EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
OVERVIEW
World Gaming Plc (the "Company" or the "Group") is a holding company
incorporated under the laws of England and Wales that, through its subsidiaries
and joint venture arrangements, is an internet gaming operator and developer,
licensor and supplier of online gaming products, including casino, sportsbook
and pari-mutuel betting.
Interactive Systems Inc., a wholly-owned subsidiary of the Company incorporated
and operating out of Antigua, licenses gaming software to third parties for an
initial licensing fee and monthly royalties. In addition, Interactive Systems
Inc. provides hosting and other systems administrative services to its
licensees. Effective October 1, 2005 and described below as the
"Sportstbetting.com Transaction", the Company, through acquisition, became an
Internet gaming operator offering Internet gaming services including casino,
sportsbook and pari-mutuel betting direct to its wholly owned database of
customers. WG Interactive Inc., a wholly-owned subsidiary of the Company,
incorporated and operating out of British Columbia, Canada, provides further
administrative services on behalf of Interactive Systems Inc. such as
development support.
The following tables set out selected consolidated information from the
statements of operations for the three and twelve months ended December 31, 2005
and December 30, 2004 and the balance sheets as at December 31, 2005 and at
December 31, 2004:
SELECTED STATEMENT OF OPERATIONS INFORMATION
For the three For the twelve
months ended months ended
------------------------- -----------------------
December December December December
31, 2005 31, 2004 31, 2005 31, 2004
(unaudited) (unaudited) (unaudited)
----------- ----------- ----------- --------
Net Sales ................... $ 99,143 $ 2,738 $ 106,471 $ 16,288
Gross Profit ................ 9,121 1,747 14,414 14,417
Expenses including interest
and depreciation ........... 4,660 1,369 7,817 9,234
Net income from operations .. 4,461 378 6,597 5,183
Extraordinary gain .......... - 12,187 - 12,187
Net income for the period ... 3,549 12,552 5,691 17,370
SELECTED BALANCE SHEET INFORMATION
December 31, 2005 December 31, 2004
(unaudited)
----------------- -----------------
Working Capital ........................... $ (6,288) $ 14,866
Total Assets .............................. 109,656 23,379
Total loans and capital lease obligations . 40,000 -
Accumulated Profit/(Deficit) .............. (873) (6,354)
Total Stockholders' Equity ................ 56,209 16,028
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
Total revenues for the quarter ended December 31, 2005 increased by $96,405 to
$99,143 compared to $2,738 for the same period last year. For the twelve months
ended December 31, 2005 total revenues increased $90,183 to $106,471 compared to
$16,288 for the same period last year. The increase in total revenues is wholly
attributable to the Sportsbetting.com Transaction effective October 1, 2005
where the Company acquired all of the business and assets of its then largest
licensee whose leading brand is SPORTSBETTING.COM (herein after referred to as
the "operating division"). See "Sportsbetting.com Transaction" below.
Underlying the significant increase in total revenue, the Company maintains two
key revenue streams:
1. Royalties and fees which includes royalties charged to the Company's
continuing licensees plus hosting fees charged to Sportingbet PLC
("Sportingbet") for hosting services provided from the Company's wholly
owned hosting facility (See "Sportingbet Transaction" below); and
2. Operations, representing revenue derived from its owned internet gaming
sites acquired through the Sportsbetting.com Transaction.
Both the Sportsbetting.com Transaction, effective October 1, 2005 and the joint
venture transaction with Sportingbet, effective October 1, 2004 have materially
changed the composition of revenue streams in the current and comparative
periods. Primarily, the Sportsbetting.com Transaction has added a new revenue
stream for the fourth quarter and future periods through operations. In
addition, royalty revenue from the SPORTSBETTING.COM group is eliminated in the
fourth quarter of 2005 and future periods as a result its acquisition by the
Company. The transaction with Sportingbet, effective October 1, 2004 and
described below as the "Sportingbet Transaction", eliminated royalty revenue
from that date in return for certain consideration and other arrangements.
Royalty and fee revenue decreased by 40.5% or $1,108 to $1,630 for the quarter
ended December 31, 2005 when compared to $2,738 for the same period last year.
The decrease in royalty and fee revenue is attributable to no longer receiving
software royalties from the SPORTSBETTING.COM group as a result of its
acquisition by the Company. For the twelve months ended December 31, 2005
royalty and fee revenue declined by 45.0% or $7,330 to $8,958. Of this decline
in royalty and fee revenue, $716 was attributable to no longer receiving
royalties from the SPORTSBETTING.COM group as a result of its acquisition by the
Company and $7,510 was the full year effect for comparative purposes, of no
longer receiving royalties from Sportingbet as a result of the Sportingbet
Transaction and growth of $896 to $3,234 was derived from new and continuing
licensees.
Revenue from operations, representing gross sports and horse racing wagers and
net casino and poker win for the quarter and year ended December 31, 2005 was
$97,513 from the operating division compared to $nil for the same periods last
year. ("Net win" refers to the difference between the amount wagered (bet
placed) by a customer and the amount paid back to (won by) the customer.) For
comparative purposes and prior to the Group owning the SPORTSBETTING.COM group,
the underlying growth in the operating division in this revenue for the quarter
ended December 31, 2005 is 42.1% or $28,902 and 50.8% or $79,387 for the twelve
months ended December 21, 2005.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
Gross profit increased $7,374 to $9,121 for the quarter ended December 31, 2005
compared to $1,747 for the same quarter last year. The increase in the quarter
was attributable to a gross profit contribution from the operating division of
$8,270 after deducting $501 of customer bonuses and jackpot transfers in the
quarter. For comparative purposes and prior to the Group owning the
SPORTSBETTING.COM group, the underlying gross profit contribution from the
operating division for the quarter ended December 31, 2004 was $6,957 after
deducting $281 in customer bonuses and jackpot transfers, representing an 18.9%
increase in gross profit contribution, subdued by the lower than expected sports
margins experienced in the quarter. For the twelve months ended December 31,
2005, gross profit decreased by $3 to $14,414 from $14,417 in the same 12 month
period last year. The change is entirely due to no longer receiving royalties
from Sportingbet, mitigated by including gross profit the operating division as
explained above. For comparative purposes and prior to the Group owning the
SPORTSBETTING.COM group, the underlying gross profit contribution from the
operating division for the year ended December 31, 2005 was $27,064 after
deducting $1,954 in customer bonuses and jackpot transfers, representing a 55.1%
increase in gross profit for the SPORTSBETTING.COM group for the 12 month
period.
The gross margin percentage for the quarter ended December 31, 2005 was 9.2%
compared to 63.8% for the same period last year. For the twelve months ended
December 31, 2005 gross margin percentage was 13.5% compared to 88.8% for the
same period last year. The decrease resulted from a significant change in
revenue mix as a result of the Sportsbetting Transaction. For comparative
purposes, the underlying gross margin percentage for the operating division for
the quarter ended December 31, 2005 was 8.5% compared to 10.1% for the quarter
ended December 31, 2004. The lower gross margin percentage in the quarter is
attributable to lower than expected win margins on sports in the quarter. The
underlying comparative and prior to the Group owning the SPORTSBETTING.COM
group, the operating division gross margin percentage for the 12 months ended
December 31, 2005 was 11.5% compared to 11.2% for the 12 months ended December
31, 2004.
Operating expenses including interest and depreciation increased by $3,291 to
$4,660 during the quarter ended December 31, 2005 compared to $1,369 for the
same period last year. The increase occurred primarily due to the inclusion of
the operating division effective October 1, 2005. Costs associated with
operations primarily consisting of transaction processing, customer service and
marketing contributed $3,154 to total operating expenses in the quarter.
Operating expenses including interest and depreciation in the twelve months to
December 31, 2005 decreased 15.3% to $7,817 compared to $9,234 for the same
period last year, primarily as a result of including the cost base of the
operating division in the fourth quarter of 2005 offset by the Company no longer
paying for development costs as a result of the Sportingbet Transaction.
Net income from operations for the quarter ended December 31, 2005 increased by
$4,083 to $4,461 compared to $378 for the same period last year. For the twelve
months ended December 31, 2005, net income from operations increased by $1,414
to $6,597 compared to net income from operations of $5,183 for the same period
last year.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
Other income and expenses including goodwill amortisation for the three months
ended December 31, 2005 decreased by $13,086 to an expense of $912 representing
goodwill and loan cost amortisation. The other income for the three months ended
December 31, 2004 represented the extraordinary gain as a result of the
Sportingbet Transaction effective October 1, 2004. For the twelve months ended
December 31, 2005, Other income and expenses decreased $13,093 to expenses of
$906, representing goodwill and loan cost amortisation.
Net comprehensive income for the three months ended December 31, 2005 decreased
by 9,192 to 3,392 compared to 12,584. Net comprehensive income for the twelve
months ended December 31, 2005 decreased by $11,989 to $5,549 compared to
$17,358 for the same period last year. The decrease in net income is entirely
attributable to the extraordinary gain relating to the Sportingbet Transaction
included in the comparative 2004 periods. Participating ordinary shares include
those shares that have voting and economic rights and exclude those shares held
by Sportingbet in accordance with the Sportingbet Transaction effective October
1, 2004 described below.
Basic earnings per share before goodwill amortisation and exceptional items per
participating ordinary share for the quarter ended December 31, 2005 was 11.4
cents (9.1 cents after goodwill amortisation and exceptional items) compared to
1.1 cents (38.6 cents after goodwill amortisation and exceptional items) for the
same quarter in 2004. Basic earnings per share before goodwill amortisation and
exceptional items per participating ordinary share for the year ended December
31, 2005 was 16.9 cents (14.6 cents after goodwill amortisation and exceptional
items) compared to 15.9 cents (53.4 cents after goodwill amortisation and
exceptional items) in 2004. Participating ordinary shares include those shares
that have voting and economic rights and exclude those shares held by
Sportingbet in accordance with the Sportingbet Transaction effective October 1,
2004.
On a fully diluted basis earnings per share before goodwill amortisation and
exceptional items per participating ordinary share for the quarter ended
December 31, 2005 was 10.0 cents (8.0 cents after goodwill amortisation and
exceptional items) compared to 0.9 cents (33.6 cents after goodwill amortisation
and exceptional items) for the same quarter in 2004. Fully diluted earnings per
share before goodwill amortisation and exceptional items per participating
ordinary share for the year ended December 31, 2005 was 14.0 cents (12.1 cents
after goodwill amortisation and exceptional items) compared to 13.9 cents (46.5
cents after goodwill amortisation and exceptional items) in 2004.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, the Company had $7,605 in cash and cash equivalents
compared to $7,944 at December 31, 2004. The decrease in the twelve months was
primarily due to net payments made in respect of the acquisition of the
SPORTSBETTING.COM group. These payments are described further in cash flows from
investing and financing activities below.
Working capital at December 31, 2005 declined to a deficit of $6,288 from a
surplus of $14,866 at December 31, 2004. The deficit has arisen due to the short
term loan facilities introduced in the fourth quarter of 2005 to fund the
Company's acquisition of the SPORTSBETTING.COM group.
The Company has entered into a Revolving Facilities Agreement providing for a $5
million revolving credit facility. As of December 31, 2005, the revolving credit
facility had not been utilized.
Consistent with the Company's accounting policies, reserves and deposits held by
credit card processors on behalf of our licensees were written off the Company's
balance sheet in the first quarter of 2005. At December 31, 2004 the Company
held as a receivable from transaction processors $2,234. These amounts relate to
reserves and other deposits that were receivable on behalf of the Company's
licensees up to the date of closure of its transaction processing division in
February 2004. These funds are held on behalf of licensees and accordingly the
associated payable to the licensees in the same amount has also been written
off.
Customer deposits of $5,438 as at December 31, 2005 represent customer accounts
in respect of the operating division held by a third party. An equal balance is
held under current liabilities representing the liability due to the customer.
Accounts receivable decreased by $275 from $4,438 at December 31, 2004 to $4,163
at December 31, 2005. The accounts receivable balance primarily consists of
amounts due to the Company in respect of deposits processed on behalf of the
operating division and the Company's licensees during December 2005. The
Company's policy is to collect all funds processed in the previous month within
30 days of month-end of the preceding month. Where applicable, the Company then
collects its royalty from these funds before distributing to its respective
licensees. Royalties due from operating licensees who maintain their own
transaction processing function are usually collected within 30 days after the
date of invoicing those licensees. Prior to closure of the transaction
processing division in February 2004, such amounts would have been disclosed as
amounts due from processors.
Consideration recoverable of $3,481 as at December 31, 2005 relates to cash
payments made into an escrow account in accordance with the terms of the
Sportsbetting.com Transaction. Upon agreement of the final 2005 profit before
tax of the SPORTSBETTING.COM group, any overpayments are recoverable at this
time. The full balance was recovered in March 2006.
Consideration receivable of $7,000 as at December 31, 2004 represented remaining
cash consideration payments due from Sportingbet in respect of the Sportingbet
Transaction which took effect October 1, 2004. These payments were received as
$3,000 on March 1, 2005 and the balance of $4,000 was received on November 2,
2005.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
Prepaid expenses and deposits increased by $645 to $989 at December 31, 2005
compared to $344 at December 31, 2004. The increase is primarily due to prepaid
marketing expenditure for the operating division. It is common that the majority
of marketing spend for the operating division is prepaid, prior to delivery of
marketing services.
Deferred loan costs of $483 at December 31, 2005 relate to the current portion
of loan costs attributable to the loan facilities drawn down on completion of
the Sportsbetting.com Transaction. These amounts are being written off over the
term of the loan. Deferred loan costs of $604 relate to deferred costs
attributable to periods beyond 12 months from the current balance date.
Goodwill of $85,662 represents acquired goodwill as a result of the
Sportsbetting.com Transaction. The goodwill balance is being amortised over 25
years.
Accounts payable and accrued liabilities balances decreased by $3,600 to $3,480
in the year ended December 31, 2005 compared to $7,080 at December 31, 2004. The
reduction relates primarily to the write-off of balances attributable to
reserves and deposits described above of $2,234. In addition, amounts managed
for jackpot balances of $567 at December 31, 2005 are included in the balance
together with general accounts payable. Jackpot balances are amounts held on
behalf of the operating division and some of the Company's licensees for its
gaming products utilized on their websites.
Bank loans of $15,000 at December 31, 2005 represent the current portion of
loans payable that were drawn down in December 2005. The total bank loan
facilities including 25,000 attributable to periods beyond 12 months from the
current balance date are repayable over 27 months commencing December 2005.
Consideration payable of $3,600 at December 31, 2005 relates to the final
instalment of consideration payable into escrow in respect of the
Sportsbetting.com Transaction. The amount was paid on January 7, 2006.
Net cash provided by operating activities for the twelve months ended December
31, 2005 was $5,404 compared to $6,477 for the same period last year. The
decrease is primarily due to higher net income from operations in the twelve
months ended December 31, 2005 when compared to the same period last year offset
by working capital movements. The increase in net income primarily relates to
the inclusion of the operating division effective October 1, 2005.
Net cash used by investing activities for the twelve months ended December 31,
2005 was $58,849 compared to $967 provided by investing activities for the same
period last year. This increase is primarily represented by the cash outflows in
respect of the acquisition of the SPORTSBETTING.COM group.
Net cash provided by financing activities for the year ended December 31, 2005
was $53,274 compared to $2,181 used for financing activities for the same period
last year. Cash provided by financing activities was primarily from the issuance
of ordinary shares in respect of the bank loan and the placing of shares in
respect of the Sportsbetting.com Transaction and the placing of shares in
respect of the Company's initial admission to AIM market of the London Stock
Exchange plc in May 2005.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
"SPORTSBETTING.COM TRANSACTION"
(Currency in US Dollars, except per share data)
On October 25, 2005 the Group announced that it had entered into a conditional
agreement to acquire (the "Acquisition") certain assets of Real Entertainment
Ltd. and the entire issued capital of DNI Holdings Ltd. (together the
"SPORTSBETTING.COM Group"), which was then the Group's largest licensee. The
transaction subsequently completed on December 13, 2005.
The Acquisition contemplated the Group making a payment to the Vendors of the
SPORTSBETTING.COM group as consideration of up to $96 million payable 75 percent
in cash and 25 percent in ordinary shares of the Company. At completion of the
Acquisition, $54 million was paid in cash to the Vendors and a further $7.2
million in cash and $12.0 million in new ordinary shares of the Company issued
at 125 pence was paid into escrow pending agreement of the final profit before
tax ("PBT") for the twelve months ending December 31, 2005. All amounts paid
into escrow are also subject to holdback arrangements of 10% of total
consideration until October 1, 2006.
On January 19, 2006, the Group issued a trading statement indicating that PBT
for the SPORTSBETTING.COM group for the calendar year ended December 31, 2005
was less than $15 million and, as a result, the total consideration payable
would equal 6 times the actual PBT for that period. The consideration would
remain payable in accordance with the terms of the agreement as 75% cash and 25%
shares and subject to applicable escrow and holdback arrangements.
In March 2006, the Group and the Vendors of the SPORTSBETTING.COM group agreed
the final PBT for the calendar year ended December 31, 2005 was $13.6 million,
meaning that total consideration of $81.8 million would be payable in respect of
the Transaction. On agreement of the final PBT the Group recovered $3.5 million
in cash from escrow. Further payments of $6 million and $2.4 million in new
ordinary shares of the Company issued at 125 pence were made to the Vendors and
held in escrow as appropriate.
Consideration of $6.1 million in cash and $2.0 million of new ordinary shares of
the Company issued at 125 pence remains in escrow subject to warranty claims.
These amounts will be released to the Vendors of the SPORTSBETTING.COM group on
October 1, 2006 subject to claims with respect to the breach of one of more
warranties of the Vendors
Financing of the cash portion of the consideration was financed through the
Group's existing cash reserves, plus a $40 million loan facility arranged
through Barclays PLC. The term of the loan is 27 months from the drawdown date
of December 12, 2005. Repayments are due quarterly throughout the term of the
loan. In addition, the Group has an unutilised revolving facility with Barclays
for $5 million. Further cash for the purpose of the Acquisition was raised
through the Placing of 4,800,000 million new ordinary shares of the Company
raising (pound)6 million for the Acquisition before expenses.
The transaction had an effective date of October 1, 2005. The effective date,
which is earlier than the completion date is the date from which all revenues
and costs from the Acquisition accrue to the Group. The SPORTSBETTING.COM Group
was acquired on a cash-free, debt-free basis as at the effective date.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
"SPORTINGBET TRANSACTION"
(Currency in US dollars)
Joint Venture Arrangements, effective October 1, 2004, were entered into on
October 12, 2004 between the Company and Sportingbet. The principle terms of the
arrangements are as follows:
o The ownership of the intellectual property in the Company's gaming
software including it's gaming product suite ("Gaming Software") was
transferred into a new exempt limited partnership, Bullen Road LP, based
in the Cayman Islands, which was established under the equal joint
ownership of SSII Limited and subsequently transferred to Interactive
Systems Inc., both wholly owned subsidiaries of the Company and
Sportingbet;
o In consideration of this transfer, Sportingbet agreed to pay a total of
$10 million in cash to the Company ($3 million was paid on each of October
12, 2004 and March 1, 2005 and the balance of $4 million was paid on
November 1, 2005). In addition, the economic value of Sportingbet's then
29.6% shareholding in the Company was eliminated by the cancellation of
all rights of any value attached to the ordinary shares of the Company
then held by Sportingbet, and a convertible loan note representing
indebtedness of $900,000 owing from the Company to Sportingbet was
cancelled;
o Each of the Company and Sportingbet has the right to appoint two directors
to the four person board of Bullen Road LP which controls the development
objectives of Alea Software Ltd, a wholly owned subsidiary of Sportingbet
and the developer of the Gaming Software under the Joint Venture
Arrangements;
o During the period of the Joint Venture Arrangements, Sportingbet is
responsible for all of Alea's costs associated with the development and
maintenance of the Gaming Software (with a minimum spend of $4.5 million
per year in the first 3 years and a minimum of $2.5 million in the fourth
year);
o The Company retains the right to determine 30% of the development time on
the Gaming Software through a development plan devised by the Joint
Venture Board consisting of two members of the Company and two members
from Sportingbet;
o The Company has a worldwide royalty free licence allowing it to continue
to use and sublicense the Gaming Software. In the event that the Company
becomes an internet gaming operator it would pay a 5% royalty only on
those revenues to Sportingbet;
o Sportingbet has a worldwide royalty free licence to use the Gaming
Software. Royalty payments of 5% are due from Sportingbet in the event
that they licence the Gaming Software to any new licencees;
o Sportingbet pays its proportion of the hosting costs on the Company's
systems and information technology (IT) services at cost plus 10%;
o The Joint Venture Arrangements may be terminated by the Company on three
months notice. Except in the event of breach by the Company, Sportingbet
may not terminate the Joint Venture Arrangements for three years.
Thereafter, Sportingbet may terminate on 12 months notice to the Company;
and
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(Dollars in thousands of US dollars, except per share data)
o On termination of the Joint Venture Arrangements, (a) Sportingbet must pay
$3 million to the Company (which would be retrospectively reduced by the
amount of consideration received by the Company if it sells its rights to
the Gaming Software within 2 years); and (b) each of the Company and
Sportingbet will be granted a perpetual, non-exclusive royalty free
licence to use, sub-licence and assign all of the then intellectual
property rights underlying the improved Gaming Software, and neither party
will have the rights to any further improvements or developments made by
the other party. The additional $3 million payable to the Company upon
termination of the Joint Venture Arrangement by Sportingbet has not been
included in the Company's financial statements.
REGULATORY DEVELOPMENTS
Authorities in certain jurisdictions, such as the United States, over the past
few years have taken indirect steps to restrict online gaming by seeking to
prevent or deter banks, payment processors, media providers and other suppliers
from transacting with and providing services to online gaming operators, even
though many of these online gaming operators are legally licensed in the
jurisdiction in which they operate. The application or enforcement (or threat of
enforcement) of restrictive laws or regulations, or a change in sentiment by
regulatory authorities or the enactment of new legislation prohibiting or
restricting online gaming or services used by online gaming businesses or the
taking of certain indirect steps, may severely and adversely impact the business
and financial position of online gaming companies such as the Company.
Presently, there are two pieces of proposed legislation being considered in the
US House of Representatives (one introduced by Congressman Leach and the other
by Congressman Goodlatte), with the likelihood of a third being introduced in
the US Senate by US Senator Kyl, as an amendment to other proposed legislation
presently being considered or, in the future, as proposed stand-alone
legislation. Each of these bills will need, in the ordinary course, to be passed
by both Houses of Congress, probably before October 2006 when the 109th Congress
is expected to adjourn, ahead of the mid-term 2006 elections. In addition, the
proposed bills offer "carve-outs" to certain US domestic groups that undertake
US domestic gaming activities and the insertion of such carve-outs by special
interests in the past undoubtedly had an impact on the failure of such
legislation in the past. Obviously, the Company will continue to monitor
developments closely.
In November 2004, the World Trade Organisation ("WTO") held that the US was in
violation of its commitments under international trade laws by not allowing
operators of Internet Gaming services licensed in Antigua and Barbuda to access
US markets. The decision was appealed and the WTO ruled that the US had shown
that its laws prohibiting gambling are "necessary to protect public morals or
maintain public order" but had failed to demonstrate, in light of its laws in
respect of online gambling on horseracing, that such prohibitions are applied
equally to both foreign and domestic providers of on-line gambling services for
horseracing. Consequently, the WTO recommended that the US bring its laws into
conformity with its obligations under international trade rules. Pursuant to the
report of the arbitrator circulated in August 2005, the US has been given until
April 3, 2006 to clarify its policies on Internet gambling and the purported
extraterritorial application of its laws. It remains to be seen what legislative
proposals, if any, will be adopted in the US in relation to Internet gambling
and whether this will lead to a change in US Internet Gaming policy or what
effect this issue will have on the current proposed legislation in the US House
of Representatives.
9
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands of U.S. Dollars)
ASSETS
------
December 31, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ....................... $ 7,605 $ 7,944
Reserves and deposits with credit card processors - 2,234
Customer deposits ............................... 5,438 -
Accounts receivable, net ........................ 4,163 4,438
Consideration recoverable ....................... 3,481 -
Consideration receivable ........................ - 7,000
Prepaid expenses ................................ 989 344
Deferred loan costs ............................. 483 -
--------- ---------
Total Current Assets .......................... 22,159 21,960
Goodwill ........................................ 85,662 -
Deferred loan costs ............................. 604 -
Capital Assets, net ............................. 1,231 1,419
--------- ---------
TOTAL ASSETS .................................. $ 109,656 $ 23,379
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
10
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(In Thousands of U.S. Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, December 31,
2005 2004
----------- -----------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued liabilities ........ $ 3,480 $ 7,080
Customer deposits ............................... 5,438 -
Bank loan ....................................... 15,000 -
Consideration payable ........................... 3,600 -
Deferred provision .............................. 735 -
Deferred loan costs payable ..................... 194 -
Current portion of capital lease obligation ..... - 14
--------- ---------
Total Current Liabilities ..................... 28,447 7,094
LONG-TERM LIABILITIES
Bank loan ........................................ 25,000 -
Deferred provision ............................... - 257
--------- ---------
TOTAL LIABILITIES .................................. 53,447 7,351
--------- ---------
STOCKHOLDERS' EQUITY
Capital stock ................................... 58,496 23,654
Accumulated deficit ............................. (873) (6,354)
Accumulated other comprehensive loss ............ (1,414) (1,272)
--------- ---------
Total Stockholders' Equity .................... 56,209 16,028
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 109,656 $ 23,379
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
11
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Income/(Loss)
(In Thousands of U.S. Dollars, except share amounts)
(Unaudited)
For the three months ended For the twelve months ended
December 31, December 31,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
REVENUE
Royalties and fees ..................... $ 1,630 $ 2,738 $ 8,958 $ 16,288
Operations ............................. 97,513 - 97,513 -
Other .................................. - - - -
--------- --------- --------- ---------
Total Revenue ........................ 99,143 2,738 106,471 16,288
Cost of sales .......................... 90,021 991 92,057 1,871
--------- --------- --------- ---------
Gross Profit ......................... 9,121 1,747 14,414 14,417
--------- --------- --------- ---------
OPERATING EXPENSES
Development, selling, general,
and administrative ..................... 4,431 996 7,281 7,752
Depreciation and amortization .......... 222 296 794 1,420
Interest and bank charges .............. 7 77 (258) 62
--------- --------- --------- ---------
Total Operating Expenses ............. 4,660 1,369 7,817 9,234
--------- --------- --------- ---------
Net Income From Operations ................ 4,461 378 6,597 5,183
--------- --------- --------- ---------
OTHER INCOME/EXPENSES
Other income ........................... (6) (13) - -
Amortization - Goodwill ................ (882) - (882) -
Amortization - Loan costs .............. (24) - (24) -
Extraordinary gain on disposal of assets - 12,187 - 12,187
--------- --------- --------- ---------
Total Other Income ................... (912) 12,174 (906) 12,187
--------- --------- --------- ---------
Profit before income taxes ................ 3,549 12,552 5,691 17,370
Income taxes .............................. - - - -
--------- --------- --------- ---------
NET INCOME ................................ 3,549 12,552 5,691 17,370
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME
Foreign currency translation ......... (157) 32 (142) 168
--------- --------- --------- ---------
Total other comprehensive income ..... (157) 32 (142) 168
--------- --------- --------- ---------
Net Comprehensive Income .................. $ 3,392 $ 12,584 $ 5,549 $ 17,538
========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
12
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Income/(Loss)(Continued)
(In Thousands of U.S. Dollars, except share amounts)
(Unaudited)
For the three months ended For the twelve months ended
December 31, December 31,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
EARNINGS PER ORDINARY SHARE (CENTS)
Basic .............................. $ 0.09 $ 0.39 $ 0.15 $ 0.53
Diluted ............................ $ 0.08 $ 0.34 $ 0.12 $ 0.47
EARNINGS PER SHARE ADJUSTED (CENTS)
Basic .............................. $ 0.11 $ 0.01 $ 0.17 $ 0.16
Diluted ............................ $ 0.10 $ 0.01 $ 0.14 $ 0.14
The calculation of basic earnings per share for the year is based on the profit
after tax at December 31, 2005 of $5.7 million (2004: $17.4 million) and on the
weighted average number of ordinary shares in issue of 39,017,629 (2004:
32,475,203).
The calculation of diluted earnings per share for the year is based on the
profit after tax at December 31, 2005 of $5.7 million (2004: $17.4m) and on the
weighted average number of ordinary shares in issue adjusted to assume the
exercise of options over shares and the dilutive effect of shares to be issued
in respect of the acquisition in the year of 45,736,190 (2004: 37,383,953).
Adjusted basic and diluted earnings per share before goodwill and exceptional
items for the year excludes amortisation of goodwill of $0.9 million (2004:
$nil) and exceptional items of $12.2 million in 2004.The calculation of basic
earnings per share for the quarter is based on the profit after tax at December
31, 2005 of $3.5 million (2004: $12.6 million) and on the weighted average
number of ordinary shares in issue of 39,017,629 (2004: 32,475,203).
The calculation of diluted earnings per share for the quarter is based on the
profit after tax at December 31, 2005 of $3.5 million (2004: $12.2 million) and
on the weighted average number of ordinary shares in issue adjusted to assume
the exercise of options over shares and the dilutive effect of shares to be
issued in respect of the acquisition in the quarter of 45,736,190 (2004:
37,383,953).
Adjusted basic and diluted earnings per share before goodwill and exceptional
items for the quarter excludes amortisation of goodwill of $0.9 million (2004:
$nil) and exceptional items of $12.2 million in the quarter 2004.
Earnings per share excludes shares with no voting or economic rights in respect
of the 13,506,204 shares held by Sportingbet and its affiliates that have been
set aside as a result of the Sportingbet Transaction and may be repurchased by
the Company for an aggregate $1 when the Company has retained earnings to do so.
The accompanying notes are an integral part of
these consolidated financial statements.
13
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands of U.S. Dollars)
(Unaudited)
For the twelve months ended
December 31,
-----------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ...................................................... $ 6,597 $ 5,183
Adjustment to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ................................. 794 1,420
Loss on disposal of fixed assets .............................. - 206
Changes in operating assets and liabilities:
(Increase) decrease in reserves with credit card processors ... 2,234 3,714
(Increase) decrease in customer deposits receivable ........... (5,438) -
(Increase) decrease in accounts receivable .................... 275 (2,975)
(Increase) decrease in prepaid expenses and deposits .......... (645) 325
Increase (decrease) in accounts payable and accrued liabilities (4,329) (1,739)
Increase (decrease) in customer deposits payable .............. 5,438 -
Increase (decrease) in provisions ............................. 478 257
Exchange movements ............................................ - 86
-------- --------
Net Cash Provided by Operating Activities ................... 5,404 6,477
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .............................. (605) (1,065)
Investment - Sportsbetting Transaction, net ..................... (65,244) -
Sportingbet Transaction, net .................................... 7,000 2,032
-------- --------
Net Cash Provided by (Used For) Investing Activities ........ (58,849) 967
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares, net .................................. 14,181 62
Bank loans, net ................................................. 39,107 -
Repayment of loans payable ...................................... - (1,596)
Principal payments on capital lease obligations ................. (14) (647)
-------- --------
Net Cash Provided by (Used for) Financing Activities ........ 53,274 (2,181)
-------- --------
Effects of exchange rate on cash ............................ $ (168) $ 24
-------- --------
The accompanying notes are an integral part of
these consolidated financial statements.
14
WORLD GAMING PLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(In Thousands of U.S. Dollars)
(Unaudited)
For the twelve months ended
December 31,
-----------------------
2005 2004
-------- --------
INCREASE/(DECREASE) IN CASH ........................................ $ (339) $ 5,287
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 7,944 2,657
-------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD ............................ $ 7,605 $ 7,944
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
----------------------------------------------
CASH PAID DURING THE PERIOD FOR
Interest and Bank charges ....................................... $ (258) $ (103)
Other non-cash transactions
Convertible loan note forgiven .................................. $ - $ 900
The accompanying notes are an integral part of
these consolidated financial statements.
15
WORLD GAMING PLC AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
December 31, 2005 and December 31, 2004
NOTE 1 - ACCOUNTING POLICIES
The consolidated financial statements at December 31, 2005 are unaudited
for the purposes of this 6-K filing, but include all adjustments
(consisting only of normal recurring adjustments) which in the opinion of
management, are necessary to state fairly the financial information set
forth therein in accordance with accounting principles generally accepted
in the United States of America. The financial amounts presented in the
notes are in thousands of U.S. dollars unless the currency has been
otherwise indicated.
NOTE 2 - UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial reporting.
Accordingly, certain information and footnote disclosures normally included
in financial statements prepared under accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such regulations. These consolidated financial statements for
the quarter and twelve months ended December 31, 2005 should be read in
conjunction with the Company's annual report on Form 20-F for the fiscal
year ended December 31, 2004.
NOTE 3 - INCOME TAXES
No income taxes arise as no taxation charges are levied in the main
operating territory and elsewhere as there are losses brought forward from
previous periods.
NOTE 4 - STOCK OPTIONS
On March 12, 1998, the Board of Directors approved a Stock Option Plan
("the Plan"), which authorized the issuance of 3,000,000 options to
employees of the Company and its subsidiaries at an exercise price of
$0.74. The options expire on January 1, 2008. On December 31, 1998, the
Board of Directors authorized the issuance of up to 4,000,000 additional
options at an exercise price to be determined based on the trading price of
the Company's shares on the grant date.
16
WORLD GAMING PLC AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
December 31, 2005 and December 31, 2004
NOTE 4 - STOCK OPTIONS (continued)
On December 23, 1999, the Board of Directors authorized the issuance of up
to 5,000,000 additional options at an exercise price to be determined based
on the trading price of the Company's shares on the grant date. On August
5, 2003 the Board of Directors authorized the issuance of up to 1,500,000
additional options to employees at an exercise price of $0.15, being the
closing market price on the date of grant, of which 1,475,000 were issued.
All subsequent option issues have been issued in accordance with the Stock
Option Plan at the discretion of the Stock Option Committee, provided that:
1.) the aggregate option grants shall not exceed the maximum allowable
under the Plan, 2.) the exercise price is not less than the market value of
the Company's trading shares on the date of the grant, and 3.) the option
period does not exceed expiry of the Plan date. Options for continuing
directors, employees and consultants expire the sooner of ten years after
the date granted or the expiry date of the Plan.
A summary of the Company's stock option activity and related information
follows:
Year ended Year ended
December 31, 2005 December 31, 2004
--------------------- ----------------------
Beginning of period .... 10,934,888 $0.63 10,818,724 $ 0.78
Granted ................ 4,491,904 0.81 2,550,000 0.37
Exercised .............. (2,757,459) 0.34 (300,000) (0.20)
Forfeited and adjusted . (3,145,933) 0.99 (2,133,836) (1.12)
---------- ----- ---------- ------
End of period .......... 9,523,400 $0.68 10,934,888 $ 0.63
---------- ----- ---------- ------
In March 2005, a former director of the Company relinquished all rights to
purchase 2,200,000 ordinary shares in the Company that had fully vested.
At December 31, 2005 options outstanding were as follows:
Options Outstanding Options Exercisable
------------------------------------- -------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number of Contractual Exercise Number of Contractual Exercise
Exercise Prices Options Life (Years) Price Options Life (Years) Price
--------------- --------- ------------ -------- --------- ------------ --------
$0.01 - $0.50 6,190,000 4.8 $ 0.27 4,240,000 4.8 $ 0.24
$0.51 - $1.00 2,851,904 5.3 $ 0.77 110,000 3.6 $ 0.60
$1.01 - $3.00 1,193,079 4.1 $ 1.72 548,079 2.7 $ 2.25
$3.01 - $8.50 288,417 4.4 $ 3.29 288,417 4.4 $ 3.29
--------------- --------- ------------ -------- --------- ------------ --------
$0.01 - $8.50 9,523,400 4.8 $ 0.69 5,186,496 4.3 $ 0.63
--------------- --------- ------------ -------- --------- ------------ --------
17
WORLD GAMING PLC AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
December 31, 2005 and December 31, 2004
NOTE 5 - COMMITMENTS AND CONTINGENCIES
At December 31, 2005, the Company had employment contracts with its three
principal officers. The salary and bonus compensation resulting from these
contracts are as follows:
Potential Bonus
Name and Term of the Base (as a percentage
Principal Position Contract Salary of Base Salary)
_______________________________________________________________________
A. Daniel Moran, ongoing GBP 159,000 Up to 50%
Director & CEO
_______________________________________________________________________
David Naismith, ongoing GBP 129,000 Up to 50%
Director & CFO
_______________________________________________________________________
Jonathan Moss ongoing GBP 100,000 Up to 50%
Director of Sales
and Marketing
_______________________________________________________________________
On April 11, 2003 the Company entered into an employment agreement with Mr.
Daniel Moran as a Director on the Board of Directors and Chief Executive
Officer. The agreement provides for an annual salary of GBP 159,000 and an
annual housing allowance of $72,000 in addition to other normal executive
employment benefits.
On August 1, 2003 the Company entered into an employment agreement with Mr.
David Naismith as a Director on the Board of Directors and Chief Financial
Officer. The agreement provides for an annual salary of GBP 129,000 and an
annual housing allowance of $48,000 in addition to other normal executive
employment benefits.
On January 1, 2005 the Company entered into an employment agreement with
Mr. Jonathan Moss as Director of Sales and Marketing. The agreement
provides for an annual salary of GBP 100,000 in addition to other normal
executive employment benefits. On March 1 2005, Mr. Moss was appointed a
Director on the Board of Directors. No change in Mr. Moss's remuneration
occurred as a result of this appointment.
18
U.S. SECURITIES ACT NOTICE
The ordinary shares to be issued in connection with the Company's proposed
acquisition transaction or the related equity offering have not been and will
not be registered under the U.S. Securities Act of 1933, as amended (the
"Securities Act"), and may not be offered or sold in the United States or to, or
for the account or benefit of, a U.S. person (as such term is defined in
Regulations S under the Securities Act) absent registration or an applicable
exemption from registration under the Securities Act.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make certain forward-looking statements in this document within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. To comply with the terms of the safe harbor, we note that a variety
of factors could cause our actual results and experience to differ substantially
from the anticipated results or other expectations expressed in our
forward-looking statements. When words and expressions such as: "believes,"
"expects," "anticipates," "estimates," "plans," "intends," "objectives,"
"goals," "aims," "projects," "forecasts," "possible," "seeks," "may," "could,"
"should," "might," "likely," "enable" or similar words or expressions are used
in this document, as well as statements containing phrases such as "in our
view," "there can be no assurance," "although no assurance can be given" or
"there is no way to anticipate with certainty," forward-looking statements are
being made. These forward-looking statements speak as of the date of this
document.
The forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. These risks and uncertainties may affect the
operation, performance, development and results of our business and could cause
future outcomes to differ materially from those set forth in our forward-looking
statements. These statements are based on our current beliefs as to the outcome
and timing of future events, and actual results may differ materially from those
projected or implied in the forward looking statements. Further, some
forward-looking statements are based upon assumptions of future events which may
not prove to be accurate. The forward-looking statements involve risks and
uncertainties including, without limitation, the risks and uncertainties
referred to in our filings with the Securities and Exchange Commission,
including our most recent Form 20-F.
We undertake no obligation to publicly update or revise any forward-looking
statements as a result of future developments, events and conditions. New risk
factors emerge from time to time and it is not possible for us to predict all
such risk factors, nor can we assess the impact of all such risk factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ significantly from those forecast in any
forward-looking statements. Given these risks and uncertainties, investors
should not overly rely on or attach undue weight to our forward-looking
statements as an indication of our actual future results.
19