Optimal Group Announces Fourth Quarter and 2006 Year End Results
Montreal, Quebec, March 6, 2007 – Optimal Group Inc. (NASDAQ:OPMR) today announced its financial results for the fourth quarter and year ended December 31, 2006. All references are in U.S. dollars.
Revenues for the fourth quarter ended December 31, 2006 were $33.9 million compared to $52.0 million in the fourth quarter ended December 31, 2005. Segmented disclosure is included in Annex A attached below.
Adjusted earnings for the fourth quarter were $5.7 million or $0.23 per diluted share (which included the reversal of $3.5 million of exceptional provisions for customer losses recorded in the third quarter) compared to $4.8 million or $0.18 per diluted share for the comparable period in 2005.
Adjusted earnings is a non-GAAP (generally accepted accounting principles) financial measure that excludes foreign exchange gains and losses, discontinued operations, impairment losses, restructuring costs, gain on sale of interest in FireOne and stock-based compensation. A reconciliation of Optimal's adjusted earnings is included in Annex B to the Company's consolidated financial statements attached below.
Net earnings in the fourth quarter ended December 31, 2006 were $2.8 million or $0.11 per diluted share (which includes the reversal of $3.5 million of exceptional provisions for customer losses, stock-based compensation of $0.7 million and $1.6 million of restructuring costs) compared to a net loss of $20.6 million or $0.89 per share (which included stock-based compensation of $12.9 million and $3.3 million of restructuring costs) in the fourth quarter ended December 31, 2005.
Revenues for the year ended December 31, 2006 were $191.9 million compared to $144.9 million in the year ended December 31, 2005. Segmented disclosure is included in Annex A attached below.
Adjusted earnings for the year ended December 31, 2006 were $31.4 million or $1.24 per diluted share compared to $16.7 million or $0.66 per diluted share for the comparable period in 2005.
Net earnings for the year ended December 31, 2006 were $12.8 million or $0.50 per diluted share (which includes stock-based compensation of $1.7 million, $1.6 million of restructuring costs, a loss on discontinued operations, net of income taxes, of $9.0 million and a loss on disposal of net assets from discontinued operations, net of income taxes, of $4.3 million), compared to net earnings of $0.6 million or $0.02 per diluted share (which included a gain on sale of an interest in FireOne of $30.4 million, stock-based compensation of $20.2 million, $3.3 million of restructuring costs, a loss on discontinued operations, net of income taxes, of $22.4 million and a loss on disposal of net assets from discontinued operations, net of income taxes, of $0.2 million) for the year ended December 31, 2005.
As previously announced, in reaction to U.S. legislation enacted on October 13, 2006, the Company's then majority-owned subsidiary, FireOne Group plc, ceased to process settlement transactions originating from United States consumers. The passage of this legislation had, in the third and fourth quarters of 2006, and will continue to have for at least the short term, a significant negative impact on the financial results of FireOne Group plc, and hence the Company. The foregoing statements, including as to adjusted earnings, should be considered in this context.
As a result of the enactment of this legislation, the Company recorded a restructuring charge of $1.6 million in the fourth quarter.
Optimal's consolidated balance sheet remains strong. At December 31, 2006, the Company had:
- Cash and cash equivalents, short-term investments (including amounts held in reserve) and settlement assets net of customer reserves, security deposits and bank indebtedness, of $134.2 million or $5.63 per issued and outstanding share;
- working capital, excluding cash and short-term investments held as reserves, of $94.3 million; and
- shareholders' equity of $219.4 million, or $9.20 per issued and outstanding share.
Use of Adjusted Earnings
In addition to the financial measures prepared in accordance with GAAP, Optimal uses certain non-GAAP financial measures, including adjusted earnings per diluted share. Optimal believes that the inclusion of such measures helps investors to gain a better understanding of its core operating results and is consistent with how management measures and forecasts the Company's operational and financial performance, especially when comparing such results to previous periods.
Going Forward/Strategic Plan
The Company continues to focus on and refine its strategic plan, both operationally and as it relates to its corporate structure of the Optimal group of companies.
With the completion of our cash offer for our majority-owned subsidiary, FireOne Group, we have repatriated and realigned certain assets, and have streamlined the operations of FireOne Group and Optimal Payments in order to more efficiently operate them as a single business segment.
We intend to pursue a strategy of establishing Optimal Payments as a leader in providing secure electronic payment and risk management solutions to small and medium-sized businesses that sell and deliver goods and services over the Internet, wirelessly, or generally in a card-not-present environment. The Company's gateway and infrastructure presently provide strong support for the ability of online merchants and other e-commerce sites to accept credit cards and process electronic checks. As well, the Company believes that it has developed particular expertise in providing higher margin transaction processing services to businesses and merchants that are considered higher risk. As demonstrated by our previous successes in managing higher risk transactions, we believe that Optimal Payments' risk management tools, such as they relate to fraud prevention, credit qualification and payment and transaction processing, as well as its marketing capabilities, should enable it to build a growing presence with small and medium-sized businesses in the online and other card-not-present marketplaces. We believe that additional opportunities exist in specific industry verticals, such as digital downloads, and we intend to dedicate resources to establish a strong position in such markets.
We are also pursuing strategic relationships with acquiring banks, with a view to growing our merchant base more rapidly and improving operating efficiencies as they relate to certain growing and strategic vertical markets. We further intend to re-position our e-wallet payment processing platform, consider expanding the potential uses for our peer-to-peer technology and diversify the geographic scope of our offerings as well as provide multi-currency functionality.
At the same time, the Company is actively exploring acquisition opportunities. In that regard, the Company has particular interest in situations that can add scale and leverage to its online processing activities.
About Optimal Group Inc.
Optimal Group Inc. is a leading payments company with operations primarily in North America and the United Kingdom as well as in Ireland. Through its wholly-owned subsidiary Optimal Payments, we process credit card payments for Internet businesses, mail-order/telephone-order and retail point-of-sale merchants, and process electronic checks and direct debits online and by phone.
For more information about Optimal, please visit the Company's website at www.optimalgrp.com.
Gary Wechsler
Chief Financial Officer
Optimal Group Inc.
(514) 738-8885
gary@optimalgrp.com
Cautionary Statements Regarding Forward-Looking Statements
This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expects", "intends", "anticipates", "plans", "believes", "seeks", "estimates", or variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include, but are not limited to, statements about our current expectations with respect to our future growth strategies, opportunities and prospects, competitive position and industry environment. These forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, or those of the markets we serve, to differ materially from those expressed in, or implied by, these forward-looking statements, including:
- existing and future governmental regulations;
- general economic and business conditions in the markets we serve;
- consumer confidence in the security of financial information transmitted via the Internet;
- levels of consumer fraud, disputes between consumers and merchants and merchant insolvency;
- our ability to safeguard against breaches of privacy and security when processing electronic transactions;
- the imposition of and our compliance with rules and practice procedures implemented by credit card and check clearing associations;
- our ability to adapt to changes in technology, including technology relating to electronic payments systems;
- our ability to protect our intellectual property;
- our relationships with our suppliers and the banking associations that we rely upon to process our electronic transactions;
- disruptions in the function of our electronic payments systems and technological defects; and
- the factors described under Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005, our Quarterly Reports on Form 10-Q for the three months ended June 30, 2006 and September 30, 2006.
There may be additional risks and uncertainties and other factors that we do not currently view as material or that are not necessarily known. The forward looking statements made in this document are only made as of the date of this document.
Except as required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in circumstances or any other reason after the date of this press release.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation. We are relying on the "safe harbor" provisions of the Private Securities Litigation Reform Act in connection with the forward-looking statements included in this press release.
Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows follow:
OPTIMAL GROUP INC.
Consolidated Balance Sheets
December 31, 2006 and 2005
(expressed in thousands of U.S. dollars)
-------------------------------------------------------------------
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2006 2005
Unaudited Unaudited
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Assets
Current assets:
Cash and cash equivalents $103,922 $98,236
Cash held as reserves 18,960 22,722
Short-term investments 71,621 82,361
Short-term investments held as reserves 3,110 3,014
Settlement assets 7,061 20,727
Accounts receivable 5,600 4,681
Income taxes receivable and refundable
investment tax credits 1,025 1,055
Prepaid expenses and deposits 1,119 1,006
Future income taxes 2,192 2,016
Current assets related to discontinued
operations 1,506 10,944
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216,116 246,762
Long-term receivables 3,144 3,528
Property and equipment 2,121 2,660
Goodwill and other intangible assets 106,041 117,090
Future income taxes 2,692 1,116
Other asset 10,423 10,462
Long-term assets related to discontinued
operations - 3,848
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$340,537 $385,466
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Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $8,581 $8,390
Customer reserves and security deposits 61,897 112,422
Accounts payable and accrued liabilities 21,399 21,796
Income taxes payable 5,573 9,003
Future income taxes 382 836
Current liabilities related to discontinued
operations 1,963 7,062
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99,795 159,509
Non-controlling interest 16,392 12,926
Future income taxes 4,968 9,741
Shareholders' equity:
Share capital 202,252 195,149
Additional paid-in capital 23,169 25,884
Deficit (4,555) (16,259)
Cumulative translation adjustment (1,484) (1,484)
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219,382 203,290
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$340,537 $385,466
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OPTIMAL GROUP INC.
Consolidated Statements of Operations
Three and twelve month periods ended December 31, 2006 and 2005
(expressed in thousands of US dollars, except per share amounts)
--------------------------------------------------------------------
Three months ended Twelve months ended
December 31, December 31,
2006 2005 2006 2005
Unaudited Unaudited Unaudited Unaudited
--------------------------------------------------------------------
Revenues $33,932 $52,028 $191,893 $144,898
Expenses:
Transaction processing 18,500 26,105 94,906 67,495
Selling, general and
administrative 6,020 11,878 47,553 35,689
Amortization of intangibles
pertaining to transaction
processing 2,974 2,988 12,129 7,833
Amortization of property
and equipment 365 346 1,520 1,324
Stock-based compensation
pertaining to selling,
general and administrative 701 12,873 1,707 20,191
Research and development 909 809 3,388 2,659
Operating leases 337 226 1,498 1,103
Restructuring costs 1,581 3,299 1,581 3,299
Impairment loss - - 1,910 -
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31,387 58,524 166,192 139,593
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Earnings (loss) from
continuing operations
before undernoted items 2,545 (6,496) 25,701 5,305
Investment income 2,502 1,295 8,388 2,973
Gain on sale of interest in
Fireone - - - 30,411
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Earnings (loss) from
continuing operations
before income taxes and
non-controlling interest 5,047 (5,201) 34,089 38,689
Income tax recovery
(provision) 155 (3,667) (1,070) (11,388)
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Earnings (loss) from
continuing operations
before non-controlling
interest 5,202 (8,868) 33,019 27,301
Non-controlling interest (1,416) (2,443) (6,934) (4,181)
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Earnings (loss) from
continuing
operations 3,786 (11,311) 26,085 23,120
Loss from discontinued
operations, net of
income taxes (1,033) (9,144) (9,023) (22,355)
Loss on disposal of net
assets from discontinued
operations, net of
income taxes - (188) (4,283) (188)
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Net earnings (loss) $2,753 $(20,643) $12,779 $577
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Weighted average number of
shares:
Basic 23,792 23,217 23,629 22,869
Plus impact of stock
options and warrants 637 3,119 1,811 2,475
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Diluted 24,429 26,336 25,440 25,344
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Earnings (loss) per share :
Continuing operations:
Basic $0.16 $(0.49) $1.10 $1.01
Diluted 0.15 (0.43) 1.03 0.91
Discontinued operations:
Basic (0.04) (0.40) (0.56) (0.98)
Diluted (0.04) (0.35) (0.53) (0.89)
Net:
Basic 0.12 (0.89) 0.54 0.03
Diluted $0.11 $(0.89) $0.50 $0.02
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OPTIMAL GROUP INC.
Consolidated Statements of Cash Flows
Three and twelve month periods ended December 31,
(expressed in thousands of US dollars)
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Three months ended Twelve months ended
December 31, December 31,
2006 2005 2006 2005
Unaudited Unaudited Unaudited Unaudited
--------------------------------------------------------------------
Cash flows from operating
activities:
Net earnings (loss) from
continuing operations $3,786 $(11,311) $26,085 $23,120
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Adjustments for items not
affecting cash:
Non - controlling interest 1,416 2,443 6,934 4,181
Amortization 3,339 3,334 13,649 9,157
Future income taxes 394 1,469 (7,106) 3,035
Stock-based compensation 701 12,873 1,707 20,191
Foreign exchange 333 (8) (390) 559
Impairment loss - - 1,910 -
Write -down of property and
equipment 301 - 301 -
Gain on sale of interest in
FireOne - - - (30,411)
Net change in operating
assets and liabilities (28,818) 8,191 (37,855) 33,525
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(18,548) 16,991 5,235 63,357
Cash flows from (used in)
financing activities:
Proceeds from exercise of
RSUs in FireOne - 16 24 16
Increase (decrease) in bank
indebtedness 878 1,715 159 (480)
Payment of dividend by
FireOne to
minority interest - - (4,796) -
Repurchase of Class "A"
shares - (436) (2,264) (436)
Proceeds from issuance of
Class "A" shares 1,094 806 5,172 7,508
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1,972 2,101 (1,705) 6,608
Cash flows from (used in)
investing activities:
Purchase of property and
equipment and intangible
assets (1,715) (625) (4,272) (2,050)
(Purchase) proceeds from
maturity of short-term
investments (15,511) (54,353) 10,740 5,852
Proceeds from note
receivable 60 62 384 138
Proceeds from sale of
interest in FireOne - - - 44,146
Decrease in cash held in
escrow - - - 3,536
Acquisition of NPS, net of
cash acquired of $126 - - - (3,000)
Acquisition of MCA - (13) - (3,722)
Acquisition of UBC - - - (44,277)
Acquisition of Moneris - (18,266) - (18,266)
Transactions costs - (635) - (6,553)
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(17,166) (73,830) 6,852 (24,196)
Effect of exchange rate
changes on cash and cash
equivalents during the
period 46 235 423 (169)
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Net (decrease) in cash from
discontinued operations (927) (3,218) (5,119) (10,301)
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Net (decrease) increase in
cash and cash equivalents (34,623) (57,721) 5,686 35,299
Cash and cash equivalents,
beginning of period 138,545 155,957 98,236 62,937
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Cash and cash equivalents,
end of period $103,922 $98,236 $103,922 $98,236
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Annex A
Segmented Disclosure
During 2006, the Company operated in three segments: through wholly-owned subsidiaries, card present and card-not-present payment services for small and medium sized merchants; through then majority-owned subsidiaries, gaming payment services; and through wholly-owned subsidiaries, hardware maintenance and repair. As a result of the Company's decision in the first quarter of 2006 to divest the hardware maintenance and repair business, the net results of this segment are reported as discontinued operations. Comparative figures have been reclassified to conform to this new presentation. Transaction processing costs, administrative expenses and other fees charged among the segments are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the parties. Management measures the results of operations based on segment income before income taxes adjusted for certain non-cash and non-recurring items provided by each business segment.
Immediately following enactment of the Act on October 13, 2006, the Company's then majority-owned subsidiary, FireOne Group plc, ceased processing settlement transactions originating from United States consumers.
(a) Information on the operating segments is as follows:
Three month period ended December 31, 2006:
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Payment Processing
Gaming
payment Payment Elimination/
services services Unallocated Consolidated
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Revenues $7,958 $26,683 $(709) $33,932
Transaction processing 1,807 17,055 (362) 18,500
Selling, general and
administrative (1,448) 7,922 (454) 6,020
Research and development 80 829 - 909
Operating leases 20 317 - 337
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7,499 560 107 8,166
Stock-based compensation 427 274 - 701
Amortization 59 3,276 4 3,339
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7,013 (2,990) 103 4,126
Restructuring (1,217) (364) - (1,581)
Investment income 1,225 1,277 - 2,502
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Earnings (loss) from
continuing operations
before income taxes and
non-controlling interest 7,021 (2,077) 103 5,047
Income tax (provision)
recovery (1,178) 1,333 - 155
Non-controlling interest (1,416) - - (1,416)
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Earnings (loss) from
continuing operations 4,427 (744) 103 3,786
Loss from discontinued
operations - (1,033) (1,033)
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Net earnings (loss) $4,427 $(744) $(930) $2,753
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Three month period ended December 31, 2005:
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Payment Processing
Gaming
payment Payment Elimination/
services services Unallocated Consolidated
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Revenues $23,826 $30,174 $(1,972) $52,028
Transaction processing 9,272 17,823 (990) 26,105
Selling, general and
administrative 4,293 8,567 (982) 11,878
Research and development 120 689 - 809
Operating leases 68 158 - 226
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10,073 2,937 - 13,010
Stock-based compensation 3,176 9,697 - 12,873
Amortization 259 3,075 - 3,334
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6,638 (9,835) - (3,197)
Restructuring - - (3,299) (3,299)
Investment income 319 976 - 1,295
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Earnings (loss) from
continuing operations
before income taxes and
non-controlling interest 6,957 (8,859) (3,299) (5,201)
Income tax provision (1,258) (2,409) - (3,667)
Non-controlling interest (2,443) - - (2,443)
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Earnings (loss) from
continuing operations 3,256 (11,268) (3,299) (11,311)
Loss from discontinued
operations - - (9,144) (9,144)
Loss on disposal of net
assets from discontinued
operations - - (188) (188)
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Net earnings (loss) $3,256 $(11,268) $(12,631) $(20,643)
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Year ended December 31, 2006:
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Payment Processing
Gaming
payment Payment Elimination/
services services Unallocated Consolidated
--------------------------------------------------------------------------
Revenues $84,151 $115,092 $(7,350) $191,893
Transaction processing 29,166 69,128 (3,388) 94,906
Selling, general and
administrative 19,378 32,457 (4,282) 47,553
Research and development 506 2,882 - 3,388
Operating leases 243 1,255 - 1,498
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34,858 9,370 320 44,548
Stock-based compensation 1,068 639 - 1,707
Impairment 1,910 - - 1,910
Amortization 860 12,777 12 13,649
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31,020 (4,046) 308 27,282
Restructuring (1,217) (364) - (1,581)
Investment income 4,689 3,699 - 8,388
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Earnings (loss) from
continuing operations
before income taxes
and non-controlling
interest 34,492 (711) 308 34,089
Income tax
(provision) recovery (6,141) 5,229 (158) (1,070)
Non-controlling
interest (6,934) - - (6,934)
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Earnings from continuing
operations 21,417 4,518 150 26,085
Loss from discontinued
operations - - (9,023) (9,023)
Loss on disposal of
net assets from
discontinued
operations - - (4,283) (4,283)
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Net earnings (loss) $21,417 $4,518 $(13,156) $12,779
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Year ended December 31, 2005:
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Payment Processing
Gaming
payment Payment Elimination/
services services Unallocated Consolidated
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Revenues $76,268 $74,781 $(6,151) $144,898
Transaction processing 30,774 40,264 (3,543) 67,495
Selling, general and
administrative 12,322 25,975 (2,608) 35,689
Research and development 1,113 1,546 - 2,659
Operating leases 309 794 - 1,103
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31,750 6,202 - 37,952
Stock-based
compensation 4,771 15,420 - 20,191
Amortization 978 8,179 - 9,157
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26,001 (17,397) - 8,604
Restructuring - - (3,299) (3,299)
Investment income 478 2,495 - 2,973
Gain on sale of
interest in FireOne - - 30,411 30,411
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Earnings (loss) from
continuing operations
before income taxes
and non-controlling
interest 26,479 (14,902) 27,112 38,689
Income tax provision (8,451) (2,937) - (11,388)
Non-controlling
interest (4,181) - - (4,181)
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Earnings (loss) from
continuing operations 13,847 (17,839) 27,112 23,120
Loss from discontinued
operations - - (22,355) (22,355)
Loss on disposal of net
assets from discontinued
operations - - (188) (188)
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Net earnings (loss) $13,847 $(17,839) $4,569 $577
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Annex B
Use of Non-GAAP Financial Information
We supplement our reporting of net earnings (loss) determined in accordance with Canadian and U.S. GAAP by reporting "adjusted earnings (loss)" as a measure of earnings (loss) in this earnings release. In establishing this supplemental measure of earnings (loss), we exclude foreign exchange gains and losses, discontinued operations, impairment losses, restructuring costs, gain on sale of interest in FireOne and stock-based compensation from earnings from continuing operations before income taxes and non-controlling interest as management believes that foreign exchange gains and losses are largely uncontrollable by management and discontinued operations, impairment losses, restructuring costs, gain on sale of interest in FireOne and stock-based compensation are not reflective of our core operations.
Management believes that adjusted earnings (loss) is useful to investors as a measure of our earnings (loss) because it is, for management, a primary measure of our performance, and provides a more meaningful reflection of our earnings.
Adjusted earnings (loss) does not have a standardized meaning under Canadian or U.S. GAAP and therefore should be considered in addition to, and not as a substitute for, earnings (loss) or any other amount determined in accordance with Canadian and U.S. GAAP. Our measure of adjusted earnings (loss) reflects management's judgment in regard to the impact of foreign exchange gains and losses, discontinued operations, impairment losses, restructuring costs, gain on sale of interest in FireOne and stock-based compensation on our core operations, and may not be comparable to similarly titled measures reported by other companies.
OPTIMAL GROUP INC.
Reconciliation of Non-GAAP Financial Information
(expressed in thousands of U.S. dollars, except per share amounts)
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Three months ended Twelve months ended
December 31, December 31,
2006 2005 2006 2005
Unaudited Unaudited Unaudited Unaudited
--------------------------------------------------------------------
Net earnings (loss) $2,753 (20,643) $12,779 577
Add (deduct):
Loss from discontinued
operations 1,033 9,144 9,023 22,355
Loss on disposal of net
assets from discontinued
operations - 188 4,283 188
Gain on sale of
interest in FireOne - - - (30,411)
Impairment loss - - 1,910 -
Restructuring costs 1,581 3,299 1,581 3,299
Stock-based compensation
pertaining to selling,
general and administrative 701 12,873 1,707 20,191
Foreign exchange (gain) loss (333) (87) 160 490
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Adjusted earnings $5,735 4,774 $31,443 16,689
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Diluted shares 24,429 26,336 25,439 25,345
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Adjusted earnings
per diluted share $0.23 $0.18 $1.24 $0.66
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