CryptoLogic Achieves Record Revenue & Excellent Earnings In 2004

    News Editors

    TORONTO--(BUSINESS WIRE)--Feb. 18, 2005--CryptoLogic Inc. (TSX:CRY)(NASDAQ:CRYP)(LSE:CRP) -

    Fourth quarter revenue up 33%, earnings up 25%

    Focused strategy delivers "blue-chip" results, global strength in online casino and poker

    CryptoLogic Inc., a leading software developer to the global Internet gaming market, announced today its financial results for the fourth quarter and year ended December 31, 2004. Record revenue, excellent earnings and healthy operating cash flow in 2004 are evidence of the company's focused strategy and growth momentum in both the casino and poker segments of the global online gaming market.

    "CryptoLogic continues to be the blue-chip e-gaming software company, with a winning hand in both the thriving online casino and poker markets," said Lewis Rose, CryptoLogic's President and CEO. "2004 marked another year of revenue growth, profitability and cash generation for CryptoLogic. In 2005, we will continue to capitalize on our strong financial performance to invest for the future, build on our market strength and continue to drive profitable returns."

--------------------------------------------------------------------- Financial Highlights (in millions of US dollars, Three months ended Years ended except per share data) December 31, December 31, 2004 2003 2004 2003 --------------------------------------------------------------------- Revenue $17.9 $13.5 $63.7 $44.2 Earnings $3.8 $3.0 $13.7 $9.4 Earnings per diluted share $0.27 $0.23 $1.01 $0.75 ---------------------------------------------------------------------

    Highlights for the fourth quarter included:

    - Fourth quarter earnings grew to $0.27 per diluted share, ahead of analysts' average forecast and the 2003 fourth quarter of $0.23. Fiscal 2004 full year earnings were also strong at $1.01 per diluted share on a 44% increase in revenue to a record $63.7 million;

    - Consistent cash generation led to the previously announced 67% increase in the quarterly dividend to $0.05 per share;

    - Online poker fees rose by more than 165% over the same previous year quarter, and accounted for over 20% of Q4 2004 revenue. Internet casino revenue grew 15% from the fourth quarter of 2003;

    - International diversification remained strong, with overseas markets exceeding 60% of licensees' revenue for the year, up from over 55% in 2003; and

    - Subsequent to year-end, the company renewed and extended its multi-year, exclusive agreement with an existing UK licensee, The Ritz Club London Online, for both online casino and poker solutions developed by CryptoLogic.

    Strong 2004 Financial Performance (All figures are expressed in US dollars)

    CryptoLogic posted record revenue and excellent earnings for the fourth quarter ended December 31, 2004. The first and fourth quarters are typically the strongest periods as players tend to spend more time indoors during the winter and fall seasons. Revenue rose 33% to $17.9 million (Q4 2003: $13.5 million). EBITDA(1) for the quarter grew 25% to $4.7 million (Q4 2003: $3.8 million). EBITDA(1) margin for the quarter was 26% as a percentage of revenue, despite higher investments to drive long term returns (Q4 2003: 28%). Earnings for Q4 2004 rose 25% to $3.8 million or $0.27 per diluted share (Q4 2003: $3.0 million or $0.23 diluted share).

    The fourth quarter results reflected strong organic growth from existing customers, recently launched poker licensees, new casino games and product enhancements. The introduction of poker tournament capabilities, an expanding poker clientele, and increased system scalability translated into rising online poker fees. The company's poker customers also benefited from the success of their first land-based poker tournament, the Caribbean Poker Classic(, which was televised and a great marketing draw for players. An expanded casino game portfolio, particularly in the popular slot category, helped growth in Internet casino revenue.

    Revenue for the year ended December 31, 2004 increased by 44% to $63.7 million (2003: $44.2 million). EBITDA(1) for fiscal 2004 rose by 51% to $17.3 million (2003: $11.5 million). This translated into EBITDA(1) margin for the year rising to 27% (2003: 26%) despite increased investments, which are already producing early returns. Earnings for the full year improved by 45% to $13.7 million or $1.01 per diluted share (2003: $9.4 million or $0.75 per diluted share).

    In the second half of 2004, CryptoLogic announced and embarked upon a major investment program, which is over and above its normal course expenditures, to support long term growth. Approximately 70%, or $7.1 million, of this program was invested in 2004. Most of the remaining 30% balance will be completed in the first half of 2005. In 2004, these expenditures included $2.6 million in operating costs and $4.5 million in capital expenditures (comprising $3.2 million for the purchase of capital assets and $1.3 million in capitalized software development costs related to the investment program).

    Balance Sheet Strength

    CryptoLogic continued to add to its strong balance sheet. At December 31, 2004, the company had no debt, and total cash grew to $86.0 million or a cash value of $6.33 per diluted share (comprising cash and cash equivalents, short term investments, and including security deposits of $7.0 million). Working capital grew to $62.8 million or $4.62 per diluted share.

    Operating cash flow for the fourth quarter of 2004 was $9.0 million (Q4 2003: $7.7 million). For fiscal 2004, operating cash flow was $18.9 million (2003: $38.7 million). The year-over-year decline related primarily to increased receivables in 2004 resulting from two licensees assuming responsibility for their own e-cash processing. In addition, cash generated from operations was exceptionally high in 2003 due to more favourable security deposit arrangements beginning that year and the timing of accounts payable.

    Increased Quarterly Dividend

    On November 4, 2004, CryptoLogic's Board approved a 67% increase in the company's quarterly dividend to US$0.05 per common share or an annual rate of US$0.20 (up from US$0.03 per share each quarter), reflecting the company's consistent earnings and cash generation. The increased rate began with the quarterly dividend paid on December 15, 2004.

    On February 16, 2005, the Board declared the company's quarterly dividend of US$0.05 per share, payable on March 15, 2005 to shareholders of record as at March 8, 2005. CryptoLogic continues to be one of the few software companies with a regular dividend policy - a sign of its financial strength.

    Internationally Diversification

    CryptoLogic has established an internationally diversified business. In 2004, more than 60% of licensees' revenue was derived from international players, up from over 55% in 2003 and 40% in 2002 . The UK and Continental Europe remain the company's key geographic focus, having grown to more than 30% and 20% respectively of licensees' overall revenue.

    CryptoLogic continues to work with some of the most prominent international gaming brands. Subsequent to the year-end, in February 2005, The Ritz Club London Online renewed and extended a multi-year contract with CryptoLogic's subsidiary, WagerLogic Limited, to continue to use the company's online casino and poker offerings exclusively during the term of the agreement.

    Market-Oriented Solutions

    CryptoLogic continued to deliver profitable growth in both its core casino and the burgeoning online poker areas. The company further expanded its online casino suite - launching more than 30 new choices of the most popular table and slot games in 2004, which helped grow Internet casino revenue by 15% in Q4 2004 over a year ago. CryptoLogic continued to demonstrate its reputation for innovation by being the first to bring "Fruit Machine" style slots, a UK pub favourite, to the Internet.

    CryptoLogic is also building a strong presence in the global online poker segment. Enhanced tournament capabilities, increased system scalability and the growing momentum of brand name poker licensees have all contributed to a more than 165% rise in online poker fees in Q4 2004 over a year ago. Online poker accounted for over 20% of total Q4 revenue, ahead of CryptoLogic's target of 15% for the year. Today, CryptoLogic-developed software powers one of the top five revenue-generating poker rooms on the Web, according to PokerPulse, an independent industry research website.

    Management Team

    During the fourth quarter, CryptoLogic appointed Andrew Goetsch as Vice President of Poker Software Development. As a senior executive with more than 20 years experience in strategic planning, technology, finance and mergers and acquisitions, Goetsch helped increase sales and profits for consumer goods and manufacturing companies. He obtained his Certified Public Accountant Designation at one of the big accounting firms. As a seasoned executive and accomplished poker player - including several final table appearances, and more than 200 "in the money" finishes in poker tournaments held both online and around the world, including the main event in the 2004 World Series of Poker - Goetsch's extensive expertise will help the company continue the growth and development of its software product plans in Internet poker.

    Outlook

    CryptoLogic's focused strategy and investment in key markets and fast-growing product segments have continued to translate into revenue growth, solid earnings and positive cash flow, notwithstanding a competitive online gaming industry marked by US regulatory uncertainty. By remaining disciplined in its execution, CryptoLogic will build on its positive momentum into 2005. Revenue in the traditionally strong first quarter is forecast to range from $19.0-$19.4 million, with earnings of $4.1-$4.3 million or $0.29-$0.30 per diluted share.

    Given CryptoLogic's revenue generation and financial strength, Management believes this is the best time to invest for growth in both its core casino and poker businesses. CryptoLogic will continue its major capital investment program largely in the first half of 2005, substantially enhancing its game offerings, infrastructure, scalability, customer care and back-office systems - all to secure continued global leadership in the major segments of the online gaming market, and intended to enhance returns in the near and long term.

    2004 Fourth Quarter and Year End Analyst Call

    A conference call is scheduled for 8:30 a.m. (EST) (1:30 p.m. GMT) on Friday, February 18, 2005. Interested parties should call either 416-695-5259, 1-877-888-3490 (North America) or international toll free number at (Country Code) 800-4222-8835. Instant replay will be available until February 25, 2005 by calling 416-695-5275 or 1-866-518-1010.

    About CryptoLogic(R) (www.cryptologic.com)

    Focused on integrity and innovation, CryptoLogic Inc. is the world's largest public online gaming software developer and supplier. Its leadership in regulatory compliance makes it one of the very few companies with gaming software that is certified to strict standards similar to land-based gaming. WagerLogic Limited, a wholly-owned subsidiary of CryptoLogic, is responsible for the licensing of its gaming software and services to customers worldwide. For information on WagerLogic(R), visit www.wagerlogic.com.

    CryptoLogic's common shares trade on the Toronto Stock Exchange (symbol: CRY), on the Nasdaq National Market (symbol: CRYP), and on the Main Market of the London Stock Exchange (symbol: CRP).

    (1) Management believes that EBITDA (earnings before interest, taxes, depreciation and amortization) is a useful supplemental measure of performance. However, EBITDA is not a recognized earnings measure under generally accepted accounting principles (GAAP) and does not have a standardized meaning. Therefore, EBITDA may not be comparable to similar measures presented by other companies.

    CRYPTOLOGIC FORWARD LOOKING STATEMENT DISCLAIMER:

    Statements in this press release which are not historical are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, risks associated with the Company's financial condition and prospects, legal risks associated with Internet gaming and risks of governmental legislation and regulation, risks associated with market acceptance and technological changes, risks associated with dependence on licensees and key licensees, risks relating to international operations, risks associated with competition and other risks detailed in the Company's filings with securities regulatory authorities. These risks may cause results to differ materially from those projected in the forward-looking statements.

CRYPTOLOGIC INC. CONSOLIDATED BALANCE SHEETS (In thousands of US dollars)

--------------------------------------------------------------------- As at As at December 31, December 31, 2004 2003 (unaudited) (audited) --------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $43,182 $44,010 Security deposits 7,000 6,550 Short term investments 35,782 16,747 Accounts receivable and other 6,487 2,389 Prepaid expenses 1,754 1,163 --------------------------------------------------------------------- 94,205 70,859

User funds on deposit 18,908 9,394 Capital assets 9,227 3,915 Intangible assets 106 122 Goodwill 1,776 1,776 --------------------------------------------------------------------- $124,222 $86,066 --------------------------------------------------------------------- ---------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $30,056 $25,063 Income taxes payable 1,331 1,063 --------------------------------------------------------------------- 31,387 26,126

User funds held on deposit 18,908 9,394 Future taxes 1,840 -- --------------------------------------------------------------------- 52,135 9,394 ---------------------------------------------------------------------

Shareholders' equity: Capital stock 20,380 11,350 Stock options 1,114 438 Retained earnings 50,593 38,758 --------------------------------------------------------------------- 72,087 50,546 --------------------------------------------------------------------- $124,222 $86,066 --------------------------------------------------------------------- ---------------------------------------------------------------------

CRYPTOLOGIC INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In thousands of US dollars)

--------------------------------------------------------------------- For the three months For the years ended December 31, ended December 31, 2004 2003 2004 2003 (unaudited) (unaudited) (unaudited) (audited) ---------------------------------------------------------------------

Retained earnings, beginning of period $47,463 $36,450 $38,758 $30,376 Earnings 3,794 3,033 13,668 9,441 Dividends paid (664) (369) (1,833) (369) Registration costs -- (356) -- (690) --------------------------------------------------------------------- Retained earnings, end of period $50,593 $38,758 $50,593 $38,758 --------------------------------------------------------------------- ---------------------------------------------------------------------

CRYPTOLOGIC INC. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of US dollars, except per share information)

--------------------------------------------------------------------- For the three months For the years ended December 31, ended December 31, 2004 2003 2004 2003 (unaudited) (unaudited) (unaudited) (audited) ---------------------------------------------------------------------

Revenue $17,949 $13,540 $63,714 $44,211 --------------------------------------------------------------------- Expenses Operating costs 11,349 8,371 39,975 27,204 General and administrative 1,773 1,296 6,028 5,161 Finance 88 91 374 350 Amortization 674 474 2,089 1,533 --------------------------------------------------------------------- 13,884 10,232 48,466 34,248 ---------------------------------------------------------------------

Earnings before undernoted 4,065 3,308 15,248 9,963 Interest income 426 160 1,293 691 ---------------------------------------------------------------------

Earnings before taxes 4,491 3,468 16,541 10,654 Income taxes 697 435 2,873 1,213 ---------------------------------------------------------------------

Earnings $3,794 $3,033 $13,668 $9,441 --------------------------------------------------------------------- ---------------------------------------------------------------------

Earnings per share Basic $0.29 $0.25 $1.05 $0.77 Diluted $0.27 $0.23 $1.01 $0.75

Weighted average number of shares ('000s) Basic 13,185 12,280 12,971 12,245 Diluted 13,871 12,972 13,586 12,604

CRYPTOLOGIC INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of US dollars)

--------------------------------------------------------------------- For the three months For the years ended December 31, ended December 31, 2004 2003 2004 2003 (unaudited) (unaudited) (unaudited) (audited) --------------------------------------------------------------------- Cash provided by (used in):

Operating activities: Earnings $3,794 $3,033 $13,668 $9,441 Adjustments to reconcile earnings to cash provided by (used in) operating activities: Amortization 674 474 2,089 1,533 Future taxes 444 -- 1,840 -- Gain on sale of investment -- -- -- (31) Stock options 337 148 1,200 438 Changes in operating assets and liabilities: Security deposits -- (1,000) (450) 9,190 Accounts receivable and other 872 (2,016) (4,098) (729) Prepaid expenses 42 57 (591) (246) Accounts payable and accrued liabilities 2,628 6,770 4,993 17,458 Income taxes payable 181 243 268 1,646 --------------------------------------------------------------------- 8,972 7,709 18,919 38,700 ---------------------------------------------------------------------

Financing activities: Issue of capital stock 2,343 360 8,506 630 Registration costs -- (356) -- (690) Dividends paid (664) (369) (1,833) (369) --------------------------------------------------------------------- 1,679 (365) 6,673 (429) ---------------------------------------------------------------------

Investing activities: Purchase of capital assets, net of disposals (1,749) (349) (7,296) (2,618) Purchase of intangible assets -- (5) (89) (13) Short term investments 9,840 (3,657) (19,035) (5,890) Sale of investment -- -- -- 711 Investment in subsidiary -- (111) -- (111) --------------------------------------------------------------------- 8,091 (4,122) (26,420) (7,921) --------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 18,742 3,222 (828) 30,350 Cash and cash equivalents, beginning of period 24,440 40,788 44,010 13,660 --------------------------------------------------------------------- Cash and cash equivalents, end of period $43,182 $44,010 $43,182 $44,010 --------------------------------------------------------------------- ---------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at December 31, 2004 (All figures are in thousands of US dollars, except per share disclosure and where otherwise indicated) (Unaudited)

    These consolidated interim financial statements of CryptoLogic Inc. (the "Company") have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) using the same accounting policies as were used for the audited consolidated financial statements for the year ended December 31, 2003. These consolidated interim financial statements do not contain all annual disclosures required by GAAP and, as such, should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the year ended December 31, 2003, as set out in the 2003 Annual Report.

    1. Stock Option Plan

    In accordance with the guidelines of the Canadian Institute of Chartered Accountants, the Company has expensed the costs of all stock option grants issued on or after January 1, 2003. The fair value of the options granted in 2003 and 2004 was made using the Black-Scholes option pricing model under the following weighted assumptions:

2004 2003 ---- ----

Dividend yield 0.75% 0.75% Risk-free rate 2.75% 2.75% Expected volatility 50.0% 50.0% Expected life of options in years 5.0 5.0

The estimated fair value of options is recorded over the vesting period of the options. The cost of stock options is included in operating costs. Consideration paid by employees on the exercise of stock options is credited to share capital.

The impact of expensing stock options on earnings is as follows:

Three months ended Years ended December 31, December 31, December 31, December 31, 2004 2003 2004 2003 --------------------------------------------------------------------- ('000) ('000) ('000) ('000)

Stock options expense $337 $148 $1,200 $438

Stock options expense (per share): Basic $0.03 $0.01 $0.09 $0.03 Diluted $0.02 $0.01 $0.09 $0.03 ---------------------------------------------------------------------

For the year ended December 31, 2002, no compensation cost was recorded on the grant of stock options during that year. In accordance with the transitional provisions of the accounting guideline, additional pro forma disclosure is presented as if the fair value method of accounting had been used to account for stock options. The fair value of the options granted was made using the Black-Scholes option pricing model under the following weighted assumptions:

2002 ---- Dividend yield -- Risk-free rate 2.0% Expected volatility 100.0% Expected life of options in years 5.0

Had compensation expense been determined based on the fair value of the employee stock option awards for 2002 grants at the grant dates in accordance with the new recommendations, the Company's earnings and earnings per share would have been changed to the following pro forma amounts:

Three months ended December 31, Years ended December 31, 2004 2003 2004 2003 --------------------------------------------------------------------- As Pro As Pro As Pro As Pro reported forma reported forma reported forma reported forma --------------------------------------------------------------------- ('000) ('000) ('000) ('000) ('000) ('000) ('000) ('000)

Earnings $3,794 $3,662 $3,033 $2,849 $13,668 $13,090 $9,441 $8,706

Earnings per share: Basic $0.29 $0.28 $0.25 $0.23 $1.05 $1.01 $0.77 $0.71 Diluted $0.27 $0.26 $0.23 $0.22 $1.01 $0.96 $0.75 $0.69

2. Capital Stock

Authorized: Unlimited common shares

Issued and Outstanding: Common Shares Series F Warrants Total Stated Stated Stated In thousands Issued Value Issued Value Value ---------------------------------------------------------------------

Balance, December 31, 2002 12,206 $10,448 30 $272 $10,720 Exercise of stock options 94 630 -- -- 630 --------------------------------------------------------------------- Balance, December 31, 2003 12,300 $11,078 30 $272 $11,350 ---------------------------------------------------------------------

Balance, December 31, 2003 12,300 $11,078 30 $272 $11,350 Exercise of stock options 1,011 9,030 -- -- 9,030 --------------------------------------------------------------------- Balance, December 31, 2004 13,311 $20,108 30 $272 $20,380 ---------------------------------------------------------------------

    3. Normal Course Issuer Bid

    In September 2004, the Board of Directors approved a share repurchase plan, under a Normal Course Issuer Bid, to repurchase and cancel up to 1,250,000 of the Company's outstanding common shares for the period commencing September 23, 2004 and ending September 22, 2005. As at December 31, 2004, the Company has not repurchased any shares.

    4. Comparative Figures

    Certain of the prior year's figures have been reclassified for consistency with the current presentation, and reflect the expensing of stock options effective January 1, 2003.



    CryptoLogic Inc. (TSX:CRY) (NASDAQ:CRYP) (LSE:CRP)

--30--CCN/na*

CONTACT: CryptoLogic Nancy Chan-Palmateer Director of Communications (416) 545-1455 OR CryptoLogic Jenifer Cua Interim Chief Financial Officer (416) 545-1455 OR Argyle Rowland Daniel Tisch (Media) (416) 968-7311 ext. 223 dtisch@argylerowland.com OR Argyle Rowland Karen Passmore (Media) (416) 968-7311 ext. 228 kpassmore@argylerowland.com

KEYWORD: NEW YORK INTERNATIONAL CANADA INDUSTRY KEYWORD: SOFTWARE EARNINGS SOURCE: CryptoLogic Inc.

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