ESI Entertainment announces Fiscal 2008 Financial Results



    BURNABY, BC, June 17 /CNW/ - ESI Entertainment Systems Inc. ("ESI" or the
"Company") (TSX: ESY) reported today its financial and operational results for
the fiscal year ended February 29, 2008 ("fiscal 2008"). All amounts are in
Canadian dollars unless otherwise stated.

    Fiscal 2008 Financial Highlights
    --------------------------------
    The highlights for ESI, on a consolidated basis, are:

    
    -   85% decrease in consolidated revenues to $3.25 million for
        fiscal 2008 from $22.0 million for fiscal 2007;

    -   96% decrease in consolidated gross profit to $0.5 million for
        fiscal 2008 from $13.5 million for fiscal 2007

    -   44% increase in consolidated net loss before income taxes and
        non-controlling interest to a loss of $7.2 million for fiscal 2008
        from a loss of $5.0 million for fiscal 2007.
    

    ESI's revenues, which had increased during fiscal 2006 and 2007, were
reduced significantly during fiscal 2008 consequent upon the cessation by
Citadel of financial processing to the non-domestic internet gaming merchants
for US based consumers. As of January 17, 2007, the Company ceased its
financial processing business for non-domestic internet gaming merchants for
US consumers. This has had a significant material impact on the revenues for
Citadel in fiscal 2008, since 97% of the revenues generated by Citadel were
from that market place. Revenues from ESI Integrity, although substantially
smaller than those of Citadel in prior years, have continued to grow over the
past three years. This is due to increased sales and marketing efforts and the
stronger recognition of the ESI Integrity brand as the number of installations
with government lotteries and pari-mutuel organizations has grown on a
worldwide basis.
    Consolidated gross profit which had increased steadily during fiscal 2006
and 2007 due to the growth of ESI's revenue base in its Citadel division, was
reduced from $13.5 million for fiscal 2007 to $518,000 for fiscal 2008. This
decrease was a direct result of cessation of financial processing for
non-domestic internet gaming merchants for US consumers. Gross profit for ESI
Integrity during fiscal 2008 increased from $686,035 in fiscal 2007 to $1.027
million in fiscal 2008, reflecting continued growth in that division.
    During fiscal 2008 operating costs were impacted significantly by
severances, contraction of rented premises, new product development and
consequential marketing costs aimed into new markets. Additionally, the
Company's costs were impacted during fiscal 2008 by the legal and auditing
costs associated with negotiations with the Office of the United States
District Attorney for the Southern District of New York ("USDA") in relation
to the investigations being carried out by the Department of Justice ("DoJ")
into internet gaming merchants.

    Fiscal 2008 Business Highlights
    -------------------------------
    Fiscal 2008 was a year for development of new business opportunities for
Citadel Commerce Corp. by seeking out and developing applications for the
Company's financial processing platform technology in new market segments as
well as continuing to build the business base of ESI Integrity. In particular
this has resulted in very limited growth in the provision of financial
processing services to internet based gaming merchants in countries outside
the USA and initial marketing of financial processing services to non-gaming
related markets. Business highlights of the year include:

    
    -   Development and launch of the Citadel Rapid Bank transfer and
        Instant Bank transfer services, which are able to confirm bank
        transfers into merchants' accounts;

    -   Increase of the customer base and profitability of ESI Integrity;

    -   Establishment of many new business contacts in the worldwide
        marketplace for financial processing for internet-based merchants in
        non-iGaming business sectors;
    

    In other respects, much of Management's time during fiscal 2008 was
devoted to continuing negotiations with the DoJ which led, in early
June, 2008, to resolution of the issues by entering into a Deferred
Prosecution Agreement ("DPA") with the USDA, which was approved and ratified
by the Court in New York in early June, 2008. Now that this negotiation has
been completed Management will be able to devote all of its energies to
building increased business on the Company's advanced technologies and
resources.


    Fiscal 2008 Financial Review

    Consolidated Revenues
    ---------------------

    The following table provides a breakdown of the Company's revenues from
its three subsidiaries for the reported periods:

    
                                                   Year ended
                                              Feb 29      Feb 28
    ($ 000)                                    2008        2007     % change
    -------------------------------------------------------------------------

    Citadel                                      875      19,976        (96%)
    Integrity                                  2,373       2,036         17%
    Other                                          -          11       (100%)
    -------------------------------------------------------------------------
    Total revenue                              3,248      22,023        (85%)
    -------------------------------------------------------------------------
    

    Total revenue decreased by 85% to $3,248 million in fiscal 2008 from
$22.0 million in fiscal 2007. This decrease was entirely due to the decrease
in Citadel revenues consequent on the cessation of financial processing for
non-domestic based internet gaming merchants for US consumers.
    ESI Integrity revenues increased by 17% in fiscal 2008. The increase in
ESI Integrity revenues was derived from continuing increasing sales within
that division.

    Consolidated Gross Profit
    -------------------------

    The following table provides a summary of the Company's gross profit for
the reported periods:

    
                                                           Year ended
                                                    February 29, February 28,
    ($ 000)                                            2008          2007
    -------------------------------------------------------------------------
    Revenues                                             3,248        22,023

    Direct costs                                         2,730         8,479
    -------------------------------------------------------------------------
    Gross profit                                           518        13,544

    Gross profit margin                                    16%           61%
    -------------------------------------------------------------------------
    

    The decrease in gross profit margin in fiscal 2008 was due to the costs
incurred in connection with the cessation of financial processing to internet
based gaming merchants in the Citadel division, which resulted in costs being
incurred in staff severance, rented premises reduction and legal and
accounting costs, as well as the costs associated with development of new
products and exploitation of new markets for the company's products and
services.
    The gross profit margin by dollar and as a percentage of revenues for
each subsidiary is listed below:

    
                                                Year ended
                                  February 29,               February 28,
    ($ 000)                          2008                       2007
    -------------------------------------------------------------------------
                                             GP%                         GP%
                                             ---                         ---
    Citadel                   (509)         (58%)       12,853           64%

    Integrity                1,027           43%           686           43%

    Other                        -             -             5           45%
    -------------------------------------------------------------------------
    Total gross profit         518           16%        13,544           61%
    -------------------------------------------------------------------------
    

    Citadel's gross profit margin during fiscal 2008 was (58%), compared to
64% for the prior fiscal year, reflecting the significant change to its
business consequent upon the cessation of financial processing for
non-domestic internet based gaming merchants for US consumers. Integrity's
gross profit increased by 43% over the prior fiscal period, reflecting
increased business in that division.

    Product Development
    -------------------
    Product development expenses were $1.24 million in fiscal 2008, a
decrease of 1% compared to $1.25 million for the prior period. These
expenditures are principally related to software development since the Company
no longer capitalizes those costs.

    Sales, Marketing and Customer Service
    -------------------------------------
    Sales, marketing and customer service expenses were $1.67 million for
fiscal 2008, a decrease of 47% compared to $3.16 million for the prior period.
The decrease primarily related to the contraction of Citadel's sales and
marketing forces, reduced travel, and reduction of marketing activities
relating to trade shows and promotional activities.

    General and Administrative
    --------------------------
    General and administrative expenses were $5.41 million for fiscal 2008, a
decrease of 29% compared to $7.64 million for the prior period. This decrease
resulted from reductions in the financial, human resources and information
systems departments to manage the decreased activity within the Citadel
division in particular. In addition, ESI contracted its rental space, but
incurred additional professional fees and other general corporate expenses in
fiscal 2008 consequent on the cessation of the financial processing business
for non-domestic internet gaming merchants for US consumers. The Company had
recorded a provision for bad debts totaling $0.8 million for fiscal 2007, but
this provision was retrospectively cancelled during fiscal 2008 related to
actions taken by the DoJ against the on-line gaming payment processing
industry in the U.S.
    Included in general and administrative expenses was non-cash stock
compensation expense of approximately $423,588 for fiscal 2008, compared to
approximately $272,874 for fiscal 2007. Stock compensation expense increased
during fiscal 2008 as a result of additional stock grants to the Company's
employee base, reflecting agreement by employees to forego salary reviews and,
in certain cases, accepting salary deferrals.

    Amortization of Property and Equipment
    --------------------------------------
    Amortization expenses were $776,706 for fiscal 2008, a decrease of 13%
compared to $887,783 for the prior period. The decrease is accounted for by
the cut back in purchases of computer hardware and software, furniture and
fixtures and leasehold improvements, consequent on the contraction of the
Company's employee base.

    Provision for Income Taxes
    --------------------------
    Provision for income tax expense was $27,243 for fiscal 2008 compared to
$46,550 for the prior period. This decrease resulted from a net loss before
income taxes in fiscal 2008, and other factors including adjustments made to
reflect non-deductible expenses and losses as well as non-capital losses which
have expired compared to net earnings before income taxes in fiscal 2006.

    Net (loss) Earnings
    -------------------
    Net loss for fiscal 2008 was $7.2 million ($0.42 loss per share - basic
and diluted) compared to net loss of $5.0 million ($0.27 earnings per share -
basic and diluted) for fiscal 2007. This decrease was largely driven by the
costs incurred consequent upon the cessation of financial processing for
non-domestic internet based gaming merchants for US customers, and the
reductions in staffing and rented premises as well as the legal and auditing
costs associated with the significant reduction of that portion of the
Company's business.

    Capital Expenditures
    --------------------
    Capital expenditures for fiscal 2008 were $103,811 compared to $506,914
for fiscal 2007. The decrease in capital expenditures was primarily the result
of reductions in acquisitions and consolidation of operations consequent upon
the cessation of financial processing for non-domestic internet based gaming
merchants for US based consumers in the Citadel division.

    Deferred Start-Up Costs
    -----------------------
    The Company established PlayLine early in fiscal 2006 and the myCitadel
division in fiscal 2004. Direct costs associated with the start up of these
operations were being deferred until each commenced commercial operations, at
which time the accumulated start up costs were to be amortized over a period
not to exceed five years. Direct costs associated with the start up of the
business operations for myCitadel and PlayLine were deferred until
November 30, 2006, at which time the accumulated start up costs were reviewed
in light of the passing of the UIGEA on October 13, 2006. During fiscal 2007,
sales, marketing, business development and other direct expenses in the amount
of $185,787 and $1.1 million were capitalized for PlayLine and myCitadel,
respectively. Before the impairment of the asset, as at November 30, 2006,
Start-up Costs for PlayLine totaled $813,698 and $3,115,148 for myCitadel.
With the enactment of the UIGEA, its impact on Citadel's market and the
redeployment of resources from Playline to Citadel, management reassessed the
carrying value of Deferred Start-up Costs. Management determined that the
passing of the UIGEA and the redeployment of resources from Playline to
Citadel would likely lead to reduced future revenue streams in the Citadel
division. In fiscal 2007, Management took the view that the Company could no
longer reasonably expect to recover the accumulated capitalized start up costs
and hence wrote them off in that fiscal year. From the beginning of fiscal
2008 the Company has expensed and will recognize any revenues in future
periods as these items occur.

    Capitalized Development Costs
    -----------------------------
    The Company had capitalized certain computer software production costs
for PlayLine and myCitadel. Amortization of the software development costs
would have commenced on reaching commercial operations using the straight line
method over the useful life of the software. During fiscal 2007, software
expenses in the amount of $253,768 and $354,024 were capitalized for PlayLine
and myCitadel, respectively. Before the impairment of the asset, as at
November 30, 2006, capitalized development costs for PlayLine totaled $610,001
and $1,266,415 for myCitadel.
    As with Deferred Start-up Costs, with the enactment of the UIGEA, the
redeployment of resources from Playline to Citadel, and its impact on
Citadel's market, management reassessed the carrying value of Capitalized
Development Costs in fiscal 2007 and determined that the passing of the UIGEA
and the redeployment of resources from Playline to Citadel would lead to
reduced future revenue streams in the Citadel division. Accordingly,
Management determined that the Company could no longer reasonably expect to
recover the accumulated capitalized development costs and hence wrote them off
in fiscal 2007.

    Citadel Processing Accounts and Liabilities
    -------------------------------------------
    Citadel processing accounts as at February 29, 2008 totaled $1.5 million
compared to $16.8 million as at February 28, 2007. The accounts are comprised
of restricted cash, which are segregated bank funds arising from the
processing of deposits and payments for Citadel merchants and consumers, and
accounts receivable relating to Citadel processing accounts for funds in
transit from merchants and consumers. The processing account balances are also
recorded as a liability because these funds represent amounts due to consumers
and merchants. The decline in Citadel processing accounts and Citadel
processing liabilities is due to cessation of the financial processing
business for non-domestic internet gaming merchants for US consumers during
fiscal 2007. The Company had also recorded a provision of allowance for bad
debts totaling $0.8 million for Citadel processing accounts due to the
uncertainty created by actions taken by the DoJ against the on-line gaming
payment processing industry in the U.S., but since this issue was clarified
during fiscal 2008, the provision in 2007 was retrospectively reversed.
    During fiscal 2008 approximately US$ 9.1 million of funds which had been
on deposit in the USA, principally Merchant funds, were seized by the DoJ.
Throughout fiscal 2008 the Company was engaged in negotiations with the DoJ
and the USDA; subsequent to the end of fiscal 2008 a resolution was reached
with the USDA.

    Liquidity and Capital Resources
    -------------------------------
    ESI has historically financed its operations through the sale of equity
and through cash generated by its operations.
    During fiscal 2008, cash used in operating activities was ($7.05) million
compared to cash provided by operating activities of $2.6 million during
fiscal 2007, a decrease of $9.65 million from the prior period. Non-cash
operating items in fiscal 2008 were lower than in fiscal 2007, principally as
a result of less provision being taken for assets written off.
    Cash provided by investing activities totaled $997,092 during fiscal 2008
compared to cash used in investing activities of ($3.1) million during fiscal
2007. This difference is accounted for principally by re-allocation of
restricted cash, in the amount of $1,100,903, and reduced costs of property
and equipment acquisitions, at $103,811 in fiscal 2008 compared to $362,644 in
fiscal 2007.
    Cash used in financing activities totaled $361,588 during fiscal 2008
compared to cash provided by financing activities on $7,488,883 in fiscal
2007. The financing activities in fiscal 2007 included the Company's IPO which
raised $8.9 million.
    Overall, the net cash used in fiscal 2008 was $6.4 million compared to
cash provided of $7 million in fiscal 2007.

    Consolidated Financial Statements
    ---------------------------------
    NOTE TO READER: The following financial statements are extracted from the
    complete audited financial statements of the Company which have been
    filed together with the Management's Discussion and Analysis and Annual
    Information Form with the Company's documents on www.sedar.com to which
    the reader is referred.

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


    
    Consolidated Balance Sheets
    ---------------------------
    (expressed in Canadian dollars)

                                                   February 29,  February 28,
    Years Ended                                           2008          2007
    -------------------------------------------------------------------------
    Assets
    Current
      Cash and cash equivalents                   $  3,042,463  $  9,453,701
      Accounts receivable                            1,111,215       558,291
      Prepaids                                         444,575       472,910
                                                   ------------  ------------

                                                     4,598,253    10,484,902
    Restricted cash                                          -     1,100,903
    Citadel processing accounts                      1,219,205    16,075,768
    Property and equipment                             718,869     1,391,764
    Deferred contract costs                          1,116,461       502,596
                                                   ------------  ------------

                                                  $  7,652,788  $ 29,555,933
                                                   ------------  ------------
                                                   ------------  ------------

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

    Liabilities
    Current
      Accounts payable and accrued liabilities    $    820,492  $  1,237,547
      Capital lease obligations                        214,715       348,671
      Software license obligation                            -         9,917
      Deferred revenue                                 706,773       539,198
                                                   ------------  ------------

                                                     1,741,980     2,135,333
    Citadel processing liabilities                   1,530,705    16,883,268
    Deferred revenue                                 1,923,472     1,080,247
    Capital lease obligations                           30,684       245,399
                                                   ------------  ------------

                                                     5,226,841    20,344,247
                                                   ------------  ------------


    Shareholders' Equity
    Capital stock                                    9,957,959    13,226,702
    Warrants                                             5,926        84,634
    Contributed surplus                              4,092,247       330,134
    Deficit                                        (11,630,185)   (4,429,784)
                                                   ------------  ------------

                                                     2,425,947     9,211,686
                                                   ------------  ------------

                                                  $  7,652,788  $ 29,555,933
                                                   ------------  ------------
                                                   ------------  ------------

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


    Consolidated Statements of Operations and Comprehensive Income (Deficit)
    -------------------------------------------------------------------------
    and Retained Earnings
    ---------------------
    (expressed in Canadian dollars)

                                                   February 29,  February 28,
    Years Ended                                           2008          2007
    ------------------------------------------------------------------------

    Revenues                                      $  3,248,630  $ 22,023,110

    Direct costs                                     2,730,208     8,478,676
                                                   ------------  ------------

    Gross profit                                       518,422    13,544,434
                                                   ------------  ------------

    Operating expenses
      Product development                            1,241,378     1,250,584
      Sales, marketing and customer service          1,671,003     3,164,733
      General and administrative                     5,410,952     7,639,875
      Amortization of property and equipment           776,706       887,783
      Cost recovery                                 (2,055,430)            -
                                                   ------------  ------------

                                                     7,044,609    12,942,975
                                                   ------------  ------------
    (Loss) earnings before under noted items        (6,526,187)      601,459

    Other expenses (income)
      Impairment of intangibles and other assets        57,192     6,211,465
      Foreign exchange loss (gain)                     837,685      (272,973)
      Interest income                                 (297,751)     (527,564)
      Interest expense                                  49,845       134,822
                                                   ------------  ------------

    Loss before income taxes                        (7,173,158)   (4,944,291)
                                                   ------------  ------------

    Provision for income taxes                          27,243        46,550
                                                   ------------  ------------

    Net loss and comprehensive loss               $ (7,200,401) $ (4,990,841)
                                                   ------------  ------------
                                                   ------------  ------------

    Loss per share
      Basic and diluted                           $      (0.42) $      (0.27)

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

    (Deficit) retained earnings, beginning of
     year                                         $ (4,429,784) $    561,057

    Net loss                                        (7,200,401)   (4,990,841)
                                                   ------------  ------------

    Deficit, end of year                          $(11,630,185) $ (4,429,784)
                                                   ------------  ------------
                                                   ------------  ------------

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


    Consolidated Statements of Cash Flows
    -------------------------------------
    (expressed in Canadian dollars)


                                                   February 29,  February 28,
    Years Ended                                           2008          2007
    -------------------------------------------------------------------------

    Cash flows provided by (used in)

      Operating activities
        Net loss                                  $ (7,200,401) $ (4,990,841)
        Items not affecting cash:
          Stock-based compensation                     423,588       272,874
          Amortization of property and equipment       776,706       887,783
          Impairment of intangibles and other
           assets                                       57,192     6,211,465

        Net changes in non-cash operating items
          Accounts receivable                         (460,152)      159,033
          Inventory                                          -      (205,250)
          Prepaids                                     (65,047)       13,072
          Accounts payable and accrued liabilities    (479,564)     (976,240)
          Allowance for bad debts                     (496,000)      807,500
          Deferred revenue                           1,010,801       367,311
          Deferred contract costs                     (613,865)       35,226
                                                   ------------  ------------

                                                    (7,046,742)    2,581,933
                                                   ------------  ------------

      Investing activities
        Restricted cash                              1,100,903    (1,100,903)
        Acquisition of property and equipment         (103,811)     (362,644)
        Deferred start up cost                               -    (1,253,151)
        Capitalized development cost                         -      (398,685)
                                                   ------------  ------------

                                                       997,092    (3,115,383)
                                                   ------------  ------------

      Financing activities
        Capital lease payments                        (348,671)     (294,889)
        Software license obligation                     (9,917)     (109,616)
        Cancellation of common share costs              (3,000)            -
        Issuance of common shares                            -     8,893,388
        Loan payable                                         -    (1,000,000)
                                                   ------------  ------------

                                                      (361,588)    7,488,883
                                                   ------------  ------------

    (Decrease) Increase in cash and cash
     equivalents                                    (6,411,238)    6,955,433

    Cash and cash equivalents, beginning of year     9,453,701     2,498,268
                                                   ------------  ------------

    Cash and cash equivalents, end of year        $  3,042,463  $  9,453,701
                                                   ------------  ------------
                                                   ------------  ------------

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


    Consolidated Statements of Cash Flows (Continued)
    -------------------------------------------------
    (expressed in Canadian dollars)

                                                   February 29   February 28
    Years Ended                                           2008          2007
    -------------------------------------------------------------------------

    Non-cash investing and financing transactions
     not included in cash flows
      Cancellation of common shares               $  3,341,525  $          -
      Fair value of expired Agent's warrants      $     78,708  $          -
      Conversion of preferred shares into common
       shares                                     $          -  $  2,706,941
      Share issue costs incurred in prior fiscal
       year                                       $          -  $    936,987
      Future income tax on share issue costs      $          -  $    258,000
      Fair value of options exercised             $          -  $        519
      Agents' warrants included in share costs    $          -  $     78,708
      Purchase of property and equipment funded
       by obligations under capital lease         $          -  $    144,270


    Cash and cash equivalents comprises
      Cash                                        $  3,042,354  $  4,943,585
      Cash equivalents                                     109     4,510,116
                                                   ------------  ------------

                                                  $  3,042,463  $  9,453,701
                                                   ------------  ------------
                                                   ------------  ------------

    Supplemental information
      Interest received                           $     71,977  $    527,535
      Interest paid                               $     25,432  $    134,822
      Income taxes paid                           $     27,243  $     57,109

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


    Forward-looking Statements
    --------------------------
    This news release contains forward-looking statements concerning
ESI Entertainment Systems Inc, which statements can be identified by the use
of forward-looking terminology such as "expect", "proposed", "may", "plan",
"intend", "will", "would" or the negative thereof or any other variations
thereon or comparable terminology referring to future events or results.
Forward-looking statements are statements about the future and are inherently
uncertain, and the actual events or results could be materially different than
those anticipated in those forward-looking statements as a result of numerous
factors. These risks include risks related to revenue growth, operating
results, industry growth, changes in regulation and legislation, products,
technology, financing, competition, personnel and other factors affecting the
Company and its business, any of which could cause actual events or results to
vary materially from ESI's anticipated future results. Forward-looking
statements are based on beliefs, opinions and expectations of ESI's management
at the time they are made, and ESI does not assume any obligation to update
its forward-looking statements if those beliefs, opinions or expectations, or
other circumstances should change. The Toronto Stock Exchange does not accept
responsibility for this press release.

    About ESI Entertainment Systems Inc.
    ------------------------------------
    ESI Entertainment Systems Inc. ("ESI") (TSX: ESY) provides products and
services to the international gaming and e-commerce industries through its
three principal subsidiaries, Citadel Commerce Corp., ESI Integrity Inc. and
PlayLine Inc. ESI's products and services, which primarily consist of payment
processing, transaction monitoring and turnkey gaming platforms, are deployed
in the online and land based gaming and e-commerce markets.

    %SEDAR: 00023260E




For further information:

For further information: ESI Entertainment Systems Inc., Tony Greening,
Chief Executive Officer, Telephone: (604) 299-6922, email: tgreening@esi.ca,
Web: www.esi.ca

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