Optimal Group Inc.
NASDAQ : OPMR
LSE : FPA

Optimal Group Inc.

August 08, 2005 16:02 ET

Optimal Group Announces Second Quarter 2005 Results; $8.7 million in Underlying Earnings for the Quarter

MONTREAL--(CCNMatthews - Aug 8, 2005) -

Optimal Group Inc. (NASDAQ:OPMR), today announced its financial results for the second quarter ended June 30, 2005. All references are to U.S. dollars.

Revenues for the second quarter ended June 30, 2005 were $40.6 million compared to $21.0 million in the second quarter ended June 30, 2004. Underlying earnings from continuing operations before income taxes and non-controlling interest were $8.7 million or $0.35 per diluted share for the second quarter ended June 30, 2005 compared to $0.7 million or $0.03 per share for the corresponding period of the prior year. Compared to the quarter ended March 31, 2005, underlying earnings from continuing operations before income taxes and non-controlling interest increased by $3.3 million or 61% from $5.4 million to $8.7 million.

Net earnings for the second quarter ended June 30, 2005 were $20.7 million or $0.83 per diluted share, which includes stock-based compensation expense of $2.8 million or $0.11 per diluted share, as well as a gain of $30.6 million or $1.22 per diluted shares on the sale of a 20% interest in FireOne Group plc. The net loss for the comparable year-earlier period was $6.6 million or $0.31 per share, which included stock-based compensation expense of $1.9 million or $0.09 per share.

In furtherance of Optimal's strategy with respect to its hardware maintenance and repair services segment, during the quarter, Optimal disposed of its U.S. field maintenance service operations, the results of which are presented as a loss from discontinued operations of $5.5 million for the three months ended June 30, 2005. Proceeds from the disposition were not material. This disposition did not have an effect on Optimal's Canadian field maintenance service operations. As well during the quarter, Optimal incurred $0.3 million of restructuring costs pertaining to the hardware repair and maintenance business segment.

Underlying earnings from continuing operations before income taxes and non-controlling interest is a non-GAAP (Generally Accepted Accounting Principles) financial measure that excludes amortization of intangibles, amortization of property and equipment, inventory write-downs, stock-based compensation expense, restructuring costs, foreign exchange, goodwill impairment, gain on sale of investments, income taxes, non-controlling interest and discontinued operations.

Optimal believes that underlying earnings from continuing operations before income taxes and non-controlling interest is useful to investors as a measure of Optimal's earnings because it is an important measure of the Company's growth and performance, and provides a meaningful reflection of underlying trends of its business. A reconciliation of Optimal's underlying earnings from continuing operations before income taxes and non-controlling interest is included in Annex A to the Company's interim consolidated financial statements attached below.

Revenues for the six months ended June 30, 2005 were $74.7 million compared to $30.2 million in the six months ended June 30, 2004. Underlying earnings from continuing operations before income taxes and non-controlling interest were $14.1 million for the six months ended June 30, 2005 compared to a loss of $2.1 million for the corresponding period of the prior year.

Net earnings for the six months ended June 30, 2005 were $20.8 million or $0.84 per diluted share, which includes stock-based compensation expense of $4.7 million or $0.19 per diluted share. The net loss for the comparable period of the prior year was $9.8 million or $0.53 per diluted share, which included stock-based compensation expense of $1.9 million or $0.11 per share.

Optimal's financial results reflect the following significant transactions, which were completed during the second quarter ended June 30, 2005:

-- Optimal acquired a portfolio of merchant processing from United Bank Card, Inc.; and

-- Through a flotation on the AIM Market of the London Stock Exchange plc, Optimal sold a 20% interest in FireOne Group.

The sale of the interest in FireOne Group resulted in the recognition during the quarter of a gain of $30.6 million. The non-controlling interest of $0.2 million represents 20% of FireOne Group`s net earnings from June 2, 2005.

Commenting on the announcement, Holden L. Ostrin, Co-Chairman of Optimal, said, "We are very pleased with our second quarter results, the state of our business and our current outlook for the immediate future. Strategically, we successfully executed the acquisition of the merchant processing portfolio from United Bank Card, as well as the flotation of FireOne Group." Mr. Ostrin continued, "We also experienced strong organic growth both within FireOne Group, as well as within the rest of our payments business. We continue to be focused upon executing our strategy of investing in our payments infrastructure while utilizing our superior balance sheet to complete strategic acquisitions."

As at June 30, 2005 cash, cash equivalents, short-term investments and settlement assets net of bank indebtedness, customer reserves and security deposits were $107.2 million. Working capital, excluding cash and short-term investments held as reserves and cash held in escrow, as at June 30, 2005 was $65.7 million. Shareholders' equity at quarter end was $206.6 million.

Financial Outlook for the Third Quarter of 2005

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions, divestitures or other business combinations.

For the third quarter of 2005, Optimal anticipates that underlying earnings from continuing operations before income taxes and non-controlling interest will be approximately $9.8 million.

Optimal's conference call will be held on Tuesday, August 9, 2005 at 10:00 am (EDT). It is the intent of Optimal's conference call to have the question and answer session limited to institutional analysts and investors. The call can be heard beginning at 10:00 am (EDT) as an audio webcast via Optimal's website at www.optimalgrp.com. As well, Optimal invites retail brokers and individual investors to hear the conference call replay by dialing 1-800-408-3053 Pass Code: 3158706#. The replay may be heard beginning at 2:00 pm (EDT) on August 9, 2005 and will be available for five business days thereafter.

Optimal also announced that Mitchell Garber, Executive Vice-President of Optimal Group, President and CEO of Optimal Payments Inc. and Executive Chairman of FireOne Group plc, in order to diversify his investment portfolio, has entered into a pre-arranged structured trading plan in accordance with guidelines specified by Rule 10b5-1 under the Securities and Exchange Act of 1934 and the counterpart provisions of applicable Canadian securities laws. Mr. Garber intends to sell a maximum of 195,000 common shares under this plan.

About Optimal Group Inc.

Optimal Group Inc. is a leading payments and services company with operations throughout North America and the United Kingdom. Through 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. Through FireOne Group and its subsidiaries, we process online gaming transactions through the use of credit and debit cards, electronic debit and through FirePay (www.firepay.com), a leading stored-value, electronic wallet. FireOne Group offers FirePay for non-gaming purchases as well. Through Optimal Services Group, we provide repair depot and field services to retail, financial services and other third-party accounts.

For more information about Optimal, please visit the Company's website at www.optimalgrp.com.



Forward-Looking Statements:

Statements in this release that are "forward-looking statements"
are based on current expectations and assumptions that are subject to
risks and uncertainties. Actual results could differ materially
because of factors such as the following: our ability to retain key
personnel is important to our growth and prospects; we may be unable
to find suitable acquisition candidates and may not be able to
successfully integrate businesses that may be acquired into our
operations; we are subject to the risk that a taxation authority could
challenge certain filing positions we have taken, and that a
successful challenge could require us to pay significant additional
taxes; our payments businesses are at risk of loss due to fraud and
disputes; our payments businesses may not be able to safeguard against
security and privacy breaches in our electronic transactions; our
payment systems might be used for illegal or improper purpose; our
payments businesses must comply with credit card and check clearing
association rules and practices which could impose additional costs
and burdens on our payments businesses; our payments businesses may
not be able to develop new products that are accepted by our
customers; the failure of our systems, the systems of third parties or
the Internet could negatively impact our business systems or our
reputation; increasing government regulation of internet commerce
could make it more costly or difficult to continue our payments
businesses; our payments businesses rely on strategic relationships
and suppliers; it may be costly and/or time-consuming to enforce our
rights with respect to payments assets held in foreign jurisdictions;
our ability to protect our intellectual property is key to the future
growth of our payments businesses; our payments businesses operate in
competitive markets for our products and services; our payments
businesses rely upon independent sales agents to retain and acquire
our customers; our business systems are based on sophisticated
technology which may be negatively affected by technological defects
and product development delays; our payments businesses rely upon
encryption technology to conduct secure electronic commerce
transactions; the ability of our payments businesses to process
electronic transactions depends on bank processing and credit card
systems; we are subject to exchange rate fluctuations between the U.S.
and Canadian dollars; we may be subject to liability or business
interruption as a result of unauthorized disclosure of merchant and
cardholder data that we store; our businesses are subject to
fluctuations in general business conditions; the legal status of
Internet gaming is uncertain and future regulation may make it costly
or impossible to continue processing for gaming merchants; we face
uncertainties with regard to lawsuits, regulations and similar
matters; our contracts for hardware maintenance and repair outsourcing
services may not be renewed or may be reduced; our hardware
maintenance and repair outsourcing services business relies upon
certain customers for a substantial portion of our services revenues;
our hardware maintenance and repair outsourcing services business is
affected by computer industry trends; our hardware maintenance and
repair outsourcing services business operates in a market subject to
rapid technological change; The failure of the systems of our hardware
maintenance and repair outsourcing services could negatively impact
our business and our reputation; our per incident hardware maintenance
and repair outsourcing services revenues are variable; our hardware
maintenance and repair outsourcing services business operates in a
highly competitive market and there is no assurance that we will be
able to compete successfully against current or future competitors;
our hardware maintenance and repair outsourcing services business
relies on single suppliers for some of our inventory; we may not be
able to accurately predict the inventory requirements of our hardware
maintenance and repair outsourcing services business; our hardware
maintenance and repair outsourcing services business may be subject to
unforeseen difficulties in managing customers' equipment; our hardware
maintenance and repair outsourcing services business may fail to price
fixed fee contracts accurately; we may be subject to additional
litigation stemming from our operation of the U-Scan self-checkout
business.
For further information regarding risks and uncertainties
associated with our business, please refer to the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", "Legal Proceedings" and "Forward Looking Statements"
sections of our annual report on Form 10-K and quarterly reports on
Form 10-Q, filed with the SEC.
All information in this release is as of August 8, 2005. We
undertake no duty to update any forward-looking statement to conform
the statement to actual results or changes in our expectations.



Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows follow:



OPTIMAL GROUP INC.
Consolidated Balance Sheets
(Unaudited)
June 30, 2005 and December 31, 2004
(expressed in thousands of U.S. dollars)
------------------------------------------------------------- --------

June 30, Dec. 31,
2005 2004
----------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $127,699 $ 62,937
Cash held as reserves 19,297 18,739
Cash held in escrow 816 3,536
Short-term investments 28,151 88,213
Short-term investments held as reserves 2,104 2,104
Settlement assets 16,910 14,375
Accounts receivable 6,780 7,121
Income taxes receivable and refundable investment
tax credits 567 773
Inventory 1,653 1,953
Prepaid expenses and deposits 2,062 1,138
Future income taxes 2,482 -
Current assets from discontinued operations 1,487 2,845
----------------------------------------------------------------------
210,008 203,734

Long-term receivables 3,529 3,666
Non-refundable investment tax credits - 4,747
Property and equipment 5,068 4,462
Goodwill and other intangible assets 111,537 68,525
Deferred compensation cost 1,279 1,807
Future income taxes 682 3,979
Other asset 10,986 -
Long-term assets from discontinued operations 733 4,326

----------------------------------------------------------------------
$343,822 $295,246
----------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 6,056 $ 8,301
Customer reserves and security deposits 81,722 77,574
Accounts payable and accrued liabilities 23,776 24,219
Income taxes payable 8,126 403
Future income taxes 876 917
Current liabilities from discontinued operations 1,513 3,357
----------------------------------------------------------------------
122,069 114,771
Future income taxes 7,829 3,794
Non-controlling interest 7,322 -

Shareholders' equity:
Share capital 191,184 184,191
Additional paid-in capital 12,732 10,557
Retained earnings (deficit) 4,170 (16,583)
Cumulative translation adjustment (1,484) (1,484)
----------------------------------------------------------------------
206,602 176,681

----------------------------------------------------------------------
$343,822 $295,246
----------------------------------------------------------------------


OPTIMAL GROUP INC.
Consolidated Statements of Operations
(Unaudited)
Periods ended June 30, 2005 and 2004
(expressed in thousands of U.S. dollars)
----------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------

Revenues $ 40,576 $ 20,970 $ 74,674 $ 30,235

Expenses:
Transaction
processing and
service costs 20,745 12,723 40,086 20,600
Inventory write-downs
pertaining to
service costs - 2,430 - 2,931
Amortization of
intangibles
pertaining to
transaction
processing and
service costs 1,998 613 3,002 795
Selling, general and
administrative 10,230 6,598 18,756 10,330
Stock-based
compensation
pertaining to
selling, general and
administrative 2,839 1,934 4,734 1,934
Research and
development 654 458 1,272 458
Operating leases 1,038 864 1,921 1,510
Restructuring costs 266 926 266 926
Amortization of
property and
equipment 528 608 1,067 789
Foreign exchange 783 101 716 (44)
Goodwill impairment 1,515 - 1,515 -

----------------------------------------------------------------------
(Loss) earnings from
continuing operations
before undernoted
items (20) (6,285) 1,339 (9,994)
Investment income 802 378 1,498 566
Gain on sale of
interest in FireOne 30,578 - 30,578 -

----------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes
and non-controlling
interest 31,360 (5,907) 33,415 (9,428)

Provision for
(recovery of) income
taxes 4,762 308 5,917 (20)

----------------------------------------------------------------------
Earnings (loss) from
continuing operations
before non-
controlling interest 26,598 (6,215) 27,498 (9,408)

Non-controlling
interest 230 - 230 -

----------------------------------------------------------------------
Earnings (loss) from
continuing operations 26,368 (6,215) 27,268 (9,408)

Loss from discontinued
operations (5,458) (4,595) (6,327) (4,595)

(Loss) gain on
disposal of net
assets from
discontinued
operations (188) 4,164 (188) 4,164

----------------------------------------------------------------------
Net earnings (loss) $ 20,722 $ (6,646)$ 20,753 $ (9,839)
----------------------------------------------------------------------

Weighted average
number of shares:
Basic 22,776,991 21,702,051 22,603,421 18,337,833
Plus impact of
stock options and
warrants 2,282,986 - 2,093,284 506

----------------------------------------------------------------------
Diluted 25,059,977 21,702,051 24,696,705 18,338,339
----------------------------------------------------------------------

Earnings (loss) per
share
Continuing
operations:
Basic $ 1.16 $ (0.29) $ 1.21 $ (0.51)
Diluted 1.05 (0.29) 1.10 (0.51)
Discontinued
operations:
Basic (0.25) (0.02) (0.29) (0.02)
Diluted (0.22) (0.02) (0.26) (0.02)
Total:
Basic 0.91 (0.31) 0.92 (0.53)
Diluted 0.83 (0.31) 0.84 (0.53)

----------------------------------------------------------------------


OPTIMAL GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited)
Periods ended June 30, 2005 and 2004
(expressed in thousands of U.S. dollars)

----------------------------------------------------------------------
Three months Six months
ended June 30, ended June
30,
------------------------------------
2005 2004 2005 2004
----------------------------------------------------------------------

Cash flows from
(used in)operating
activities:
Net earnings (loss)
from continuing
operations $ 26,368 $ (6,215) $ 27,268 $ (9,408)
Adjustments for
items not affecting
cash:
Non-controlling
interest 230 - 230 -
Stock-based
compensation 2,839 1,934 4,734 1,934
Amortization 2,526 1,221 4,069 1,584
Goodwill
impairment 1,515 - 1,515 -
Gain on sale of
interest in
FireOne (30,578) - (30,578) -
Loss on disposal
of property and
equipment 91 - 48 -
Foreign exchange 199 - 480 -
Inventory
write-downs - 2,430 - 2,931
Future income
taxes 136 282 910 (46)
Net change in
operating assets and
liabilities 5,795 (10,120) 3,356 (9,450)
----------------------------------------------------------------------
9,121 (10,468) 12,032 (12,455)
Cash flows from
investing activities:
Purchase of property,
equipment and
intangible assets (664) (1,223) (1,213) (1,524)
Proceeds from sale of
property, equipment
and intangibles 29 - 69 -
Increase in
short-term
investments - (27,951) - (20,138)
Proceeds from sale of
assets 518 - 518 -
Proceeds from
maturity of
short-term
investments 23,798 83,106 60,062 83,106
Proceeds from note
receivable 16 147 137 147
Proceeds from sale of
interest in FireOne 44,146 - 44,146 -
Decrease in cash held
in escrow 11 - 2,720 -
Cash acquired on
acquisition of Terra - 32,880 - 32,880
Payment of balance of
sale on acquisition
of NPS - - (1,500) -
Acquisition of MCA,
including
acquisition costs of
$49 - - (2,689) -
Acquisition of UBC,
including
acquisition costs of
$277 (44,277) - (44,277) -
Proceeds from sale of
business, before
repayment of
purchase price
adjustment in July
2004 - 35,000 - 35,000
Proceeds from
disposal of EBS - 3,975 - 3,975
Transaction costs (4,427) (1,028) (4,427) (1,378)
Acquisition of
Systech Retail
Systems - (342) - (826)
----------------------------------------------------------------------
19,150 124,564 53,546 131,242
Cash flows used in
financing activities:
Decrease in bank
indebtedness (2,090) (106) (2,245) (370)
Proceeds from
issuance of common
shares 2,041 32 4,961 32
----------------------------------------------------------------------
(49) (74) 2,716 (338)

Effect of exchange
rate on cash and cash
equivalents (444) (118) (669) (118)

----------------------------------------------------------------------
Increase in cash and
cash equivalents
during the period 27,778 113,904 67,625 118,331

Net decrease in cash
from discontinued
operations (921) (2,812) (2,863) (4,306)

Cash and cash
equivalents,
beginning of period 100,842 7,145 62,937 4,212

----------------------------------------------------------------------
Cash and cash
equivalents, end of
period $127,699 $118,237 $127,699 $118,237
----------------------------------------------------------------------



Annex A

Use of Non-GAAP Financial Information

We supplement our reporting of earnings (loss) from continuing operations before income taxes determined in accordance with Canadian and U.S. GAAP by reporting "underlying earnings (loss) from continuing operations before income taxes and non-controlling interest" as a measure of earnings (loss) in this earnings release. In establishing this supplemental measure of earnings (loss), we exclude from earnings (loss) from continuing operations before income taxes those items which, in the opinion of management, are not reflective of our underlying core operations.

Examples of the type of items which are included in our earnings (loss) from continuing operations before income taxes as determined in accordance with Canadian and U.S. GAAP, but which are excluded in establishing underlying earnings (loss) from continuing operations before income taxes and non-controlling interest may include, but are not limited to restructuring charges, inventory write-downs, stock-based compensation, amortization of intangible assets, amortization of property and equipment, foreign exchange gains and losses, goodwill impairment, gain on sale of investments, income taxes, non-controlling interest and discontinued operations. Management believes that underlying earnings (loss) from continuing operations before income taxes and non-controlling interest is useful to investors as a measure of our earnings (loss) because it is, for management, a primary measure of our growth and performance, and provides a more meaningful reflection of underlying trends of the business.

Underlying earnings (loss) from continuing operations before income taxes and non-controlling interest 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) from continuing operations before income taxes or any other amount determined in accordance with Canadian and U.S. GAAP. Our measure of underlying earnings (loss) from continuing operations before income taxes and non-controlling interest reflects management's judgment in regard to the impact of particular items 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)

Three months ended Six months ended
June March June
30, 31, 30,
---------------- ------ ----------------
2005 2004 2005 * 2005 2004

Earnings (loss) from
continuing operations before
income taxes and non-
controlling interest 31,360 (5,907) 2,055 33,415 (9,428)

Add (deduct):
Gain on sale of interest in
FireOne (30,578) - - (30,578) -
Goodwill impairment 1,515 - - 1,515 -
Restructuring costs 266 926 - 266 926
Inventory write-downs
pertaining to service costs - 2,430 - - 2,931
Stock-based compensation
pertaining to selling,
general and administrative
expenses 2,839 1,934 1,895 4,734 1,934
Amortization of intangibles
pertaining to transaction
processing and service costs 1,998 613 1,005 3,002 795
Amortization of property and
equipment 528 608 539 1,067 789
Foreign exchange (gain) loss 783 101 (68) 716 (44)

---------------- ------ ----------------
Underlying earnings (loss)
from continuing operations
before income taxes and non-
controlling interest 8,711 705 5,426 14,137 (2,097)
================ ====== ================

* Extracted and reclassified from first quarter results
(please refer to our press release dated May 4, 2005)


OPTIMAL GROUP INC.
Reconciliation of Non-GAAP
Financial Information by Segment

For the three-month period ended
June 30, 2005 (expressed in
thousands of U.S. dollars)

Hardware Gain on
maintenance sale of
& interest
Non- repair in
Gaming gaming services FireOne Consolidated

Earnings (loss) from
continuing operations
before income taxes
and non-controlling
interest 6,541 (1,583) (4,176) 30,578 31,360

Add (deduct):
Gain on sale of
interest in FireOne - - - (30,578) (30,578)
Goodwill impairment - - 1,515 - 1,515
Restructuring costs - - 266 - 266
Stock-based
compensation
pertaining to
selling, general and
administrative
expenses 465 2,001 373 - 2,839
Amortization of
intangibles
pertaining to
transaction
processing and
service costs 225 1,570 203 - 1,998
Amortization of
property and
equipment 19 312 197 - 528
Foreign exchange
(gain) loss (3) 326 460 - 783

-------------- ----------- -------- ------------
Underlying earnings
(loss) from
continuing operations
before income taxes
and non-controlling
interest 7,247 2,626 (1,162) - 8,711
============== =========== ======== ============



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