 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20112 Significant accounting policies continued Property, plant and equipment Property, plant and equipment is stated at historic cost less accumulated depreciation. Assets are assessed at each balance sheet date for indications of impairment. Depreciation is calculated using the straight-line method, at annual rates estimated to write off the cost of the assets less their estimated residual values over their expected useful lives. The annual depreciation rates are as follows: IT equipment Office furniture and equipment Motor vehicles 33% 7–15% 15% Leasehold improvements Over the shorter of the term of the lease or useful lives Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually on 31 December, and where applicable an impairment loss is recognised immediately in the income statement. Other non- financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset’s cash generating unit (i.e. the lowest Group of assets in which the asset belongs for which there are separately identifiable cash flows). financial instruments The Group does not hold or issue derivative financial instruments for trading purposes. Investment in equity accounted joint ventures Jointly controlled entities (JCE) are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. JCEs are accounted for using the equity method (equity accounted investees) and are recognized initially at cost. The Group’s share of post-acquisition profits and losses is recognised in the consolidated income statement, except that losses in excess of the Group’s investment in the JCEs are not recognised unless there is an obligation to make good those losses. Profits and losses arising on transactions between the Group and its JCEs are recognised only to the extent of unrelated investors’ interests in the JCE. The investor’s share in the JCEs profits and losses resulting from these transactions is eliminated against the carrying value of the JCEs. Any premium paid for a JCE above the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the JCE. Where there is objective evidence that the investment in a JCE has been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets. Trade receivables Trade receivables are recognised at fair value and carried at amortised cost and principally comprise amounts due from credit card companies and from e-payment companies. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is objective evidence that the full amount may not be collected. 53 21273-04 888 Holdings.indd 53 10/04/2012 11:44:24 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 2 Significant accounting policies continued Derivative financial instruments The Group enters into contracts for derivative financial instruments such as forward currency contracts to hedge risks associated with foreign exchange rates. Such derivative financial instruments are measured at fair value under IAS 39 and comprise level two fair value measurement instrument and carried in the statement of financial position as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in the fair values of derivatives are recorded immediately in the consolidated income statement. A fair value measurement hierarchy is based on the inputs to valuation techniques used to measure fair value to increase consistency and comparability. The inputs are categorised into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority given to unobservable inputs. Level two inputs are inputs other than quoted prices included within level one that are either directly or indirectly observable for the asset or liability. Cash and cash equivalents Cash comprises cash in hand and balances with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash. They include short-term deposits originally purchased with maturities of three months or less. Equity Equity issued by the Company is recorded as the proceeds received, net of direct issue costs. Trade and other payables Trade and other payables are recognised at fair value and carried at amortised cost. Liabilities to customers Liabilities to customers comprises the amounts that are credited to customers’ bankroll (the Group’s electronic ‘wallet’), including provision for bonuses granted by the Group, less management fees and charges applied to customer accounts, along with full provision for jackpots. These amounts are repayable on demand in accordance with the applicable terms and conditions. Available-for-sale financial assets Available-for-sale financial assets comprise non-derivative financial assets not included in any of the above financial asset categories and comprise principally the Group’s investments in entities not qualifying as joint ventures or subsidiaries. They are carried at fair value with changes in fair value recognised directly in a separate component of equity. Where there is a significant decline in the fair value of an available-for-sale financial asset the full amount of the impairment, including any amount previously charged to equity, is recognised in the income statement. On disposal of an available-for-sale asset any balance within equity is transferred to the income statement. Chargebacks The cost of chargebacks is included in operating expenses. 54 21273-04 888 Holdings.indd 54 10/04/2012 11:44:24 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20112 Significant accounting policies continued Leases Leases are classified as finance leases wherever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases and rentals payable are charged to income on a straight-line basis over the term of the lease. Provisions Provisions are recognised when the Group has a present or constructive obligation as a result of a past event from which it is probable that it will result in an outflow of economic benefits that can be reasonably estimated. Segment information Segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the management team comprising the Chief Executive Officer and the Chief Financial Officer. These segments are: ●● B2C (Business to Customer) Casino, Poker, Bingo and Emerging Offering which mainly comprises 888’s Sportsbook, Live dealer offering and games, Mytopia social games; and ●● B2B (Business to Business) which offers Total Gaming Services under the Dragonfish trading brand. Dragonfish offers to its business partners use of technology, software, operations, e-payments and advances marketing services, through the provision of offline/online marketing, management of affiliates, SEO, CRM and business analytics. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends this is when paid. In the case of final dividends, this is when approved by the shareholders at the Annual General Meeting. Share-based payments Where the Company grants its employees or contractors shares, nil priced options or market value options, the fair value at the date of grant is charged to the income statement over the vesting period. Non-market performance conditions are taken into account by adjusting the number of instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of instruments that eventually vest. Severance pay schemes Severance scheme surpluses and deficits are measured at: ●● The fair value of plan assets at the reporting date; less ●● Plan liabilities calculated using the projected unit credit method discounted to its present value using yields available for the appropriate government bonds that have maturity dates appropriately to the terms of the liabilities; plus ●● Unrecognised past service costs. Any difference between the expected return on assets and that actually achieved, and any changes in liabilities over the year due to changes in assumptions or experience within the scheme, are recognised in other comprehensive income in the period in which they arise. financial guarantee contracts Where the Group enters into financial guarantee contracts the Group considers these to be insurance contracts and accounts for them as such. The Group treats the guarantee as a contingent liability until such time as it becomes probable that the Group will be required to make payments under the guarantee. 55 21273-04 888 Holdings.indd 55 10/04/2012 11:44:24 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 3 Segment information Business Segments Year Ended 31 December, 2011 B2C B2B Consolidated Casino Poker Bingo US$’000 US$’000 US$’000 Emerging offering US$’000 Revenue 148,034 60,620 53,957 21,592 Total B2C US$’000 284,203 US$’000 46,947 US$’000 331,150 Result Segment result before impairments Impairments Segment result Unallocated corporate expenses1 Operating profit Financial expenses, net Release of contingent consideration Share of post-tax profit of equity accounted joint ventures Tax expense Profit for the year Assets Unallocated corporate assets Total assets Liabilities Segment Liabilities Unallocated corporate liabilities Total liabilities 151,973 (20,673) 131,300 27,782 — 27,782 179,755 (20,673) 159,082 144,496 14,586 (13,048) 4,225 84 (3,912) 1,935 269,132 269,132 39,062 5,888 44,950 102,863 147,813 1 Including share benefit charges of US$2,374,000 and restructuring costs of US$4,949,000. 56 21273-04 888 Holdings.indd 56 10/04/2012 11:44:24 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20113 Segment information continued Year Ended 31 December, 2010 B2C B2B Consolidated Casino Poker Bingo US$’000 US$’000 US$’000 116,922 38,407 50,140 Emerging offering US$’000 16,206 Total B2C US$’000 221,675 US$’000 40,438 US$’000 262,113 114,470 22,993 137,463 125,653 11,810 (1,265) 19 (2,701) 7,863 271,760 271,760 29,142 5,547 34,689 120,121 154,810 Revenue Result Segment result Unallocated corporate expenses1 Operating profit Financial expenses, net Share of post-tax profit of equity accounted joint ventures Tax expense Profit for the year Assets Unallocated corporate assets Total assets Liabilities Segment Liabilities Unallocated corporate liabilities Total liabilities 1 Including share benefit charges of US$2,309,000 and restructuring costs of US$2,219,000. Other than where amounts are allocated specifically to the B2C and B2B segments above, the expenses, assets and liabilities relate jointly to all segments. These amounts are not discretely analysed between the two operating segments as any allocation would be arbitrary. 21273-04 888 Holdings.indd 57 10/04/2012 11:44:24 57 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 3 Segment information continued Geographical information The Group’s performance can also be reviewed by considering the geographical markets and geographical locations within which the Group operates. This information is outlined below: Revenue by geographical market1 UK Europe (excluding UK) Americas Rest of world Revenue 1 Allocation of geographical segments is based on Net Revenue Commission received by the Group. Assets by geographical location Year ended Year ended 31 December 31 December Revenue Revenue 2011 US$’000 153,090 124,187 26,488 27,385 331,150 2010 US$’000 127,371 96,759 17,110 20,873 262,113 Carrying amount of segment Additions to property, plant assets by location and equipment Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2011 US$’000 228,469 40,663 269,132 2010 US$’000 229,954 41,806 271,760 2011 2010 US$’000 US$’000 3,299 1,276 4,575 7,365 1,700 9,065 Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 2,374 52,067 54,441 2,309 21,992 24,301 Europe (including UK) Rest of World 4 Administrative expenses Share benefit charges — all equity-settled Other administrative expenses Administrative expenses 58 21273-04 888 Holdings.indd 58 10/04/2012 11:44:24 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20115 operating profit Operating profit is stated after charging: Staff costs (see note 6) Audit fees Other fees paid to auditors in respect of taxation services Depreciation (within operating expenses) Amortisation (within operating expenses) Chargebacks Payment service providers’ commissions Restructuring costs1 Share benefit charges — all equity-settled Goodwill impairment (within administrative expenses — see note 12) Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 86,831 74,854 474 12 9,039 3,998 3,379 18,769 4,949 2,374 20,673 402 11 8,480 3,796 2,987 13,882 2,219 2,309 — 1 Following the departure of the former CEO on 30 April 2011, the Group has restructured its management team resulting in aggregated terminated staff and related costs of US$4,949,000 for the year ended 31 December 2011 of which US$3,909,000 are in relation to the former CEO. Total costs include $503,000 in respect of accelerated share benefit charges arising on termination. During 2010 the Group initiated measures designed to reduce its overheads and increase operational efficiency. These measures mainly affected employment costs and included redundancies across the Group’s locations. Costs associated with these redundancies are reflected in the restructuring cost line for the year ended 31 December 2010. 6 Employee benefits Staff cost including Executive Directors’ remuneration comprises the following elements: Wages and salaries Social security Pension costs Staff costs capitalized in respect of internally generated assets 2011 US$’000 82,060 3,092 4,932 90,084 (3,253) 86,831 2010 US$’000 71,673 2,898 4,521 79,092 (4,238) 74,854 In the income statement total staff costs, excluding share benefit charge of US$2,374,000 (2010: US$2,309,000), are included within the following expenditure categories: Operating expenses Research and development expenses Administrative expenses 2011 2010 US$’000 US$’000 49,133 19,567 18,131 86,831 48,525 14,483 11,846 74,854 59 21273-04 888 Holdings.indd 59 10/04/2012 11:44:24 www.888holdingsplc.com21273-04 04/04/2012 Proof 17 notes to the Consolidated Financial Statements 6 Employee benefits continued Average headcount number of employees by category: Operation Research and development Administration 2011 593 217 119 929 2010 632 179 126 937 At 31 December 2011 the Group employed 932 (2010: 928) staff. Severance pay liability — Israel The Group’s employees in Israel are eligible to receive certain benefits from the Group in certain defined circumstances. As such the Group operates a defined benefit severance pay plan which requires contributions to be made to separately administrated funds. The method used to determine the current service cost and the present value of the defined benefit obligation, according to IAS 19 ‘Employee Benefits’ is the Projected Unit Credit actuarial cost method. Actuarial gains and losses are recognised by the Group using the equity method. The following table summarises the employee benefits figures as included in the Group’s financial statements for 2011 and 2010, respectively: Severance pay liability (within trade and other payables) Income statement Actuarial movements on severance pay liability (included in statement of comprehensive income) Movement in severance pay liability: Severance pay plan assets At beginning of year Expected return Contributions Benefits paid Actuarial gain on assets Exchange differences At end of year 60 2011 2010 US$’000 US$’000 601 3,044 273 2,548 443 366 Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 8,279 407 3,030 (2,442) (265) (617) 8,392 6,784 359 2,630 (2,254) 181 579 8,279 21273-04 888 Holdings.indd 60 10/04/2012 11:44:24 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20116 Employee benefits continued Severance pay plan liabilities At beginning of year Interest cost Current service costs Benefits paid Actuarial loss on obligations Exchange differences At end of year Severance pay plan trends Plan assets Plan liabilities Severance pay liability Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 8,552 347 3,104 (2,533) 178 (655) 8,993 7,013 299 2,608 (2,380) 547 465 8,552 Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2011 2010 2009 2008 US$’000 US$’000 US$’000 US$’000 8,392 (8,993) (601) 8,279 (8,552) (273) 6,784 (7,013) (229) 4,220 (4,496) (276) The main actuarial assumptions used in determining the fair value of the Group’s employee benefits plan are shown below: Discount rate (nominal) Estimated increase in employee benefits costs Voluntary termination rate Estimated rate of return on assets 2011 % 4.34 3 70 4.71 2010 % 4.71 3 70 5.06 The discount rates are based on Israeli government bonds and reflect inflation rates of 2.19% in 2011 (2010: 2.86%). 7 finance expenses Interest expense Interest expense on deferred consideration Unwinding of discount on contingent and deferred consideration Fair value movements on Foreign exchange derivatives Foreign exchange losses Finance expenses Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 — 3,694 3,692 1,572 4,323 13,281 19 — 1,122 — 321 1,462 61 21273-04 888 Holdings.indd 61 10/04/2012 11:44:24 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 8 Taxation Corporate taxes Current tax Deferred tax Taxation expense Profit before taxation Tax at effective tax rate in Gibraltar (2011: 10%, 2010: nil) Effect of overseas taxation Effect of deferred tax originating in overseas jurisdictions Permanent disallowable expenditure/(income) Adjustments to prior years tax charges Total tax charge for the year Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 3,761 151 3,912 2,490 211 2,701 Year ended Year ended 31 December 31 December 2011 US$’000 5,847 585 2,159 (91) 1,954 (695) 3,912 2010 US$’000 10,564 — 2,490 211 — — 2,701 Current tax is calculated with reference to the profit of the Company and its subsidiaries in their respective countries of operation: Gibraltar — The Company and its Gibraltar registered subsidiaries were subject to the provisions of the Gibraltar Companies (Taxation and Concessions) Act (the ‘CTCA’) as tax-exempt companies. Subject to a change of ownership or activity of a tax-exempt company, the grandfathering of tax-exempt benefits in respect of existing tax-exempt companies extended up to 31 December 2010. Commencing as of 1 January 2011, Gibraltar companies are subject to a corporate tax rate of 10%. However, certain forms of income, including royalty income, are exempt from corporate tax. Israel — 888 has entered into certain transfer pricing agreements with the Israeli Income Tax Commissioner. The agreement in respect of its subsidiary, Random Logic Limited was effective until the end of 2010 and is currently being discussed. Domestic corporate tax in Israel in 2011 is 24% (2010: 25%). Effective from 2012 the corporate tax rate will increase to 25%. UK — 888’s subsidiary in the UK pays corporate tax in the UK at the applicable rate of 26% (2010: 28%). 62 21273-04 888 Holdings.indd 62 10/04/2012 11:44:25 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 20119 Earnings per share Basic earnings per share Basic earnings per share have been calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of shares in issue during the year. Diluted earnings per share In accordance with IAS 33, ‘Earnings per share’, the weighted average number of shares for diluted earnings per share takes into account all potentially dilutive shares and share options granted, which are not included in the number of shares for basic earnings per share. In addition, certain employee options have also been excluded from the calculation of diluted EPS as their exercise price is greater than the weighted average share price during the year and it would not be advantageous for the holders to exercise the option. The number of options excluded from the diluted EPS calculation is 1,305,779 (2010: 781,953). Year ended Year ended 31 December 2011 31 December 2010 US$’000 US$’000 Profit from continuing operations attributable to ordinary shareholders Weighted average number of ordinary shares in issue Effect of dilutive ordinary shares and share options Weighted average number of dilutive ordinary shares Basic Diluted 1,935 7,863 346,385,511 345,709,869 2,620,010 349,983,027 348,329,879 2.3¢ 3,597,516 0.6¢ 0.6¢ 2.3¢ Adjusted earnings per share The Directors believe that EPS excluding share benefit charges, restructuring costs, impairment charges and write-back of contingent consideration better reflects the underlying performance of the business and assists in providing a clearer view of the performance of the Group. Reconciliation of profit to profit excluding share benefit charges, restructuring costs, impairment costs and write-back of contingent consideration: Profit from continuing operations attributable to ordinary shareholders Share benefit charges (excluding Share benefit charges within restructuring costs) Restructuring costs Release of contingent consideration Impairment charges Profit excluding share benefit charges, restructuring costs, impairment charges and write-back of contingent consideration Weighted average number of ordinary shares in issue Weighted average number of dilutive ordinary shares Adjusted basic earnings per share Adjusted diluted earnings per share Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 1,935 2,374 4,949 (4,225) 20,673 7,863 2,309 2,219 — — 25,706 12,391 346,385,511 345,709,869 349,983,027 348,329,879 3.6¢ 7.4¢ 7.3¢ 3.6¢ 63 21273-04 888 Holdings.indd 63 10/04/2012 11:44:25 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 10 Dividend Dividends paid Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 — 10,491 11 Acquisitions completed in prior years mytopia social games On 16 June 2010 the Group acquired the trade and assets comprising the Mytopia social games development studio (“Mytopia”) from Real Dice Inc. for an all cash consideration. In calculating the goodwill arising on acquisition, the fair value of the assets of Mytopia were valued by a professional valuation firm and recognised in accordance with IFRS 3 (revised) and adjustments from book value were necessary. These adjustments are summarized as follows: Intangible assets Assets Book value on fair value acquisition adjustments fair value US$’000 US$’000 US$’000 — — 1,870 1,870 1,870 1,870 The fair value relates to the recognition of online bingo game application (US$830,000), software licence agreement (US$410,000), non-compete agreement (US$540,000) and a service agreement (US$90,000) acquired as part of the acquisition. The online bingo game application intangible asset is being amortised over its estimated useful economic life of three years. The software licence agreement intangible asset is being amortised over its estimated useful economic life of nine months. The non-compete agreement intangible asset is being amortised over its estimated useful economic life of four years. The service agreement is being amortised over its estimated useful economic life of one year. During the year the goodwill arising on acquisition of US$20,173,000 was tested for impairment and fully provided against. Further details are given in note 12. The Group paid US$6.0 million in February 2011 of contingent consideration in respect of the acquisition. The remaining contingent consideration of US$5.1 million (before discounting) that was recognised on acquisition has been written back in the year. Further details are given in note 21. Wink online Bingo business On 31 December 2009 the Group acquired the trade and assets comprising the Wink online Bingo business of Daub Limited (‘Wink Bingo Business’) for an all cash consideration. As noted in last year’s annual report the financial performance of the Wink business post acquisition led to increases in the contingent consideration payable. In March 2011 the Group entered into an amendment agreement to fix the consideration payable. Further details are given in note 21. The unwinding of the discount element of the deferred consideration is charged to finance expenses in the Income statement. 64 21273-04 888 Holdings.indd 64 10/04/2012 11:44:25 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201112 Intangible assets Cost or valuation At 1 January 2010 Additions Acquisitions At 31 December 2010 Additions At 31 December 2011 Amortisation and Impairments: At 1 January 2010 Charge for the year At 31 December 2010 Impairment in the year Charge for the year At 31 December 2011 Carrying amounts At 31 December 2011 At 31 December 2010 At 31 December 2009 Analysis of goodwill by cash generating units: Valuation at 1 January 2010 Acquisitions of Mytopia social games Adjustment to the Wink bingo business contingent consideration1 Valuation at 1 January 2011 Mytopia social games goodwill impairment Internet domain name goodwill impairment Valuation at 31 December 2011 Internally generated Acquired intangible intangible assets assets Goodwill Total US$’000 US$’000 US$’000 US$’000 10,213 5,870 — 16,083 4,079 20,162 1,271 1,785 3,056 — 2,548 5,604 14,558 13,027 8,942 6,842 — 2,211 9,053 201 9,254 3,563 2,011 5,574 — 1,450 7,024 2,230 3,479 3,279 Bingo online business US$’000 58,111 — 67,001 125,112 — — 125,112 mytopia social games US$’000 — 20,173 — 20,173 (20,173) — — 58,611 67,001 20,173 145,785 — 75,666 72,871 22,384 170,921 4,280 145,785 175,201 — — — 20,673 — 20,673 125,112 145,785 58,611 Internet domain name US$’000 500 — — 500 — (500) — 4,834 3,796 8,630 20,673 3,998 33,301 141,900 162,291 70,832 Total Goodwill US$’000 58,611 20,173 67,001 145,785 (20,173) (500) 125,112 1 As a result of the financial performance of the Wink Bingo business since the commencement of the earn-out period on 1 April 2010 the Board revised its estimate of the potential contingent consideration that would  become payable to US$75.5 million in 2010. This estimate was based on the assumption that the earn-out payment would reach its contractual cap. As the Wink Bingo acquisition was accounted for under IFRS 3 (2004) the adjustment to contingent consideration was taken to goodwill. On 18 March 2011 the Group announced that it had entered into an amendment agreement with the Wink Bingo vendors to reschedule the earn out payment payable in May 2011. Further details are given in note 21. 21273-04 888 Holdings.indd 65 10/04/2012 11:44:25 65 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 12 Intangible assets continued Bingo Online Business Intangible assets and goodwill associated with the cash generating online Bingo business unit relates to the acquisition of the online Bingo business of Globalcom Limited during 2007 and the acquisition of the Wink Bingo business in 2009. The income streams generated from the bingo business, comprising the B2C Bingo cash generating unit and the B2B cash generating unit, have been treated together as the risks and rewards associated with those income streams are deemed to be sufficiently similar. At the year end, the carrying value-in-use was determined by discounting the expected future cash flows of the online Bingo cash generating units, to their present value. The key assumptions for the value-in-use calculations were those regarding discount rate and growth rates of the business. The Directors estimate discount rates that reflect the current market assessment of the time value of money and risks appropriate to the online Bingo business. The discount rate that is considered by the Directors to be appropriate is 8% (2010: 12%) being the Group’s specific weighted average cost of capital which also applies to the online Bingo cash generating units. Discount rate is re-calculated each year by taking into account prevailing risk free rates, equity risk premium and beta. The result this year was a lower discount rate primarily due to a lower company beta. In estimating the future cash flows the Group has used conservative estimates in respect of revenues generated and costs incurred and therefore certain B2B contracts due to end in the next five years have not been projected to be renewed and have been expected to decline gradually over the period to contract end. Growth rates of the online Bingo business are based on past experience and projections of future changes in the online gaming market, taking into account external sources of information such as analysts' research reports. These suggest that Bingo is expected to demonstrate year on year growth. The Group has used lower growth rates in estimating the future cash flows conservatively reflecting the current uncertainties about the medium-term global economic outlook. The Directors have used forecasts for the next five years of the expected cash flows, of which the first year is based on the Group's current approved budget. Excluding the effects of B2B contracts projected to come to an end over the five year period, an annual underlying growth rate of 2% (2010: 7%) was used for 2012 mainly attributed to the stabilization in the Wink Bingo business revenues after the earn out period ended on March 2011. For 2013-2016, no growth rate was assumed (2010: no growth). Following year five, the Group extrapolates cash flows in perpetuity, using an estimated conservative growth rate of 1% (2010: 1%), which is lower than the forecast long-term growth rate of the UK economy. Marketing costs associated with the Bingo cash generating units were projected as a fixed percentage of revenues. All other operational costs are forecast as percentage of revenue, such percentage increased conservatively by 6% (2010: 7%) in each of the five year periods to 2016, over and above the level of growth in revenues and well above the actual level experienced in 2011. The Directors are not aware at this time of any need to change their key assumptions on which they have based their determination of the recoverable amount of the goodwill which would cause its carrying amount to exceed its recoverable amount. In fact, although such movements are not expected to arise, neither a 1% decrease in the growth rate in each of the next three years nor a 5% increase in the discount rate would have led to an impairment of the acquired intangible assets and goodwill in the current year. Mytopia social games The Group has performed an impairment review during the year on the cash generating Mytopia social games unit which was acquired in June 2010, and was affected by commercial disputes which arose during the year over two branded social games which Mytopia was developing. This review compared carrying value to value in use and fair value less costs to sell, adjusting the originally forecast revenue arising. Due to the overall reduced expectation of income growth from the Mytopia business, it was determined that the recoverable amount of that business was US$957,000 based on an estimate by management of fair value less costs to sell which has resulted in a full impairment charge of US$20,173,000 against goodwill. Other assets acquired have not been impaired. 66 21273-04 888 Holdings.indd 66 10/04/2012 11:44:25 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011 12 Intangible assets continued The impairment charge has been taken to administrative expenses in the consolidated Income statement and is included within the B2C operating segment. Other intangible assets associated with the cash generating Mytopia social games unit acquired during June 2010 including an online bingo game application, software licence agreement, non-compete agreement and a service agreement, are being amortized over their estimated useful economic lives of up to four years. At the previous year end, the carrying value-in-use was determined by discounting the expected future cash flows to their present value. The key assumptions for the value-in-use calculations were those regarding discount rate, users’ life time value, marketing spend and growth rates of the business. In estimating the future cash flows the Directors used estimates in respect of revenues generated and costs incurred. Growth rates of the Mytopia business were based on projections of future changes in the social games market, taking into account external sources of information such as analysts’ research reports and publicly available information that analyzes KPIs of various social networks game providers and the development of new games by Mytopia. Forecast revenues assumed lower user’s life value compared to other major social games. The Directors used forecasts for the following five years of the expected cash flows, of which the first year was based on the Group’s 2011 budget. Revenue was forecast to grow between 2011 and 2014 assuming a compound quarterly growth of 21%, and cost of sales was forecast at an average of 23% of revenue. Marketing costs were projected to increase by a fixed compounded monthly percentage during 2012 to 2014 across all games. All other overhead costs (mainly wages) were forecast in line with 2011 budget which, on an annualized basis assumed an increase of 50% over 2010 actual figures. Thereafter these costs were assumes to increase by 3 % in each of 2012 to 2014. Following year five, the Group used a long term growth rate of 2%. The Directors estimated discount rates of 18%. Internet domain name During 2008 the Group acquired an internet domain name based business which is used to generate traffic into the Group’s various websites. Out of total consideration of US$513,000, an intangible asset of US$13,000 was recognized whilst the remainder of US$500,000 was recognised as goodwill. The Group has performed an impairment review at the year end, in respect of the carrying value-in-use of the internet domain name. comparing carrying value to value in use and fair value less costs to sell, adjusting the originally forecast revenue arising. Due to the overall reduced expectation of income growth from the internet domain, it was determined that the recoverable amount of the internet domain was nil based on an estimate by management of fair value less costs to sell which has resulted in a full impairment charge of US$500,000 against goodwill and US$13,000 against intangible assets. Licences In respect of certain licences costs amounting to US$3.7 million where the Group considers these to have an indefinite life, the Group has conducted an impairment review at the period end, in respect of the carrying value-in-use of its licences comparing carrying value to value in use and fair value less costs to sell. At the year end, the carrying value-in-use was determined by discounting the expected future cash flows of the relevant cash generating unit (CGU), to its present value. The key assumptions for the value-in-use calculations were those regarding discount rate and growth rates of the business. The Directors estimate discount rates that reflect the current market assessment of the time value of money and risks appropriate to the relevant CGU. The discount rate that is considered by the Directors to be appropriate is 8% being the Group’s specific weighted average cost of capital. 21273-04 888 Holdings.indd 67 10/04/2012 11:44:25 67 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 12 Intangible assets continued The Group has used prudent growth of 3% in respect of revenue and conservative costs figures in assessing the expected cash flows from the CGU. At 31 December 2011 no impairment needs to be recognised. Internally generated intangible assets The Group has put in place processes and procedures which enable it to ascertain technological feasibility before development costs are incurred and therefore be in a position to capitalise costs incurred after that point. Such expenditure is only capitalised when the development cost meets the definition of an intangible asset and the recognition criteria as set out in IAS 38 ‘Intangible assets’. The Group estimates the useful life of these assets as between three and five years. These assets are subject to impairment test wherever events or changes in circumstances indicate their carrying amount may not be recoverable on the same basis as described above for acquired intangible assets. At 31 December 2011 no impairment needs to be recognised and the carrying value of internally generated assets is considered appropriate. 13 Property, plant and equipment office furniture and motor Leasehold IT equipment equipment vehicles improvements Total US$’000 US$’000 US$’000 US$’000 US$’000 33,125 8,617 — 41,742 4,397 (5,600) 40,539 21,669 6,920 — 28,589 7,545 (5,601) 30,533 10,006 13,153 11,456 2,641 120 — 2,761 82 — 2,843 1,490 251 — 1,741 187 — 1,928 915 1,020 1,151 503 63 (35) 531 — (21) 510 287 75 (13) 349 62 — 411 99 182 216 14,848 265 — 15,113 96 (1,895) 13,314 6,687 1,234 — 7,921 1,245 (1,891) 7,275 6,039 7,192 8,161 51,117 9,065 (35) 60,147 4,575 (7,516) 57,206 30,133 8,480 (13) 38,600 9,039 (7,492) 40,147 17,059 21,547 20,984 Cost At 1 January 2010 Additions Disposals At 31 December 2010 Additions Disposals At 31 December 2011 Accumulated depreciation At 1 January 2010 Charge for the year Disposals At 31 December 2010 Charge for the year Disposals At 31 December 2011 Depreciated cost At 31 December 2011 At 31 December 2010 At 31 December 2009 68 21273-04 888 Holdings.indd 68 10/04/2012 11:44:25 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201114 Investment in equity accounted joint ventures The following entity meets the definition of a Jointly controlled entity and has been equity accounted in the consolidated financial statements: Name Technology Solutions (Gibraltar) Limited Percentage Percentage of equity of equity interest interest Country of incorporation Gibraltar 2011 % 50% 2010 % 50% On 6 October 2010 the Group entered into a Joint Venture Agreement (“JVA”) via 888 Regulated Markets Ltd. (“888 RM”), a wholly owned subsidiary, with Prima Networks Ltd. (“PNL”) and Technology Solutions (Gibraltar) Ltd. (“TSG”), a Gibraltar company jointly owned by 888 RM and PNL in equal parts. The Group through 888 RM obtained in 2010 a licence to operate online poker games in France. Under the terms of the JVA, 888 RM, PNL and TSG operate the network jointly, utilizing rights to use poker software technology and related services required to make the Games available for use in the French poker networks of PNL (licenced to TSG) and 888 RM and combining them into one French poker network sharing the liquidity of their respective customers. Aggregated amounts relating to TSG are as follows: Current assets Non-current assets Current liabilities Non-current liabilities Revenues Expenses Profit Share of before tax profit of Joint Venture Investment including loans in equity accounted Joint Venture 15 financial Assets — Available-for-sale investments Opening balance at the beginning of the year Investments during the year 2011 2010 US$’000 US$’000 — 2,348 2,207 — 1,712 (1,544) 168 84 1,243 6 2,502 2,467 — 414 (376) 38 19 1,297 Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 175 — 175 — 175 175 Available-for-sale assets comprised of unquoted securities. The fair value of these has been determined on the basis of expected cash flows discounted using a rate based on the market interest rate and a premium specific to the unlisted securities. Fair value movements for 2010 and 2011 were insignificant. 69 21273-04 888 Holdings.indd 69 10/04/2012 11:44:25 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 16 Deferred taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Group’s deferred tax assets resulting from temporary differences are as follows: Accrued severance pay Property, plant and equipment Intangible assets Provision for share benefit charges Provision for vacation Provision for convalescence 17 Cash and cash equivalents Cash and cash equivalents Restricted cash Restricted cash primarily relates to deposits held by banks for guarantees 18 Trade and other receivables Trade receivables Corporate tax Other receivables and prepayments Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 280 101 (408) 116 323 23 435 88 — — 94 382 22 586 31 December 31 December 2011 US$’000 74,028 7,824 81,852 2010 US$’000 60,569 951 61,520 31 December 31 December 2011 2010 US$’000 US$’000 17,197 1,799 7,472 26,468 12,332 796 11,216 24,344 The carrying value of trade and other receivables approximates to their fair value as the credit risk has been addressed as part of impairment provisioning and, due to the short-term nature of the receivables; they are not subject to ongoing fluctuations in market rates. 70 21273-04 888 Holdings.indd 70 10/04/2012 11:44:25 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201119 Share capital Share capital comprises the following: Ordinary shares of £0.005 each Ordinary shares of £0.005 each Issue of ordinary shares of £0.005 each Share buy back Authorized 31 December 31 December 31 December 31 December 2011 2010 2011 2010 Number Number 426,387,500 426,387,500 US$’000 US$’000 3,880 3,880 Allotted, called up and fully paid 31 December 31 December 31 December 31 December 2011 2010 2011 2010 Number Number 345,429,509 346,534,097 2,190,090 2,257,959 (3,294,678) 347,687,468 345,429,509 — US$’000 US$’000 3,145 18 — 3,163 3,152 17 (24) 3,145 The following tables include details on issue of ordinary shares of £0.005 each as part of the Group’s employee share option plan (see note 23) during 2011 and 2010: Issued during 2011 March 2011 May 2011 June 2011 August 2011 September 2011 October 2011 November 2011 December 2011 Issued during 2010 January 2010 March 2010 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 ordinary shares of £0.005 each 50,000 780,612 359,443 187,105 45,106 474,597 174,528 186,568 ordinary shares of £0.005 each 255,812 88,884 613,110 145,055 421,905 125,884 231,653 279,306 28,481 During 2011, the Company did not issue shares (2010: nil) in respect of employees’ exercising market value options. Shares issued are converted into US$ at the exchange rate prevailing on the date of issue. The issued and fully paid share capital of the Group amounts to US$3,228,000 (2010: US$3,210,000) and is split into 347,687,468 (2010: 345,429,509) ordinary shares. The share capital in UK sterling (GBP) is £1,738,437 (2010: £1,727,148) and translates at an average exchange rate of US$1.86 (2010: US$1.86) to GBP. 71 21273-04 888 Holdings.indd 71 10/04/2012 11:44:26 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 20 Trade and other payables Trade payables Corporate taxes Other payables and accrued expenses 31 December 31 December 2011 2010 US$’000 US$’000 27,308 667 37,487 65,462 15,335 309 22,170 37,814 The carrying value of trade and other payables approximates to their fair value given the short maturity date of these balances. Comparative amounts have been reclassified between trade and other payables following a review by management. 21 Contingent and deferred consideration Deferred (2010 contingent) consideration re Wink acquisition1 Contingent consideration re Mytopia acquisition2 31 December 31 December 2011 US$’000 37,397 — 37,397 2010 US$’000 72,046 10,225 82,271 1 On 18 March 2011 the Group announced that it had entered into an amendment agreement with the Wink Bingo vendors to reschedule the earn out payment payable in May 2011. The earn out payment reached its maximum cap of £59.7 million out of which £11 million was paid on 31 December 2009. Under the revised payment terms the Group made a payment out of its cash resources of £9.26 million on 18 March 2011, £9.26 million on 21 May 2011 and £6.173 million on 31 August 2011. On 23 February 2012 the Group paid an amount of £20.2 million resulting in a balance of £3.8 million payable on 21 May 2012 without a penalty. Payments after 21 May 2011 bear interest at 15% per annum. The Group has implemented security over the assets comprising the Wink bingo business in favor of the vendors. 2 On February 2011 the Group paid US$6.0 million due upon meeting certain milestones connected to the mobile and social networking games. An estimated earn-out payment of US$5.1 million was supposed to be payable in cash during the second quarter of 2012 based on achieving certain performance criteria during 2011. The subsequent financial performance has led to a release of that liability as the performance criteria were not achieved. Contingent and deferred consideration - movements in the year Contingent and Deferred consideration at the beginning of the year Paid in year — Capital amounts Unwinding of discount Release of contingent consideration Foreign exchange differences on deferred consideration Deferred consideration at the end of the year Wink Bingo mytopia business social games US$’000 72,046 US$’000 10,225 Total US$’000 82,271 (40,080) (6,000) (46,080) 3,692 — 1,739 37,397 — (4,225) — — 3,692 (4,225) 1,739 37,397 72 21273-04 888 Holdings.indd 72 10/04/2012 11:44:26 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011 22 Liabilities to customers and progressive prize pools Liabilities to customers Progressive prize pools 31 December 31 December 2011 2010 US$’000 US$’000 40,016 4,938 44,954 30,630 4,095 34,725 23 Investments in significant subsidiaries Percentage Percentage Name Cassava Enterprises (Gibraltar) Limited Virtual Marketing Services (UK) Limited Virtual Marketing Services (Gibraltar) Limited Dixie Operation Limited Random Logic Limited Brigend Limited Fordart Limited New Wave Virtual Ventures Limited Virtual Internet Services Limited Gisland Limited 888 Regulated Markets Limited 888 Denmark Limited 888 Spain Public LImited Company 888 Virtual Limited Country of incorporation Gibraltar UK Gibraltar Antigua Israel Gibraltar Gibraltar Gibraltar Gibraltar Gibraltar Malta Gibraltar Gibraltar Gibraltar of equity interest 2011 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 of equity interest 2010 % 100 100 100 100 Nature of business Gaming website operator Advertising services Marketing acquisition Customer call center operator 100 Research, development 100 100 and marketing Bingo business operator General commercial business activities 100 Development of social 100 100 games — Mytopia. General commercial business activities Provider of payments service solutions; Holds money transmission licence 100 Holder of French online gaming licence — Holder of Danish online gaming licence — Applied for Spanish online gaming licence — Holder of Group IP assets 21273-04 888 Holdings.indd 73 10/04/2012 11:44:26 73 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 24 Share-based payment Prior to flotation, the Company adopted two equity-settled employee share incentive plans — the 888 All-Employee Share Plan and the Long-term Incentive Plan. The 888 All-Employee Share Plan is open to all employees and Executive Directors of the Group who are not within six months of their normal retirement age at the discretion of the Remuneration Committee. Awards under this scheme will vest in instilments over a fixed period of up to four years. The Company grants awards to certain Executive Directors and members of its senior management. These awards are subject to performance conditions imposed by the Remuneration Committee at the dates of grant. Details of Shares and Share Options granted as part of the 888 All-Employee Share Plan: Share options granted Outstanding at the beginning of the year Market value options granted during the year Market value options lapsed during the year Outstanding at the end of the year1 31 December 2011 Weighted average 31 December 2010 Weighted average exercise price Number exercise price Number £1.38 4,587,481 £1.38 6,027,789 — £1.29 £1.41 — (942,437) 3,645,044 — £1.36 £1.38 — (1,440,308) 4,587,481 1 Of the total number of options outstanding at the end of the year, 2,932,129 had vested and were exercisable at the end of the year (2010: 2,836,040). 2 Range of exercise price for options outstanding at the end of the year is £1.02–£1.80 (2010: £1.02–£1.80). Shares granted Outstanding at the beginning of the year Shares granted — future vesting Lapsed future vesting shares Shares issued during the year Outstanding at the end of the year Shares are granted at a nominal exercise price. Valuation information — Shares granted Weighted average share price at grant date Weighted average share price at issue of shares Average remaining life until vesting (Months) 31 December 31 December 2011 US$’000 4,441,138 5,091,457 2010 US$’000 7,182,929 1,689,103 (906,344) (2,240,804) (2,257,959) (2,190,090) 6,368,292 4,441,138 2011 £0.34 £0.34 20 2010 £ 0.50 £ 0.66 15 Shares granted for future vesting are fair valued at the share price at grant date. The restrictions on the shares during the vesting period, primarily relating to non-receipt of dividends, have an immaterial effect on this fair value estimate at grant date. 74 21273-04 888 Holdings.indd 74 10/04/2012 11:44:26 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201124 Share-based payment continued In accordance with International Financial Reporting Standards a charge to the income statement in respect of any shares or options granted under the above schemes will be recognised and spread over the vesting period of the shares or options based on the fair value of the shares or options at the date at grant, adjusted for changes in vesting conditions at each balance sheet date. This charge has no cash impact. Share benefit charges Charges in respect of share and option awards granted this year Charges in respect of share and option awards granted in previous years Charges in respect of share and option awards granted in previous years included within restructuring charges (see note 5) Charge for the year 25 Related party transactions Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 607 1,767 2,374 503 2,877 246 2,063 2,309 — 2,309 During the year the Group paid US$81,290 (2010: US$258,815) in respect of rent and office expenses to companies of which Mr John Anderson was a Director. At 31 December 2011 the amount owed to those companies was nil (2010: nil). Remuneration paid to the Directors in the year totalled US$6,676,000 (2010: US$2,284,000). Share benefit charge in respect of awards granted to the Directors totalled US$1,055,000 (2010: US$348,380). 26 Commitments Lease commitments Future minimum lease commitments under property operating leases for the year ended 31 December 2011 are as follows: Leases expiring within One year Two to five years The amount paid in the year was US$3,714,000 (2010: US$3,060,000). Lease commitments on the Group’s property are shown to the date of the first break clause. Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 3,278 11,357 14,635 2,937 12,956 15,893 21273-04 888 Holdings.indd 75 10/04/2012 11:44:26 75 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 27 financial risk management The Group is exposed through its operations to risks that arise from use of its financial instruments. Policies and procedures for managing these risks are set by the Board following recommendations from the Chief Financial Officer. The Board reviews the effectiveness of these procedures and, if required, approves specific policies and procedures in order to mitigate these risks. The main financial instruments used by the Group, on which financial risk arises, are as follows: ●● Cash and cash equivalents. ●● Restricted cash. ●● Trade and other receivables. ●● Trade and other payables. ●● Liabilities to customers. ●● Contingent consideration on acquisition. ●● Available-for-sale financial investments. Detailed analysis of these financial instruments is as follows: financial assets Trade receivables Other receivables Cash and cash equivalents Restricted cash Available-for-sale financial investments 31 December 31 December 2011 2010 US$’000 US$’000 17,197 9,271 74,028 7,824 175 12,332 12,012 60,569 951 175 108,495 86,039 In accordance with IAS 39, with the exception of available-for-sale assets, all financial assets are classified as loans and receivables. financial liabilities Trade payables Other payables and accrued expenses Contingent and deferred Consideration Liabilities to customers 31 December 31 December 2011 2010 US$’000 US$’000 27,308 38,154 37,397 44,954 147,813 4,179 33,635 82,271 34,725 154,810 In accordance with IAS 39, all of the above financial liabilities are held at amortised cost, except for US$1,534,000 relating to the forward currency contracts to hedge risks associated with foreign exchange rates. Such derivative financial instruments are measured at fair value under IAS 39 and comprise level two fair value measurement instruments. (2010: US$82,271,000 relating to the contingent consideration arising on acquisitions which are recognised at fair value). At 31 December 2011 and 2010, the fair value and the book value of the Group’s financial assets and liabilities were materially the same. 76 21273-04 888 Holdings.indd 76 10/04/2012 11:44:26 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011 27 financial risk management continued Capital The capital employed by the Group is composed of equity attributable to shareholders. The primary objective of the Group is maximizing shareholders’ value, which, from the capital perspective, is achieved by maintaining the capital structure most suited to the Group’s size, strategy, and underlying business risk. Other than disclosed elsewhere in note 28, there are no demands or restrictions on the Group’s capital. The main financial risk areas are as follows: Credit risk Trade receivables The Group’s credit risk is primarily attributable to trade receivables who are the Group’s payment service providers (‘PSP’). These are third party companies that facilitate deposits and withdrawals of funds to and from customers’ virtual wallet with the Group. These are mainly intermediaries that transact on behalf of the main credit card companies. The risk is that a PSP would fail to discharge its obligation with regard to the balance owed to the Group. The Group reduces this credit risk by: ●● Monitoring those balances on a regular basis. ●● Arranging for the shortest possible cash settlement intervals. ●● Replacing rolling reserve requirements, where they exist, with a Letter of Credit by a reputable financial institution. ●● Ensuring a new PSP is only contracted following various due diligence and ‘Know Your Customer’ procedures. ●● Ensuring policies are in place to reduce dependency on any specific PSP. The Group believes that based on the above and on extensive past experience, the PSP receivables are of good credit quality and there is no requirement to provide for any potential bad debts arising from a PSP failing to discharge its obligation. None of the balances owed by the various PSP are overdue or impaired (2010: nil). An additional credit risk the Group faces relates to customers disputing charges made to their credit cards (‘chargebacks’) or any other funding method they have used in respect of the services provided by the Group. Customers may fail to fulfil their obligation to pay which will result in funds not being collected. These chargebacks and uncollected deposits, when occurring, will be deducted at source by the PSPs from any amount due to the Group. As such the Group provides for these eventualities by way of a provision based on analysis of past transactions. This provision is netted off from the trade receivables balance and at 31 December 2011 was US$1,161,000 (2010: US$886,000). The Group’s in-house Fraud and Risk Management department carefully monitors deposits and withdrawals by following prevention and verification procedures using internally developed bespoke systems integrated with commercially available third party measures. Cash and cash equivalents The Group controls its cash position out of its Gibraltar headquarters. Subsidiaries in its other locations (Israel, Antigua and London) maintain minimum cash balances which are deemed required for their operations. Cash settlement proceeds from PSPs, as described above, are paid into bank accounts controlled by the Treasury function. The Group maintains its funds with highly reputable financial institutions and will not hold funds with financial institutions with low credit rating. The Group maintains its cash reserve in highly liquid deposits and regularly monitors rates in order to maximize yield. 77 21273-04 888 Holdings.indd 77 10/04/2012 11:44:26 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 27 financial risk management continued Restricted cash Restricted cash is mainly attributed to a deposit in respect of the Spanish licence application. The Group’s maximum exposure to credit risk by type of financial instrument is summarized below: Trade receivables Other receivables Cash and cash equivalents Restricted cash Available for sale financial investments 31 December 2011 31 December 2010 Carrying maximum value US$’000 exposure US$’000 17,197 9,271 74,028 7,824 175 17,197 9,271 74,028 7,824 175 Carrying value US$’000 12,332 12,012 60,569 951 175 Maximum exposure US$’000 12,332 12,012 60,569 951 175 108,495 108,495 86,039 86,039 Liquidity risk Liquidity risk exists in the case where the Group will encounter difficulties in meeting its financial obligations as they become due. The Group monitors its liquidity in order to ensure that sufficient liquid resources are available to allow it to meet its obligations. The following table details the contractual maturity analysis of the Group’s financial liabilities: On demand In three months Between three months and one year More than one year 31 December 2011 Trade payables US$’000 other payables1 US$’000 Contingent Liabilities to consideration customers Total US$’000 US$’000 US$’000 8,479 17,107 1,467 255 27,308 1,007 34,416 1,634 1,097 38,154 — — 37,397 — 44,954 — — — 37,397 44,954 54,440 51,523 40,498 1,352 147,813 1 Includes other payables, accrued expenses, derivative financial liabilities and provisions. 31 December 2010 Trade payables US$’000 Other payables1 US$’000 Contingent Liabilities to consideration customers Total US$’000 US$’000 US$’000 1,857 2,068 254 — 4,179 7,356 24,621 662 996 33,635 — 34,725 5,987 72,046 4,238 82,271 — — — 34,725 43,938 32,676 72,962 5,234 154,810 On demand In three months Between three months and one year More than one year 1 Includes other payables, accrued expenses and provisions. 78 21273-04 888 Holdings.indd 78 10/04/2012 11:44:26 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201127 financial risk management continued market risk Interest rate risk The Group’s exposure to interest rate risk is limited to the interest bearing deposits in which the Group invests surplus funds. The Group’s policy is to invest surplus funds in low risk money market funds or on call over night facilities. The Group also arranges with its principal bankers that excess funds are swept automatically across its accounts, every night, in order to maximize availability of funds for investments. Downside interest rate risk is minimal as the Group has no floating rates borrowings. Given current low US$ interest rate a 0.5% downward movement in bank interest rates would not have a significant impact on finance income for the year. However, a 0.5% increase in interest rates would, based on the year-end deposits, increase annual profits by US$250,000. Currency risk The Group’s financial risk arising from exchange rate fluctuations is mainly attributed to: ●● Mismatch between Balance sheet Liabilities to customers which is predominantly denominated in US$ and the net receipts from customers which are settled in the currency of the customer’s choice, of which sterling (GBP) and euros (EUR) are significant. ●● Mismatch between reported revenue which is mainly generated in USD (the Group’s functional and reporting currency) and significant portion of deposits which are settled in local currencies. ●● Expenses, the majority of which are denominated in foreign currencies including sterling (GBP), euro (EUR) and New Israeli shekel (ILS). ●● The Wink Bingo deferred consideration is denominated in GBP. The Group entered into a specific forward contract in order to fix the economic impact of the currency mismatch. The Group continually monitors the foreign currency risk and takes steps, where practical, to ensure that the net exposure is kept to an acceptable level, inter alia by using foreign exchange forward contracts designed to fix the economic impact of known liabilities. At 31 December 2011 there were 20,000,000 GBP outstanding forward contracts regarding the Wink deferred liability whose fair value is US$1,534,000 and with a remaining contractual life of five months. The tables below detail the net financial position by currency at 31 December 2011 and 2010: Cash and cash equivalent Receivables Available-for-sale financial investments Net monetary assets Payables Net monetary liabilities Net financial position GBP EUR ILS USD other Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 31 December 2011 12,699 9,491 16,098 6,742 6,111 2,411 44,099 5,190 — 22,190 (62,905) (62,905) (40,715) — 22,840 (8,483) (8,483) 14,357 — 8,522 (15,161) (15,161) (6,639) 175 49,464 (60,912) (60,912) (11,448) 2,845 2,634 — 5,479 (352) (352) 5,127 81,852 26,468 175 108,495 (147,813) (147,813) (39,318) 21273-04 888 Holdings.indd 79 10/04/2012 11:44:26 79 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Consolidated Financial Statements 27 financial risk management continued Cash and cash equivalent Receivables Available-for-sale financial investments Net monetary assets Payables Net monetary liabilities Net financial position 31 December 2010 GBP EUR ILS USD Other Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 11,820 10,779 — 22,599 (94,226) (94,226) (71,627) 9,430 4,631 — 14,061 (2,828) (2,828) 11,233 5,706 1,454 — 7,160 (9,308) (9,308) (2,148) 31,496 5,863 175 37,534 (48,115) (48,115) (10,581) 3,068 1,617 — 4,685 (333) (333) 4,352 61,520 24,344 175 86,039 (154,810) (154,810) (68,771) Sensitivity analysis The table below details the effect on profit before tax of a 10% strengthening (and weakening) in the US dollar exchange rate at the balance sheet date for balance sheet items denominated in sterling, euros and new Israeli shekels: Year ended 31 December 2011 GBP 4,071 EUR 1,436 (4,071) (1,436) Year ended 31 December 2010 GBP 7,163 (7,163) EUR 1,123 (1,123) ILS 664 (664) ILS 215 (215) 10% Strengthening 10% Weakening 10% Strengthening 10% Weakening 80 21273-04 888 Holdings.indd 80 10/04/2012 11:44:26 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 201128 Contingent liabilities and regulatory issues (a) As part of the Board’s ongoing regulatory compliance and operational risk assessment process, the Board continues to monitor legal and regulatory developments, and their potential impact on the business, and continues to take appropriate advice in respect of these developments. (b) Given the nature of the legal and regulatory landscape of the industry, from time-to-time the Group has received notices, communications and legal actions from a small number of regulatory authorities and other parties in respect of its activities. The Group has taken legal advice as to the manner in which it should respond and the likelihood of success of such actions. Based on this advice and the nature of the actions, the Board is unable to quantify reliably any material outflow of funds that may result, if any. Accordingly, no provisions have been made. (c) The Group operates in numerous jurisdictions. Accordingly, the Group is filing tax returns, providing for and paying all taxes it believes are due based on local tax laws, transfer pricing agreements and tax advice obtained. The Group is periodically subject to audits and assessments by local taxing authorities. The Board is unable to quantify reliably any exposure for additional taxes, if any, that may arise from the final settlement of such assessments. Accordingly no additional provisions have been made. 29 Post balance sheet events (a) As part of commercial negotiations between the Group and one of its B2B white label customers, the Group has acquired the customer’s domain names and brands as at 1 January 2012. As a result the Group will be recognising the income within its B2C business for 2012 rather than the net commission charged within B2B income as was the case for 2011. Based upon the provisional estimates of fair value there is no material effect on the Group assets and liabilities. (b) On 23 February 2012 the Group prepaid £20.2 million of the Wink deferred consideration to reduce interest costs. This resulted in a balance of £3.8 million payable on 21 May 2012 without a penalty. 21273-04 888 Holdings.indd 81 10/04/2012 11:44:27 81 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Company Balance Sheet At 31 December 2011 Assets Non-Current Assets Investments in subsidiaries Fixed assets Current assets Trade and other receivables Cash and cash equivalents Total assets Equity and Liabilities Equity Share capital Share premium Retained earnings Capital redemption reserve Total equity attributable to equity holders of the parent Liabilities Current liabilities Trade and other payables Total liabilities Total equity and liabilities 31 December 31 December Note 2011 US$’000 2010 US$’000 2 3 4 5 6 22,782 11 22,793 146,287 16,386 162,673 185,466 3,163 65 (4,333) 24 (1,081) 20,956 5 20,961 135,339 13,674 149,013 169,974 3,145 65 7,454 24 10,688 186,547 186,547 185,466 159,286 159,286 169,974 The financial statements on pages 82 to 84 were approved and authorised for issue by the Board of Directors on 27 March 2012 and were signed on its behalf by: Brian mattingley Chief Executive Officer Aviad Kobrine Chief Financial Officer The notes on pages 85 to 86 form part of these financial statements. 82 21273-04 888 Holdings.indd 82 10/04/2012 11:44:27 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Company Statement of Changes in Equity For the year ended 31 December 2011 Balance at 1 January 2010 Dividend paid Issue of shares Share benefit charges Share buy back Total comprehensive income for the year Balance at 1 January 2011 Issue of shares Share benefit charges Total comprehensive income for the year Balance at 31 December 2011 Capital Share Redemption Share capital US$’000 3,152 Reserve US$’000 — premium US$’000 65 Retained earnings US$’000 14,344 Total US$’000 17,561 — 17 — (24) — 3,145 18 — — 3,163 — — — 24 — 24 — — — 24 — — — — — 65 — — — 65 (10,491) (10,491) (17) 2,309 (3,465) 4,774 7,454 (18) 2,877 (14,646) (4,333) — 2,309 (3,465) 4,774 10,688 — 2,877 (14,646) (1,081) The following describes the nature and purpose of each reserve within equity. Share capital — represents the nominal value of shares allotted, called-up and fully paid for. Capital redemption reserve — represents amounts transferred from the share capital reserve following the buy back and cancellation of equity shares. Share premium — represents the amount subscribed for share capital in excess of nominal value. Retained earnings — represents the cumulative net gains and losses recognised in the consolidated statement of comprehensive income. The notes on pages 85 and 86 form part of these financial statements. 21273-04 888 Holdings.indd 83 10/04/2012 11:44:27 83 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Company Statement of Cash Flows For the year ended 31 December 2011 Cash flows from operating activities:  Loss before income tax Adjustments for  Interest received  Share benefit charges  Depreciation  Increase in amounts owed by subsidiaries  Decrease in other accounts receivables  Increase in trade payables  (Decrease) Increase in amounts owed to subsidiaries  Increase (decrease) in other accounts payables Cash generated from (used in) operations Tax paid Net cash generated from (used in) operating activities Cash flows from investing activities:  Interest received  Purchase of fixed assets  Dividends received Net cash generated from investing activities Cash flows from financing activities:  Dividends paid  Share buy back Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes on pages 85 to 86 form part of these financial statements. 31 December 31 December 2011 US$’000 2011 US$’000 2010 2010 US$’000 US$’000 (13,679) (59) 1,051 2 (11,369) 421 485 22,365 3,719 59 (8) — — — (5,810) (63) 293 1 (11,047) 528 39 (11,035) (1,702) 63 (6) 10,491 2,936 (275) 2,661 (28,796) (50) (28,846) 51 10,548 (10,491) (3,465) — 2,712 13,674 16,386 (13,956) (32,254) 45,928 13,674 84 21273-04 888 Holdings.indd 84 10/04/2012 11:44:27 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011notes to the Company Financial Statements 1 General information and accounting policies A description of the Company, its activities and definitions are included in note 1 to the consolidated financial statements. The Company has applied accounting policies identical to the Group’s accounting policies listed in note 2 to the consolidated financial statements other than in relation to investments in its subsidiaries which are held at cost less any impairment provision required. The following standard issued by the IASB has not been adopted by the Company as this was not effective for the year 2011. The Company is currently assessing the impact this standard will have on the presentation of its results in future periods. IAS27 Separate Financial Statements (effective for accounting periods beginning on or after 1 January 2013). IAS27 has not yet been endorsed for use in the EU. Under Section 10(2) of the Gibraltar (Consolidated Accounts) Act 1999, the Company is exempt from the requirement to present its own income statement. 2 Investments in subsidiaries The Company’s subsidiaries are listed in note 23 to the consolidated financial statements and are held at cost less provision for any impairment. The Group applies IFRIC 11 ‘Group and treasury share transactions’. Consequently, the Parent Company recognises as a cost of investment the value of its own shares that it makes available for the purpose of granting share options to employees or contractors of its subsidiaries. The movement on investment in subsidiaries in both years was in respect of IFRIC 11. This amount was US$1,821,000 in 2011 (2010: US$2,015,000). 3 Trade and other receivables Amounts due from subsidiaries Other receivables and prepayments Year ended Year ended 31 December 31 December 2011 US$’000 146,271 16 146,287 2010 US$’000 134,902 437 135,339 The carrying value of trade and other receivables approximate to their fair value. None of the balances included within trade and other receivables are past due or impaired. Amounts due from subsidiaries are payable on demand. 4 Cash and cash equivalents Cash and cash equivalents Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 16,386 16,386 13,674 13,674 85 21273-04 888 Holdings.indd 85 10/04/2012 11:44:27 www.888holdingsplc.com21273-04 04/04/2012 Proof 17notes to the Company Financial Statements 5 Share capital The disclosures in note 19 to the consolidated financial statements are identical for the Company. 6 Trade and other payables Trade payables Amounts due to subsidiaries Corporate tax Other payables and accrued expenses Year ended Year ended 31 December 31 December 2011 2010 US$’000 US$’000 546 179,324 667 6,010 61 156,959 190 2,076 186,547 159,286 The carrying value of trade and other payables approximate to their fair value. All balances included within trade and other payables are repayable on demand. 7 financial risk management The Company’s financial risk management objectives and policies are identical to those of the Group as disclosed in note 27 to the consolidated financial statements. 8 Contingent liabilities The disclosures in note 28 to the consolidated financial statements are identical for the Company. 9 Share-based payment The disclosures in note 24 to the consolidated financial statements are identical for the Company except that the charge for the year is partly taken to investment in subsidiaries as set out in note 2. 10 Related party transactions During the year the Company received dividends from its subsidiaries totalling nil (2010: US$10,491,000) and paid to its shareholders dividends totalling nil (2010: US$10,491,000). Remuneration paid to Directors of the Company by its subsidiaries in the year totalled US$271,488 (2010: US$127,938). Share benefit charges in respect of options and shares of the Company awarded to employees of subsidiaries totalled US$1,821,000 (2010: US$2,015,000). During the year subsidiaries of the Company participated in funding its costs which totalled US$15,120,000 (2010: US$8,379,000). At 31 December 2011, net amount owed by the Company to its subsidiaries US$33,054,000 (2010: US$22,059,000). 86 21273-04 888 Holdings.indd 86 10/04/2012 11:44:27 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Shareholder Information Group websites A range of shareholder information is available in the Investor Relations area of the Group’s website, www.888holdingsplc.com, including: ●● Latest information on the Group’s share price ●● Information on the Group’s financial performance ●● News and events The following websites can be also accessed through the Group’s main web portal www.888.com or are available directly. Casino 888’s Casino games are offered through its Casino-on-Net and Reef Club Casino offerings ●● www.Casino-on-Net.com ●● www.ReefClubCasino.com Poker 888’s Poker offering is through Pacific Poker ●● www.PacificPoker.com Sportsbook 888’s Sportsbook offering is through 888sports ●● www.888sport.com Bingo 888’s Bingo offering is through 888ladies and Wink ●● www.888ladies.com ●● www.winkbingo.com Betmate: 888 Offers access to a betting exchange ●● www.Betmate.com 888.info: Allows customers to practice their gaming skills for fun through a number of key Casino and Poker games ●● www.888.info 888responsible: The Group’s dedicated site focusing on responsible gaming ●● www.888responsible.com 21273-04 888 Holdings.indd 87 10/04/2012 11:44:27 87 www.888holdingsplc.com21273-04 04/04/2012 Proof 17Shareholder notes 88 21273-04 888 Holdings.indd 88 10/04/2012 11:44:27 21273-04 04/04/2012 Proof 17888 Holdings plc Annual Report & Accounts 2011Shareholder Services All enquiries relating to Ordinary Shares, Depository Auditors BDO LLP Interests, dividends and changes of address should be Chartered Accountants directed to the Group’s Transfer Agent: 55 Baker Street London W1U 7EU UK BDO Limited Registered Auditors Montagu Pavilion 8–10 Queensway Gibraltar Incorporated in Gibraltar with registered number 90099 Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU UK Tel: 0870 162 3100 www.capitaregistrars.com Further Information For further information please contact: info@888holdingsplc.com Principal Bankers The Royal Bank of Scotland plc 280 Bishopsgate London EC2M 4RB UK Solicitors Freshfields Bruckhaus Deringer 65 Fleet Street London EC4Y 1HS UK Hassans 57/63 Line Wall Road Gibraltar Company Secretary Strait Secretaries Limited 57/63 Line Wall Road Gibraltar 21273-04 888 Holdings Cover(20).indd 6 10/04/2012 11:43:39 06 www.888holdingsplc.com21273-04 10/04/2012 Proof 20888 Holdings plc Suite 601/701 Europort Europort Road Gibraltar T: +350 20049800 F: +350 20048280 E: Info@888holdingsplc.com www.888holdingsplc.com 01 21273-04 888 Holdings Cover(20).indd 1 10/04/2012 11:43:37 l 8 8 8 H o d n g s p l c i A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 888 Holdings plc Annual Report & Accounts 201021273-04 10/04/2012 Proof 20 

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