Gaming VC Holdings SA Results for the year ending 31 December 2006 2 3 6 8 8 9 10 11 11 16 16 17 17 18 18 20 20 21 22 23 24 25 25 25 25 26 27 GAMING VC Holdings SA (Incorporated in the Grand Duchy of Luxembourg, Registered Number RC Luxembourg B 104348) CONTENTS CHAIRMAN’S STATEMENT CHIEF EXECUTIVE’S REVIEW INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF GAMING VC HOLDINGS SA CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CASHFLOWS NOTES TO THE CONSOLIDATED ACCOUNTS Signi¢cant accounting policies 1 2 Segment reporting Personnel expenses 3 Net ¢nancing costs Income tax expense 4 5 6 7 Property, plant and equipment Intangible assets Receivables and prepayments 8 Cash and cash equivalents 9 Capital and reserves 10 11 12 Earnings per share Employee bene¢ts Trade and other payables Related parties 13 14 Group entities 15 Accounting estimates and judgments 16 Subsequent events DIRECTORS ADVISERS 1 CHAIRMAN’S STATEMENT On behalf of the Board of Gaming VC SA, I am pleased to present the results of the company’s trading for the year ended 31 December 2006. I also want to share the important changes we implemented during 2006, and the new direction we have carefully planned to pursue in 2007 and beyond. I am con¢dent that we are stronger, more knowledgeable, and in a better position to generate increased returns for our shareholders in the future. The ¢nancial results for the year ended 31 December 2006 show an operating pro¢t of C13.5 million (2005 : C13.9 million), before share option charges and taking C8.3 million of accelerated amortisation charges on the Group’s software licences, plus a C33.3 million write down of goodwill primarily driven impact of the continuing German Laender’s regulatory position against the online by the potential gaming industry. Since the year end the Board has been encouraged by the position taken by the EU Commission, and the healthy debate in Germany at the quarterly sessions of the Laender Prime Ministers on the regulation of online gaming. The Board has recommended a ¢nal dividend of 13p gross (c C0.193) giving a total distribution of 26p (c C0.386) for the year (2005: 42p (c C0.604)). The ¢nal dividend will be paid on 29 May 2007 to all shareholders on the register at the close of business on 27 April 2007. We have made important changes in management and the Board during the year. I accepted the position of non-executive chairman on 1 November 2006. At the same time, we announced that Steve Barlow was stepping down from his position as Chief Executive, and that a search has been started for a replacement with extensive online gaming experience. I am pleased that the search was completed and that Kenneth Alexander was appointed Chief Executive effective 1 March 2007. Mr Alexander’s initial views on strategy and structure are included in the Chief Executive’s review. Shareholders will be asked to con¢rm Mr. Alexander’s appointment to the Board at the AGM which will be held on 15 May 2007. During the year, the Board accepted resignations from Dr. Robert Willis and Scott Miller as Executive Directors, and also from their Board positions. The Board appreciates their service to Gaming VC in the initial development of the Group. I am con¢dent that we now have a stronger and more experienced management team to take the Group to the next stage of its development. The Core business in Germany is cash generative, and the ¢rst three months of the 2007 ¢nancial year are in line with expectations. With experienced ¢nancial and operating management leading the business, we are able to expand with con¢dence into new European markets outside of Germany. Adrian J. R. Smith Chairman 2 CHIEF EXECUTIVE’S REVIEW I am delighted to be in a position to give my ¢rst statement as Chief Executive since my appointment on 1 March 2007. In this report I would like to give you an insight into the challenges the Group currently faces and what our objectives will be in the coming year in taking the business forward. Notwithstanding more encouraging announcements by the EU Commission on the regulatory environment surrounding online gaming in Germany, diversi¢cation into other European markets is the key strategic objective for Gaming VC during the next twelve months. The Group is con¢dent that it will obtain a gaming licence in Italy in Q2 2007 which will permit the introduction of a sportsbook. The Group envisages a subsequent launch of bingo and tournament poker. Opportunities are also being looked at to secure licences or to enter new territories enabling diversi¢cation into new markets outside Germany. No investment will be made in any new market until a comprehensive business plan and experienced local executives are in place. The Group’s German customer base has been built by means of off-line direct mail marketing and this marketing strategy has remained the core marketing strategy in recruiting new customers. Ongoing, other marketing channels will be targeted which are expected to lower the Group’s customer acquisition costs. Accordingly, direct mail marketing will be used on a smaller scale for retention purposes for our established higher value German customers. However, new recruitment channels focusing on online and af¢liate marketing will make our marketing more ef¢cient and are more suited to an online business. This change in focus to concentrate more on online marketing will require different marketing skills from those that have been required in the past and recruitment has commenced to effectively implement this strategy. The change in strategy from direct mail to online marketing, with a dedicated marketing team possessing the skills to implement the revised strategy, is expected to improve the growth prospects of Gaming VC and materially improve marketing ef¢ciency. Customer Retention Management (CRM) will also have an increased focus ongoing in the business. The gaming industry is maturing and the levels of sophistication employed to maintain and work the existing customer database is increasing all the time. To improve in this area, work has also started to recruit the necessary expertise and to invest in the most appropriate tools to implement effective CRM. It is expected that these actions will increase lifetime values and reduce attrition, both critical areas for online gaming operations as the market matures and focus increases on maintaining the existing customer base. As well as diversifying geographically during the new ¢nancial year there will be diversi¢cation in terms of Gaming VC’s product range. A strategic review is being carried out to ensure that the Group is operating on the optimal platform for its business requirements and we will be looking to offer an increased range of gaming products, including ¢xed odds games and bingo, and explore the possibility of launching a sportsbook in conjunction with our entry into new markets. Casino New registrations New depositing customers Daily average revenue Total revenue 2006 2005 % Change 52,774 22,916 o105,091 o38,358,324 32,840 18,023 o109,907 o40,116,120 61% 27% (4.4%) (4.4%) Casino revenues fell by 4% despite new depositing customers increasing by 27% year-on-year. This re£ects a disappointing third quarter and a high-staking account in December 2006 which reduced that month’s revenue by C0.3 million which was subsequently recovered in January 2007. This trend highlights the issues with our marketing strategy over the last twelve months where direct mail marketing and CRM efforts not deliver growth in total volumes despite an increase in depositing customers. 3 Poker New registrations New depositing customers Daily average revenue Total revenue 2006 25,957 11,845 o6,051 o2,208,489 2005 7,308 3,355 o1,779 o327,362 % Change 255% 353% 240% 575% Poker has demonstrated solid growth during the ¢nancial year and has compensated for the slight fall in Casino revenues. Similarly to the Casino, the marketing efforts on Poker will concentrate on online measurable channels to deliver the growth in our Poker offering. Group Financial Performance The total gross wagers placed were C1.6 billion (2005 : C1.6 billion) and net revenues were C40.6 million (2005 : C40.4 million). The gross pro¢t for the ¢nancial year ended 31 December 2006 was C29.4 million (2005 : C30.8 million). The small decrease in gross margin has arisen due to both the impact of the one high stake roulette player discussed above, and the increased percentage of lower margin poker business in the total wagers placed. The primary operating cost element for the Group are the turnkey online casino services provided by Boss Media SA and its subsidiaries. In the ¢nancial year there were no signi¢cant one-off jackpot winners on the Group’s slot machine games with associated ‘‘progressive’’ jackpots, although 3 players won over C0.1 million each in the year (2005 : none). The total of the available jackpots at the end of December 2006 was C2.2 million (2005 : C1.7 million) with the jackpot being C1.3 million available (2005 : C0.8 million). Upon this jackpot becoming payable it will be a charge against the relevant period’s gross pro¢t. The last major jackpot win was for C0.5 million in November 2004. individual largest The Group operating pro¢t for the ¢nancial year ended 31 December 2006 before exceptional items and share option charge was C13.5 million (2005 : C13.9 million) after the deduction of distribution and administrative expenses. The Group incurred C41.6 million of exceptional charges in the year (2005 : nil), these consist of C8.3 million of accelerated amortisation charges on the Groups software licences and a C33.3 million write down of goodwill after considering the potential impact of the continuing German Laender’s regulatory position against the online gaming industry in the foreseeable future. This resulted in a Group operating loss after exceptional items of C28.9 million (2005 : pro¢t of C13.4 million). Net operating expenses before goodwill impairment in the year of C25.1 million (2005 : C17.4 million) are analysed as distribution, administration and amortisation costs as detailed below. Distribution costs of C7.1 million (2005 : C7.4 million) re£ect the third party marketing costs incurred by the Group to recruit active members to the Casino. The major items within the administrative expenses (excluding amortisation) incurred during the ¢nancial year are detailed below : Employment costs Travel Legal, accounting and tax Re-organisation costs All other costs Total administrative expenses 2006 g’000 3,434 886 1,682 ^ 775 2005 o’000 2,378 1,121 1,941 545 1,207 6,777 7,192 Employment costs which are analysed in note 2 to the ¢nancial statements, include C0.4 million settlement for contractual obligations to Mr S Barlow and Mr S Miller on their standing down as Executive Directors of the Group. Of the total C44.4 million amortisation and impairment charge (2005 : C2.8 million), detailed in note 6 to the ¢nancial statements, C41.6 million was an exceptional charge in 2006. C8.3 million re£ects accelerated amortisation of the Group’s software licenses following a review that identi¢ed a reduced bene¢cial life of the licenses due to both technical developments and price pressure on royalties in the market place; C33.3 million re£ects an ongoing concern regarding the continued uncertainty in the German regulatory position. 4 Net ¢nancing income for the ¢nancial year ended 31 December 2006 of C0.1 million (2005 : net ¢nancing costs C0.6 million) are analysed in note 3 to the ¢nancial statements. The majority of Group revenues are in Euros, as are both the cost of sales and marketing. Employment costs are primarily US Dollar denominated and most legal, tax and accounting services are incurred in Sterling. Dividend payments are also Sterling denominated. The Group intends to add new gaming licences within the EU in 2007 to those already held in Curacao. The impact of this will be to strengthen the EU business operationally but it will increase the overall group tax charge going forward. It is expected that Gaming VC will increase its tax charge from a current base level of 2% of operating pro¢ts to closer to 10% by 2008. The ¢nal charge will depend on both the markets where growth is achieved and future developments on taxation in the domiciles Gaming VC operates in. In the reporting period the Group generated C17.9 million (2005: C17 million) from operating activities. After payment of dividends totalling C15.6 million during the year, the Group’s closing cash balance as at 31 December 2006 was C9.4 million (2005 : C7.2 million). The Group had no signi¢cant capital expenditure during the year and does not envisage any material capital expenditure in 2007. Dividends The Board considers that the current dividend policy remains appropriate for the Group. The core business is cash generative and not capital intensive and we will continue to return excess capital to shareholders, as appropriate. The Board recommends a ¢nal dividend of 13p (gross) (c C0.193) per share (2005 : 21p per share), making a total distribution of 26p per share (c C0.386) for the year. This will be paid on 29 May 2007 to shareholders on the register at the close of business on 27 April 2007. While the total dividend for 2006 will be greater than the earnings per share in the year, given the ¢nancial performance of the Group in 2006 and the positive start to 2007, the Board considers the ¢nal dividend is appropriate. As at 31 March 2007 our cash balances were more than suf¢cient to cover the ¢nal dividend. Outlook Trading for the ¢rst three months of the 2007 ¢nancial year has been in line with expectations. Likely bene¢ts of the revised marketing strategy include increased player acquisition numbers with an associated reduction in customer acquisition costs together with an increased retention of the existing customer base. It is expected that these initial bene¢ts will be experienced in the last quarter of the ¢nancial year. The impact of the associated costs of this strategy which will be incurred before the bene¢t is received will be offset by the savings made on a signi¢cant reduction in the use of direct mail as a marketing tool. Gaming VC has started 2007 in a much stronger and more competitive position than last year. Management’s combined experience in the online gaming industry places Gaming VC in an excellent position to diversify its operations into new European territories. I am con¢dent for the future. Kenneth Alexander Chief Executive 5 6 7 Consolidated income statement For the year ended 31 December 2006 In thousands of euro Revenue Cost of Sales Gross pro¢t Net operating expenses including exceptional items and share option charges Operating pro¢t before exceptional items and share option charge Share option charge Exceptional items Operating (loss)/pro¢t before ¢nancing EBITDA Depreciation Amortisation and impairment Financial income Financial expense Net ¢nancing income/costs (Loss)/Pro¢t before Tax Income tax expense (Loss)/Pro¢t for the year Note 1 Before goodwill impairment Goodwill impairment Total Year ended 31 December 2006 Year ended 31 December 2005 40,573 (11,158) 29,415 ^ ^ ^ 40,573 (11,158) 40,443 (9,677) 29,415 30,766 (25,075) (33,274) (58,349) (17,404) 13,505 (893) (8,272) 4,340 15,536 (35) (11,161) 163 (68) 95 4,435 ^ 4,435 ^ 13,505 13,853 ^ (33,274) (893) (41,546) (491) ^ (33,274) ^ ^ (33,274) ^ ^ (28,934) 15,536 (35) (44,435) 163 (68) 13,362 16185 (21) (2,802) 46 (601) ^ 95 (555) (33,274) ^ (28,839) ^ 12,807 (13) (33,274) (28,839) 12,794 6 3 3 4 Basic earnings per share (euro) Diluted earnings per share (euro) 10 10 (0.93) (0.93) 0.41 0.41 Consolidated statement of recognised income and expense For the year ended 31 December 2006 In thousands of euro Year ended 31 December 2006 Year ended 31 December 2005 (Loss)/Pro¢t and total recognised income and expense for the year (28,839) 12,794 8 Consolidated balance sheet As at 31 December 2006 In thousands of euro Assets Property, plant and equipment Intangible assets Total non-current assets Trade receivables Other receivables and prepayments Cash and cash equivalents Total current assets Total assets Equity Issued share capital Share premium Retained earnings Total equity attributable to equity holders of the parent Liabilities Income tax payable Trade and other payables Accrued expenses Withholding tax on dividends Total current liabilities Total liabilities Total equity and liabilities Note 31 December 2006 31 December 2005 5 6 7 7 8 9 9 9 4 12 12 12 56 58,548 58,604 1,892 417 9,407 11,716 70,320 46 102,752 102,798 2,151 531 7,233 9,915 112,713 38,608 57,926 (29,853) 38,608 67,522 4,109 66,681 110,239 18 1,317 1,101 1,203 3,639 3,639 18 1,140 1,316 ^ 2,474 2,474 70,320 112,713 9 Consolidated statement of cash£ows For the year ended 31 December 2006 In thousands of euro Cash £ows from operating activities Cash receipts from customers Cash paid to suppliers and employees Net cash from operating activities Cash £ows from investing activities Interest received Acquisition of property, plant and equipment Acquisition of intellectual property Net cash from investing activities Cash £ows from ¢nancing activities Payment of transaction costs Dividend paid Net cash from ¢nancing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of exchange rate £uctuations on cash held Cash and cash equivalents at end of the year Year ended 31 December 2006 Year ended 31 December 2005 Note 40,833 (22,934) 17,899 38,911 (21,966) 16,945 5 6 154 (45) (231) (122) 46 (67) (75) (96) ^ (15,612) (867) (9,559) (15,612) (10,426) 2,165 7,233 9 9,407 6,423 1,270 (460) 7,233 10 Notes to the consolidated ¢nancial statements Signi¢cant accounting policies Gaming VC Holdings SA (the ‘‘Company’’) is a company registered in Luxembourg that was incorporated on 30 November 2004. The consolidated ¢nancial statements of the Company for the year ended 31 December 2006 comprise the Company and its subsidiaries (together referred to as the ‘‘Group’’). The ¢nancial statements were authorised for issue by the directors on 18 April 2007. (a) Statement of compliance The consolidated ¢nancial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International Accounting Standards Board (IASB) as adopted by the European Union. (b) Basis of preparation The ¢nancial statements are presented in euro, rounded to the nearest thousand. They are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative ¢nancial instruments, ¢nancial instruments held for trading or classi¢ed as available for sale. However, no such ¢nancial instruments were held during the year. The preparation of ¢nancial statements in conformity with IFRSs requires directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on various factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The accounting policies set out below have been applied consistently to all periods presented in these consolidated ¢nancial statements. The accounting policies have been applied consistently by Group entities. (c) Basis of consolidation Subsidiaries (i) Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the ¢nancial and operating policies of an entity so as to obtain bene¢ts from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The ¢nancial statements of subsidiaries are included in the consolidated ¢nancial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation (ii) Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated ¢nancial statements. (iii) Business combinations All business combinations are accounted for by applying the purchase method. The cost of a business combination is measured as the aggregate of the fair values, at the acquisition date, of the assets given, liabilities incurred or assumed, and equity instruments issued by the Group, plus any costs directly liabilities and contingent liabilities of the attributable to the combination. The identi¢able assets, acquiree are measured initially at fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of the business combination over the Group’s interest in the net fair value of the identi¢able assets, liabilities and contingent liabilities is recognised as goodwill. 11 Foreign currency transactions (d) Foreign currency (i) Transactions in foreign currencies are translated to euro at the foreign exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the consolidated income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Financial statements of foreign operations (ii) The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to euro at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to euro at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. (e) Property, plant and equipment (i) Owned assets Property, plant and equipment are stated at cost, less accumulated depreciation (see below) and impairment losses (see accounting policy g). Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. (ii) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: . . . buildings plant and equipment ¢xtures and ¢ttings 40 years 3-12 years 5-10 years The residual value, if not insigni¢cant, is reassessed annually. Intangible assets Goodwill (f) (i) Acquired goodwill represents the excess of the cost of a business combination over the Group’s interest in the fair value of the identi¢able assets, liabilities and contingent liabilities of the acquiree at the date of acquisition. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. At the date of acquisition, goodwill is allocated to cash generating units for the purpose of impairment testing. Negative goodwill arising on an acquisition is recognised directly in pro¢t or loss. (ii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy g). The cost of intangible assets acquired in a business combination is the fair value at acquisition date. The valuation methodology used for each type of identi¢able asset category is detailed below : . . . . . Magazine-related Consulting Software licence Trademarks Goodwill Cost Income (cost saving) Income (incremental value plus loss of pro¢ts) Relief from royalty Residual balance Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. Subsequent expenditure (iii) Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic bene¢ts embodied in the speci¢c asset to which it relates. All other expenditure is expensed as incurred. 12 (iv) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are inde¢nite. Goodwill and intangible assets with an inde¢nite useful life are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: . . . consulting agreements capitalised development costs software licence agreements 3-5 years 2-4 years 2-3 years Impairment (g) At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes an estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is written down to its recoverable amount. Recoverable amount is the higher of fair value less costs to sell and value in use and is determined for an individual asset. If the asset does not generate cash in£ows that are largely independent of those from other assets or groups of assets the recoverable amount of the cash generating unit to which the asset belongs is determined. Discount rates re£ecting the asset speci¢c risks and the time value of money are used for the value in use calculation. For goodwill and trademarks that have an inde¢nite useful life, the recoverable amount is estimated at each balance sheet date. (h) Share capital Dividends (i) Dividends are recognised as a liability in the period in which they are declared. Employee bene¢ts De¢ned contribution plans (i) (i) The Group operates a de¢ned contribution plan. Obligations for contributions to de¢ned contribution pension plans are recognised as an expense in the income statement as incurred. Share-based payment transactions (ii) The share option programme allows Group employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using a black-scholes valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to re£ect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. Provisions (j) A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an out£ow of economic bene¢ts will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash £ows at a pre-tax rate that re£ects current market assessments of the time value of money and, where appropriate, the risks speci¢c to the liability. (k) Trade and other payables Trade and other payables are stated at cost. Revenue (l) Revenue comprises proceeds from gaming activities. In accordance with industry practice, gaming revenue represents ‘‘customer drop’’ or net revenue which comprises amounts staked net of customer winnings and not the handle or wagered amount. (m) Expenses (i) Operating lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. 13 (ii) Net ¢nancing costs Net ¢nancing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested, dividend income, foreign exchange gains and losses. Interest income is recognised in the income statement as it accrues, using the effective interest method. Dividend income is recognised in the income statement on the date the entity’s right to receive payments is established. (n) Tax Income tax on the pro¢t or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for ¢nancial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable pro¢t, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is more probable than not that future taxable pro¢ts will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax bene¢t will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (o) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. (p) Short-term deposits Short-term deposits comprise cash deposits held with highly credit rated ¢nancial original maturities of more than three months and up to one year. institutions with (q) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits held with banks. (r) New standards The Company adopted the following new IFRS standards and interpretations. These new standards and interpretations do not have a material impact on the accounting policies of the Company. . . . . . . IFRS 6 Exploration for and Evaluation of Mineral Resources. Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates ^ Net Investment in a Foreign Operation. Amendments to IAS 39 Financial Instruments: Recognition and Measurement ^ Cash Flow Hedge Accounting of Forecast Intra-group Transactions. Amendments to IAS 39 Financial Instruments: Recognition and Measurement ^ The Fair Value Option. Amendments to IAS 39 and IFRS 4 Financial Guarantee Contracts. IFRIC 4 Determining whether an Arrangement contains a Lease. 14 . . . IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. IFRIC 6 Liabilities arising from Participating in a Speci¢c Market ^ Waste Electrical and Electronic Equipment. IFRIC 7 Applying the restatement Approach under IAS 29 Financial reporting in Hyperin£ationary Economies. A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2006, and have not been applied in preparing these consolidated ¢nancial statements. These include: . . . . . . . . IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures require extensive disclosures about the signi¢cance of ¢nancial instruments for an entity’s ¢nancial position and performance, and qualitative and quantitative disclosures on the nature and extent of risks. IFRS 7 and amended IAS 1, which become mandatory for the Group’s 2007 consolidated ¢nancial statements. IFRS 8 Operating Segments. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperin£ationary Economies. IFRIC 8 Scope of IFRS 2 Share-based Payment. IFRIC 9 Reassessment of Embedded Derivatives. IFRIC 10 Interim Financial Reporting and Impairment. IFRIC 11 IFRS 2 ^ Group and Treasury Share Transactions. IFRIC 12 Service Concession Arrangements. The Company has not yet determined the potential effect of the new standards and interpretation not yet effective. 15 Segment reporting 1 Segment information is presented in respect of the Group’s business and geographical segments. Business segments Based on risks and returns the management considers that the primary reporting format is by business segment. The directors consider that there are two business segments being the casino operation of games of chance and skilled based games, primarily Poker which was launched in the last quarter of 2005. Geographical segments Within the year the core business activity has been concentrated in the German language countries. Development speci¢cally tailored for other European language countries is ongoing. Owing to current legislation in the US the company continues to block access to its games to potential players located there. Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the location of the assets themselves. Games of Chance In thousands of euro Germany 2006 2005 Austria 2006 2005 Switzerland 2005 2006 Other Countries 2005 2006 Consolidated 2006 2005 Revenue 28,669 30,074 7,161 7,673 1,807 1,203 721 1,166 38,358 40,116 Segment assets Capital expenditure ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ 111,598 112,599 111,598 112,599 ^ 266 67 266 67 Games of Skill In thousands of euro Germany 2006 2005 Austria 2006 2005 Switzerland 2005 2006 Other Countries 2005 2006 Consolidated 2006 2005 Revenue 1,661 219 354 69 66 10 Segment assets Capital expenditure ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ 134 268 10 29 2,215 114 75 268 10 327 114 75 Assets and liabilities are not speci¢cally allocated to business segments as the total assets and liabilities of the Group are utilised, managed and reported centrally across all business segments. Consequently, it is not possible to provide a meaningful allocation of assets and liabilities for each business segment as this cannot be done on a reasonable basis. All segments are continuing operations. 2 Personnel expenses In thousands of euro Wages and salaries Compulsory social security contributions Contributions to de¢ned contribution plans Equity-settled transactions 16 Year ended 31 December 2006 Year ended 31 December 2005 2,400 154 (13) 893 3,434 1,713 135 39 491 2,378 3 Net ¢nancing costs In thousands of euro Interest income Net foreign exchange gain through pro¢t Financial income Interest expenses and bank charges Net foreign exchange loss through pro¢t Financial expenses Net ¢nancing income/(expenses) 4 Income tax expense Year ended 31 December 2006 Year ended 31 December 2005 154 9 163 (68) ^ (68) 95 46 ^ 46 (141) (460) (601) (555) Current tax Current tax for the current and prior periods is classi¢ed as a current liability to the extent that it is unpaid. Amounts paid in excess of amounts owed are classi¢ed as a current asset. There is a current tax liability of C18,043 at 31 December 2006 (2005 : C18,043). Recognised in the income statement In thousands of euro Current tax expense Current year Adjustments for prior period Deferred tax expense Origination and reversal of temporary differences Reduction in tax rate Bene¢t of tax losses recognised Total income tax expense in income statement Reconciliation of effective tax rate In thousands of euro (Loss)/Pro¢t before tax Income tax using the domestic corporation tax rate Effect of tax rates in foreign jurisdictions (Rates decreased) Year ended 31 December 2006 Year ended 31 December 2005 ^ ^ ^ ^ ^ ^ ^ ^ 13 ^ 13 ^ ^ ^ ^ 13 Year ended 31 December 2006 Year ended 31 December 2005 (28,839) 12,807 ^ ^ ^ 2,818 (2,805) 13 No deferred tax asset was recognised as the Group considers that it is more probable than not that no future taxable pro¢ts will be available against which the asset could be utilised. 17 5 Property, plant and equipment In thousands of euro Cost Balance at 1 January 2006 Other acquisitions Balance at 31 December 2006 Depreciation and impairment losses Balance at 1 January 2006 Depreciation charge for the year Balance at 31 December 2006 Carrying amounts At 1 January 2006 At 31 December 2005 Fixtures and Fittings Total Property Plant and Equipment 67 45 112 21 35 56 46 56 67 45 112 21 35 56 46 56 Capital expenditure related primarily to the initial set up of of¢ce machines and computer equipment for management and administrative support. Software licence Consulting Magazine Total 6 Intangible assets In thousands of euro Goodwill Cost Balance at 1 January 2005 Acquisitions Balance at 31 December 2005 Balance at 1 January 2006 Acquisitions 73,613 ^ 73,613 73,613 ^ Trade- marks 15,144 ^ 15,144 15,144 ^ 11,840 75 11,915 11,915 231 At 31 December 2006 73,613 15,144 12,146 Amortisation and impairment losses Balance at 1 January 2005 Amortisation for the year Balance at 31 December 2005 Balance at 1 January 2006 Amortisation for the year Impairment loss for the year At 31 December 2006 Carrying amounts At 31 December 2005 ^ ^ ^ ^ ^ 33,274 33,274 ^ ^ ^ ^ ^ ^ ^ 16 1,197 1,213 1,213 9,556 ^ 10,769 73,613 15,144 10,702 At 31 December 2006 40,339 15,144 1,377 18 419 ^ 419 419 ^ 419 1 105 106 106 105 ^ 211 313 208 4,500 ^ 4,500 4,500 ^ 105,516 75 105,591 105,591 231 4,500 105,822 20 1,500 1,520 1,520 1,500 37 2,802 2,839 2,839 11,161 ^ 33,274 3,020 47,274 2,980 102,752 1,480 58,548 Valuation methodologies The valuation methodology for each type of identi¢able intangible asset is detailed below. Asset Magazine-related Consulting Software licence Trade-marks Goodwill Valuation methodology Cost Income (cost saving) Income (incremental value plus loss of pro¢ts) Relief from royalty Residual balance The valuation conclusions, for the assets acquired through business combinations, were cross-checked relative to the overall consideration paid in the transaction over net tangible assets, to ensure that the proportion of value attributed to (i) each identi¢able intangible asset : and (ii) to all of the identi¢ed intangible assets combined in the total purchase price appears reasonable. In addition, the implied weighted average return on assets was reconciled with the cost of capital derived for the business as a whole to check for the reasonableness of values placed on intangible assets and the discount rates/returns used. Amortisation and impairment charge The amortisation for the year and the accelerated amortisation on the software licence are recognised in the following line items in the income statement. The accelerated amortisation of the Group’s software licenses, as an exceptional item, follows a review that identi¢ed a reduced bene¢cial life of the licenses due to both technical developments and price pressure on royalties in the market place. In thousands of euro Net operating expenses Exceptional items Year ended 31 December 2006 Year ended 31 December 2005 2,889 8,272 2,802 ^ Impairment tests for cash-generating units containing goodwill An Impairment Review was carried out at the year end of the Company’s goodwill in the Casino operation. The carrying values of the assets were compared with the recoverable amounts, these were determined with the assistance of independent valuers. The carrying amount was determined to be higher than its recoverable amount and an impairment loss of C33,274 thousand (2005 : nil) was recognised. The impairment loss was allocated fully to goodwill and is shown as an exceptional item in the income statement. In performing the Impairment Review the following information was used. . . . . . . Historical ¢nancial performance, unaudited ¢nancial results for the year ended 31 December 2006 Market analysis of the online gaming industry speci¢cally : . . . . Market growth for the online industry Market forecasts from independent analysts and researchers Technology advances (including increases in internet penetration) Perceived threats to the industry. Net revenue forecasts for 2007 Long-term rate of growth of 2% based on the industry average and taking into consideration increased competitive pressures, due to large online gaming companies looking aggressively to increase non-US sources of Income. Tax rate of 1.5% based upon the Company’s current corporation tax rate. Discount rate post-tax of 30% based on the discount rate implied in the Casino-Club acquisition, a theoretically derived cost of equity based on an adjusted CAPM model and the nature of the intangible asset being valued. 19 The following units have signi¢cant carrying amounts of goodwill : In thousands of euro 31 December 2006 31 December 2005 Casino operation: GVC Corporation II BV 40,339 73,613 7 Receivables and prepayment In thousands of euro Trade receivables Interest receivables Prepayments 31 December 2006 31 December 2005 1,892 11 406 2,309 2,151 ^ 531 2,682 Trade receivables include funds held by Web Dollar as of 31 December 2006 amounting to C1.9 million (2005 : C2.2 million), which corresponds to the revenue generated over the last 3 weeks of the 12 month period ended 31 December 2006. Prepayments include payment as at 31 December 2006 for goods or services which will be consumed after 1 January 2007. 8 Cash and cash equivalents In thousands of euro Bank balances Treasury deposits Cash and cash equivalents 31 December 2006 31 December 2005 2,341 7,066 9,407 7,233 ^ 7,233 20 9 Capital and reserves Reconciliation of movement in capital and reserves In thousands of euro Balance at 1 January 2005 Equity settled transactions net of tax Dividend paid in year Total recognised income and expense Note 12 Attributable to equity holders of the parent Share capital Share premium Retained earnings Total 38,608 ^ ^ ^ 67,522 ^ ^ ^ 383 491 (9,559) 12,794 106,513 491 (9,559) 12,794 Balance at 31 December 2005 38,608 67,522 4,109 110,239 Balance at 1 January 2006 Equity settled transactions net of tax Dividend paid in year Total recognised income and expense 12 38,608 ^ ^ ^ 67,522 ^ (9,596) ^ 4,109 893 (6,016) (28,839) 110,239 893 (15,612) (28,839) Balance at 31 December 2006 38,608 57,926 (29,853) 66,681 Share capital Ordinary shares On issue at beginning of year On issue at end of the year Year ended 31 December 2006 Year ended 31 December 2005 31,135,762 31,135,762 31,135,762 31,135,762 At 31 December 2006, (2005 : 49,600,000). The ordinary shares have a par value of C1.24. the authorised share capital comprised 49,600,000 ordinary shares The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. Dividends After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided for and there are no income taxes consequences. In thousands of euro GBP 0.13 (C0.193) per qualifying ordinary share (2005 : GBP 0.21 (C0.302)) Year ended 31 December 2006 Year ended 31 December 2005 6,009 9,472 21 Earnings per share 10 The calculation of basic earnings per share at 31 December 2006 was based on the loss attributable to ordinary shareholders of C28,838,575 (2005 : Pro¢t of C12,793,954) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2006 of 31,135,762 (2005 : 31,135,762), calculated as follows: Pro¢t attributable to ordinary shareholders In thousands of euro (Loss)/Pro¢t attributable to ordinary shareholders Exceptional item (note 6) Pro¢t before exceptional item Weighted average number of ordinary shares In shares Year ended 31 December 2006 Year ended 31 December 2005 (28,839) 41,546 12,707 12,794 ^ 12,794 Year ended 31 December 2006 Year ended 31 December 2005 Issued ordinary shares at beginning of the year 31,135,762 31,135,762 Weighted average number of ordinary shares at end of the year 31,135,762 31,135,762 Earnings per share In euro Basic earnings per share Basic earnings per share before exceptional items Year ended 31 December 2006 Year ended 31 December 2005 (0.926) 0.408 0.411 0.411 Diluted earnings per share The calculation of diluted earnings per share at 31 December 2006 was based on the loss attributable to ordinary shareholders of C28,838,575 (2005 : C12,793,954) and a weighted average number of shares outstanding during the year ended 31 December 2006 of 31,135,762 ordinary (2005 : 31,135,762), calculated as follows: Pro¢t attributable to ordinary shareholders (diluted) In thousands of euro (Loss)/Pro¢t attributable to ordinary shareholders (diluted) Exceptional item (note 6) Pro¢t before exceptional item Year ended 31 December 2006 Year ended 31 December 2005 (28,839) 41,546 12,707 12,794 ^ 12,794 22 Weighted average number of ordinary shares (diluted) In shares Year ended 31 December 2006 Year ended 31 December 2005 Weighted average number of ordinary shares at end of the year Effect of share options on issue 31,135,762 ^ 31,135,762 ^ Weighted average number of ordinary shares (diluted) at end of the year 31,135,762 31,135,762 Diluted earnings per share In euro Diluted earnings per share Diluted earnings per share before exceptional items 11 Employee bene¢ts Year ended 31 December 2006 Year ended 31 December 2005 (0.926) 0.408 0.411 0.411 Share-based payments At 2 December 2004, the Group established a share option programme that entitles key management personnel and senior employees to purchase shares in the Group. At 23 January and 16 May 2006, In grants were made available to eligible individuals under the programme as detailed below. accordance with the programme options are exercisable at the market price of the shares at the starting date of employment or the date of grant. Share-based payments Grant date/employees entitled Option grants to eligible individuals at 23 January 2006 Option grants to eligible individuals at 16 May 2006 Number of instruments Contractual life of options 375,000 140,000 Ten years Ten years Vesting Options will vest and become exercisable as to one quarter on the ¢rst anniversary of the date of grant, and the balance becoming exercisable in 36 equal monthly instalments over the following three years. The number of weighted average exercise prices of share options is as follows : Weighted average exercise price 2006 GBP 4.58 3.55 4.66 4.06 Number of options 2006 840,365 515,000 (291,467) 1,063,898 229,652 Weighted average exercise price 2005 GBP 4.20 4.81 ^ 4.58 Number of options 2005 310,000 530,365 ^ 840,365 77,500 Outstanding at the beginning of the year Granted during the year Forfeited during the year Outstanding at the end of the year Exercisable at the end of the year The options outstanding at 31 December 2006 have a weighted average contractual life of 8.75 years. 23 Fair value of share options and assumptions Fair value at measurement date Share price Exercise price Expected volatility (expressed as weighted average volatility used in the modelling under Black-Scholes model) Option life (expressed as weighted average life used in the modelling under Black-Scholes model) Expected dividends Risk-free interest rate (based on national government bonds) The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted. The estimate of the fair value of the services received is measured on a Black-Scholes valuation model. The contractual life of the option (10 years) is used as an input into this model. Expectations of early exercise are incorporated into the Black-Scholes model. The option exercise price for individuals who were employed at 21 December 2004 was the market price on admission to AIM of GBP 4.20 and for all other individuals the average market price on grant date. 16 May 2006 GBP 1.23 3.83 4.20 23 January 2006 GBP 1.10 3.89 2.98 GBP 0.94 3.89 3.59 28 September 2005 GBP GBP 1.95 5.50 4.20 1.58 5.50 5.50 2004 GBP 1.33 4.20 4.20 65% 65% 65% 45% 45% 45% 4.8 8% 4.8 8% 4.8 8% 4.8 5% 4.8 5% 4.8 4% 4.70% 4.16% 4.16% 4.22% 4.22% 4.51% The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. There are no market conditions associated with the share option grants. 12 Trade and other payables In thousands of euro Other trade payables Accrued expenses Withholding tax on dividends 31 December 2006 31 December 2005 1,317 1,101 1,203 3,621 1,140 1,316 ^ 2,456 24 13 Related parties Identity of related parties The Group has a related party relationship with its subsidiaries (see note 14) and with its directors and executive of¢cers. Transactions with key management personnel Directors of the Company and their immediate relatives control 7.23% of the voting shares of the Company as detailed below : In shares Steve Barlow Scott Miller Dr Robert Willis 31 December 2006 31 December 2005 2,251,927 ^ ^ 2,551,927 2,265,927 2,551,927 In addition to their salaries, the Group also contributes to a post-employment de¢ned contribution bene¢t plan on their behalf. The key management personnel compensations are as follows : In thousands of euro Post-employment bene¢ts Total remuneration is included in ‘‘personnel expenses’’ (see note 2): Year ended 31 December 2006 Year ended 31 December 2005 22 35 Year ended 31 December 2006 Year ended 31 December 2005 1,430 903 In thousands of euro Directors 14 Group entities Signi¢cant subsidiaries Gaming VC (Cyprus) Limited Gaming VC (Jersey) Limited GVC Corporation BV GVC Corporation II BV Country of incorporation Ownership interest 31 December 2006 31 December 2005 Cyprus Jersey Netherland Antilles Netherland Antilles 100% 100% 100% 100% 100% 100% 100% 100% 15 Accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates, main accounting estimates and judgements for the year relate to the valuation of intangible assets (see note 6). Subsequent events 16 There have been no subsequent events between 31 December 2006 and the date of the signing of these accounts that merit inclusion. 25 DIRECTORS Adrian J R Smith, Non-Executive Director Chairman (63) Adrian is the CEO of the Woolton Group, and has signi¢cant public company and corporate governance experience, having been the Non-Executive Chairman of the Carter and Carter Group from 2002 in the USA. through to its £otation in 2005. He serves on the board of Tutogen Medical His management experience includes Deloitte Touche Tohmatsu, Grant Thornton LLP and Arthur Andersen LLP, as well as Procter and Gamble. Inc. Nigel Blythe-Tinker, Non-Executive Director (56) Between January 1999 and May 2004, Nigel was the Group Company Secretary and Head of Legal at William Hill plc as well as a member of the executive management team. He was involved in the highly successful £otation of William Hill plc at an enterprise value of »1.46 billion. He was associated with William Hill’s discharge of US high yield debt and ¢nancial and corporate restructuring of the business. His additional responsibilities to the William Hill plc board were for corporate governance, statutory and regulatory compliance, legal matters (including worldwide litigation), its insurance portfolio and group services. Nigel was also actively involved in William Hill plc’s acquisition and transactional programme. Prior to this, he held various positions including Company Secretary and Head of the Legal department for Thorn Lighting Group plc, Head of Legal Services at Framlington Group plc and Assistant Secretary of The Rank Organisation plc. Lee Feldman, Non-Executive Director (39) Lee is the Managing Partner of Twin Lakes Capital LLC, a private equity ¢rm based in New York and focused on growth capital investments primarily in technology, media and consumer branded products. Prior to this he was a partner in SOFTBANK Capital Partners, a US private equity fund focused on technology and media enterprises. His extensive experience has been in private equity investing, as well as corporate and business development activities. Prior to his partnership in SOFTBANK Capital Partners, he was Vice President of corporate development at Ziff-Davis, which, prior to its sale, was a New York Stock Exchange quoted media company focused on technology with annual revenues exceeding US $1 billion. Prior to this, he was a member of the senior management team of two leveraged roll-ups and began his career as a corporate lawyer practising with a major New York City law ¢rm. Steven Barlow, Non-Executive Director (48) Steven, co-founder of Gaming VC and CEO from the IPO in December 2004 till November 2006, has in excess of 23 years of technology and management experience. His recent involvement with SOFTBANK Capital Partners has been in connection with an online gambling transaction. Steven previously served as a Director and President of Gamecraft Inc., a US slot machine manufacturer. In this capacity he held several gaming licences for land based casino jurisdictions throughout the United States. At Gamecraft, he was instrumental in securing a US distribution agreement with Mikohn Gaming Corporation for a series of slot machine poker games known as ‘‘Heads up Poker’’. Additional previous directorships include ThingWorld.com, where, as a co-Founder, he served as Chairman, CEO and CTO; at ThingWorld.com Steve raised US$26 million from strategic investors that included Microsoft, Intel, CMGI and the Kraft Group. As CEO he managed 150 employees. Prior to this, for 9 years he held technical and management positions at IBM/Lotus Development Corporation. Kenneth J Alexander, Chief Executive Of¢cer (37) Kenny is a member of the Institute of Chartered Accountants of Scotland. He started his career as an accountant at Grant Thornton and joined Sportingbet PLC in February 2000 where he held the position of Finance Director for European operations. In April 2002, Kenny was appointed Managing Director of Sportingbet’s European Operations. In this position, Kenny was directly responsible for 150 employees from 16 countries overseeing trading, marketing, ¢nance, IT, product development and customer service. In addition he had overall responsibility for all Sportingbet’s sports book and gaming sites in in developing Sportingbet’s operations in new European markets Europe. Kenny was instrumental including Turkey, Spain, Greece, Germany, France and Italy and driving cross-selling initiatives in these markets. Under Kenny’s leadership, the business became one of the most pro¢table gaming operations in Europe. 26 Gerard Cassels, Finance Director (45) Gerard an experienced Finance Director of listed companies, and has worked both in Europe and the US. Between 2001 and 2004, he was Group Finance Director for NMT Group PLC, the medical device design, development and licensing company. Prior to that he was Group Finance Director of Inveresk PLC, the niche specialty paper and board manufacturer. Gerard started his career at KPMG in the corporate ¢nance department and is a quali¢ed chartered accountant. 27 ADVISERS Registered Of¢ce : Financial PR Advisers: Nominated Adviser and Broker : Lawyers to the Company: Auditors: Depositary : 73 Cote d’Eich L-1450 LUXEMBOURG Abchurch Communications Ltd 100 Cannon Street London EC4N 6EU Collins Stewart Limited 9th Floor 88 Wood Street London EC2V 7QR Reynolds Porter Chamberlain LLP (as to matters of English Law) Tower Bridge House St. Katharine’s Way London E1W 1AA Loyens & Loeff (as to matters of Luxembourg Law) PO Box 507 J8 Corsiraweg 4 Willemstad Curacao Netherland Antilles KPMG Audit S.a'.r.l. 31, allee Scheffer L-2520 LUXEMBOURG Capita IRG Trustees Limited The Registry 34 Beckenham Road Beckenham KENT BR3 4TU 28 greenaways E170253