GVCH o l d i n g s ~ The multinational sports betting and gaming group GVC is financially focused on generating cash and returning a high proportion of this to shareholders by way of dividends I N T R O D U C T O N I GVC is a multinational sports betting and gaming group, founded in 2004. It provides both B2B and B2C services to the online gaming and sports betting markets. Its core brands are now CasinoClub, Betboo and Sportingbet. It has offices in Dublin, Malta, Tel Aviv, Guernsey, Alderney, Manila, Barbados and London. It is headquartered in the Isle of Man and across the group has over 500 employees. l G V C H o d n g s P L C i GVC Holdings PLC | www.gvc-plc.com Incorporated in the Isle of Man under number 4685V A n n u a l R e p o r t 2 0 1 3 Annual Report Highlights Total Proforma Revenues (€’000) 180,573 Annual growth of 69% 2013 180.6 2012 107.1 2011 48.8 Clean *EBITDA (€’000) 38,299 Annual growth of 148% 2013 38.3 2012 15.5 2011 8.4 Dividend (€cents) 48.5 Increased by 120% 2013 48.5 2012 22 2011 21 Operational aims achieved in period Sportingbet Integration Successful integration of Sportingbet into the main body of the Group with a reduction in the inherited cost base of around 50%, and a growth in its inherited revenues Data Migration Data migrations completed onto a single platform of Sportingbet, including that of Betboo. As a result, from 2014 onwards there will no longer be a charge in the Consolidated Income Statement for the deferred discount release. Licence Principal licence moved to Malta from Alderny GVC HOLDINGS PLC 162749 GVC 2013 AR Cover Throwout.indd 2 14/04/2014 15:17 GVCH o l d i n g s ~ The multinational sports betting and gaming group GVC is financially focused on generating cash and returning a high proportion of this to shareholders by way of dividends I N T R O D U C T O N I GVC is a multinational sports betting and gaming group, founded in 2004. It provides both B2B and B2C services to the online gaming and sports betting markets. Its core brands are now CasinoClub, Betboo and Sportingbet. It has offices in Dublin, Malta, Tel Aviv, Guernsey, Alderney, Manila, Barbados and London. It is headquartered in the Isle of Man and across the group has over 500 employees. l G V C H o d n g s P L C i GVC Holdings PLC | www.gvc-plc.com Incorporated in the Isle of Man under number 4685V A n n u a l R e p o r t 2 0 1 3 Annual Report Highlights Total Proforma Revenues (€’000) 180,573 Annual growth of 69% 2013 180.6 2012 107.1 2011 48.8 Clean *EBITDA (€’000) 38,299 Annual growth of 148% 2013 38.3 2012 15.5 2011 8.4 Dividend (€cents) 48.5 Increased by 120% 2013 48.5 2012 22 2011 21 Operational aims achieved in period Sportingbet Integration Successful integration of Sportingbet into the main body of the Group with a reduction in the inherited cost base of around 50%, and a growth in its inherited revenues Data Migration Data migrations completed onto a single platform of Sportingbet, including that of Betboo. As a result, from 2014 onwards there will no longer be a charge in the Consolidated Income Statement for the deferred discount release. Licence Principal licence moved to Malta from Alderny GVC HOLDINGS PLC 162749 GVC 2013 AR Cover Throwout.indd 2 14/04/2014 15:17 Proforma Revenue Mix (€’000m) 12 months to 31 December 2013 Sports Casino Poker, bingo and other revenue I N T R O D U C T O N I 2010 2011 2012 2013 0 20 40 60 80 100 Recent Dividend History Cents per share declared 50 40 30 20 10 0 Cents per share declared 18 16 14 12 10 8 6 4 2 0 01-Jul-13 25-Sep-13 09-Jan-14 09 Apr-14 How Revenue becomes Dividends £180m Revenue converts to £15m Dividends Dividends Variable costs Expenditure Capex Tax Betboo earn-outs Exceptional items and WH contribution and loan and SBT balance sheet Regulatory and working capital requirement estimate ANNUAL REPORT 2013 GVC~ H o l d i n g s 162749 GVC 2013 AR Cover Throwout.indd 1 Contribution* by Market Based on Q4-2013 Turkey (30%) Eastern Europe (22%) Central Europe (20%) CasinoClub (18%) LATAM (5%) UK (4%) Other (1%) *Contribution is Revenue less Variable costs but before expenditure such as staff, property, etc. For the full year ending 31st December 2013 contribution amounted to €102,631,000. For 2013 GVC restored the dividend earlier than expected, increased the dividend in January 2014 and in April 2014, the Board declared a repeat of this quarterly dividend enhanced by a special dividend Delivering on our dividend promise 14/04/2014 15:17 Proforma Revenue Mix (€’000m) 12 months to 31 December 2013 Sports Casino Poker, bingo and other revenue I N T R O D U C T O N I 2010 2011 2012 2013 0 20 40 60 80 100 Recent Dividend History Cents per share declared 50 40 30 20 10 0 Cents per share declared 18 16 14 12 10 8 6 4 2 0 01-Jul-13 25-Sep-13 09-Jan-14 09 Apr-14 How Revenue becomes Dividends £180m Revenue converts to £15m Dividends Dividends Variable costs Expenditure Capex Tax Betboo earn-outs Exceptional items and WH contribution and loan and SBT balance sheet Regulatory and working capital requirement estimate ANNUAL REPORT 2013 GVC~ H o l d i n g s 162749 GVC 2013 AR Cover Throwout.indd 1 Contribution* by Market Based on Q4-2013 Turkey (30%) Eastern Europe (22%) Central Europe (20%) CasinoClub (18%) LATAM (5%) UK (4%) Other (1%) *Contribution is Revenue less Variable costs but before expenditure such as staff, property, etc. For the full year ending 31st December 2013 contribution amounted to €102,631,000. For 2013 GVC restored the dividend earlier than expected, increased the dividend in January 2014 and in April 2014, the Board declared a repeat of this quarterly dividend enhanced by a special dividend Delivering on our dividend promise 14/04/2014 15:17 162749 GVC Annual Report Pt1_162749 GVC Annual Report Pt1 14/04/2014 07:42 Page 1 CONTENTS DIRECTORS ADVISORS REGISTERED OFFICE, REGISTRAR AND UK TRANSFER AGENT FACTSHEET 2013 REVIEW Chairman’s Statement Report of the Chief Executive Report of the Group Finance Director PRINCIPAL RISKS AND UNCERTAINTIES GOVERNANCE Directors Report CONSOLIDATED FINANCIAL STATEMENTS (UNDER IFRS) Independent Auditor’s report to the Members of GVC Holdings PLC Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cashflows Notes to the Consolidated Financial Statements REMUNERATION Report of the Remuneration Committee COMPANY FINANCIAL STATEMENTS (UNDER UK GAAP) Independent Auditor’s report to the Members of GVC Holdings PLC Company Balance Sheet Notes to the Company Financial Statements ADDITIONAL UNAUDITED INFORMATION Five year trading history 2 3 3 4 5 6 9 18 20 23 24 24 25 26 27 29 63 68 69 70 77 GVC HOLDINGS PLC ANNUAL REPORT 2013 1 162749 GVC Annual Report Pt1_162749 GVC Annual Report Pt1 14/04/2014 07:42 Page 2 DIRECTORS Lee Feldman (age 46), Chairman, and non-executive Director Lee joined GVC in December 2004. He is the Managing Partner of Twin Lakes Capital, a private equity firm focused on branded consumer products, media and business services. He is also the CEO and a board member of both MacKenzie- Childs and Jay Strongwater, the American luxury home furnishings and personal accessories companies. Lee was appointed the CEO of MacKenzie-Childs when Twin Lakes led the acquisition of the business in May 2008 and was appointed the CEO of Jay Strongwater when Twin Lakes formed Jay Strongwater LLC in August 2011. He is also a member of the board of directors of both PacificHealth Labs and LRN Corporation. Prior to co-founding Twin Lakes, Lee was a partner in Softbank Capital Partners. He has a B.A and J.D. from Columbia University. Karl Diacono (age 51), Non-Executive Director – Chairman of the Audit Committee Karl joined GVC as a Non-executive Director in December 2008. He chairs the Audit Committee and serves on the Remuneration Committee. He holds a Masters Degree in Management and is currently CEO of Fenlex Corporate Services Limited, a corporate service provider based in Malta, and managing director of Impetus Europe Consulting Group. He is also a non-executive director of various trading and holding companies as well as other online gaming companies. He is actively involved in the hospitality industry. Karl is a director of a number of GVC subsidiaries along with Gaming VC Corporation Limited, a Maltese subsidiary of the GVC Group to which Fenlex Corporate Services Limited also provides certain payroll and administrative services. He is a Maltese citizen. Kenneth J Alexander (age 44), Chief Executive Officer Kenneth joined GVC in March 2007 as Chief Executive. He was formerly Finance Director, then Managing Director, of the European operations of Sportingbet plc, which he joined in 2000. He is a member of the Institute of Chartered Accountants of Scotland and previously worked for Grant Thornton. Richard Cooper (age 53), Group Finance Director Richard joined GVC in December 2008 as Group Finance Director. He spent the early part of his career in the financial markets where he was finance director at the principal UK subsidiary of the Tullett and Tokyo Group (a forerunner of Tullett Prebon plc) and Chief Financial Officer at Fidelity Brokerage. He then undertook a number of restructuring roles, including working as finance director at Patsystems Group plc. In early 2005 he became a founder director of Trident Gaming plc which bought, developed and then sold the Gamebookers business. He is a member of the Institute of Chartered Accountants in England and Wales, having trained and qualified with Saffery Champness in London. Nigel Blythe-Tinker stepped down from the board on 17 January 2014. The Board aims to meet four times a year and more frequently if required. Committees of the Board The Board has both Audit and Remuneration Committees. The Audit Committee, currently chaired by Karl Diacono, is required to give its approval before the release of the annual report and accounts, the preliminary year-end statement and the interim financial statements. In addition to this the Committee is responsible for assessing the Group’s internal controls, monitoring the independence of the Group auditors and assessing the Group’s audit arrangements. The Remuneration Committee, reviews the remuneration packages of the Executive Directors and, is required by the board to review the bonus arrangements of any employee or consultant to the group. The Committee meets at least twice a year. See the Report of the Remuneration Committee on page 63 for further details. ANNUAL REPORT 2013 2 162749 GVC Annual Report Pt1_162749 GVC Annual Report Pt1 14/04/2014 07:42 Page 3 REGISTERED OFFICE, REGISTRAR AND UK TRANSFER AGENT Registered Office: Milbourn House St. Georges Street Douglas Isle of Man IM1 1AJ Registration Number: 4685V Registrar: Capita Registrars (Isle of Man) Limited Clinch’s House Lord Street Douglas Isle of Man IM99 1RZ UK Transfer Agent: Capita Asset Services The Registry 34 Beckenham Road Kent BR3 4TU Telephone: 0871 664 0300 ADVISERS Nominated Adviser and Broker: Daniel Stewart & Company Plc Becket House 36 Old Jewry London EC2R 8DD Lawyers to the Company: As to matters of UK law Addleshaw Goddard LLP Milton Gate 60 Chiswell Street London EC1Y 4AG As to matters of Isle of Man law Dougherty Quinn Limited The Chambers 5 Mount Pleasant Douglas Isle of Man IM1 2PU As to matters of Maltese law Fenech & Fenech Advocates 198, Old Bakery Street Valletta, VLT 1455 Malta, Europe Auditor: Grant Thornton UK LLP Grant Thornton House Melton Street London NW1 2EP Financial PR Advisers: Abchurch Communications Ltd 125 Old Broad Street London EC2N 1AR GVC HOLDINGS PLC ANNUAL REPORT 2013 3 162749 GVC Annual Report Pt1_162749 GVC Annual Report Pt1 14/04/2014 07:42 Page 4 FACTSHEET GVC Holdings PLC is a leading online gaming company. The Company is incorporated in The Isle of Man and the Group’s activities are licensed in Malta, UK, Denmark, Germany, Italy, South Africa, Alderney and the Dutch Carribean. On 19 March 2013 the Group completed the acquisition of Sportingbet PLC in conjunction with William Hill PLC. Through a UK court scheme of arrangement, William Hill acquired from Sportingbet the Australian business together with certain other assets, including an option to acquire Miapuesta, Sportingbet’s Spanish brand, which it subsequently exercised in 2013. The Company is bound by the corporate laws of The Isle of Man, the Company’s Articles of Association, the AIM rules of the London Stock Exchange and the City Code on Takeovers and Mergers. The primary economic environment in which the Group’s subsidiaries operate is the Eurozone and thus the Euro is the functional currency of the majority of the Group’s subsidiaries. As such management and the Directors have selected the Euro as the presentational currency of the Group. The Group offers its customers a number of payment options across a wide range of currencies including EUR, GBP and USD. The full payment options can be found on www.sportingbet.com. The shares are traded on AIM in GBP. The Group does not and has never conducted wagering or betting business in the United States of America. Key Events Q4-04 – Shares first traded on AIM Q3-07 – Granted a class 4 licence by the LGA in Malta Q3-07 – Sportsbook operation started Q3-09 – Acquired the trade and assets of “Betboo” a leading Latin American e-gaming business Q2-10 – Redomiciliation to Isle of Man Q1-11 Q4-11 – New sports betting operation launched – Enters into first B2B contract with Curacao based East Pioneer Corporation B.V. (“EPC”) to provide back-end support to the Superbahis business, acquired by EPC from Sportingbet. Q2-12 – Announced disposal of Betaland Q1-13 – Acquired Sportingbet PLC Investor Relations Website Extensive information on the Group, prior-year financial statements and press releases can be found on the Group’s website: www.gvc-plc.com. Principal Brands CasinoClub (www.casinoclub.com) Betboo (www.betboo.com) Sportingbet (www.sportingbet.com) ANNUAL REPORT 2013 4 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page i BUSINESS REVIEW IN THIS SECTION CHAIRMAN’S STATEMENT REPORT OF THE CHIEF EXECUTIVE REPORT OF THE GROUP FINANCE DIRECTOR PRINCIPAL RISKS AND UNCERTAINTIES DIRECTORS REPORT 5 6 9 18 20 GVC HOLDINGS PLC ANNUAL REPORT 2013 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page ii ANNUAL REPORT 2013 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 5 CHAIRMAN’S STATEMENT 2013 saw a step-change in GVC, its size, its complexity, but more importantly its profitability, cash generation, and the dividends paid to shareholders following the acquisition of Sportingbet PLC on 19 March 2013. The Group is now generating over €1.2 billion a year in sports wagers, and total revenues in the first quarter of 2014 exceeded €50 million, an average of more than €556k per day (2013: €394k). At the date of this statement, GVC’s market capitalisation is now over £240 million, and between 2009 and 2013 the Group has paid to its shareholders £51.8 million in dividends and is already ranked as one of the highest yielding dividend payers on AIM (Source: Dividends on AIM – March 2014 by Allenby Capital). Cash generation and its conversion into dividends is a key part of GVC’s strategy, and the Board is pleased to announce today a final dividend for 2013 of 11.5 €cents. In addition, the Board is proposing a special dividend of 4.5 €cents, reflecting results ahead of recently upgraded market expectations for 2013. The payment of the 16 €cents dividend is proposed for 19 May 2014 but is dependent on the shareholder vote at the Annual General Meeting to be held in the Isle of Man on 14 May 2014. Thus the total dividend declared for the year will be 48.5 €cents, an increase of 120% on the prior year (2012: 22.0 €cents). GVC undertook its acquisition of Sportingbet to: mitigate the earn-out payments arising from the November 2011 Superbahis transaction with Sportingbet; acquire market-leading software; and acquire customers in over 20 additional markets. GVC has a proven track record of executing acquisitions and now GVC has the platform, scale and infrastructure to pursue further transactions, along with being able to utilise economies of scale to further drive organic growth. GVC significantly restructured Sportingbet and its balance sheet, which not only had a deficit in working capital of €50 million at acquisition, but also, was substantially loss-making and cash-burning. In the nine and half months since acquisition, a financial turnaround has been achieved resulting in a Clean EBITDA for Sportingbet of €4.7 million with €3.8 million being generated in Q4-2013 alone. The acquisition and the subsequent restructuring costs were largely financed through the issue of an additional 29 million shares to existing Sportingbet shareholders at a “roll-over” price per share of £2.48; and from William Hill plc a contribution of £36.5 million along with a long-term loan of £6.9 million. GVC’s strategy is to increase shareholder returns through a combination of: generating high levels of cash and distributing this by way of dividends; increasing the markets in which the Group trades to diversify geographic risk; and improving the quality of the Group’s earnings through acquisitions and joint ventures. In the next 12 months, the Group will seek to: accelerate its penetration in Brazil, the host nation of the FIFA World Cup; drive further synergies from the Sportingbet acquisition; improve the product offering, particularly mobile; continue growing the many markets in which GVC operates; and devote more executive time to non- dilutive investment and acquisition opportunities. Current trading (Q1 2014) is at record levels, with sports wagers averaging €3.8 million per day, a sports margin of 10.1% and an average Net Gaming Revenue (“NGR”) increasing by 41% to €556k per day compared to €394k in 2013, and up by 6.3% on Q4-2013 (€523k). The Board is therefore confident of meeting current market expectations for the 2014 financial year as underpinned by our proposed 16 €cents dividend. Lee Feldman Chairman and Non-Executive Director 8 April 2014 GVC HOLDINGS PLC ANNUAL REPORT 2013 5 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 6 REPORT OF THE CHIEF EXECUTIVE I am pleased to report a series of significant increases over 2012: Sports wagers Proforma Revenue* NGR Contribution Clean EBITDA Normalised EPS Dividends declared 2013 (€) 2012 (€) Percentage Increase 1.2 billion 181 million 168 million 103 million 38.3 million 58.6 cents 48.5 cents 0.5 billion 107 million 60 million 36 million 15.6 million 32.1 cents 22.0 cents 125% 69% 179% 181% 148% 83% 120% Totals may not sum due to rounding and percentages have been calculated on the underlying rather than the summarised figures. * as described in the Chairman’s report of 25 March 2013, being the underlying levels for the business as if the revenues of the B2B partner, East Pioneer Corporation BV were fully consolidated in the results of GVC. GVC has achieved a record level of Clean EBITDA for 2013 at €38.3 million which is ahead of recently upgraded market expectations. The financial turnaround of Sportingbet was completed during the year with significant restructuring, and the acquired business returned to profitability, making a contribution to Clean EBITDA of €4.7 million. This financial turnaround has allowed GVC not only to pay a quarterly dividend of 11.5 €cents in line with what it had already paid earlier in 2014, but also to announce a special dividend of a further 4.5 €cents. This means that the total dividend declared for the year is 48.5 €cents, an increase of 120% on 2012 (22.0 €cents). In Sportingbet, GVC has acquired and developed further a market leading sports platform, and it is this, together with a more “fit for purpose” corporate infrastructure, which has allowed the Board to be ready for further acquisitions and investments. GVC is already benefiting from the successful integration of Sportingbet and this can be seen in the record levels of trading in Q1-2014, with revenues exceeding €50 million per quarter for the first time. However, whatever the size of the transactions the GVC Board looks at, none will be considered if they might undermine the maintenance of the dividend for our shareholders. The principal aims of GVC in 2013 were to: • • • • Complete the acquisition and integration of Sportingbet at minimal cost and dilution to shareholders; Deliver significant synergies on the Sportingbet integration; Enhance the dividend for shareholders; and Improve the overall product offering, particularly in the mobile channel. Shareholders and customers alike have benefited from all of the above. Of particular note, in my statement for last year, I was hopeful that GVC would restore the dividend by November 2013. In fact, in July 2013 GVC announced a 50% increase in its quarterly dividend to 10.5 €cents up from 7.0 €cents declared in January 2013, and the Board then declared a further 10.5 €cents in September 2013. In January 2014, the dividend was increased again by 1 €cent (a rise of 9.5%) to 11.5 €cents. After eight months of negotiations, the deal to acquire the non-Australian business of Sportingbet was completed on 19 March 2013. GVC passed on Sportingbet’s Spanish business to William Hill, as previously agreed, on 16 September 2013. The Group had its shares suspended at 233.5 pence on 16 October 2012 and on 20 March 2013, the date on which the new GVC shares were admitted to trading, the shares closed at 247 pence. The business of Sportingbet was profoundly indebted, loss-making and cash-burning. In the nine and a half months since acquisition, GVC has converted these substantial losses into a profit of just under €5 million but with the majority of this being generated in the back-end of the year, with €3.8 million being earned in Q4-2013. ANNUAL REPORT 2013 6 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 7 To make the acquisition financially enhancing for our shareholders, deep cuts were needed and it was necessary to reduce the inherited headcount by around a third, which, along with property and other cost reductions, reduced the expenditure base by around 50%. A number of in-house functions were outsourced and GVC has a number of significant partnerships in cost-efficient jurisdictions. GVC sees this as a blueprint for its future expansion. This success has not just been achieved however through cost cutting. GVC has very much focused on driving-up its revenues against strong currency headwinds in both Brazil and Turkey. The Group has grown its revenues in local currencies and those reported in Euros through a combination of intensive CRM activity and VIP management. Of course a key driver of the revenue success is the achievement of consistently high sports margins. There will of course be times when the sports results are “punter-friendly.” GVC’s aim has been to use the skills of its trading teams (around 100 employees and a sixth of the Group’s workforce) and combine this with state-of-the-art event feeds. This approach has enabled GVC to deliver an aggregate sports margin of 9.6% in 2013. GVC’s customers want great service, great products and a great experience. The Group is unrelenting in the delivery of these factors, without which the highly competitive landscape will entice players away from GVC. For that reason, the Group has been investing in its mobile product and has witnessed a significant increase in the take-up of mobile to around 19% of sportsbook NGR, albeit, from a low base of around 10%. This is a trend that GVC sees continuing and being ever more important for customer retention. In-play betting continues to grow and now represents around 70% of the sports wagers placed. Football, tennis and basketball represent around 90% of customer wagering. Operationally, by early 2014 GVC had: • • • • migrated its main gaming licence to Malta; integrated its Betboo product; consolidated its payment wallets; and outsourced at significantly lower cost some of its IT and Customer Services support functions. I am also pleased to report on our high-level KPIs based on “pro-forma” revenues (“PFR”) over the last nine quarters expressed in €000’s per day. Sports wagers €000’s 3,773 1,894 1,530 3,926 1,453 3,335 1,402 3,637 1,286 Sports margin % 10.1% 12.5% 11.5% 8.4% 12.3% 9.8% 10.4% 9.2% 10.8% Sports NGR €000’s 254 209 148 244 162 267 123 275 120 Gaming & other revenues €000’s €000’s Total PFR €000’s 302 185 141 279 162 251 149 267 166 556 394 289 523 324 518 272 542 286 Q1-2014 Q1-2013 Q1-2012 Q4-2013 Q4-2012 Q3-2013 Q3-2012 Q2-2013 Q2-2012 Sports wagers have doubled in value over Q1-2013 to just under €3.8 million per day and revenues per day have not only grown by 41% year-on-year but have grown 6.3% in the last quarter alone. Gaming revenues have also increased across all of the Group’s markets and are expected to benefit further by our continued investment in our mobile product. The Group has been impacted by a stronger Euro, and we estimate that the impact of this in 2013 alone would be around €25k per day, thus GVC’s underlying growth rates are closer to 50%. GVC HOLDINGS PLC ANNUAL REPORT 2013 7 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 8 REPORT OF THE CHIEF EXECUTIVE continued GVC is now ready for the next stage in its corporate development and further geographic expansion through organic growth and acquisitions. GVC aims to deliver this without diluting the dividend. The Board is confident of meeting current market expectations for the 2014 financial year as underpinned by our proposed dividend of 16 €cents total. Kenneth Alexander Chief Executive 8 April 2014 ANNUAL REPORT 2013 8 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 9 REPORT OF THE GROUP FINANCE DIRECTOR The financial information for the Group reflects the consolidation of Sportingbet* for the 287 days from 19 March 2013. The business is now largely integrated and the Group now presents its results as a single entity, including both CasinoClub and the B2B activities. Table 1: Summary of key financial measures In €millions Sports wagers – sports from Sportingbet – sports from existing businesses 2013 1,169.5 661.9 507.6 2012 518.9 – 518.9 Change % change +125% +650.6 +661.9 -11.3 Sports margin 9.6% 11.3% -170bps -15% Sports revenue Gaming revenue – gaming from Sportingbet – gaming from existing businesses Total proforma revenue – from Sportingbet – from existing businesses Total NGR – NGR acquired from Sportingbet – NGR from existing business Contribution Contribution divided by PFR = – Contribution from Sportingbet – Contribution from existing brands Expenditure Clean EBITDA Clean EBITDA/proforma revenue PBT and exceptional items Exceptional items Taxation Discontinued activities Profit after taxation Normalised, non dilutive EPS in €cents Dividend paid / share in €cents Dividends declared / share in €cents Operating cashflows Dividends paid Cash and cash in transit Customer liabilities Net current assets Non-current liabilities 90.8 89.8 35.2 54.6 180.6 86.1 94.5 168.4 74.7 93.7 102.6 57% 42.0 60.6 (64.3) 38.3 21% 32.7 (19.7) (0.7) – 12.3 58.6 28.0 48.5 19.8 (15.0) 37.1 (13.3) 0.3 (14.0) 50.6 56.5 – 56.5 107.1 – 107.1 60.3 – 60.3 36.5 34% – 36.5 (21.0) 15.5 14% 10.6 0.2 (0.5) (1.1) 9.2 32.1 26.0 22.0 4.8 (8.2) 20.0 (1.7) 4.6 (12.3) +40.2 +33.3 +35.2 -1.9 +73.5 +86.1 -12.6 +108.1 +74.7 +33.4 +66.1 +23% +42.0 +24.1 +43.3 +22.8 +7% +22.1 -19.9 -0.2 +1.1 3.1 +26.5 +2.0 +26.5 +15.0 +6.8 +17.1 -11.6 -4.5 -1.7 +69% +179% +181% +148% +208% +34% +83% +8% +120% +312% +83% Shareholder funds Number of shares in issue Number of shares under option 141.1 60,906,760 3,801,667 58.5 31,592,172 3,698,180 82.6 29,314,588 103,487 +141% +93% * Excluding Australia and certain other assets along with Sportingbet’s Spanish business past over to William Hill from 16 September 2013. GVC HOLDINGS PLC ANNUAL REPORT 2013 9 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 10 REPORT OF THE GROUP FINANCE DIRECTOR continued REVENUES Sports wagers, incorporating Sportingbet from 19 March 2013, grew 125% to €1,169.5 million (2012: €518.9 million). Sportingbet wagers, consolidated from 19 March 2013 to 31 December 2013 averaged €2.3 million per day and rose to €3.9 million per day in Q4 (Q4-2012: €1.5 million). Sports margins differ widely across the multiple markets in which GVC operates as a consequence of the maturity of each market and the sports followed within them. A sports margin of 9.6% across the full year and 287 days since the acquisition of Sportingbet was achieved despite the industry-wide backdrop of punter- friendly results in Q4 2013, as previously reported by the Group on 4 December 2013. Sport NGR represents the gross margin less free bets and promotional bonuses. Customers have a variety of gaming opportunities ranging from Casino, through to Poker and, in certain markets, Bingo. Casino games are provided by over ten companies including such industry-leading suppliers such as Net-Entertainment, Evolution and Boss Media. Sports and gaming revenues are relatively equal now, and in H2-2013 sports NGR represented 52% of proforma revenue and gaming represented 48%. As trailed in the 2012 Report and Accounts, whilst the customer base of Superbahis, acquired in 2011, belongs to third-party provider, East Pioneer Corporation (“EPC”), as the bulk of the economic benefit resides with the now enlarged GVC, under accounting rules approved by the EU, the Group has to fully consolidate the results. This is shown as “proforma” revenue. NGR is proforma revenue less the revenues attributable to EPC for the period from 1 January 2013 to 19 March 2013. 2013 saw a 69% increase in proforma revenues over 2012. Table 2: Average revenues per day since 1 January 2013 €000’s Sports wagers per day Sports margin % PFR per day Q1-2013 Q2-2013 Q3-2013 Q4-2013 Q1-2014 1,894 12.5% 394 3,637 9.2% 542 3,335 9.8% 518 3,926 8.4% 523 3,763 10.1% 556 Average sports wagers per day have risen by 99% to €3.8 million in Q1-2014 compared to Q1-2013 (€1.9 million). Proforma revenues per day have increased by 41% over the same period. CONTRIBUTION Contribution is GVC’s measure of revenues less cost of sales, and costs with a high correlation to revenues, such as partner shares, affiliate commissions and other marketing expenditure. Cost of sales includes payment processing charges, software royalties and local betting taxes payable in jurisdictions where we have a local licence. The Group continues to encourage dialogue with its existing and potential regulators in the markets in which the Group operates, although it notes that in some markets there remains regulatory uncertainty. Contribution increased by 181% to €102.6 million and an aggregate contribution margin percentage of 57% was achieved based on PFR. The Group is making significant marketing investments ahead of the FIFA World Cup in the summer of 2014 and aims for an aggregate contribution margin of between 52% and 55%. CLEAN EBITDA Clean EBITDA is contribution, less expenditure incurred primarily; on staff costs, property, professional fees and other overheads. The Group aims to achieve a clean EBITDA margin of not less than 20%. Expenditure inevitably rose with the acquisition of Sportingbet, although the acquired cost base has already been trimmed by around 50%. The Group headcount in December 2013 was around 400 employees higher than in December 2012, although around 165 inherited staff left the Group in 2013. Within expenditure there are remuneration arrangements highly geared to performance and dividend payments. Indeed for 2014, the Board’s bonuses are wholly linked to dividends and all staff can earn bonuses, although 50% of the potential is dependent on market expectations of dividend targets being met. ANNUAL REPORT 2013 10 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 11 EXCEPTIONAL ITEMS An acquisition as complex as a public company consortium bid has been accounted for by GVC as an exceptional item, as substantial, and one-off costs were incurred in both the acquisition and the restructuring. Whilst a significant portion in cash-terms was contributed by William Hill, accounting rules require that the contribution was taken to the balance sheet whilst the costs were taken to the Income Statement. A summary of the components of these and other exceptional costs is reproduced below: Table 3: Summary of exceptional items Transaction costs Restructuring costs Gross costs Contribution from Sportingbet Spanish business to 16 September 2013 €millions 9.2 11.9 21.1 (1.4) 19.7 The actual costs of the restructuring at €21.1 million have been lower than €24 million as anticipated in page 49 of the prospectus. Included within restructuring costs of €11.9 million was €9.0 million incurred through either redundancy or retention arrangements payable to staff who departed through the restructuring process. The terms of the exit payments were governed largely by the inherited redundancy terms of the Sportingbet group and these terms were enforceable by the application of the City Code on takeovers and mergers. Also included were the cost of terminating a variety of contracts, including property commitments that has allowed the Group to reduce its overheads. Under the terms of the consortium agreement with William Hill plc, GVC was the custodian and financial beneficiary of the Sportingbet Spanish “Miapuesta” brand from 19 March 2013 to 16 September 2013. As GVC was not a “controlling party” as defined under IFRS, the contribution has been treated as a deduction from exceptional items. The financial benefit of this amounted to €1.4 million. NON-CASH CHARGES IN THE INCOME STATEMENT Depreciation of Property, Plant and Equipment rose in the year to €0.5 million (2012 €0.2 million) on total acquisitions of €0.6 million. Amortisation of Intangible Assets rose to €3.2 million (2012: €2.3 million) arising from either assets acquired through the Sportingbet acquisition or through the acquisition of additional software required to run the Sportsbook platform. Finance income is principally the imputed credit (as per IAS 39) on the interest free loan from William Hill. A rate of 4% has been used for the imputation. Finance charges included €43k (2012: €0) on leased software and €1.7 million (2012: €2.2 million) on the unwinding of the discount on the deferred consideration arising from the 2009 acquisition of Betboo. Share option charges increased to €0.7 million principally through the granting of share options to third parties in consideration for underwriting arrangements on the Sportingbet acquisition. The Group has only 3.2 million share options granted to directors and officers (5.2%) although its permitted allocation is 16.8% (10.2 million). GVC HOLDINGS PLC ANNUAL REPORT 2013 11 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 12 REPORT OF THE GROUP FINANCE DIRECTOR continued EARNINGS PER SHARE Normalised (i.e. before exceptional items) rose 83% in 2013. Table 4: Earnings per share Normalised EPS: Basic EPS: Diluted Normalised EPS: Diluted EPS: 58.6 €cents (2012: 32.1 €cents) 22.5 €cents (2012: 29.3 €cents) 57.2 €cents (2012: 31.6 €cents) 22.0 €cents (2012: 28.8 €cents) The diluted EPS is affected by two components: grants of share options granted to employees and directors, and warrants granted to third parties pursuant to underwriting arrangements entered into in contemplation of the Sportingbet acquisition. DIVIDENDS Table 5: History of dividends paid and declared in 2013 Declaration date 19 September 2012 25 January 2013 1 July 2013 25 September 2013 9 January 2014 9 April 2014 Fiscal year 2012 €cents Fiscal year 2013 €cents Paid 2013 €cents Payable 2014 €cents 15.0 7.0 22.0 10.5 10.5 11.5 16.0 48.5 7.0 10.5 10.5 28.0 11.5 16.0 27.5 As previously announced, GVC is committed to paying dividends on a quarterly basis and paying a cash amount broadly equivalent to 75% of its net operating cashflows, taking into account an assessment of its working capital needs. The final dividend of 16.0 €cents per share will be payable on 19 May 2014 to shareholders on the register at the close of business on Friday 25 April 2014. The shares will go ex-dividend on Wednesday 23 April 2014. ACCOUNTING FOR THE SPORTINGBET ACQUISITION Table 6: Summary of the acquisition accounting of Sportingbet Various non-current assets at fair value Net current liabilities excluding transaction costs Transaction costs Termination arrangements for Sportingbet board Amount discharged at completion by William Hill Goodwill Issue of 29,018,075 ordinary GVC shares at £2.48 at £1 = €1.1661 €000’s (35,961) (8,624) (5,022) (49,607) 42,562 €000’s 6,742 (7,045) 84,221 83,918 The Sportingbet balance sheet was in very poor shape, GVC effectively inherited a deficit of €50 million – Sportingbet fully drew-down on its banking facilities, had placed heavy reliance on finance leases, had deeply out-of-the-money currency hedges, and legacy liabilities which fell to GVC to discharge. The inheritance of this together with the professional and other costs arising from the acquisition both by Sportingbet and GVC, and the Group’s planned restructuring costs were partially offset by the contribution from William Hill and augmented by their interest free loan, which is repayable in three instalments by June 2016. ANNUAL REPORT 2013 12 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 13 Whilst the acquisition balance sheet was significantly worse than anticipated, the swift turnaround of the business coupled with the mitigated earn-out payments under the Superbahis transaction meant that the acquisition ‘washed its face’ in less than nine months. Table 7: Cash impact of the acquisition and its results during 2013 In €millions Costs of removing Sportingbet board Transaction fees incurred by Sportingbet Net current liabilities at acquisition Balance sheet deficit GVC transaction costs Restructuring costs William Hill plc capital contribution William Hill loan Profits arising from Sportingbet turnaround, Superbahis mitigation and Spanish contribution Total (5.0) (8.6) (36.0) (49.6) (9.3) (11.9) 42.6 8.0 25.1 4.9 Acquisition balance sheet Exceptional items (5.0) (8.6) (36.0) (49.6) 42.6 – (7.0) – (9.3) (11.9) 1.5 (19.7) NET CURRENT ASSETS The net position is obviously affected by the timing of the dividend payments – which totalled €15.0 million during 2013 (2012: €8.2 million). Such is the strategy of GVC towards its dividend payments, that GVC aims to keep its Net Current Assets relatively equal to its Net Current Liabilities, but ensuring at all times that its balances with customers are covered and meet regulatory requirements. Table 8: Liquidity position as at 31 December 2013 Restricted cash* Add: cash in transit with payment processors Total Less: Customer balances Surplus over customer liabilities Free cash Trade payables Instalments payable in 2014 to providers of lease finance Instalment payable to William Hill in December 2014 Loan imputed interest Corporate and other taxes reclaimable less payable Other tax liabilities Accruals, prepayments and other net current assets Net current assets €000’s 11,452 (9,586) (2,752) 238 €000’s 7,356 18,270 25,656 (13,298) 12,358 1,866 (945) (2,514) (539) (4,182) (5,765) 279 * Restricted cash refers to balances at banks where the cash has to be ring-fenced for regulatory reasons. GVC HOLDINGS PLC ANNUAL REPORT 2013 13 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 14 REPORT OF THE GROUP FINANCE DIRECTOR continued SUMMARISED CASHFLOW The Group’s cashflow position for 2013 is summarised below: Table 9: Summarised cashflow Clean EBITDA Less: – Exceptional items – Betboo earnout – Expenditure of tangible and intangible fixed assets for cash – Corporate taxes paid (less recovered) – Deficit in Sportingbet Balance sheet (from above) Add: – Contribution from William Hill – Loan from William Hill – Cash raised in issue of share options And: Net movements in working capital Less: restricted cash Net operating cashflows Less: Dividends paid (equating to 75.75% of cashflow) Net cashflow for year Add: restricted cash balances Add: Cash at 1 January 2013 Cash at 31 December 2013 NON-CURRENT LIABILITIES These consist of three principal items: 2013 €millions 38.3 (19.7) (6.4) (0.0) (0.4) (49.6) 42.6 8.0 0.3 14.1 27.2 (7.4) 19.8 (15.0) 4.8 7.4 6.6 18.8 a.) Interest free loan from William Hill As part of the Sportingbet acquisition there was a loan facility from William Hill of up to £15 million. At the balance sheet date the amount drawn-down amounted to £6.9 million, of which £2.3 million is repayable in less than one year and thus accounted for as a current liability and the balance is shown on the GVC balance sheet as a non-current liability. It is repayable in two further equal instalments, by 31 December 2015 and 30 June 2016. Should GVC declare dividends in excess of 58 €cents per share, William Hill are entitled to receive an accelerated repayment equal to the excess of the actual dividend over 58 €cents per share. Whilst the loan is interest free, IAS 39 requires GVC to account for imputed interest calculated at 4%. Gross amount of loan payable after one year Imputed interest Amount recognised in non-current liabilities 2013 €000’s 5,504 (356) 5,148 b.) Deferred consideration on Betboo Under accounting rules, this item is a combination of gross amounts payable, €8.4 million at 31 December 2013, and which can vary, but are subject to a cap, and the “unwinding of the discount”, €0.8 million and chargeable to the Income Statement. Following the migration of the Betboo software to the existing Sportingbet platform in the second-half of 2013 there was a minor change in the staging of the earn-out payments, but not the ultimate quantum. ANNUAL REPORT 2013 14 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 15 Table 10: Analysis of Betboo deferred consideration € millions Arising on acquisition Charge to income statement – prior to 2013 – during 2013 – due in 2014 – due in future periods Payments made – on acquisition – up to 31.12.2012 – During 2013 Payments due – In 2014 – In 2015 – In 2016 Lifetime balances Balances due at 31.12.2013 Due to Founders Acquisition costs 21.4 0.3 – – – – 2.8 3.8 6.4 3.8 2.4 2.2 21.4 8.4 – – – – 0.3 – – – – – 0.3 - Sub total 21.7 – – – – 3.1 3.8 6.4 3.8 2.4 2.2 21.7 8.4 Accounting discount (8.6) (6.1) (1.7) (0.7) (0.1) – – – – – – (8.6) (0.8) Total 13.1 (6.1) (1.7) (0.7) (0.1) 3.1 3.8 6.4 3.8 2.4 2.2 13.1 7.6 c.) Finance leases This represents the lease finance taken-out for the purchase of software and similar underpinning the Sportsbook platform. Table 11: Analysis of finance lease liabilities Property, plant and equipment capitalised Software capitalised Hardware and software support to be expensed Total amount financed Finance charges expensed in 2013 Finance charges expensed in future periods Total amounts repayable to provider of lease finance Payable in 2014 (included in current liabilities) Payable in future periods Amount payable in future periods Less: future finance charges Included in non-current liabilities €000’s 543 827 1,370 753 2,123 43 74 2,240 945 1,295 2,240 1,295 (74) 1,221 SUMMARY OF BALANCE SHEET MOVEMENTS The most significant impact on the balance sheet was the acquisition of Sportingbet and the issue of shares used to finance it. GVC HOLDINGS PLC ANNUAL REPORT 2013 15 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 16 REPORT OF THE GROUP FINANCE DIRECTOR continued Table 12: Balance Sheet bridge At 1 January 2013 EBITDA Exceptional items Net finance charges Depreciation and amortisation Taxation Movement on translation reserve Issue of shares for Sportingbet acquisition Share options exercised Dividends paid At 31 December 2013 38,299 (19,711) (1,104) (3,740) (711) Total €000’s 58,471 13,033 359 83,918 294 (14,979) 141,096 CURRENCY EXPOSURES GVC Group reports in Euro and its main operating subsidiary is incorporated in the Eurozone. Table 13: Mix of currency exposures based on Q4-2013 revenues Euro Turkish Lira Brazilian Real Sterling Other currencies 39% 27% 4% 4% 26% During the year, the combined loss from realised and unrealised foreign exchange was €1.9 million although €1.1 million of this arose as a one-off re-translation of the Sportingbet ledgers, hitherto denominated in Sterling. The William Hill loan is denominated in Sterling (£6.9 million) and incurred an unrealised loss of €0.2 million. GVC does not take delivery of either TRY or BRL as such currency conversions are handled by the Group’s payment processing intermediaries. Additionally, the Net Current Assets of the Group are of course revalued each month at month-end exchange rates and this also results in exchange gains and losses. The principal revaluations are for the customer liabilities, although these are now largely currency matched to produce a natural hedge. The relative purchasing power of the Euro has strengthened against three significant currencies for the Group. GVC estimates that the impact on profits from weaker TRY and BRL when compared to average rates in 2012 would be in the region of €5 million. Table 14: Relative purchasing power of the Euro (Source: www.oanda.com, the mid point of the bid/offer price has been selected) 1 Euro = BRL TRY Average rate in 2012 2.502 Rate at 31 Dec 2012 2.70856 Average rate in 2013 2.8514 Rate at 31 Dec 2013 3.2531 2.314 2.3685 2.5199 2.9464 GBP 0.8113 0.8174 0.8491 0.8348 % change in average rate Euro Strengthened by 14.0% Euro Strengthened by 8.9% Euro strengthened by 4.7% % change in year-end rate Euro Strengthened by 20.1% Euro Strengthened by 24.4% Euro Strengthened by 2.1% ANNUAL REPORT 2013 16 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 17 Future trading updates and financial calendar It is anticipated that GVC will make further announcements on or around the following dates: I B U S N E S S R E V E W I – Posting of R&As and Notice of AGM – AGM Trading Update, Result of AGM – Payment of Final Dividend – H1 and post World Cup Trading Update – Payment of quarterly dividend 22 April 2014 14 May 2014 19 May 2014 W/c 14 July 2014 W/c 18 August 2014 W/c 22 September 2014 – Interim Results W/c 27 October 2014 W/c 8 December 2014 W/c 12 January 2015 W/c 9 February 2015 – Payment of quarterly dividend – Trading Update – Pre-close Trading Update – Payment of quarterly dividend Richard Cooper Group Finance Director 8 April 2014 GVC HOLDINGS PLC ANNUAL REPORT 2013 17 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 18 PRINCIPAL RISKS AND UNCERTAINTIES Risk description Potential impact Mitigation ECONOMIC RISK – Customer base becomes less confident about their financial prospects REGULATORY RISK – Conflict between jurisdictions in which the customer resides and where the service is provided – Risk of criminal, civil and administrative enforcement action in jurisdictions where the Group generates the business FINANCIAL Lower revenues and consequently profits • Customer retention programmes Reduction in market size • Broader geographic spread of products • Migration of third party costs to be aligned with revenues • • • Diversified product portfolio Strict adherence to the laws of the jurisdiction in which the service is provided Close monitoring of regulatory developments and assessment of their longer-term impact – Foreign exchange risks Lower or more volatile profits • Group tries to match its income and cost exposures to create a natural hedge • Regular evaluation of low cost hedging opportunities – Withdrawal of payment processing facilities Short-term interruption of funds deposited by customers • Multiple payment processing methods used by the Group OPERATIONAL – Dependence on third party Reduction of revenue streams software GVC’s CasinoClub website is highly dependent on Boss Media with whom it has a long- term contract • • Long-term contracts entered into with suppliers of a good financial covenant In some cases it is not practicable to mitigate the software reliance risk without significant business and economic disruption – Dependence on key personnel Interruption of business continuity and loss of corporate knowledge • Broader base of Executives below Board level ANNUAL REPORT 2013 18 18 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 19 Risk description Potential impact Mitigation OPERATIONAL continued – Loss of major introducer of Reduction of revenue streams • Competitive revenue sharing I B U S N E S S R E V E W I business – Poor sports results Lower or more volatile earnings – Abnormal jackpot wins Lower or more volatile earnings – Loss of major customer Lower earnings – Reliance on third party Lower earnings payment and multi-currency processing systems models applied and monitored regularly. Key introducers are offered long- term revenue prospects with the Group • Sports represents around 50% of the Groups’ NGR and sports results, are as a matter of policy not hedged as over the long-term they trend to the Group’s expected margin percentage • Revenues from some business lines have a jackpot insurance scheme. Others do not have as a matter of policy • Highly diversified customer base with many thousands of customers across all its brands • Spreading of risk across a multitude of payment processors with varying deposit and withdrawal methods • Constant monitoring of the competitive landscape • Working with third party software providers where possible to enhance product offering Lower revenues COMPETITION RISK – The market place becomes more competitive via new entrants or by more attractive products available from those or existing competitors TECHNOLOGY RISK – The Group may be threatened by Denial of Service attacks or similar – Hosting platforms may suffer critical failure Temporary disruption of service, blackmail demands • Group has highly advanced preventive measures with world-class technology firms Temporary disruption of service, undermining of the confidence built with customers GVC HOLDINGS PLC ANNUAL REPORT 2013 19 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 20 DIRECTORS REPORT The Directors present their report for GVC Holdings PLC and the audited financial statements for the year ended 31 December 2013. Principal Activities Gaming VC Holdings S.A. was the original holding company of the Group. GVC Holdings PLC was incorporated on 5 January 2010 in The Isle of Man. It took over the assets of Gaming VC Holdings S.A. after approval by the shareholders on 21 May 2010, and is now the holding company of the Group. Results and Dividends The profit for the year attributable to ordinary shareholders after taxation amounted to €12,303,000 (2012: profit of €9,236,000). The Company is incorporated under the 2006 Isle of Man Companies Act. This act does not require the Company to have distributable reserves for the purpose of declaring a dividend. The Act requires the Directors to consider the solvency of the Company before making a dividend. A corollary of this is that the matter of dividends is not required to be put before General Meeting. The Group’s consolidated financial statements are set out on pages 24 to 61. For a more detailed review of the Group’s result see the Report of the Chief Executive and the Report of the Group Finance Director. Trading Review and Future Developments The Directors are pleased with the Group’s performance during 2013 and are confident that this performance will continue to improve during 2014 and beyond. For a detailed review of the trading performance and future developments of the Group see the Chairman’s Statement, Report of the Chief Executive and the Report of the Group Finance Director, which form part of their reports. Key Performance Indicators For a more detailed review of the key performance indicators of the Group see the Report of the Chief Executive. Directors and their Interests The Directors of the Company and their beneficial interest in the ordinary share capital of the Group are as follows: Ordinary shares of €0.01 each in GVC Holdings PLC Executive Directors K Alexander R Cooper Non-Executive Directors L Feldman K Diacono 31 March 2013 31 December 2013 31 December 2012 400,333 300,000 98,700 – 400,333 300,000 98,700 – 313,333 135,000 73,700 – The Directors shareholdings represent 1.31% (2012: 0.86%) of the voting shares of the Company. Details of the Directors who have an interest in share options are disclosed in the Report of the Remuneration Committee. Creditor Payment Policy It is the Group’s policy to agree terms of business with suppliers prior to the supply of goods and services. Going Concern The Group’s business activities, together with the factors likely to affect its future performance and position are set out in the Chairman’s, Chief Executive’s and Group Finance Director’s statements. Note 22 to the financial statements sets out the Group’s financial risk management policies, and its exposure to credit risk and liquidity risk. The Directors have assessed the financial risks facing the business, and compared this risk assessment to the net current assets position and dividend policy. The Directors have also reviewed relationships with key suppliers and software providers and are satisfied that the appropriate contracts and contingency plans are ANNUAL REPORT 2013 20 I B U S N E S S R E V E W I 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 21 in place. The Directors have prepared income statement and cash flow forecasts to assess whether the Group has adequate resources for the foreseeable future. The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the consolidated financial statements. Statement of Directors’ Responsibilities The Directors are responsible for preparing the Directors’ report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to keep reliable accounting records which allow financial statements to be prepared. In addition, the Directors have elected to prepare group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and applicable law, and have elected to prepare the parent company financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice). The financial statements are required to give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that year. In preparing these financial statements, the Directors are required to: • • • • select suitable accounting policies and apply them consistently; make judgments and estimates that are reasonable and prudent; state whether applicable International Financial Reporting Standards and UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are responsible for keeping reliable accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Isle of Man Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as the Directors are aware: • • there is no relevant audit information of which the Company’s auditors are unaware; and the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing preparation and dissemination of financial statements may differ from legislation in other jurisdictions. For and on behalf of the Board of GVC Holdings PLC. Richard Cooper Group Finance Director 8 April 2014 Registered office: Milbourn House, St. Georges Street, Douglas, Isle of Man, IM1 1AJ GVC HOLDINGS PLC ANNUAL REPORT 2013 21 162749 GVC Annual Report Pt2_162749 GVC Annual Report Pt2 14/04/2014 09:18 Page 22 ANNUAL REPORT 2013 22 I I A U D T O R S R E P O R T A N D P R M A R Y F N A N C A L S T A T E M E N T S I I 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page i AUDITORS REPORT AND PRIMARY FINANCIAL STATEMENTS IN THIS SECTION INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF GVC HOLDINGS PLC CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASHFLOWS 23 24 24 25 26 27 GVC HOLDINGS PLC ANNUAL REPORT 2013 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page ii ANNUAL REPORT 2013 I I A U D T O R S R E P O R T A N D P R M A R Y F N A N C A L S T A T E M E N T S I I 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 23 INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF GVC HOLDINGS PLC We have audited the Group financial statements of GVC Holdings PLC for the year ended 31 December 2013 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cashflows and the related notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Section 80c (2) of the Isle of Man Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Auditor’s Report and for no other purpose. 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, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 21, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Group financial statements sufficient to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Group financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited consolidated financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion the Group financial statements: • • give a true and fair view, of the state of the Group’s affairs as at 31 December 2013 and Group’s profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards (as adopted by the European Union). Other Matter We have reported separately on the parent company financial statements of GVC Holdings PLC for the year ended 31 December 2013. Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 8 April 2014 GVC HOLDINGS PLC ANNUAL REPORT 2013 23 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 24 CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2013 Net gaming revenue Cost of sales Contribution Operating costs (as below) Other operating costs Share option charges Exceptional items Depreciation and amortisation Operating profit Financial income Financial expense Profit before tax Taxation expense Profit after taxation from continuing operations Loss after taxation from discontinued operations Profit after tax Earnings per share Basic Profit from continuing operations Loss from discontinued operations Total Diluted Profit from continuing operations Loss from discontinued operations Total Notes 2 2 4 4 4 4 4, 9, 10 5 5 6 7 8 8 2013 €000’s 168,407 (65,776) 102,631 (88,513) (64,332) (730) (19,711) (3,740) 14,118 627 (1,731) 13,014 (711) 12,303 – 12,303 € 0.225 – 0.225 0.220 – 0.220 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2013 Profit for the year Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Profit and total comprehensive income for the year The notes on pages 29 to 61 form part of these financial statements. 2013 €000’s 12,303 359 12,662 2012 €000’s 60,325 (23,849) 36,476 (23,442) (21,024) (79) 208 (2,547) 13,034 2 (2,206) 10,830 (480) 10,350 (1,114) 9,236 € 0.328 (0.035) 0.293 0.323 (0.035) 0.288 2012 €000’s 9,236 – 9,236 ANNUAL REPORT 2013 24 I I A U D T O R S R E P O R T A N D P R M A R Y F N A N C A L S T A T E M E N T S I I 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 25 CONSOLIDATED BALANCE SHEET as at 31 December 2013 Assets Property, plant and equipment Intangible assets Deferred tax asset Total non-current assets Trade and other receivables Income taxes reclaimable Other tax reclaimable Cash and cash equivalents Total current assets Current liabilities Trade and other payables Balances with customers Income taxes payable Other taxation liabilities Total current liabilities Current assets less current liabilities Non-current liabilities Interest bearing loans and borrowings Non-interest bearing loan and borrowings Deferred consideration on Betboo Total non-current liabilities Total net assets Capital and reserves Issued share capital Merger reserve Share premium Translation reserve Retained earnings Total equity attributable to equity holders of the parent Notes 9 10 6 13 6 14 15 6 17 18 16 12 19 19 19 19 19 2013 €000’s 918 153,850 – 154,768 23,579 1,877 306 18,808 44,570 (24,089) (13,298) (2,722) (4,182) (44,291) 2012 €000’s 653 65,440 83 66,176 17,356 943 – 6,632 24,931 (17,270) (1,712) (1,185) (186) (20,353) 279 4,578 (1,221) (5,148) (7,582) (13,951) 141,096 609 40,407 84,530 359 15,191 141,096 – – (12,283) (12,283) 58,471 316 40,407 611 – 17,137 58,471 The financial statements from pages 24 to 61 were approved and authorised for issue by the Board of Directors on 8 April 2014 and signed on their behalf by: K.J. Alexander (Chief Executive Officer) R.Q.M. Cooper (Group Finance Director) The notes on pages 29 to 61 form part of these financial statements. GVC HOLDINGS PLC ANNUAL REPORT 2013 GVC HOLDINGS PLC ANNUAL REPORT 2013 25 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 26 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2013 Attributable to equity holders of the parent company: Share Capital €000’s Merger Reserve €000’s Share Translation Reserve €000’s Premium €000’s Balance at 1 January 2012 315 40,407 Share option charges Lapsed share options Share options exercised Dividend paid Transactions with owners Profit and total comprehensive expense Balance as at 31 December 2012 Balance at 1 January 2013 Share option charges Share options cancelled Share options exercised Issue of share capital for the acquisition of Sportingbet PLC Dividend paid Transactions with owners Profit and total comprehensive income Total comprehensive income – – 1 – 1 – 316 316 – – 3 290 – 293 – – – – – – – – 40,407 40,407 – – – – – – – – 416 – – 195 – 195 – 611 611 – – 291 83,628 – 83,919 – – Balance as at 31 December 2013 609 40,407 84,530 – – – – – – – – – – – – – – – – 359 359 Retained Earnings €000’s 16,036 568 (489) – (8,214) (8,135) Total €000’s 57,174 568 (489) 196 (8,214) (7,939) 9,236 9,236 17,137 58,471 17,137 58,471 736 (6) – – (14,979) (14,249) 12,303 – 736 (6) 294 83,918 (14,979) 69,963 12,303 359 15,191 141,096 All reserves of the Company are distributable. Under The Isle of Man Companies Act 2006 distributions are not governed by reserves but by the Directors undertaking an assessment of the Company’s solvency at the time of distribution. The notes on pages 29 to 61 form part of these financial statements. ANNUAL REPORT 2013 26 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 27 CONSOLIDATED STATEMENT OF CASHFLOWS for the year ended 31 December 2013 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Corporate taxes recovered Corporate taxes paid Net cash from operating activities Cash flows from investing activities Interest received Acquisition earn-out payments (Betboo) Acquisition (net of cash acquired) Non-interest bearing loan (from William Hill) Acquisition of property, plant and equipment Acquisition of intangible assets Net cash from investing activities Cash flows from financing activities Proceeds from issue of share capital Repayment of borrowings Dividend paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year The notes on pages 29 to 61 form part of these financial statements. Notes 12 11 16 11 19 2013 €000’s 173,885 (181,592) 1,143 (1,580) (8,144) 33 (6,378) 64,755 8,020 (37) (4) 66,389 294 (31,384) (14,979) (46,069) 12,176 6,632 18,808 2012 €000’s 56,881 (47,686) 1,529 (1,946) 8,778 2 (2,863) – – (492) (628) (3,981) 196 – (8,214) (8,018) (3,221) 9,853 6,632 I I A U D T O R S R E P O R T A N D P R M A R Y F N A N C A L S T A T E M E N T S I I GVC HOLDINGS PLC ANNUAL REPORT 2013 GVC HOLDINGS PLC ANNUAL REPORT 2013 27 162749 GVC Annual Report Pt3_162749 GVC Annual Report Pt3 14/04/2014 08:01 Page 28 ANNUAL REPORT 2013 28 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page i NOTES TO FINANCIAL STATEMENTS, REPORT OF REMUNERATION COMMITTEE, COMPANY FINANCIAL STATEMENTS & ADDITIONAL UNAUDITED INFORMATION IN THIS SECTION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS REPORT OF THE REMUNERATION COMMITTEE COMPANY FINANCIAL STATEMENTS (UNDER UK GAAP) ADDITIONAL UNAUDITED INFORMATION 29 63 67 77 GVC HOLDINGS PLC ANNUAL REPORT 2013 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I , R E P O R T O F R E M U N E R A T O N C O M M T T E E I I , I I C O M P A N Y F N A N C A L S T A T E M E N T S & A D D T O N A L U N A U D T E D I I I I N F O R M A T O N I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page ii ANNUAL REPORT 2013 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2013 1. 2. 3. 4. 5. 6. 7. 8. 9. Significant accounting policies Segmental reporting Contract with East Pioneer Corporation B.V. Operating costs Financial income and expenses Taxation Discontinued operations Earnings per share Property, plant and equipment 10. Intangible assets 11. Acquisition of Sportingbet PLC and Gomifer S.A. 12. Acquisition of Betboo 13. Receivables and prepayments 14. Cash and cash equivalents 15. Trade and other payables 16. Non-interest bearing loan 17. Other taxation payable 18. Commitments under operating and finance leases 19. Share capital and reserves 20. Dividends 21. Share option schemes 22. Financial instruments and risk management 23. Related parties 24. Group entities 25. Contingent liabilities 26. Accounting estimates and judgements 27. Going concern 28. Subsequent events GVC HOLDINGS PLC ANNUAL REPORT 2013 29 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 SIGNIFICANT ACCOUNTING POLICIES 1. This note from pages 29 to 61 deals with both the significant accounting policies used in the preparation of these financial statements, together with a note identifying new accounting standards which will affect the Group. GVC Holdings PLC is a company registered in The Isle of Man and was incorporated on 5 January 2010. It is the successor company of Gaming VC Holdings S.A. and took the assets of Gaming VC Holdings S.A. on 21 May 2010 after formal approval by shareholders. The consolidated financial statements of the Group for the year ended 31 December 2013 comprise the Company and its subsidiaries (together referred to as the ‘Group’). On the 19 March 2013 the Group completed the acquisition of Sportingbet PLC. Management views the enlarged group as having one business line which it has worked hard at integrating during 2013. Within that one business line there are two distinct operating segments, sports and gaming. Gaming includes Casino, Poker and Bingo. The significant subsidiary undertakings of the Group are listed in note 24. 1.1 Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), as adopted by the European Union. The Directors have reviewed the accounting policies used by the Group and consider them to be the most appropriate. The accounting policies are consistent with the prior year with the exception of revisions and amendments to IFRS issued by the IASB, which are relevant to and effective for the annual period beginning 1 January 2013. Material effects on current, prior or future periods arising from the first-time application of these new requirements in respect of presentation, recognition and measurement are described in note 1.19. 1.2 Basis of Preparation The financial information, which comprises the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in shareholders’ equity, consolidated cash flow statement and related notes, is derived from the Group financial statements for the year ended 31 December 2013, which have been prepared under International Financial Reporting Standards as adopted by the European Union (IFRS) and those parts of the Isle of Man Companies Act 2006 applicable to companies reporting under IFRS. It does not constitute full accounts within the meaning of the Isle of Man Companies Act 2006. This financial information has been agreed with the auditors for release. The financial statements are presented in the Euro, rounded to the nearest thousand, and are prepared on the historical cost basis. The financial statements are prepared on the going concern basis (see note 27). Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36. The preparation of financial 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. Significant accounting estimates and judgements are discussed in further detail in note 26. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. The accounting policies have been applied consistently by Group entities. ANNUAL REPORT 2013 30 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 31 1.3 Basis of Consolidation 1.3.1 Subsidiaries Subsidiaries are entities controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. 1.3.2 Transactions Eliminated on Consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 1.3.3 Business Combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are generally recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • • • deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 respectively; liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss. When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. GVC HOLDINGS PLC ANNUAL REPORT 2013 31 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 1. SIGNIFICANT ACCOUNTING POLICIES continued 1.3 Basis of Consolidation continued 1.3.3 Business Combinations continued If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the terms for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date. 1.4 Foreign Currency The functional currency of the Company and the Group, as well as the presentational currency of the Group, is the Euro. 1.4.1 Foreign Currency Transactions Transactions in foreign currencies are translated to the Euro at the foreign exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting balance sheet date are translated to the 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. On consolidation the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing at the period end date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly, in which case the spot rate for significant items is used. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. 1.5 Property, Plant and Equipment 1.5.1 Owned Assets Property, plant and equipment is stated at cost, less accumulated depreciation (see 1.5.2 below) and impairment losses (see accounting policy 1.7). 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. 1.5.2 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: Fixtures and fittings: Plant and equipment: 3 years 3 years The residual value, if significant, is reassessed annually. 1.6 Intangible Assets 1.6.1 Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill has been allocated to each of the Group’s cash-generating units that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. ANNUAL REPORT 2013 32 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 33 1.6.2 Other Intangible Assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (see 1.6.4) and impairment losses (see accounting policy 1.7). 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 identifiable asset category is detailed below: Asset category Consulting and magazine Software licence Trademarks Trade name Non Contractual customer relationships Valuation methodology Income (cost saving) Income (incremental value plus loss of profits) Relief from royalty Relief from royalty Excess earnings Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense is incurred. 1.6.3 Subsequent Expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. This includes legal and similar expenditure incurred in registering brands and trade names, which is capitalised, all other expenditure is expensed as incurred. 1.6.4 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 indefinite. Goodwill and trademarks with an indefinite 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 Non-contractual customer relationships 3-5 years 2-4 years 2-15 years 4 years 1.7 Impairment 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 inflows 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 reflecting the asset specific risks and the time value of money are used for the value in use calculation. For goodwill and trademarks that have an indefinite useful life, the recoverable amount is estimated at each balance sheet date. 1.8 Dividends Paid to Holders of Share Capital Dividend distributions payable to equity shareholders are recognised through equity reserves on the date the dividend is paid. 1.9 Employee Benefits 1.9.1 Pension Costs In some jurisdictions in which the Group has employees, there are government or private schemes into which the employing company or branch must make payments on a defined contribution basis, the contributions are shown in the profit or loss account in the year. 1.9.2 Share Options The Group has share option schemes which allow Group employees and contractors 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. GVC HOLDINGS PLC ANNUAL REPORT 2013 33 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 1. SIGNIFICANT ACCOUNTING POLICIES continued 1.9 Employee Benefits continued The fair value of the options granted is measured using a binomial valuation model. This valuation method takes into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. Payments made to repurchase or cancel vested awards are accounted for with the fair value of the options cancelled, measured at the date of cancellation being taken to retained earnings; the balance is taken to the income statement. Also on cancellation an accelerated charge would be recognised immediately. See note 21 for further details of the three schemes. 1.10 Provisions 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 outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 1.11 Revenue Recognition Net Gaming Revenue is measured at the fair value of consideration received or receivable and comprises the following elements: Casino: net win in respect of bets placed on casino games that have concluded in the year, stated net of promotional bonuses. Sportsbook: gains and losses in respect of bets placed on sporting events in the year, stated net of promotional bonuses. Open positions are carried at fair market value and gains and losses arising on this valuation are recognised in revenue, as well as gains and losses realised on positions that have closed. Poker: Bingo: net win in respect of rake for poker games that have concluded in the year, stated net of promotional bonuses. net win in respect of bets placed on bingo games that have concluded in the year, stated net of promotional bonuses. Where promotional bonuses apply to customers playing a variety of products through the same wallet, bonuses are allocated pro-rata to the net win. B2B income comprises the amounts receivable for services to other online gaming operators. Income is recognised when a right to consideration has been obtained through performance and reflects contract activity during the year. Until 19 March 2013 B2B income included amounts due for the provision of services to East Pioneer Corporation B.V. (“EPC”). The amounts have been shown as income as they represent normal trading transactions and match costs incurred by the Group as a result of providing services to EPC. A reconciliation of the NGR attributable to the B2B partner to the B2B income recognised in these financial statements is shown in note 2. From the 19 March 2013 the results of EPC have been fully consolidated into the Group following the acquisition of Sportingbet PLC. 1.12 Financial Expenses Financial expenses comprise interest payable on borrowings calculated using the effective interest rate method. 1.13 Exceptional Items Exceptional items are those that in the judgement of the Directors, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information. 1.14 Financial Income Financial income is interest income recognised in the income statement as it accrues, using the effective interest method. 1.15 Tax Current tax is the tax currently payable based on taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. ANNUAL REPORT 2013 34 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 35 Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is neither provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with investments in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income or equity in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity as appropriate. 1.16 Segment Reporting The Board has reviewed and confirmed the Group’s reportable segments in line with the guidance provided by IFRS 8 ‘Operating Segments’. The segments disclosed below are aligned with the reports the Group’s Chief Executive reviews to make strategic decisions. Sports: being the gains and losses in respect of bets placed on sporting events in the year. Gaming: being the net win in respect of bets placed on casino, poker, bingo that have concluded in the year, along with deposit charges debited to customer accounts. Corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to a segment. The prior year comparatives have been re-stated to reflect the change in Management’s approach to follow this one business line. 1.17 Financial Instruments Financial assets and financial liabilities are recognised when a Group entity becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. 1.17.1 Non-Derivative Financial Instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value, plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition, non- derivative financial instruments are measured at amortised cost using the effective interest method. Provisions for impairment are made against financial assets if considered appropriate and any impairment is recognised in profit or loss. 1.17.2 Cash and Cash Equivalents Cash and cash equivalents comprise cash balances and any balances with payment processors that are repayable on demand. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Accounting for financial income and financial expenses are discussed in notes 1.14 and 1.12 respectively. GVC HOLDINGS PLC ANNUAL REPORT 2013 35 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 1. SIGNIFICANT ACCOUNTING POLICIES continued 1.17 Financial Instruments continued 1.17.3 Impairment of Financial Assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. Objective evidence of impairment could include: • • • • significant financial difficulty of the issuer or counterparty; or breach of contract, such as a default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or the disappearance of an active market for that financial asset because of financial difficulties. 1.18 Equity Equity comprises the following: ‘Share capital’ represents the nominal value of equity shares. ‘Share premium’ represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. ‘Retained earnings’ represents retained profits. ‘Merger reserve’ arose on the re-domiciliation of the Group from Luxembourg to The Isle of Man. It consists of the pre- redomiciliation reserves of the Luxembourg company plus the difference in the issued share capital (31,135,762 share at €0.01 versus 31,135,762 shares at €1.24). ‘Translation reserve’ represents exchange differences on translation of foreign subsidiaries recognised in other comprehensive income. 1.19 Adoption of new and revised International Financial Reporting Standards The IFRIC interpretations, amendments to existing standards and new standards that are mandatory and relevant for the Group’s accounting periods beginning on or after 1 January 2013 have been adopted. The following new standards and interpretations have been adopted in the current period but have not impacted the reported results or the financial position: • • IFRS 13 Fair Value Measurement – The Group has applied IFRS 13 for the first time in the current year. IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad, the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value. Amendments to IAS 1 Presentation of items of Other Comprehensive Income – The Group has applied the amendments to IAS 1 Presentation of Items of Other Comprehensive Income for the first time in the current year. The amendments introduce new terminology, whose use is not mandatory, and the Group have chosen not to rename the statement of comprehensive income and income statement. The amendments to IAS 1 retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require terms of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income and total comprehensive income. 1.20 Standards in Issue, not yet effective Standards, Amendments and Interpretations that are mandatory for the Group’s accounting periods beginning on or after 1 January 2014 and have not been adopted early by the Group are as follows: • IFRS 9 Financial Instruments ANNUAL REPORT 2013 36 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 37 The following Standards are not likely to have a material impact on the Group’s or Company’s financial statements: • • • • • • • • IFRS 10 Consolidated Financial Statements IFRS 11 Joint arrangements IFRS 12 Disclosure of interest in other entities IAS 27 (Revised) Separate financial statements IAS 28 (Revised) Investments in associates and joint ventures IAS 32 (Revised) Financial instruments: Presentation IAS 36 (Revised) Impairment of assets IAS 39 (Revised) Financial instruments: Recognition and measurement 1.21 Restatements The Group has made two restatements in the period. Net Gaming Revenue Betting duties and similar taxes and charge-backs have been restated to be recognised as a ‘Cost of Sale’. ‘Net Gaming Revenue’ is now measured at the fair value of consideration received or receivable net of promotional bonuses only. Technology costs Technology costs relating to the provision of sports data have been restated from ‘Cost of Sales’ to ‘Operating Costs’, as it is judged that they are more representative of the contractual commitment being expressed as expenditure as opposed to cost of sales. The comparative figures for the financial year ending 2012 have been restated as below for these restatements. Revenue Cost of sales Operating costs Operating profit Original €000’s 59,596 (24,513) (22,049) 13,034 Restatements €000’s 729 664 (1,393) – Restated €000’s 60,325 (23,849) (23,442) 13,034 SEGMENTAL REPORTING 2. Management follows one business line with two operating segments, being Sports and Gaming segmenting the revenues. These operating segments are monitored and strategic decisions are made on the basis of overall operating results. Management also monitors revenue by geographic location of its customers, monitoring performance in Europe and Latin America. 2.1 Geographical Analysis The Group’s revenues and other income from external customers are divided into the following geographic areas: Europe Latin America and Emerging Markets Total 2013 €000’s 146,458 21,949 168,407 2012 €000’s 49,472 10,853 60,325 The total non-current assets (other than financial instruments, investments accounted for using the equity method, deferred tax assets and post-employment benefit assets) located in Europe is €146,381,000 (2012: €57,026,000) and the total located in other regions is €8,387,000 (2012: €9,067,000). The total deferred tax asset located in Europe is €nil (2012: €83,000). There are no deferred tax assets in other regions. Revenues from external customers in the Group’s domicile, Europe, as well as its major markets, Europe and Latin America, have been identified on the basis of the customer’s geographical location. Non-current assets are allocated based on their physical location. The above table does not include discontinued operations, for which revenue and assets can be attributed to Europe. GVC HOLDINGS PLC ANNUAL REPORT 2013 37 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 2. SEGMENTAL REPORTING continued 2.2 Reporting by Segment STATEMENT OF TURNOVER Sports wagers Sports margin Gross margin Sports NGR Gaming NGR Revenue recognised by GVC Revenue recognised by B2B partners (up until 19 March 2013) SEGMENTAL REPORTING Total revenue Variable costs Contribution Contribution margin Other operating costs Personnel expenditure Professional fees Technology costs Office, travel and other costs Third party service costs Foreign exchange differences Clean EBITDA Exceptional items Share option charges EBITDA Depreciation and amortisation Financial income Financial expense Finance lease interest Unwinding of discount on deferred consideration Profit before tax Taxation Profit after tax from continuing operations NET ASSETS Non-current assets Current assets Current liabilities Net current assets Non-current liabilities Net assets Total assets Total liabilities Notes 4 4 4 4 5 5 5 5 6 2013 €000’s 1,169,505 9.6% 112,081 90,823 89,750 180,573 168,407 12,166 180,573 168,407 (65,776) 102,631 61% (32,507) (2,523) (19,795) (5,146) (2,427) (1,934) 38,299 (19,711) (730) 17,858 (3,740) 627 (11) (43) (1,677) 13,014 (711) 12,303 2012 €000’s 518,931 11.3% 58,647 50,621 56,566 107,143 60,325 46,818 107,143 60,325 (23,849) 36,476 60% (10,811) (1,177) (2,856) (1,909) (3,925) (346) 15,452 208 (79) 15,581 (2,547) 2 – – (2,206) 10,830 (480) 10,350 154,768 66,176 44,570 (44,291) 279 24,931 (20,353) 4,578 (13,951) (12,283) 141,096 199,338 (58,242) 58,471 91,107 (32,636) ANNUAL REPORT 2013 38 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 39 2. 3 Performance Summary Revenue H2-2013 H1-2013 FY-2013 H2-2012 H1-2012 FY-2012 Contribution H2-2013 H1-2013 FY-2013 H2-2012 H1-2012 FY-2012 Clean EBITDA H2-2013 H1-2013 FY-2013 H2-2012 H1-2012 FY-2012 €000’s 95,744 72,663 –––––––– 30,699 29,626 –––––––– 57,081 45,550 –––––––– 18,801 17,675 –––––––– 20,499 17,800 –––––––– 7,776 7,676 –––––––– Total €000’s 168,407 60,325 102,631 36,476 38,299 15,452 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I CONTRACT WITH EAST PIONEER CORPORATION B.V. 3. As part of the agreement between the Group and EPC the Group agreed to guarantee the performance of EPC’s obligations to SBT and therefore entered into the acquisition agreement alongside EPC as its guarantor. A contingent liability has been disclosed in respect of this guarantee as detailed in note 25. The Group mitigated this liability following the acquisition of Sportingbet PLC on the 19 March 2013. As the fair value of the contingent liability was €nil at both 31 December 2012 and 19 March 2013, there is no charge or credit to the income statement arising from this pre-existing relationship. 4. OPERATING COSTS Wages and salaries, including Directors remuneration Amounts paid to long term contractors Compulsory social security contributions Compulsory pension contributions Health and other benefits Recruitment and training Personnel expenditure (excluding share option charges) Professional fees Technology costs Office, travel and other costs Third party service costs* Foreign exchange differences Other operating costs Share option charges Exceptional items Depreciation Amortisation *provided to Betboo by external providers Notes 4.1 2013 €000’s 24,776 3,763 1,794 751 701 722 32,507 2,523 19,795 5,146 2,427 1,934 64,332 730 19,711 504 3,236 88,513 2012 €000’s 8,700 868 718 195 45 285 10,811 1,177 2,856 1,909 3,925 346 21,024 79 (208) 248 2,299 23,442 GVC HOLDINGS PLC ANNUAL REPORT 2013 39 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 4. OPERATING COSTS continued 4.1 Exceptional Items The Group incurred expenditure on exceptional items (as defined in accounting policy note 1.13). These are items which are both exceptional in size and nature. Costs arising on the acquisition of Sportingbet PLC – Legal advice – Nominated advisors – Reporting accountants – Other professional fees Total of professional fees – Underwriting – Stamp duty and stock exchange fees – Transaction success bonuses (see page 64) Transaction costs Redundancies, retentions and similar Contract buyouts Restructuring costs Economic benefit from the management of the Sportingbet Spanish business Boss dispute Notes 2013 €000’s 2012 €000’s a a a a a a a a a b c 3,428 1,210 938 822 6,398 810 639 1,444 9,291 9,017 2,855 11,872 (1,452) – 19,711 – – – – – – – – – – – – – (208) (208) Note a: On 19 March 2013, the Group completed the acquisition of Sportingbet PLC. Professional fees attributable to the acquisition and subsequent costs restructuring the Sportingbet business have been treated as exceptional items. Professional fees associated with the acquisition and incurred by Sportingbet amounted to €8,624,000 (£7,396,000). These have been included in the acquisition balance sheet (note 11) as liabilities. Note b: As part of the Group’s acquisition of Sportingbet PLC, a call option was granted to William Hill PLC over certain assets of Sportingbet’s Spanish business. The call option assets were: (i) the Spread Your Wings Spain PLC (“SYWS”) Customer List; (ii) the SYWS Customer Balances; (iii) the entire issued share capital of SYWS; and (iv) the entire issued share capital of Asesores en Tecnología y Diseño, S.L. (“ATD”). William Hill exercised the call option over all of the call option assets, as a result the Group was entitled to receive the economic benefit of the assets until 16 September 2013. As explained in note 26.8, the Group does not consider that it exercised control over the Spanish business in this period and its results have not therefore been consolidated. The benefit to the Group arising from the management fee earned in the period has been shown as exceptional income. Note c: The Group had been in a number of legal disputes with Boss Media and these have now ended. The net costs incurred by the Group relating to these disputes has been taken as an exceptional item. 4.2 Employees The average monthly number of persons (including Directors) employed by the Group during the year was: Number of personnel With employment contracts or service contracts Contractors 2013 556 49 605 2012 153 7 160 ANNUAL REPORT 2013 40 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 41 5. FINANCIAL INCOME AND EXPENSES Discount on non-interest bearing loan (see note 16) Unwinding of discount on non-interest bearing loan (see note 16) Net discount on non-interest bearing loan Financial income – interest income Financial expense – interest payable – Finance lease interest (see note 18) – Unwinding of discount on deferred consideration (see note 12) – Other expense 2013 €000’s 780 (186) 594 33 627 (43) (1,677) (11) (1,731) 2012 €000’s – – – 2 2 – (2,206) – (2,206) TAXATION 6. Current tax for the current and prior periods is classified as a current liability to the extent that it is unpaid. Amounts paid in excess of amounts owed are classified as a current asset. There is a current tax liability from continuing operations of €711k (net of tax receivable amounts) at 31 December 2013 (2012: Current tax liability from continuing operations of €480k (net of tax receivable amounts)). Current tax expense Current year Prior year Deferred tax Origination and reversal of temporary differences Total income tax expense in income statement 2013 €000’s 2012 €000’s 524 104 628 83 711 410 70 480 – 480 The tax for the year is different from that which would result from applying the standard rate of Corporation Tax in the UK (23.25%, 2012: 24.5%*). A reconciliation is shown below: Profit before tax Income tax using the domestic corporation tax rate Effect of tax rates in foreign jurisdictions (rates decreased) Expenses not deductible for tax purposes Utilisation of tax losses Tax losses for which no deferred tax assets have been recognised Adjustment in respect of prior years – corporation tax Adjustment in respect of prior years – deferred tax Capital allowances for the period in excess of depreciation 13,014 3,025 (3,603) (293) (265) 1,666 104 83 (6) 711 10,830 2,653 (2,460) 504 (242) 31 70 – (76) 480 *From 1 April 2013 the UK Corporation Tax rate changed from 24% to 23% and from 1 April 2014 the rate will reduce to 21%. GVC HOLDINGS PLC ANNUAL REPORT 2013 41 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 6. TAXATION continued 6.1 Taxation Amounts Recognised in the Balance Sheet Balances at 1 January 2012 Paid/(received) during the year ended 31 December 2012 Charge in income statement for prior years (Charge)/credit in income statement for the year ended 31 December 2012 Balances at 31 December 2012 Balances at 1 January 2013 Paid/(received) during the year ended 31 December 2013 (Charge)/credit acquired on acquisition Credit/(charge) in income statement for prior years (Charge)/credit in income statement for the year ended 31 December 2013 Balances at 31 December 2013 Current Tax Payable Receivable €000’s €000’s (1,771) 1,529 1,946 (70) (1,290) (1,185) (1,185) 1,268 (820) 7 (1,992) (2,722) (1,529) – 943 943 943 (832) 409 (111) 1,468 1,877 Deferred Tax Asset €000’s Liability €000’s 83 – – – 83 83 – (83) – – – – – – – – – – – – – Total €000’s (159) 417 (70) (347) (159) (159) 436 (411) (187) (524) (845) Tax reclaimable represents a portion of the tax paid by Maltese entities in the Group which is refundable by the Maltese tax authorities to the parent company shortly after the submission of the audited accounts and tax computation for the company the tax is payable in. Unrelieved tax losses remain available to offset against future trading profits. Should suitable taxable profits arise, these losses would represent a deferred tax asset of approximately €931,000. DISCONTINUED OPERATIONS 7. On 10 April 2012, the Group announced that it had entered into an arrangement to dispose of its Betaland business to a third party for a nominal sum. The declining profitability of Betaland led the Board to conclude that it was no longer in the shareholders’ interests for the Group to continue to own this business, the disposal was completed on 4 May 2012. At the time of disposal the net assets of this business were nil. The results from Betaland are shown below: Net gaming revenue Cost of sales Gross profit Marketing and revenue shares Contribution Other operating costs Clean EBITDA/cashflow from operating activities Exceptional items EBITDA Depreciation and amortisation Financial income and expenses Loss before tax Tax Loss after tax There were no cash flows from financing or investing activities in the period before disposal. 2013 €000’s – – – – – – – – – – – – – – 2012 €000’s 4,500 (1,451) 3,049 (2,995) 54 (1,059) (1,005) – (1,005) (173) 1 (1,177) 63 (1,114) ANNUAL REPORT 2013 42 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 43 8. EARNINGS PER SHARE 8.1 Basic Earnings Per Share and Basic Earnings Per Share Before Exceptional Items Basic earnings per share has been calculated by taking the profit attributable to ordinary shareholders and dividing by the weighted average number of shares in issue. Basic earnings per share from continuing operations before exceptional items has been calculated by taking the profit attributable to ordinary shareholders and adding back the cost of exceptional items in the year and dividing by the weighted average number of shares in issue. Profit for the year from continuing operations attributable to ordinary shareholders Loss for the year from discontinued operations attributable to ordinary shareholders Profit for the year attributable to ordinary shareholders Weighted average number of shares Basic earnings from continuing operations (in €) Basic earnings from discontinued operations (in €) Basic earnings per share (in €) Exceptional items Profit for the year from continuing operations attributable to ordinary shareholders before exceptional items Basic earnings per share from continuing operations before exceptional items (in €) 2013 2012 12,303,000 – 12,303,000 54,586,391 0.225 – 0.225 10,350,000 (1,114,000) 9,236,000 31,553,164 0.328 (0.035) 0.293 19,711,000 (208,000) 32,014,000 10,142,000 0.586 0.321 8.2 Diluted Earnings Per Share and Diluted Earnings Per Share Before Exceptional Items Diluted earnings per share has been calculated by taking the profit attributable to ordinary shareholders and dividing by the weighted average number of shares in issue as diluted by share options. Diluted earnings per share from continuing operations before exceptional items has been calculated by taking the profit attributable to ordinary shareholders and adding back the cost of exceptional items and dividing by the weighted average number of shares in issue, as diluted by share options. Profit for the year from continuing operations attributable to ordinary shareholders Loss for the year from discontinued operations attributable to ordinary shareholders Profit for the year attributable to ordinary shareholders Weighted average number of shares Effect of dilutive share options Weighted average number of dilutive shares Diluted earnings from continuing operations (in €) Diluted earnings from discontinued operations (in €) Diluted earnings per share (in €) 2013 12,303,000 – 12,303,000 54,586,391 1,419,914 56,006,305 0.220 – 0.220 2012 10,350,000 (1,114,000) 9,236,000 31,553,164 505,663 32,058,827 0.323 (0.035) 0.288 Exceptional items Profit for the year from continuing operations attributable to ordinary shareholders before exceptional items Diluted earnings per share from continuing operations before exceptional items (in €) 19,711,000 (208,000) 32,014,000 10,142,000 0.572 0.316 GVC HOLDINGS PLC ANNUAL REPORT 2013 43 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 9. PROPERTY, PLANT AND EQUIPMENT Cost At 1 January 2012 Additions Disposals At 1 January 2013 Additions Acquisitions – Sportingbet PLC Acquisitions – Gomifer S.A. At 31 December 2013 Depreciation At 1 January 2012 Depreciation charge for the year Disposals At 1 January 2013 Depreciation charge for the year Acquisitions – Sportingbet PLC Acquisitions – Gomifer S.A. Exchange differences At 31 December 2013 Net Book Value At 31 December 2012 At 31 December 2013 Leased Plant and Equipment €000’s Owned Plant and Equipment €000’s Total Plant and Equipment €000’s Fixtures and Fittings €000’s – – – – 543 – – 543 – – – – 124 – – – 124 – 419 728 412 (390) 750 37 347 63 1,197 498 211 (390) 319 287 182 40 (1) 827 431 370 728 412 (390) 750 580 347 63 1,740 498 211 (390) 319 411 182 40 (1) 951 431 789 1,168 80 (168) 1,080 – – – 1,080 928 98 (168) 858 93 – – – 951 222 129 Total €000’s 1,896 492 (558) 1,830 580 347 63 2,820 1,426 309 (558) 1,177 504 182 40 (1) 1,902 653 918 ANNUAL REPORT 2013 44 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 45 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I Trade- marks & Non- contractual Trade Consulting Customer Name & Magazine Relationships €000’s €000’s €000’s 16,119 – – 16,119 – 946 – – 17,065 526 256 – 782 313 – – – 1,095 4,919 – – 4,919 – – – – 4,919 4,919 – – 4,919 – – – – 4,919 1,704 – – 1,704 – 675 – – 2,379 1,065 426 – 1,491 477 – – – 1,968 Total €000’s 122,313 628 (873) 122,068 831 91,443 17 7 214,366 55,090 2,411 (873) 56,628 3,236 645 6 1 60,516 10. INTANGIBLE ASSETS Leased Software Licence €000’s Owned Software Licence €000’s Total Software Licence €000’s Cost At 1 January 2012 Additions Disposals At 1 January 2013 Additions Acquisitions – Sportingbet PLC Acquisitions – Gomifer S.A. Exchange differences At 31 December 2013 Amortisation and Impairment At 1 January 2012 Amortisation Disposal At 1 January 2013 Amortisation Acquisitions – Sportingbet PLC Acquisitions – Gomifer S.A. Exchange differences At 31 December 2013 Net Book Value At 31 December 2012 At 31 December 2013 10.1 Amortisation – – – – 827 – – – 827 – – – – 243 – – – 243 – 584 17,625 628 (873) 17,380 4 5,601 17 7 23,009 15,306 1,729 (873) 16,162 2,203 645 6 1 19,017 1,218 3,992 Goodwill €000’s 81,946 – – 81,946 – 84,221 – – 17,625 628 (873) 17,380 831 5,601 17 7 23,836 166,167 15,306 1,729 (873) 16,162 2,446 645 6 1 19,260 33,274 – – 33,274 – – – – 33,274 1,218 4,576 48,672 132,893 15,337 15,970 – – 213 411 65,440 153,850 The amortisation for the year is recognised in the following line items in the income statement. Net operating expenses Discontinued activities 2013 €000’s 3,236 – 3,236 2012 €000’s 2,299 112 2,411 10.2 Impairment Tests for Cash-Generating Units Containing Goodwill and Trademarks An Impairment Review of the Group’s goodwill was carried out for the year ended 31 December 2013. The goodwill relates to Betboo, CasinoClub and Sportingbet. The carrying values of the assets were compared with the recoverable amounts, the recoverable amount was estimated based upon a value in use calculation, based upon management forecasts for the years ending 31 December 2014 and up to 31 December 2018. The assumptions detailed below have been determined based on past experience in this market which the Group’s management believes is the best available input for forecasting this market. Betboo Significant growth is expected in the short-term reducing to 20% annual growth by 2017, a long-term growth rate of 2% was used from 2018 to reflect the likely competitive pressures. A discount rate of 35% was used, based on the internal rate of return of the Betboo acquisition. It was concluded that the carrying value of the goodwill and trademarks was not impaired. CasinoClub A long-term growth rate of 2% was used to reflect the increasing competitive pressures from large online gaming companies. A discount rate of 17.2% was used, based on company specific pre-tax weighted average cost of capital. Having performed appropriate sensitivity analysis on the key assumptions (including reducing the growth rate to nil and increasing the discount rate to 22%), it was concluded that the carrying value of the goodwill and trademarks was not impaired. GVC HOLDINGS PLC ANNUAL REPORT 2013 45 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 10. INTANGIBLE ASSETS continued 10.2 Impairment Tests for Cash-Generating Units Containing Goodwill and Trademarks continued Sportingbet A long-term growth rate of 3% has been applied to reflect the likely competitive pressures from other large online gaming companies. A discount rate of 20% was used and a sensitivity analysis carried out including increasing the discount to 30%. It was concluded that the carrying value of the goodwill and trademarks was not impaired. The following units have significant carrying amounts of goodwill: Betboo CasinoClub Sportingbet Total Goodwill 2013 €000’s 8,333 40,339 84,221 132,893 2012 €000’s 8,333 40,339 – 48,672 11. ACQUISITION OF SPORTINGBET PLC AND GOMIFER S.A 11.1 Sportingbet PLC On 19 March 2013, the Group completed the acquisition of Sportingbet PLC in order to acquire market-leading software, and customers in over 20 additional markets. Under a court approved Scheme of Arrangement, it excluded the Australian business of Sportingbet which was acquired by William Hill PLC. References to Sportingbet in this statement exclude Australia. GVC Holdings PLC are identified as the acquirer in accordance with IFRS 3. The Group issued 29,018,075 shares at 248p* as consideration, booked at 19 March 2013 exchange rate of £1 = €1.1661, this amounted to €83,918,184 to acquire 100% of the issued share capital of Sportingbet PLC. *In accordance with IFRS3 – Business Combinations, the price at the date of completion of the acquisition on 19 March 2013 is used as the basis for the fair value of consideration transferred. Useful economic life 3 years 3 years 5 years 2 years 3 years Indefinite The fair value of consideration comprised the following: Fair value of consideration transferred Recognised amounts of identifiable net assets: Non-current assets – Property, plant and equipment – Intangible assets – Trade names – Customer list – Software – Goodwill Current assets – Trade and receivables – Cash and cash equivalents* Current liabilities – Trade and other payables – Bank borrowings and similar – Income taxes payable – Other taxation liabilities Net current liabilities Net position €000’s 83,918 165 769 946 675 4,187 84,221 90,963 21,700 64,792 86,492 (55,066) (31,384) (820) (6,267) (93,537) (7,045) 83,918 *includes €42,562,000 (£36,500,000) received from William Hill PLC as a contribution into the scheme of arrangement pool towards the settlement of acquisition liabilities in the Sportingbet Group. ANNUAL REPORT 2013 46 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 47 The receivables acquired (which principally comprised trade receivables) in the acquisition with a fair value of €21.7 million had gross contractual amounts of €21.7 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected were €21.7 million. Goodwill Goodwill of €84,221,000 is primarily related to expected future profitability following the restructuring of Sportingbet, growth expectations from utilising the Sportingbet software platform throughout the group including the provision of services to B2B partners and expected cost synergies. Pre-existing relationships In considering the impact of the acquisition of Sportingbet and its contracts with East Pioneer Corporation (“EPC”) with whom the group had pre-existing contracts relating to the Superbahis business, the group re-evaluated its contract with EPC in accordance with IFRS 3. In so doing it considered the services provided, the risks associated with the provision of those services and the expected financial reward for their provision and concluded the existing contract remained on terms no more or less favourable to market conditions than on its outset. Therefore, no gain or loss on settlement is recognised in profit or loss. Transaction costs As part of the transaction costs the Group incurred €6,398,000 of legal and professional fees in acquiring the business. These costs have been excluded from the consideration transferred and have been recognised as an expense in profit or loss in the current year within ‘exceptional items’. See note 4.1 for details. Contribution to Group results Sportingbet recorded total revenue of €74.7m and generated a Clean EBITDA of €4.7 million and incurred a loss before tax of €15.7 million for the period from acquisition to 31 December 2013. If Sportingbet had been acquired on 1 January 2013, Group revenue for the year would have increased by €27.3 million and it would have contributed an additional loss before tax of €8.4 million. 11.2 Gomifer S.A. On 1 October 2013 following the migration of the Betboo business to the Sportingbet trading platform (see note 12), the Group acquired Gomifer S.A. from the founders of the Betboo business for $1 plus the net asset value of the business at the date of transfer. The fair value of net assets acquired are as follows: Useful economic life 3 years 3 years Non-current assets – Property, plant and equipment – Intangible assets Current assets – Trade and receivables – Cash and cash equivalents Current liabilities – Trade and other payables Net current assets Net assets acquired 11.3 Net Cash Acquired Through Acquisition The net cash acquired through acquisition is show below: Sportingbet PLC acquisition Gomifer S.A. acquisition Gomifer S.A consideration €000’s 23 11 34 61 14 75 (58) 17 51 €000’s 64,792 14 (51) 64,755 GVC HOLDINGS PLC ANNUAL REPORT 2013 47 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 12. ACQUISITION OF BETBOO Balance at 1 January Unwinding of discount charged to income statement Payments made Balance at 31 December 2013 €000’s 12,283 1,677 (6,378) 7,582 2012 €000’s 12,940 2,206 (2,863) 12,283 On 2 July 2009, the Group acquired the trade and assets of betboo.com, a leading South American internet gaming operator, offering, bingo, casino, poker and a sports betting product. The terms of the acquisition were an initial payment of US$4 million (€2,840k) with the sellers able to earn up to a further US$26 million depending on performance. On 23 February 2011, the Group announced a change in the terms of the earn out. Under the new arrangements: • • From 1 July 2011 there will be 36 monthly payments of $156,944. From 31 January 2012, there will be four annual payments equal to 25% of the Betboo NGR earned in the previous fiscal year. Management originally estimated the deferred consideration payable to be €8,963k, and the discount to be €4,076k, resulting in the discounted value being €4,887k. The revised earn out results in total deferred consideration increasing to €18,530k and the discount to €8,588k resulting in the new discounted value being €9,942k. The fair values of the revised earn out has been estimated using cash flow projections for the 4 years to 31 December 2014, and discounted using the estimated weighted average cost of capital of 21%. On 1 October 2013 the Betboo business migrated to the Sportingbet trading platform, the payments terms of the earn-out changed from this date to the following. • • • • • Four consecutive monthly payments, with the first being in October 2013, of one quarter of 25 per cent of the Net Gaming Revenue for the period commencing 1 January 2013 and ending on 30 September 2013. From 1 October 2013 there will be 9 monthly payments of €227,625 with the final payment in June 2014. An earn-out dependent on certain revenue shares with a floor of €200,000 per month for the 40 months ending 31 January 2017. There are also further earn-out payments that stretch to the earlier of: (a) the date on which the total earn-outs reach €21,381,227 (b) 40 months after 31 January 2017 The total earn-out cap remains at $30 million. The exchange rate between the US Dollar and Euro has been fixed at 1 Euro = US$ 1.4031 making the cap €21,381,227. The fair values of the intangible assets acquired in the transaction and the impact of the revised earn-out are as follows: Acquisition price of Betboo Initial consideration Deferred consideration Acquisition costs Fair value Year ended 31/12/2013 €000’s 2,840 18,541 21,381 289 21,670 ANNUAL REPORT 2013 48 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 49 The deferred consideration has been discounted to reflect its fair value at the date of acquisition. The effect of this discount will be unwound over the period of the deferral with a charge to the income statement contained within interest expense. The expected impact of this over the earn-out period is shown below: Prior periods €000’s Balance at 1 January Fair value of deferred consideration Unwinding of discount charged to income statement Payments made Payments anticipated – 9,942 3,941 (943) – 2012 €000’s 12,940 – 2,206 (2,863) – Balance at 31 December 12,940 12,283 Total payments to date and anticipated are as follows: 2013 €000’s 12,283 – 1,677 (6,378) – 7,582 2014 €000’s 7,582 – 710 – (3,760) 4,532 2015 €000’s 4,532 – 54 – (2,400) 2,186 2016 €000’s 2,186 – 11 – (2,197) – Total €000’s – 9,942 8,599 (10,184) (8,357) – At acquisition Up to 31 December 2013 Anticipated future payments Total (Cap $30,000,000 at 1.4031 = €21,381,227) 13. RECEIVABLES AND PREPAYMENTS Balances with payment processors Trade receivables Other receivables Loans and receivables Prepayments Total €000’s 2,840 10,184 8,357 21,381 2012 €000’s 13,419 862 1,105 15,386 1,970 17,356 2013 €000’s 18,270 274 1,341 19,885 3,694 23,579 Payment processor balances described as receivables are funds held by third party collection agencies subject to collection after one month, or balances used to make refunds to players. Prepayments include payments as at 31 December 2013 for goods or services which will be consumed after 1 January 2014. Payment processor debtor days: On revenue per income statement: Balance with payment processors Revenue Debtor days (balances with payment processors/revenue x 365 days) On pro-forma revenue: Balance with payment processors Pro-forma revenue Debtor days (balances with payment processors/revenue x 365 days) 2013 €000’s 18,270 168,407 40 days 18,270 180,573 37 days 2012 €000’s 13,419 60,325 82 days 13,419 107,490 46 days GVC HOLDINGS PLC ANNUAL REPORT 2013 49 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 14. CASH AND CASH EQUIVALENTS Cash and cash equivalents Bank balances Held in the following currencies (in Euro equivalents at the balance sheet date): Euro US Dollars British Pounds Danish Kroner Other Balances with customers: – Restricted cash – Other Balances with customers Own funds 15. TRADE AND OTHER PAYABLES Other trade payables Finance leases (see also note 18) Non-interest bearing loan from William Hill PLC (see also note 16) Accruals 2013 €000’s 18,808 6,587 752 8,428 1,531 1,510 18,808 7,356 5,942 13,298 5,510 18,808 0.309 2013 €000’s 9,586 945 2,514 11,044 24,089 2012 €000’s 6,632 5,566 862 165 – 39 6,632 – 1,712 1,712 4,920 6,632 0.156 2012 €000’s 13,777 – – 3,493 17,270 16. NON-INTEREST BEARING LOAN As part of the Groups acquisition of Sportingbet PLC, a credit facility was made available to the Group by William Hill PLC to fund working capital. At the 31 December 2013 the Group had drawn down €8,255,619 (£6,861,956) of this facility. The loan was revalued at the 31 December exchange rate of 1.2031. IAS 39 Financial Instruments: Recognition and Measurement states that all loans and receivables should initially be measured at their fair value. The loan has therefore been discounted at a rate of 4% and will be unwound over the period of the loan. ANNUAL REPORT 2013 50 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 51 The facility is repayable in three instalments and should GVC declare dividends in excess of 58 €cents per share, William Hill are entitled to receive an accelerated repayment equal to the excess of the actual dividend over 58 €cents per share. The instalments as well as the impact of the discount are shown below: Amount in Euro’s Base Currency £000’s Total €000’s Current liabilities €000’s Non- current liabilities €000’s Loan balance on initial recognition Revaluation at 31 December exchange rate (i) the first instalment by no later than 31 December 2014; (ii) the second instalment by no later than 31 December 2015; and (iii) by no later than 30 June 2016, the balance of the facility Loan balance before discount Discount on recognition of the loan Unwinding of discount at 31 December 2013 Loan balance at 31 December 2013 Future discount 6,862 – 6,862 2,287 2,287 2,288 6,862 – – – – 6,862 8,020 236 8,256 2,752 2,752 2,752 8,256 (780) 186 7,662 594 8,256 17. OTHER TAXATION PAYABLE Employment related tax liabilities associated with Sportingbet Social security Betting taxes 2,752 – – 2,752 (424) 186 2,514 238 2,752 2013 €000’s 2,264 1,402 516 4,182 – 2,752 2,752 5,504 (356) – 5,148 356 5,504 2012 €000’s – 186 – 186 18. COMMITMENTS UNDER OPERATING AND FINANCE LEASES 18.1 Finance Leases The Group in the year entered into a finance lease for the purchase of computer hardware and software together with support services for these, commencing in June 2013. As at the 31 December 2013 the life outstanding on this lease was 2 years and 5 months. The average effective rate of borrowing for the lease was 2.8%. The obligations under finance leases are: Computer equipment Software Hardware and software support Finance charges (€43k charge in 2013, €74k in future periods) Total lease cost Future finance charges Recognised in trade payables Recognised in long-term liabilities Present value of minimum lease payments: No later than one year Later than one year and no later than five years Total payments 2013 €000’s 2012 €000’s 543 827 753 117 2,240 (74) 2,166 945 1,221 945 1,295 2,240 – – – – – – – – – – – GVC HOLDINGS PLC ANNUAL REPORT 2013 51 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 18. COMMITMENTS UNDER OPERATING AND FINANCE LEASES continued 18.2 Operating Leases The Group leases various offices under non-cancellable operating leases. The leases have varying terms, escalation clauses and renewal rights. The future minimum lease payments under non-cancellable leases are as follows: No later than one year Later than one year and no later than five years 19. SHARE CAPITAL AND RESERVES 19.1 Share Capital 2013 €000’s 2,030 1,440 3,470 2012 €000’s 192 234 426 On 21 May 2010 shareholders of Gaming VC Holdings S.A., approved a redomiciliation to The Isle of Man which resulted, pari passu, in shareholders receiving shares with a nominal value of €0.01 in GVC Holdings PLC. As a result of this transaction, GVC Holdings PLC acquired all the assets and liabilities of Gaming VC Holdings S.A. Arising from this transaction was the creation of a Merger Reserve. The various transfers into this reserve are shown in the Consolidated Statement of Changes in Equity, see page 26. The authorised and issued share capital is: Authorised Ordinary shares of €0.01 each At 31 December – 80,000,000 shares (2012: 40,000,000 shares)* Issued, Called Up and Fully Paid At 31 December – 60,906,760 shares (2012: 31,592,172 shares) *The authorised share capital was increase as part of the Group’s acquisition of Sportingbet PLC The issued share capital history is shown below: 2013 €000’s 2012 €000’s 800 609 400 316 Balance at 1 January Shares issued on initial listing in 2004 Share options exercised – at £1.00 – at £1.26 – at £1.29 – at €0.01 Issue of shares for acquisition Balance at 31 December 2004 to 2010 2011 2012 2013 – 31,135,762 31,135,762 – 31,469,095 – 31,592,172 – – – – – – 233,333 100,000 – – – – – 123,077 – – – 165,000 31,513 100,000 29,018,075 31,135,762 31,469,095 31,592,172 60,906,760 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. However, should the Company not be satisfied as to the true identity of the shareholders it can suspend the entitlement of those shareholders to (a) vote at general meetings of the Company; and/or (b) to receive dividends. ANNUAL REPORT 2013 52 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 53 19.2 Reserves Share Capital €000’s Share Premium €000’s At 1 January 2013 Result for the year Dividends paid Issue of share capital for Sportingbet acquisition Share option charge Lapsed share options Share options exercised At 31 December 2013 316 – – 290 – – 3 609 611 – – 83,628 – – 291 84,530 Merger Reserve €000’s 40,407 – – – – – – Translation Reserve €000’s – 359 – – – – – Retained Earnings €000’s 17,137 12,303 (14,979) – 736 (6) – Total €000’s 58,471 12,662 (14,979) 83,918 736 (6) 294 40,407 359 15,191 141,096 The ‘Merger reserve’ arose on the re-domiciliation of the Group from Luxembourg to The Isle of Man. It consists of the pre- redomiciliation reserves of the Luxembourg company plus the difference in the issued share capital (31,135,762 share at €0.01 versus 31,135,762 shares at €1.24). The Group’s capital management objectives are to ensure its ability to continue as a going concern and to provide an adequate return to shareholders and benefits to other stakeholders by pricing services commensurately with the level of risk, and maintaining an optimal capital structure to reduce the cost of capital. The Group desires to pay not less than 75% of its net operating cashflows to shareholders by way of dividends. In order to maintain or adjust the capital structure, the Company may issue new shares, return capital to shareholders, limit the amount of dividends paid, or sell assets. Total equity employed at 31 December 2013 was €141.1 million (2012: €58.5 million). 20. DIVIDENDS The dividend history from 2007 together with the dividend proposed by the Directors and paid after the balance sheet date, but up to the date on which these financial statements were approved are shown below: Date declared Per share €c 01-May-07 01-Oct-07 01-May-08 01-Oct-08 01-May-09 01-Oct-09 01-Jun-10 28-Sep-10 28-Mar-11 29-Sep-11 25-May-12 19-Sep-12 25-Jan-13 01-Jul-13 25-Sep-13 09-Jan-14 19.30 20.00 –––––––– 20.00 20.00 –––––––– 20.00 20.00 –––––––– 50.00 10.00 –––––––– 10.00 10.00 –––––––– 11.00 15.00 –––––––– 7.00 10.50 10.50 –––––––– 11.50 264.80 39.3 40.0 40.0 60.0 20.0 26.0 28.0 Per share £p 13.0000 13.9000 Shares in issue 31,135,762 31,135,762 Amount € 6,009,202 6,227,152 Amount £ 4,047,649 4,327,871 15.9000 15.8300 31,135,762 31,135,762 6,227,152 6,227,152 4,950,586 4,928,791 17.7700 18.2600 31,135,762 31,135,762 6,227,152 6,227,152 5,532,825 5,685,390 41.9600 8.7700 31,135,762 31,135,762 15,567,881 3,113,576 13,064,566 2,730,606 8.8400 8.6600 31,469,095 31,469,095 3,146,910 3,146,910 2,781,868 2,725,224 8.7835 12.0900 31,592,172 31,592,172 3,475,139 4,738,826 2,774,898 3,819,494 5.8950 9.0658 8.8161 31,592,172 60,748,427 60,848,427 2,211,452 6,378,585 6,389,085 1,862,359 5,507,331 5,364,458 9.5833 217.1237 60,906,760 7,004,277 5,836,878 92,317,603 75,940,794 GVC HOLDINGS PLC ANNUAL REPORT 2013 53 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 20. DIVIDENDS continued On 9 April 2014, the Directors proposed a final quarterly dividend of 11.5 €cents augmented by a special dividend of 4.5 €cents, to be payable on 19 May 2014 subject to shareholder approval at the Annual General Meeting on 14 May 2014. 21. SHARE OPTION SCHEMES The Group has three share option schemes: (a) (b) (c) the ‘original’ scheme that has been in place since the IPO of GVC Holdings PLC’s predecessor Gaming VC Holdings S.A and in which only 26,667 share options are outstanding a ‘new’ scheme that was approved by shareholders on 21 May 2010 (the “21 May 2010 scheme”) under which 1,600,000 share options remain outstanding a further grant of options under the new scheme to three directors, approved by shareholders on 16 November 2011 (“16 November 2011 scheme”). A total of 1,600,000 shares under this scheme were granted on 30 January 2012 at an exercise price of 154.79p. Under the terms of the share option plans the Group can allocate up to 16.8% of the issued share capital although it must take allowance of the 752,923 shares in issue as a consequence of the exercise of share options. The following options to purchase €0.01 ordinary shares in the Company were granted, exercised, lapsed or existing at the year end. Date of Grant 15 May 2007 12 Dec 2008 21 May 2010 21 May 2010 21 May 2010 28 Jan 2012 16 Jan 2013 01 Feb 2013 28 Feb 2013 Exercise Price 129p 126p 213p 1p 1p 154.79p 233.5p 233.5p 233.5p Existing at 1 January Granted in Bought out Exercised 31 December 31 December Vesting 2013 criteria Existing at Exercisable at in the year in the year the year 2013 2013 31,513 191,667 1,675,000 100,000 100,000 1,600,000 – – – – – – – – – 166,666 166,667 166,667 – – – – (100,000) – – – – (31,513) (165,000) – (100,000) – – – – – – 26,667 1,675,000 – – 1,600,000 166,666 166,667 166,667 – Note a 26,667 Note a 1,675,000 Note b – Note c – Note d 933,333 Note e Note f 166,666 Note f 166,667 Note f 166,667 Total all schemes 3,698,180 500,000 (100,000) (296,513) 3,801,667 3,135,000 The existing share options at 31 December 2013 are held by the following employees: Option price Grant date Kenneth Alexander Richard Cooper Lee Feldman Nigel Blythe-Tinker Third parties 126p 12-Dec-08 213p 21-May-10 154.9p 28-Jan-12 233.5p 16-Jan-13 233.5p 01-Feb-13 233.5p 28-Feb-13 – 26,667 – – – 800,000 400,000 400,000 75,000 – 800,000 400,000 400,000 – – 26,667 1,675,000 1,600,000 – – – – 166,666 166,666 – – – – 166,667 166,667 – – – – 166,667 Total 1,600,000 826,667 800,000 75,000 500,000 166,667 3,801,667 Note a: These awards were granted under the original scheme, on the first anniversary of the grant date, 25% of the option vests. Thereafter, the balance of the option vests over three years, at 1/36th per month. Note b: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. Note c: These options were granted under the new scheme; it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. The awards are subject to a performance condition which will require the Company’s average share price over a period of 30 dealing days to reach 300p per ordinary share before the initial awards are capable of being exercised. ANNUAL REPORT 2013 54 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 55 Note d: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. The awards are subject to a performance condition which will require the Company’s average share price over a period of 30 dealing days to reach 200p per ordinary share before the initial awards are capable of being exercised. Note e: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. Note f: These options were granted to third parties as part of the Sportingbet acquisition following underwriting commitments made at the time. The awards vested on the grant date and the options have the exercise price reduced by the value of any dividends declared up to the point of exercise. The charge to the consolidated income statement in respect of these options (excluding bought out options) in 2013 was €736,000 (2012: €568,000), a credit to the income statement of €nil (2012: €489,000) in respect of the lapsed options and a credit to the income statement of €6,000 (2012: €nil) in respect of the bought out options. 21.1 Weighted Average Exercise Price of Options The number and weighted average exercise prices of share options is as follows: Outstanding at the beginning of the year Granted during the year Exercised during the year Bought out in the year Lapsed during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise Number of options 2013 price 2013 Weighted average exercise Number of options 2012 price 2012 171p 233.5p 84p 1p 3,698,180 500,000 (296,513) (100,000) 191p 3,801,667 3,135,000 161p 155p 129p – 120p 171p 3,271,257 1,600,000 (123,077) – (1,050,000) 3,698,180 1,785,679 The options outstanding at 31 December 2013 have a weighted average contractual life of 4.7 years (2012: 5.7 years). 21.2 Valuation of Options The fair value of services received in return for share options granted in 2013, 2012, 2010, and 2007 were 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 Binomial 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 Binomial model. The option exercise price for all individuals was the average market price on grant date, with the exception of the options granted to third parties as part of the Sportingbet acquisition. These were priced at the amount the Group offered as consideration for the purchase. Fair value of share options and assumptions: Date of grant 15 May 07 21 May 10 21 May 10 21 May 10 28 Jan 12 16 Jan 13 01 Feb 13 28 Feb 13 Share price at date of grant* (in £) Exercise price (in £) Expected volatility Exercise multiple Expected dividend yield Fair value at Risk free measurement date rate** 1.22 1.85 1.85 1.85 1.67 2.335 2.635 2.375 1.29 2.13 0.01 1.50 1.5479 2.335 2.335 2.335 50% 60% 60% 60% 58% 60% 60% 60% 2 2 2 2 2 2 2 2 8% 17% 17% 17% 20% 12.15% 12.15% 12.15% 5.33% 2.75% 2.75% 2.75% 2.19% 0.572% 0.572% 0.572% 0.40 0.39 0.05 0.59 0.33 0.58 0.76 0.61 * This is the bid price, not the mid-market price, at market close, as sourced from Bloomberg. ** The measurement of the risk-free rate was based on rate of UK sovereign debt prevalent at each grant date over the expected term of the option. GVC HOLDINGS PLC ANNUAL REPORT 2013 55 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 21. SHARE OPTION SCHEMES continued 21.2 Valuation of options continued 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. 22. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Group’s principal financial instruments as at 31 December 2013 comprise cash and cash equivalents. The main purpose of these financial instruments is to finance the Group’s operations. The Group has other financial instruments which mainly comprise receivables and payables, which arise directly from its operations. Cash and cash equivalents and trade and other receivables have been classified as loans and receivables and trade and other payables, and deferred consideration as financial liabilities measured at amortised cost. During the year, the Group did not use derivative financial instruments to hedge its exposure to foreign exchange or interest rate risks arising from operational, financing and investment activities. The Group does not hold or issue derivative financial instruments for trading purposes. 22.1 Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates which will affect the Group’s income or value of its holdings of financial instruments. Exposure to market risk arises in the normal course of the Group’s business. 22.2 Foreign Exchange Risk Foreign exchange risk arises from transactions, recognised assets and liabilities and net investments in foreign operations. The Group does not use foreign exchange contracts to hedge its currency risk. The Group dividend is declared in the Euro. Two weeks before the dividend is due to be paid, the Company sells Euro and buys British Pounds for an amount equal to the dividend. The Group has investments in foreign operations which are all denominated in Euros minimising the Group’s exposure to currency translation risk. 22.2.1 Analysis of the Balance Sheet by Currency At 31 December 2013 Non-current assets Receivables and prepayments Tax reclaimable Other taxes reclaimable Cash and cash equivalents Total current assets Trade and other payables Balances with customers Taxation payable Other taxation liabilities Total current liabilities Net current assets Non-current liabilities – Interest bearing loan and borrowings – Non-interest bearing loan and borrowings – Deferred consideration Total assets less total liabilities Euro €000’s 153,148 14,875 1,877 – 6,587 23,339 (13,930) (5,767) (2,500) (772) (22,969) 370 – – (7,582) 145,936 GBP €000’s 1,620 5,144 – 281 8,428 13,853 (9,447) (1,710) (186) (3,285) (14,628) (775) (1,221) (5,148) – (5,524) Other €000’s Total €000’s – 154,768 3,560 – 25 3,793 7,378 (712) (5,821) (36) (125) (6,694) 684 – – – 23,579 1,877 306 18,808 44,570 (24,089) (13,298) (2,722) (4,182) (44,291) 279 (1,221) (5,148) (7,582) 684 141,096 ANNUAL REPORT 2013 56 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 57 At 31 December 2012 Non-current assets Receivables and prepayments Tax reclaimable Cash and cash equivalents Total current assets Trade and other payables Balances with customers Taxation payable Other taxation liabilities Total current liabilities Net current assets Non-current liabilities – Deferred consideration* Total assets less total liabilities *priced in US Dollars but at a fixed Euro exchange rate. Euro €000’s 66,176 10,608 943 5,566 17,117 (14,222) (525) (1,146) (20) (15,913) 1,204 (12,283) 55,097 GBP €000’s – 1,286 – 165 1,451 (2,662) (59) (38) (128) (2,887) (1,436) – (1,436) Other €000’s – 5,462 – 901 6,363 (386) (1,128) (1) (38) (1,553) 4,810 – – 4,810 Total €000’s 66,176 17,356 943 6,632 24,931 (17,270) (1,712) (1,185) (186) (20,353) 4,578 (12,283) 58,471 A significant proportion of the Group’s financial assets and liabilities are denominated in Euros, which minimises the Group’s exposure to foreign exchange risk. Management do not consider the impact of possible exchange rate movements based on current market conditions to be material to the net result for the year. 22.3 Interest Rate Risk The Group earns interest from bank deposits. During the year, the Group held cash on deposits with a range of maturities of less than three months. The Group had no committed borrowing facilities as at 31 December 2013 (2012: €nil). Management do not consider the impact of possible interest rate movements based on current market conditions to be material to the net result for the year or the equity position at the year end for either the year ended 31 December 2012 or 31 December 2013. 22.4 Credit Risk The Group has seldom any significant concentrations of credit risk with exposure spread over a large number of customers. The Group grants credit facilities to its customers and the maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet. The Group has material exposure to credit risk through amounts owed by payment processors (third party collection agencies) of €18.3 million (2012: €13.4 million) and cash balances held with banking institutions of €18.8 million (2012: €6.6 million). The Group considers the credit risk associated with these balances to be low, having assessed the credit ratings and financial strength of the counter-parties involved. The Group is seeking to diversify its banking deposits to further reduce credit risk. No provision for impairment has been made at 31 December 2013 (2012: €nil). No receivable amounts were past due date at 31 December 2013 (2012: €nil). 22.5 Liquidity Risk At 31 December 2013, the Group had cash and cash equivalents of €18.8 million (2012: €6.6 million) and considers liquidity risk to be low for the business. All financial liabilities at the year-end are due within one year, with the exception of the deferred consideration on Betboo. 22.6 Fair Values The carrying amounts of the financial assets and liabilities, including deferred consideration in the Balance Sheet at 31 December 2013 and 2012 for the Group and Company are a reasonable approximation of their fair values. All trade and other receivables and payables have a maturity of less than one year. GVC HOLDINGS PLC ANNUAL REPORT 2013 57 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 22. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued 22.7 Summary of Financial Assets and Liabilities by Category The carrying amounts of the Group’s financial assets and liabilities recognised at the balance sheet date are categorised as follows: Current assets: Financial assets measured as loans and receivables: – Trade and Other receivables – Cash and cash equivalents Total current assets Current liabilities: Financial liabilities measured at amortised cost: – Trade and other payables Non-current liabilities – Interest bearing loans and borrowings – Non-interest loans and borrowings – Deferred consideration Total non-current liabilities 23 RELATED PARTIES 23.1 Identity of Related Parties 2013 €000’s 19,885 18,808 38,693 2012 €000’s 15,386 6,632 22,018 37,387 18,982 1,221 5,148 7,582 13,951 – – 12,283 12,283 The Group has a related party relationship with its subsidiaries (see note 24), with its Directors and executive officers and under the AIM rules with East Pioneer Corporation B.V. (see note 26.7). 23.2 Transactions with Directors and Key Management Personnel Nigel Blythe-Tinker (stepped down from the board on 17 January 2014) is the Executive chairman of Pentasia Limited, a leading recruiter in the field of internet gaming. During the year ended 31 December 2013, Pentasia provided recruitment services to various members of the Group to a value of €15,000 (2012: €17,689). Karl Diacono is the Chief Executive Officer of Fenlex Corporate Services Limited, a corporate service provider incorporated in Malta. During the year ended 31 December 2013, Fenlex received €49,968 from the Group in relation to Company secretarial matters arising in Malta (2012: €55,391). Richard Cooper received dividends during the year of €350. The wife of Richard Cooper received dividends during the year of €59,850 (2012: €35,100) in respect of her interest in the ordinary share capital of the Group. Lee Feldman received dividends during the year of €23,786 (2012: €19,162) in respect of his beneficial interest in the ordinary share capital of the Group. Lee Feldman is the Managing Partner of Twin Lakes Capital, a private equity firm based in New York. During the year ended 31 December 2013, Twin Lakes Capital received £50,000 (€59,209) (2011: £50,000 (€62,697)) in relation to office services. The wife of Kenneth Alexander received dividends during the year of €106,003 (2012: €81,467) in respect of her interest in the ordinary share capital of the Group. 23.3 Transactions with Directors and Key Management Personnel Details of the remuneration of key management are detailed below: Salaries and employee benefits Share based payments 2013 €000’s 6,916 348 7,264 2012 €000’s 3,973 257 4,230 Details of Directors’ remuneration is given in the Report of the Remuneration Committee on page 63. ANNUAL REPORT 2013 58 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 59 24. GROUP ENTITIES Significant subsidiaries Country of incorporation Ownership interest 2013 2012 GVC Corporation B.V.* Intera N.V. GVC Sports B.V. Gaming VC Corporation Limited GVC Administration Services Limited Sportingbet PLC Interactive Sports (C.I.) Limited Sportingbet Management Services Limited Sportingbet (IT Services) Limited Sportingbet (Product Services) Limited Sporting Odds Limited *also has a branch registered in Israel Netherlands Antilles Netherlands Antilles Netherlands Antilles Malta England and Wales England and Wales Alderney England and Wales England and Wales England and Wales England and Wales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% N/A N/A N/A N/A N/A N/A 25. CONTINGENT LIABILITIES The Group, through its trading websites, offers progressive jackpots on slot machines. 25.1 CasinoClub Progressive Jackpots CasinoClub offers an equivalent system in which only its own customers participate. This means that CasinoClub make no contributions to the central fund as it builds up (since they are the only operator in the scheme, this would serve no purpose) and, should a CasinoClub customer win the progressive jackpot, there is no central fund to cover the payout so the cost of this would be taken directly to the Income Statement in the period in which it would be won. Across 44 games, the total of the available jackpots at 31 December 2013 was €7.4 million (2012: 37 games and total available jackpot of €6.6 million). The single largest jackpot available amounted to €3.0 million from the slots game “Aladdin’s Lamp” (2012: €2.9 million). The Group had no winners of a significant jackpot. 25.2 East Pioneer Corporation Guarantee On 21 November 2011 the Group entered into a service agreement and guarantee relating to the acquisition by East Pioneer Corporation B.V. (“EPC”) from Sportingbet PLC of Superbahis, a Turkish language website. The maximum contingent liability under this agreement at inception was €171 million. The Directors consider this has a fair value of €nil (2012: €nil). GVC continues to provide back office and support services to EPC. Following the acquisition of Sportingbet PLC on the 19 March 2013 the Group now receives all payments of amounts from EPC under the Business Purchase Agreement and other Transaction Documents and does not now offer any guarantee of payments to legal entities outside of the Group. 26. ACCOUNTING ESTIMATES AND JUDGEMENTS The Directors discuss the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. In the application of the accounting policies, which are detailed in this note, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. 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 estimates and assumptions, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. 26.1 Intangible assets For all acquisitions management has recognised separately identifiable intangible assets on the Balance Sheet. These intangible assets have been valued based on expected future cash flow projections from existing customers. The calculations of the value and estimated future economic life of the assets involve, by the nature of the assets, significant judgement. GVC HOLDINGS PLC ANNUAL REPORT 2013 59 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 31 December 2013 26. ACCOUNTING ESTIMATES AND JUDGEMENTS continued 26.2 Customer liabilities Customer liabilities represent cash held by the Group on behalf of customers. These are stated net of an allowance for uncollected dormant balances. Management apply judgement calculating the allowance by reference to player terms and conditions. 26.3 Receivables Management apply judgement in evaluating the recoverability of receivables. To the extent that the Board believes receivables not to be recovered they have been provided for in the financial statements. 26.4 Impairment of Goodwill and Trademarks Determining whether goodwill and trademarks with an indefinite useful life are impaired requires an estimation of the value in use of the cash-generating units. The value-in-use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and select a suitable discount rate in order to calculate present value. Note 10.2 provides information on the assumptions used in these financial statements. The valuation work to assess the impairment of goodwill and intangible assets was conducted internally by management. 26.5 Share Options Accounting for share option charges requires a degree of judgement over such matters as dividend yield, and expected volatility. Further details on the assumptions made by management are disclosed in note 21. 26.6 Open Bets The Directors review the scale and magnitude of open bets frequently, and in particular at the balance sheet date. Assessments are made on whether to make provisions for the outcome of such open bets. Management have assessed that the value of open bets at year end is not material. 26.7 East Pioneer Corporation B.V. On 21 November 2011 the Group entered into a B2B arrangement with East Pioneer Corporation B.V. (“EPC”) to provide a suite of back office services to the company following EPC’s acquisition of Superbahis, a business operated by Sportingbet PLC (“SBT”). The terms of the contracts between SBT, EPC and the group are complex. Until 19 March 2013, neither the Group nor EPC provided the platform or licensing, held the customers on their servers, retained the brand nor set and controlled the sports book odds of the website. In return for the back office services provided, the Group was entitled to receive income from EPC equating to a share of the profits of the business. The Group does not, however, have any interest in the net assets or equity of EPC which is an independently held entity. Prior to 19 March 2013, management asserted that the group did not control any of the operating or financial policies of EPC. The Group did recognise there are material transactions between itself and EPC and the provision of back office services necessitates an interchange of management personnel and the provision of essential technical information between EPC and the Group. Accordingly, such amounts due under the B2B transaction with EPC were therefore included within revenue up to 19 March 2013. Following the acquisition of Sportingbet PLC on 19 March 2013, the group now has the power to govern the financial and operating policies of the Superbahis operations, delivers virtually all of the services required to operate the business and in turn enjoys substantially all of the risks and rewards arising from the performance of that business. On this basis, from this date, the Group considers it is appropriate to consolidate the results of the Superbahis business of EPC within these financial statements. The Directors considered that the guarantee relating to the acquisition by EPC as referred to in note 25 had a fair value of €nil due to the uncertainty regarding the regulatory environment in which EPC operates and also due to the fact that much of the cash used to fund such payments resides within payment processor accounts operated by the Group. In considering the impact of the acquisition of Sportingbet and its contracts with EPC with whom the group had pre-existing contracts relating to the Superbahis business, the group re-evaluated its contract with EPC in accordance with IFRS 3. In so doing it considered the services provided, the risks associated with the provision of those services and the expected financial reward for their provision and concluded the existing contract remained on terms no more or less favourable to market conditions than on its outset. ANNUAL REPORT 2013 60 I N O T E S T O T H E F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 61 26.8 Sportingbet PLC – Spanish Subsidiaries Under a UK court sanctioned Scheme of Arrangement Sportingbet PLC was divided between the assets to be acquired by William Hill PLC (mainly Australia and certain freehold property in Guernsey) and other assets to be acquired by the Group. However, the subsidiary companies operating the business in Spain, which are regulated, were not immediately included in the acquisition. The arrangement included a provision for the temporary running of this business by the Group during a transitional period post acquisition. This consisted of a call option for William Hill to purchase the business six months post acquisition. In the absence of an any scope exclusion within IAS 27 for subsidiaries acquired when control is intended to be temporary, the Directors have considered whether, at the date of acquisition, GVC Holdings PLC retained control over the Spanish business. IAS 27 presumes that where the Parent owns more than half of the voting power of an entity then control is presumed to exist. However, it is possible to demonstrate, in exceptional circumstances, that such ownership does not constitute control of the business. Control is defined in IAS 27 as “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities”. Taking into account the Transfer Deed dated 12 March 2013, the Co-Existence Agreement dated 19 March 2013, and the Side Deed dated 5 September 2013; the Directors are satisfied that the running of the Spanish business by GVC Holdings PLC was envisaged as a temporary transitional arrangement to allow an orderly migration of the Spanish business, and did not constitute the power of governance. As part of the transition a Steering committee, comprised of members equally from GVC Holdings PLC and William Hill coordinated the migration and supervision of the transitional running of the Spanish business. In addition, certain obligations falling on GVC Holdings plc were drafted limiting the actions that GVC Holdings PLC could take in respect of the Spanish business during the transitional period. Therefore as the Group did not control the subsidiaries operating the business in Spain during the year, results have not been included within the 2013 consolidated financial statements. 27. GOING CONCERN The Group’s business activities, together with the factors likely to affect its future performance and position are set out in the Chairman’s, Chief Executive’s and Group Finance Director’s statements. Note 22 to the financial statements sets out the Group’s financial risk management policies, and its exposure to credit risk and liquidity risk. The Directors have assessed the financial risks facing the business, and compared this risk assessment to the net current assets position and dividend policy. The Directors have also reviewed relationships with key suppliers and software providers and are satisfied that the appropriate contracts and contingency plans are in place. The Directors have prepared income statement and cash flow forecasts to assess whether the Group has adequate resources for the foreseeable future. The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the consolidated financial statements. 28. SUBSEQUENT EVENTS There have been no subsequent events between 31 December 2013 and the date of the signing of these accounts that merit inclusion. GVC HOLDINGS PLC ANNUAL REPORT 2013 61 162749 GVC Annual Report Pt4_162749 GVC Annual Report Pt4 14/04/2014 08:47 Page 62 ANNUAL REPORT 2013 62 R E P O R T O F T H E R E M U N E R A T O N C O M M T T E E I I 162749 GVC Annual Report Pt5_162749 GVC Annual Report Pt5 14/04/2014 08:33 Page 63 REPORT OF THE REMUNERATION COMMITTEE Remuneration Committee The Remuneration Committee is comprised of the three Non-Executive Directors and was chaired in the year by Nigel Blythe-Tinker. The Committee determines the remuneration packages of the Executive Directors and other senior management, and is required by the board to review the bonus arrangements of any employee or consultant to the Group. The Committee meets at least twice a year. Group Remuneration Policy In accordance with its remit, the Committee’s policy is to determine the remuneration packages of the Executive Directors and other senior management in order to ensure that the relevant individuals are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company. Remuneration Package The remuneration package comprises basic salary and benefits, annual bonus and long term incentive arrangements. The Executive Directors and senior management are remunerated using the policy described below. Basic Salary and Benefits Basic salary is set for each individual based on individual performance and achievement of objectives and following the consideration of compensation information for other companies in the e-gaming industry, both quoted and unquoted. The Executive Directors are also entitled to health and life cover. Pension The Group did not operate a pension plan for the Executive Directors or senior management in 2013 or 2012. Bonus Arrangements Bonus scheme arrangements are in place for all members of staff, including the Executive Directors. The staff bonuses are based on individual performance and the Executive Directors linked to the performance of the Group as detailed below. The Remuneration Committee after consulting with shareholders has decided that Executive Directors annual bonuses should be linked directly to the dividends paid by the Company. Accordingly, both Kenneth Alexander and Richard Cooper will receive a bonus each year equal to the dividends that would have been paid by the Company to that Director in the relevant period in respect of the GVC Holdings shares subject to unexercised awards granted under the ‘new’ scheme to that Director as if those awards had already been exercised (and the GVC Holdings shares issued) at the record date for payment of the relevant dividend. Directors’ Emoluments Summary Executive Directors K Alexander R Cooper Non-Executive Directors L Feldman N Blythe-Tinker** K Diacono Salary/Fees € Bonus* € Pension € Benefits in Kind*** € Total 2013 € Total 2012 € 833,207 453,297 2,087,498 1,087,064 153,061 115,090 69,000 761,103 21,000 – 1,623,655 3,956,665 – – – – – – 2,877 4,236 2,923,582 1,544,597 1,575,998 828,331 – – – 914,164 136,090 69,000 573,717 140,084 56,250 7,113 5,587,433 3,174,380 * see bonus detail on page 64 ** stepped down from the Board on 17 January 2014 *** principally healthcare GVC HOLDINGS PLC ANNUAL REPORT 2013 63 162749 GVC Annual Report Pt5_162749 GVC Annual Report Pt5 14/04/2014 08:33 Page 64 REPORT OF THE REMUNERATION COMMITTEE continued Bonus Executive Directors K Alexander R Cooper Non-Executive Directors L Feldman N Blythe-Tinker Dividend Transaction success € related € Interest on deferred bonuses* € Total 2013 € Total 2012 € 1,196,431 598,216 598,216 21,000 826,511 461,426 155,806 – 64,556 27,422 2,087,498 1,087,064 7,081 – 761,103 21,000 826,698 413,349 413,349 19,500 2,413,863 1,443,743 99,059 3,956,665 1,672,896 * As part of the Sportingbet acquisition the Executive Directors agreed that the entitlement to payment of a bonus on the November 2013 €0.15 interim dividend and dividend bonus on payment of a dividend greater than €0.2599 and any subsequent bonus would not arise until the earlier of: (i) payment of a dividend by 30 November 2013; (ii) the GVC Shares ceasing to be traded on AIM; and/or (iii) the relevant GVC Director’s employment and/or office with GVC being terminated by GVC for whatever reason or the relevant GVC Director’s employment terminating by reason of their resignation for “good reason”. Interest was accrued on the amount due to the relevant GVC Director under this bonus arrangement at a rate of 5 per cent. per annum from the month following the declaration of a dividend until the bonus is paid. All deferred bonuses and accrued interest have been paid at 31 December 2013 and were made to UK resident Directors through a UK payroll, and taxed at source. Further details can be found in the annual bonus summary on page 63. Reinvestment criteria for Directors’ bonuses The Directors are under an obligation to re-invest not less than 20% of the post-tax amount of bonus received by them. This reinvestment can take the form of either purchasing shares in the open market, or through the exercise of share options whereby the Company receives the re-investment funds and issues shares. At 31 December 2013, all Directors had satisfied this criteria. Share option base Dividend per share Dividend bonus Dividend bonus on payment of a dividend greater than €0.2799 K Alexander 1,600,000 € 0.28 € 448,000 € 748,431 € 1,196,431 R Cooper 800,000 € 0.28 € 224,000 € 374,216 € 598,216 L Feldman N Blythe-Tinker 800,000 € 0.28 € 224,000 € 374,216 € 598,216 75,000 € 0.28 € 21,000 – € 21,000 Directors’ Service and Consultancy Agreements Executive Directors K Alexander R Cooper Non-Executive Directors L Feldman N Blythe-Tinker** K Diacono Date appointed Service contract 19 April 2010 19 April 2010 19 April 2010 19 April 2010 19 April 2010 Yes Yes No No No Notice period by either party 12 Months* 12 Months* 12 months* 12 months 12 months * unless (a) dividend hurdles are reached or (b) there is a change of control, in which case the notice period to be given by the Company to the individual increases to 2 years ** stepped down from the Board on 17 January 2014 ANNUAL REPORT 2013 64 162749 GVC Annual Report Pt5_162749 GVC Annual Report Pt5 14/04/2014 08:33 Page 65 Long-term Incentive Schemes The Group operates three schemes the Executive Director’s and Senior Management participate in both. Original Scheme The original scheme has had ten main grants. At 31 December 2013, all of the outstanding grants had vested. 21 May 2010 Scheme Following a vote by shareholders in an Extraordinary General Meeting held in Luxembourg on the 21 May 2010 the Group introduced a new scheme and made an initial award to the Executive Directors and certain Senior Management. The awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. 16 November 2011 scheme On 16 November 2011, shareholders approved the grant of additional share options with the same rights as the 21 May 2010 scheme to three directors as follows: Director Kenneth Alexander Richard Cooper Lee Feldman Number of shares subject to options 800,000 400,000 400,000 Exercise period Date of grant to the fifth anniversary of grant Date of grant to the fifth anniversary of grant Date of grant to the fifth anniversary of grant These share options were granted at an exercise price of 154.79p being 120% of the average mid-market closing price over the period from 17 November 2011 to 28 January 2012. Each of the Executive Directors has agreed to retain the shares which he acquires on exercise of his awards under the LTIP until the date of his cessation of employment with the GVC Group (save that each Executive Director will be permitted to sell sufficient of the Shares acquired on exercise to enable him to fund the exercise price of such awards and any income tax and social security contribution liabilities which arise on exercise). R E P O R T O F T H E R E M U N E R A T O N C O M M T T E E I I Directors’ Share Options Scheme Existing at 31 Vested at 31 Option December Exercised December December 2013 Existing at 31 2012 in the year price 2013 Expiry date Executive Directors K Alexander K Alexander R Cooper R Cooper R Cooper 21 May 2010 16 Nov 2011 Original 21 May 2010 16 Nov 2011 213p 154.79p 126p 213p 154.79p Non-Executive Directors L Feldman L Feldman 21 May 2010 16 Nov 2011 213p 154.79p N Blythe-Tinker 21 May 2010 213p 800,000 800,000 191,667 400,000 400,000 400,000 400,000 75,000 – – (165,000) – – – – – 800,000 800,000 26,667 400,000 400,000 400,000 400,000 75,000* 800,000 20 May 2020 27 Jan 2022 466,667 26,667 11 Dec 2018 400,000 20 May 2020 27 Jan 2022 233,333 400,000 20 May 2020 27 Jan 2022 233,333 75,000 20 May 2020 Total 3,466,667 (165,000) 3,301,667 2,635,000 *these share options were bought out on 17 January 2014 Each of the Executive Directors will agree to retain the GVC Holdings PLC shares which he acquires on exercise of his awards under the LTIP until the date of his cessation of employment with the redomiciled Group (save that each Executive Director will be permitted to sell sufficient of the GVC Holdings PLC shares acquired on exercise to enable him to fund the exercise price of such awards and any income tax and social security contribution liabilities which arise on exercise). The charge to the consolidated income statement in respect of these options in 2013 was €353,000 (2012: €483,000). GVC HOLDINGS PLC ANNUAL REPORT 2013 65 162749 GVC Annual Report Pt5_162749 GVC Annual Report Pt5 14/04/2014 08:33 Page 66 REPORT OF THE REMUNERATION COMMITTEE continued Other Employees and Consultants The majority of staff in the Group are also able to benefit financially from their endeavors through either a discretionary bonus scheme and/or Group share option plans. There are no outstanding share options at 31 December 2013. The charge to the consolidated income statement in respect of the options for other employees and consultants in 2013 was €1,000 (2012: €85,000). The total charge to the income statement for the years ending 31 December excluding bought out and lapsed options was: Directors Other staff Third parties 2013 €353,000 €1,000 €382,000 €736,000 2012 €483,000 €85,000 – €568,000 ANNUAL REPORT 2013 66 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 67 COMPANY FINANCIAL STATEMENTS (UNDER UK GAAP) In this section: Independent Auditor’s report to the Members of GVC Holdings PLC Co mpany Balance Sheet Notes to the Company Financial Statements I C O M P A N Y F N A N C A L S T A T E M E N T S I 68 69 70 GVC HOLDINGS PLC ANNUAL REPORT 2013 67 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 22/04/2014 14:07 Page 68 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GVC HOLDINGS PLC We have audited the parent company financial statements of GVC Holdings PLC for the year ended 31 December 2013 which comprise the parent company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Section 80C(2) of the Isle of Man Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. 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, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 21, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the Audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the parent company financial statements sufficient to give reasonable assurance that the parent company financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the parent company financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited parent company financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on Financial Statements In our opinion the parent company financial statements: • • give a true and fair view of the state of the Company’s affairs as at 31 December 2013; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice. Other Matter We have reported separately on the group financial statements of GVC Holdings PLC for the year ended 31 December 2013. Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 8 April 2013 ANNUAL REPORT 2013 68 I C O M P A N Y F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 69 COMPANY BALANCE SHEET at 31 December 2013 Fixed assets Investments Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current liabilities Non-interest bearing loan Net assets Capital and reserves Issued share capital Share premium Merger reserve Retained earnings Total equity Notes 2013 €000’s 2012 €000’s 3 4 6 5 7 8, 10 10 10 10 148,563 64,154 25,352 2,085 27,437 (75,966) (48,529) (5,148) 94,886 609 84,530 40,407 (30,660) 94,886 10,351 19 10,370 (43,632) (33,262) – 30,892 316 611 40,407 (10,442) 30,892 The Financial Statements from pages 69 to 75 were approved and authorised for issue by the Board of Directors on 8 April 2013 and signed on their behalf by: K.J. Alexander (Chief Executive Officer) R.Q.M. Cooper (Group Finance Director) GVC HOLDINGS PLC ANNUAL REPORT 2013 69 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 70 NOTES TO THE COMPANY FINANCIAL STATEMENTS for the year ended 31 December 2013 ACCOUNTING POLICIES 1. A summary of the significant accounting policies are set out below, these policies have been applied consistently to the periods presented, unless otherwise stated. 1.1 Basis of Preparation The financial information has been prepared on the historical cost basis, and in accordance with applicable Isle of Man law and United Kingdom accounting standards. 1.2 Investments Investments in subsidiary undertakings are stated at cost less amounts written off. 1.3 Foreign Currency Translation The Company maintains its accounting records in Euro and the balance sheet and profit and loss account are expressed in this currency. Income and charges are translated at the exchange rates ruling at the transaction date. Fixed assets are valued using historical exchange rates. Other current assets and liabilities expressed in foreign currencies are translated into Euros at the rates of exchange in effect at the balance sheet date. Realised exchange gains and losses and unrealised exchange losses are recognised in the profit and loss account. 1.4 Fixed Assets Investments in subsidiaries are shown as fixed assets in the Company balance sheet, and are valued at cost less any provision for impairment in value. 1.5 Trade and Other Debtors Trade and other receivables are stated at amortised cost. A provision for impairment will be recorded where there is evidence that the Company will not be able to collect all costs due according to the terms of the receivable concerned. 1.6 Trade and Other Creditors Trade and other payables are stated at their fair value and subsequently measured at amortised cost. 1.7 Share Based Payments The Group has a share option scheme which allows Group employees and contractors 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 binomial valuation model. This valuation method take into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. See note 9 for further details of the two schemes. Payments made to repurchase or cancel vested awards are accounted for with the fair value of the options cancelled, measured at the date of cancellation being taken to retained earnings; the balance is taken to the income statement. 1.8 Related Party Transactions Financial Reporting Standard 8, ‘Related Party Transactions’, requires the disclosure of the details of material transactions between the reporting entity and related parties. The Company has taken advantage of exemptions under FRS 8 not to disclose transactions between wholly owned Group companies. PROFIT AND LOSS ACCOUNT 2. The loss for the year dealt with in the accounts of the Company was €5,969,000 (2012: profit of €3,018,000). The Company has not presented a separate profit and loss account. ANNUAL REPORT 2013 70 I C O M P A N Y F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 71 3. INVESTMENTS Investment in subsidiary undertakings At 1 January Investments in the year* At 31 December 2013 €000’s 64,154 84,409 148,563 2012 €000’s 64,153 1 64,154 *includes an investment of €83,918,184 in Sportingbet PLC, the company issued 29,018,075 shares at 248p as consideration Significant subsidiaries Country of incorporation Ownership interest Netherlands Antilles Netherlands Antilles Netherlands Antilles Malta England and Wales England and Wales Alderney England and Wales England and Wales England and Wales England and Wales GVC Corporation B.V.* Intera N.V. GVC Sports B.V. Gaming VC Corporation Limited GVC Administration Services Limited Sportingbet PLC Interactive Sports (C.I.) Limited Sportingbet Management Services Limited Sportingbet (IT Services) Limited Sportingbet (Product Services) Limited Sporting Odds Limited *also has a branch registered in Israel 4. DEBTORS Amounts owed by Group undertakings Other debtors Prepayments 5. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Amounts due to Group undertakings Other creditors 6. CASH AND CASH EQUIVALENTS Bank balances 2013 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2013 €000’s 23,787 1,310 255 25,352 2013 €000’s 71,973 3,993 75,966 2013 €000’s 2,085 2012 100% 100% 100% 100% 100% N/A N/A N/A N/A N/A N/A 2012 €000’s 8,190 943 1,218 10,351 2012 €000’s 43,092 540 43,632 2012 €000’s 19 NON-INTEREST BEARING LOAN 7. As part of the Group’s acquisition of Sportingbet PLC, a credit facility was made available to the Group by William Hill PLC to fund working capital. At the 31 December 2013 the Group had drawn down €8,255,619 (£6,861,956) of this facility. The loan was revalued at the 31 December exchange rate of 1.2031. IAS 39 Financial Instruments: Recognition and Measurement, states that all loans and receivables should initially be measured at their fair value. The loan has therefore been discounted at a rate of 4% and will be unwound over the period of the loan. GVC HOLDINGS PLC ANNUAL REPORT 2013 71 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 72 NOTES TO THE COMPANY FINANCIAL STATEMENTS continued for the year ended 31 December 2013 NON-INTEREST BEARING LOAN continued 7. The facility is repayable in three instalments and these as well as the impact of the discount are shown below: Amount in Euro’s Base Currency £000’s Total €000’s Current liabilities €000’s Non- current liabilities €000’s Loan balance on initial recognition Revaluation at 31 December exchange rate the first instalment by no later than 31 December 2014; the second instalment by no later than 31 December 2015; and (i) (ii) (iii) by no later than 30 June 2016, the balance of the facility Loan balance before discount Discount on recognition of the loan Unwinding of discount at 31 December 2013 Loan balance at 31 December 2013 Future discount 6,862 – 6,862 2,287 2,287 2,288 6,862 – – – – 6,862 8,020 236 8,256 2,752 2,752 2,752 8,256 (780) 186 7,662 594 8,256 2,752 – – 2,752 (424) 186 2,514 238 2,752 – 2,752 2,752 5,504 (356) – 5,148 356 5,504 CALLED UP EQUITY SHARE CAPITAL 8. On 21 May 2010 shareholders of Gaming VC Holdings S.A., approved a redomiciliation to Luxembourg which resulted, pari passu, in shareholders holding shares with a nominal value of €0.01 in GVC Holdings PLC. As a result of this transaction, GVC Holdings PLC acquired all the assets and liabilities of Gaming VC Holdings S.A. Arising from this transaction was the creation of a Merger Reserve, which is distributable. The authorised and issued share capital is: Authorised Ordinary shares of €0.01 each At 31 December – 80,000,000 shares (2012: 40,000,000 shares)* Issued, Called Up and Fully Paid At 31 December – 60,906,760 shares (2012: 31,592,172 shares) *The authorised share capital was increase as part of the Group’s acquisition of Sportingbet PLC The issued share capital history is shown below: 2013 €000’s 2012 €000’s 800 609 400 316 Balance at 1 January Shares issued on initial listing Share options exercised – at £1.00 – at £1.26 – at £1.29 – at €0.01 Issue of shares for acquisition Balance at 31 December 2004 to 2010 2011 2012 2013 – 31,135,762 31,135,762 – 31,469,095 – 31,592,172 – – – – – – 233,333 100,000 – – – – – 123,077 – – – 165,000 31,513 100,000 29,018,075 31,135,762 31,469,095 31,592,172 60,906,760 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. However, should the Company not be satisfied as to the true identity of the shareholders it can suspend the entitlement of those shareholders to receive dividends. ANNUAL REPORT 2013 72 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 73 SHARE OPTION SCHEME 9. The Group has three share option schemes: (a) (b) (c) the ‘original’ scheme that has been in place since the IPO of GVC Holdings PLC’s predecessor Gaming VC Holdings S.A and in which only 26,667 share options are outstanding a ‘new’ scheme that was approved by shareholders on 21 May 2010 (the “21 May 2010 scheme”) under which 1,600,000 share options remain outstanding a further grant of options under the new scheme to three directors, approved by shareholders on 16 November 2011 (“16 November 2011 scheme”). A total of 1,600,000 shares under this scheme were granted on 30 January 2012 at an exercise price of 154.79p. Under the terms of the share option plans the Group can allocate up to 16.8% of the issued share capital although it must take allowance of the 752,923 shares in issue as a consequence of the exercise of share options. The following options to purchase €0.01 ordinary shares in the Company were granted, exercised, lapsed or existing at the year end. I C O M P A N Y F N A N C A L S T A T E M E N T S I Vesting criteria Note a Note a Note b Note c Note d Note e Note f Note f Note f Total 1,600,000 826,667 800,000 75,000 500,000 Date of Grant 15 May 2007 12 Dec 2008 21 May 2010 21 May 2010 21 May 2010 28 Jan 2012 16 Jan 2013 01 Feb 2013 28 Feb 2013 Exercise Price 129p 126p 213p 1p 1p 154.79p 233.5p 233.5p 233.5p Existing Exercisable at 31 Existing at 1 January Granted in Bought out Exercised December December 2013 in the year in the year the year at 31 2013 2013 31,513 191,667 1,675,000 100,000 100,000 1,600,000 – – – – – – – – – 166,666 166,667 166,667 – – – – (100,000) – – – – (31,513) (165,000) – (100,000) – – – – – – 26,667 1,675,000 – – 1,600,000 166,666 166,667 166,667 – 26,667 1,675,000 – – 933,333 166,666 166,667 166,667 Total all schemes 3,698,180 500,000 (100,000) (296,513) 3,801,667 3,135,000 The existing share options at 31 December 2013 are held by the following employees: Option price Grant date Kenneth Alexander Richard Cooper Lee Feldman Nigel Blythe-Tinker Third parties 126p 12-Dec-08 213p 21-May-10 154.9p 28-Jan-12 233.5p 16-Jan-13 233.5p 01-Feb-13 233.5p 28-Feb-13 – 26,667 – – – 26,667 800,000 400,000 400,000 75,000 – 800,000 400,000 400,000 – – 1,675,000 1,600,000 – – – – 166,666 166,666 – – – – 166,667 166,667 – – – – 166,667 166,667 3,801,667 Note a: These awards were granted under the original scheme, on the first anniversary of the grant date, 25% of the option vests. Thereafter, the balance of the option vests over three years, at 1/36th per month. Note b: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. Note c: These options were granted under the new scheme; it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. The awards are subject to a performance condition which will require the Company’s average share price over a period of 30 dealing days to reach 300p per ordinary share before the initial awards are capable of being exercised. GVC HOLDINGS PLC ANNUAL REPORT 2013 73 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 74 NOTES TO THE COMPANY FINANCIAL STATEMENTS continued for the year ended 31 December 2013 SHARE OPTION SCHEME continued 9. Note d: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. The awards are subject to a performance condition which will require the Company’s average share price over a period of 30 dealing days to reach 200p per ordinary share before the initial awards are capable of being exercised. Note e: These options were granted under the new scheme, it is expected that the initial awards will vest over a three year period as follows; one third of the ordinary shares subject to each award will vest 12 months after the date of grant of the awards and the balance of the ordinary shares will vest in eight equal quarterly instalments over the following 24 months. Once vested, awards will normally be exercisable up to ten years from the date of grant at the end of which period they will lapse. Note f: These options were granted to third parties as part of the Sportingbet acquisition following underwriting commitments made at the time. The awards vested on the grant date and the options have the exercise price reduced by the value of any dividends declared up to the point of exercise. The charge to the consolidated income statement in respect of these options (excluding bought out options) in 2013 was €736,000 (2012: €568,000), a credit to the income statement of €nil (2012: €489,000) in respect of the lapsed options and a credit to the income statement of €6,000 (2012: €nil) in respect of the bought out options. 9.1 Weighted Average Exercise Price of Options The number and weighted average exercise prices of share options is as follows: Outstanding at the beginning of the year Granted during the year Exercised during the year Bought out in the year Lapsed during the year Outstanding at the end of the year Exercisable at the end of the year Weighted average exercise price 2013 171p 233.5p 84p 1p Number of options 2013 3,698,180 500,000 (295,846) (100,000) 191p 3,802,334 3,135,000 1,785,679 Weighted average exercise price 2012 161p 155p 129p – 120p 171p Number of options 2012 3,271,257 1,600,000 (123,077) – (1,050,000) 3,698,180 The options outstanding at 31 December 2013 have a weighted average contractual life of 4.7 years (2012: 5.7 years). 9.2 Valuation of Options The fair value of services received in return for share options granted in 2013, 2012, 2010, and 2007 were 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 Binomial 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 Binomial model. The option exercise price for all individuals was the average market price on grant date, with the exception of the options granted to third parties as part of the Sportingbet acquisition. These were priced at the amount the Group offered as consideration for the purchase. Fair value of share options and assumptions: Date of grant 15 May 07 21 May 10 21 May 10 21 May 10 28 Jan 12 16 Jan 13 01 Feb 13 28 Feb 13 Share price at date of grant* (in £) Exercise price (in £) Expected volatility Expected multiple Expected dividend yield Fair value at Risk free measurement a date rate** 1.22 1.85 1.85 1.85 1.67 2.335 2.635 2.375 1.29 2.13 0.01 1.50 1.5479 2.335 2.335 2.335 50% 60% 60% 60% 58% 60% 60% 60% 2 2 2 2 2 2 2 2 8% 17% 17% 17% 20% 12.15% 12.15% 12.15% 5.33% 2.75% 2.75% 2.75% 2.19% 0.572% 0.572% 0.572% 0.40 0.39 0.05 0.59 0.33 0.58 0.76 0.61 * This is the bid price, not the mid-market price, at market close, as sourced from Bloomberg. ** The measurement of the risk-free rate was based on rate of UK sovereign debt prevalent at each grant date over the expected term of the option. ANNUAL REPORT 2013 74 I C O M P A N Y F N A N C A L S T A T E M E N T S I 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 75 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. 10. SHARE CAPITAL AND RESERVES At 1 January 2013 Earnings for the period Dividends paid Issue of share capital for the acquisition of Sportingbet PLC Share option charge Lapsed share options Share options exercised At 31 December 2013 11. DIVIDENDS The dividends paid in the year were as follows: Share Capital €000’s Share Premium €000’s 316 – – 290 – – 3 609 611 – – 83,628 – – 291 84,530 Merger Reserve €000’s 40,407 – – – – – – Retained Earnings €000’s (10,442) (5,969) (14,979) – 736 (6) – 40,407 (30,660) Declaration date 25 January 2013 01 July 2013 25 September 2013 EURO amount GBP amount 0.07 0.105 0.105 0.05895 0.090658 0.08816106 Total €000’s 30,892 (5,969) (14,979) 83,918 736 (6) 294 94,886 2013 €000’s 2,212 6,378 6,389 14,979 All reserves of the Company are distributable, as under The Isle of Man Companies Act 2006 distributions are not governed by reserves but by the Directors undertaking an assessment of the Company’s solvency at the time of distribution (section 49, 2006 Companies Act Isle of Man). GVC HOLDINGS PLC ANNUAL REPORT 2013 75 162749 GVC Annual Report Pt6_162749 GVC Annual Report Pt6 14/04/2014 08:55 Page 76 ANNUAL REPORT 2013 76 162749 GVC Annual Report Pt7_162749 GVC Annual Report Pt7 14/04/2014 09:01 Page 77 ADDITIONAL UNAUDITED INFORMATION Net gaming revenue Contribution Clean EBITDA Operating profit Profit before tax Cash at the balance-sheet date Total dividend declared (pence) Interim dividends (euro) Final dividend (euro) Total dividend (euro) 20091, 2 €000’s 31,615 25,555 15,909 14,188 13,780 20,995 60.22p €0.20 €0.50 €0.70 20102 €000’s 32,680 19,124 10,225 3,605 2,525 6,551 17.61p €0.10 €0.10 €0.20 Total dividend paid during the year (€’000’s) 12,454 18,681 20112 €000’s 44,340 20,550 8,382 1,999 (386) 9,853 17.4p €0.10 €0.11 €0.21 6,225 20122 €000’s 60,325 36,476 15,452 13,034 10,830 6,632 17.99p €0.22 – €0.22 2013 €000’s 168,407 102,631 38,300 14,118 13,014 18,808 – €0.325 €0.16 €0.485 8,214 14,979 1The results for the financial years ending 2008 and 2009 exclude the results of Winzingo whose operations had been loss making. 2The results for the financial years ending 2008, 2009, 2010, 2011 and 2012 exclude the results of Betaland that has been disposed of. The results of this business have been discontinued, see note 7 on page 42 for further details. I I A D D T O N A L U N A U D T E D I I N F O R M A T O N I GVC HOLDINGS PLC ANNUAL REPORT 2013 77 162749 GVC Annual Report Pt7_162749 GVC Annual Report Pt7 14/04/2014 09:01 Page 78 ANNUAL REPORT 2013 78 Proforma Revenue Mix (€’000m) 12 months to 31 December 2013 Sports Casino Poker, bingo and other revenue I N T R O D U C T O N I 2010 2011 2012 2013 0 20 40 60 80 100 Recent Dividend History Cents per share declared 50 40 30 20 10 0 Cents per share declared 18 16 14 12 10 8 6 4 2 0 01-Jul-13 25-Sep-13 09-Jan-14 09 Apr-14 How Revenue becomes Dividends £180m Revenue converts to £15m Dividends Dividends Variable costs Expenditure Capex Tax Betboo earn-outs Exceptional items and WH contribution and loan and SBT balance sheet Regulatory and working capital requirement estimate ANNUAL REPORT 2013 GVC~ H o l d i n g s 162749 GVC 2013 AR Cover Throwout.indd 1 Contribution* by Market Based on Q4-2013 Turkey (30%) Eastern Europe (22%) Central Europe (20%) CasinoClub (18%) LATAM (5%) UK (4%) Other (1%) *Contribution is Revenue less Variable costs but before expenditure such as staff, property, etc. For the full year ending 31st December 2013 contribution amounted to €102,631,000. For 2013 GVC restored the dividend earlier than expected, increased the dividend in January 2014 and in April 2014, the Board declared a repeat of this quarterly dividend enhanced by a special dividend Delivering on our dividend promise 14/04/2014 15:17 GVCH o l d i n g s ~ The multinational sports betting and gaming group GVC is financially focused on generating cash and returning a high proportion of this to shareholders by way of dividends I N T R O D U C T O N I GVC is a multinational sports betting and gaming group, founded in 2004. It provides both B2B and B2C services to the online gaming and sports betting markets. Its core brands are now CasinoClub, Betboo and Sportingbet. It has offices in Dublin, Malta, Tel Aviv, Guernsey, Alderney, Manila, Barbados and London. It is headquartered in the Isle of Man and across the group has over 500 employees. l G V C H o d n g s P L C i GVC Holdings PLC | www.gvc-plc.com Incorporated in the Isle of Man under number 4685V A n n u a l R e p o r t 2 0 1 3 Annual Report Highlights Total Proforma Revenues (€’000) 180,573 Annual growth of 69% 2013 180.6 2012 107.1 2011 48.8 Clean *EBITDA (€’000) 38,299 Annual growth of 148% 2013 38.3 2012 15.5 2011 8.4 Dividend (€cents) 48.5 Increased by 120% 2013 48.5 2012 22 2011 21 Operational aims achieved in period Sportingbet Integration Successful integration of Sportingbet into the main body of the Group with a reduction in the inherited cost base of around 50%, and a growth in its inherited revenues Data Migration Data migrations completed onto a single platform of Sportingbet, including that of Betboo. As a result, from 2014 onwards there will no longer be a charge in the Consolidated Income Statement for the deferred discount release. Licence Principal licence moved to Malta from Alderny GVC HOLDINGS PLC 162749 GVC 2013 AR Cover Throwout.indd 2 14/04/2014 15:17