Final Results

28th Feb 2006 07:03

PartyGaming Plc28 February 2006 28 February 2006 PartyGaming Plc Preliminary announcement of results for the year ended 31 December 2005 Highlights • Revenues up 63% to $977.7m (2004: $601.6m) reflecting continued growth in poker and the introduction of blackjack • Clean EBITDA* up 49% to $583.7m (2004: $391.0m); EBITDA after share option charges, IPO expenses and skin-related settlement costs of $349.7m (2004: $387.8m) • Clean EPS* of 13.9 cents (2004: 9.3 cents); basic earnings per share of 7.7 cents (2004: 9.2 cents) • Cashflow from operating activities up 45% to $620.2m (2004: $429.1m); net cash at year end of $199.9m (2004: net debt of $350.7m) • Trading to date in line with the Board's expectations • Recommended final dividend of $200m (2004: nil) equal to 5.25 cents per share $ refers to US Dollars throughout * EBITDA / EPS before IPO-related expenses, non-recurring costs associated withthe settlement of legal claims by certain skins as well as non-cash chargesrelating to share options which are to be satisfied by existing shares that wereeffectively gifted to the Employee Trust by the Principal Shareholders. Commenting on the full year results for 2005, Michael Jackson, Chairman, said: "PartyGaming's full year performance has again been outstanding, endorsing thestrategy mapped out at the time of the IPO. The rapid pace of development hascontinued in 2006. The Group has launched PartyCasino as part of a fullyintegrated, Party-branded platform with a common account and shared purse; madesignificant enhancements to PartyPoker, and acquired EmpirePoker consolidatingour leading position in online poker and concluding our skins strategy. "PartyGaming's IPO and subsequent success has been due in large part to theleadership of Richard Segal, the Group's CEO. It is therefore with regret thatwe are announcing Richard's departure. On behalf of all stakeholders we thankhim for his substantial contribution and wish him every success for the future." Contacts: PartyGaming Plc On 28 February 2006: +44 (0)20 7831 3113Richard Segal, Chief Executive OfficerMartin Weigold, Group Finance DirectorPeter Reynolds, Director of Investor RelationsJohn Shepherd, Director of CorporateCommunications Financial Dynamics +44 (0)20 7831 3113Edward Bridges / Juliet Clarke Analyst Meeting, webcast and conference call details: Tuesday, 28 February 2006 There will be an analyst meeting for invited UK-based analysts at Deutsche Bank,75 London Wall London, EC2N 2DB starting at 9.30am GMT. There will be asimultaneous webcast and dial-in broadcast of the meeting. To register for thelive webcast, please pre-register for access by visiting the Group website (www.partygaming.com). Details for the dial-in facility are given below. A copyof the webcast and slide presentation given at the meeting will be available onthe Group's website later today. In addition, there will be an interactive conference call for internationalinvestors and analysts starting at 2.30pm GMT, details of which are set outbelow. An interview with Richard Segal, Chief Executive, and Martin Weigold, GroupFinance Director, in video/audio and text will also be available from 7.00am GMTon 28 February 2006 on: http://www.partygaming.com and on http://www.cantos.com. Dial-in details to listen to the analyst presentation: Tuesday 28 February 20069.20 am Please call +44 (0)20 7138 0844 (UK)9.30 am Meeting starts A recording of the meeting will be available for a period of seven days from 28February 2006. To access the recording please dial the following replaytelephone number: Replay telephone number +44 (0)20 7806 1970 (UK)Replay passcode: 5414926 Dial-in details to participate in the conference call for internationalinvestors Tuesday 28 February 2006 For international analysts and investors there will also be an opportunity toput questions to Richard Segal, Chief Executive, and Martin Weigold, GroupFinance Director, by way of a conference call. The details of the call are asfollows: 2.20 pm Please call +44 (0) 1452 562 815 (UK) / +1 866 629 0054 (US)2.30 pm Conference call starts A recording of the conference call will be available for a period of seven daysfrom 28 February 2006. To access the recording please dial the following replaytelephone number: UK Replay telephone number +44 (0) 1452 550 000UK Replay passcode: 5539645US Replay no: +1 866 247 4222US Replay passcode: 5539645 All times are GMT. OPERATING AND FINANCIAL REVIEW Introduction PartyGaming Plc is the world's leading online gaming company and operatesPartyPoker.com, the world's largest online poker room as well asEmpirePoker.com, MultiPoker.com, IntertopsPoker.com and PokerNOW.com. The Groupis also now the world's largest online casino based on current daily revenuesand operates PartyCasino.com, StarluckCasino.com, PlanetLuck.com andPartyBingo.com. The 2005 financial year was a period of transformation for the Group. Inaddition to the Group's flotation on the London Stock Exchange in June 2005, theGroup also launched a brand new affiliate programme, PartyPartners, movedPartyPoker to a new operating platform, introduced blackjack to PartyPokercustomers and rationalised its white label arrangements in poker by acquiringtwo of its 'skins' and terminating its relationship with a third. Since the yearend the Group has also acquired its last remaining skin, EmpirePoker.com,subject to the approval of Empire Online's shareholders. Against this backgroundof rapid corporate development, the Group's strong financial performance hascontinued, delivering record revenue, Clean EBITDA and cashflow. Results During the year the company incurred significant non-recurring costs in respectof IPO related expenses and skin related settlement costs. Additionally, shareoption charges contributed significantly to non-cash expenses. Details of theseitems are set out in note 2 to the financial information. The reconciliation below arrives at 'Clean EBITDA' by adjusting operating profitfor the effect of these items to assist in an understanding of the underlyingtrading performance of the business and the cash flows it has generated duringthe financial year. Reconciliation of Operating Profit to Clean EBITDA Year ended 31 December 2005 2004 $m $mOperating Profit 332.4 383.2Depreciation and amortisation 17.3 4.6 ------ ------EBITDA 349.7 387.8 ------ ------Share option charges 65.6 3.2IPO-related expenses 22.6 -Skin-related settlement costs 145.8 - ------ ------Clean EBITDA 583.7 391.0 ------ ------ In 2005 Group revenues increased by 63% year on year and Clean EBITDA climbed by49%. Poker remains the largest individual business segment, representing 88% of 2005revenues and 87% of Clean EBITDA. However, the launch of blackjack during thefourth quarter of 2005 has improved the balance of the Group's business and weexpect this to be further reflected in the 2006 financial results. PartyPoker was the driving force behind the Group's poker business in 2005 andtotal poker revenue grew 55% to $859.1m (2004: $553.0m). Clean EBITDA increasedby 41% to $509.2m (2004: $361.9m), driven by the substantial growth in pokerrevenue. The casino business saw revenues increase strongly by 144% to $118.6m (2004:$48.6m), due to the launch of blackjack on PartyPoker during the fourth quarter.Clean EBITDA for this business segment also rose strongly to $75.6m (2004: $29.0m). Overall Clean EBITDA margins declined from 65.0% to 59.7% as competitivepressures in the online gaming market led to an increase in marketing expenses,but also reflected increased administration expenses arising from the additionalinfrastructure costs associated with becoming a public listed company. Business development The online gaming market is highly dynamic and is continuing to develop apace.As the world's leading online gaming business, the Group has a well-establishedinfrastructure with appropriate procedures and processes which allow our highlyskilled employees to react quickly to changing market dynamics. During 2005,there were a number of important developments within each of the Group's keyareas of operation, namely marketing, systems and customer service. 1. Marketing The Group's marketing strategy remains focused on growing the number of activeplayers on its sites as well as broadening the appeal of its productsinternationally. By increasing the range of product offered to our customers, weaim to broaden the appeal of our gaming sites and capture a greater share oftotal gaming spend. While the main focus will be on promoting the Group'sfully-integrated Party-branded sites: PartyPoker, PartyCasino, and PartyBingoand the other soon to be launched Party-branded games, the Group will alsocontinue to support StarLuckCasino, PlanetLuckCasino and EmpirePoker, each ofwhich will act as secondary gaming brands. Players on MultiPoker andIntertopsPoker will be migrated to the fully-integrated platform in due course. During 2005 the Group launched successful multi-channel marketing campaigns in anumber of countries including the US, UK and a number of other Europeancountries. The Group had 1.3m active real money poker players in 2005 (2004:0.7m) of which 19% were outside the US compared with 10% in 2004. In casino, thenumber of real money players increased to 0.4m (2004: 0.1m). The proportion ofreal money sign-ups for poker coming from countries outside the US increasedfrom 10% to 24% while in casino it increased from 25% to 32%. Customer promotions in a variety of different forms remain one of the primarytools used by the industry to attract players as well as retain them. TheGroup's brand strength means that it can continue to drive new player sign-ups,without having to match the levels of player incentives offered by a number ofsmaller competitors, many of whom are offering incentives to a level that maynot deliver long term returns. However, the market remains competitive and totalbonuses (and other fair value adjustments to revenue) as a percentage of grosspoker revenue have increased during the year to 9.3% (2004: 6.9%). Bonus levelsin casino tend to be much higher than in poker due to the faster rate of playand the higher revenue generated per active player day. However, the impact ofblackjack on casino revenue has meant that bonuses (and other fair valueadjustments to revenue) fell as a percentage of gross revenue from 29.5% in 2004to 14.4% in 2005. While player acquisition remains a key driver for the business, retainingplayers is also critical. At the beginning of 2005, the Group commenced anextensive data mining project, the first phase of which was completed during thefourth quarter of 2005, allowing a number of marketing initiatives to beintroduced that are expected to drive improved trends in player retention. The Group's affiliate programme for the integrated platform, PartyPartners, isnow operational. PartyPartners combines a number of the Group's affiliateprogrammes enabling affiliates to leverage the Group's existing poker affiliatenetwork to drive new players to the Group's non-poker products using oneaccount, with common reporting systems and payment mechanisms. During 2005affiliates generated 34.3% of poker revenue (2004: 28.3%) and it is expectedthat, through PartyPartners, a number of existing PartyPoker affiliates will nowalso promote PartyCasino.com. Affiliates will also be encouraged to supportother Party-branded games, as and when they are launched. 2. Systems and product development The most significant event during the year from a systems and productdevelopment perspective was the separation of PartyPoker from the Group's skinsin October 2005. Whilst the Group regularly updates and adds new features to its poker and casinogames through periodic 'releases' of revised versions of its software, therelease of a new version of PartyPoker in October 2005 in conjunction with thedecision to move PartyPoker to a new and independent operating platform was amajor step for the Group. This involved moving all of the Group's PartyPokerplayers and was a necessary first step before launching the fully-integratedParty-branded platform. The move also allowed us to further differentiatePartyPoker from the skins by offering new and additional features, includingblackjack. Since the move, the performance of PartyPoker has strengthened andthe additional revenue from blackjack has been substantial. Other new features that were rolled out on PartyPoker during the year includedthe introduction of high-limit tables, "deal-making" that allows tournamentfinalists to agree to split the winnings rather than risk losing out altogetherand the creation of a number of micro-limit and beginners' tables for thebenefit of less experienced players. During the year, the Group successfully relocated the real money casino serversto Gibraltar but has yet to relocate its real money poker servers to Gibraltaras the required telecommunications capacity and resilience are not yetavailable. The Group has undertaken to the Government of Gibraltar that, inaccordance with the terms of its primary gaming licence, the poker servers willbe relocated to Gibraltar within six months of the required bandwidth andresilience becoming available. PartyGaming continually strives to ensure that its customers have only the veryhighest levels of trust and confidence in the Group's gaming products. Inaddition to internal review processes, all of the Group's sites are checked eachday by an independent third party to confirm that the highest standards aremaintained. 3. Customer service Looking after the Group's 1.3 million active poker customers and 0.4 millionactive casino customers during the year is a core part of the Group'sactivities. Customers need to feel that they are playing in a safe and secureenvironment and that any issues will be resolved quickly. Our state-of-the-artbusiness process outsourcing ("BPO") operation in Hyderabad now has over 900operators in Customer Services and Transaction Services who are available totalk to or respond to emails from customers 24 hours a day. Over the 12 monthsto 31 December 2005, the customer service teams dealt with over four millioncustomer contacts, of which 2.4 million were by phone, the balance by email.This represents a 25% increase in the total over 2004. In an online survey of customers conducted by GoodCorporation in January 2006,of those who expressed a view, 87% found that the customer contact byPartyGaming was either better than expected or said it was much better thancompetitors. That said, the Group is not complacent and is determined tocontinue to improve the quality of its customer service offering throughincreased resources and training. Transaction Services in India is primarily responsible for resolving customerqueries relating to the online cashier. Both the Customer Service andTransaction Services teams work closely together and a customer enquiry receivedby one team may be resolved by the other, if more appropriate to do so.Improving the speed of transactions for customers and also increasing the rangeof methods available to pay-in and withdraw funds remain key objectives for theGroup. There are now 23 ways in which customers can pay-in funds to theiraccounts including online wallets, credit cards and other mechanisms. Responsible gaming Responsible gaming is another area that the Group takes very seriously.PartyGaming is one of only four online gaming operators to have been certifiedby GamCare and we have continued to strive to improve the processes and systemsin place to protect younger or more vulnerable players. For example, players canset limits over the amount that they can deposit in a given period or the numberof times that they log on each day. The Group also provides links toorganisations that give information, advice and practical help on compulsive orexcessive gambling. Skins At the time of the IPO, the Group made it clear that it would seek to change thebasis of its relationships with its skins partners, the rationale for themhaving diminished following the Group's rapid expansion since 2003. In November 2005, the Group announced the acquisition of the player database andintellectual property of MultiPoker for US$14.5m in cash. MultiPoker is a leaderin online poker in Scandinavia with more than 255,000 registered players. TheGroup also announced the termination of its skin arrangement withIntertopsPoker.com and the acquisition of its player database. IntertopsPokerhas since become an affiliate of PartyPoker, allowing PartyPoker to market itsservices to IntertopsPoker.com players. At the same time the Group announcedthat it had agreed to terminate its skin arrangement with Coral Eurobet. Also in November 2005, the Group announced that it was in discussions regardinga possible offer to acquire the business and assets of Empire Online Limited("EOL"). Those discussions were terminated on 21 November 2005 and EOL announcedthat it was proposing to commence legal proceedings against the Group for, interalia, breach of contract following the separation of PartyPoker from the rest ofthe Group's skins. On 14 February 2006, the Group announced that it had agreedto acquire the business and assets of EmpirePoker.com, its last remaining skin,from EOL as well as some other associated assets, for a total cash considerationof $250m. As part of the transaction, that is subject to the approval by EOLshareholders on 6 March 2006, EOL has agreed to withdraw all legal claimsagainst the Group. The agreement with EOL is conditional upon the approval ofEOL Shareholders and the Group has received irrevocable powers of attorney fromEOL Shareholders representing approximately 56% of the issued share capital ofEOL to the effect that their votes will be cast in favour of any necessaryresolution. As required under International Financial Reporting Standards, a non-recurringcharge of $145.8m has been included in the 2005 financial year withinAdministration Expenses to reflect the settlement of disputes arising from theseparation of PartyPoker players from EmpirePoker and all of the other thirdparty skins. Management In order to add strength and depth to the management team, the Group hascontinued to appoint high quality personnel into a number of senior managementpositions. These include Steve Heller, previously CEO of IVY Comptech, theGroup's BPO operation in India, who now has executive responsibility for allcustomer service and transaction service operations across the Group. BhagwanDass Goel has recently joined as head of Group technology having previously heldsenior positions in a number of leading e-commerce companies such asTravelocity, Internet Shopping Network and Infoseek. Nigel Birrell has beenappointed as Director of Merger and Acquisitions - he was formerly at HITEntertainment PLC where he was a main Board Director in charge of corporatedevelopment and acquisitions. Future business developments From an operational point of view, the Group is continuing to develop newproducts and additional services to broaden its customer base, improve thequality of its product offering and drive the business forward. The Group hasalready announced the launch of PartyCasino and the integrated platform whichtook place earlier this month. The introduction of the first of two new games ison-track for the first half with the second planned for the third quarter of2006. Multi-lingual and multi-currency versions of PartyPoker are also scheduledfor the second half of 2006. Regulation The regulatory environment for online gaming around the world is constantlychanging with new rules and regulations being considered in a number ofterritories where we attract players. These currently include three proposedlegislative initiatives in the US. The first is the reintroduction of anInternet Gambling Prohibition Act by Congressman Goodlatte that seeks to updatethe US Wire Act in order to prohibit all forms of online gaming in the US,subject to certain carve-outs. The other two are sponsored by Congressman Leachand Senator Kyl respectively and essentially seek to restrict the processing of"illegal online gaming" transactions in the US. These initiatives are similar toa number of previous initiatives, all of which have failed either in the Senateor the House of Representatives. Elsewhere, in Italy the authorities haveordered a number of internet service providers to block online gaming sitesbeing accessed in Italy. The online gaming industry intends to challenge thismove which it sees as being in contravention of EU law. The Board continues tomonitor closely developments regarding these and other proposed regulatorychanges around the globe and remains committed to promoting a uniforminternational regulatory framework for all online gaming. Current trading and outlook In the seven weeks to 18 February 2006 the Group's trading performance has beenin line with the Board's expectations, with average gross daily poker revenue up9% versus the fourth quarter of 2005 to $3.0m per day. As expected, casino saw amodest decline in the average daily gross win from blackjack and average dailygross win for casino as a whole was $0.92m compared with $0.98m in the fourthquarter of 2005. The Group has continued to grow new real money sign-ups and in January added arecord 92,838 new players to the system. Whilst it is too early to comment specifically on its longer term impact, thelaunch of the new integrated platform incorporating the latest release ofPartyPoker as well as the new PartyCasino has been well received by players andindustry commentators alike. Our marketing strategies aim to encourage anincreasing proportion of our players to play more than one game on our platform,using their common account and shared purse. Whilst an increasing proportion of more recreational players can be expected toincrease the impact of seasonality on the Group's quarter-on-quarterperformance, the introduction of two new games as well as multi-currency andmulti-lingual versions of PartyPoker later in the year are expected to bepositive for the Group and the Board remains confident of making good progressin the current year. Key performance indicators for the first quarter of 2006 will be announced onTuesday 18 April 2006. SUMMARY OF RESULTS Year ended 31 December Revenue Clean EBITDA 2005 2004 2005 2004 $m $m $m $m Poker 859.1 553.0 509.2 361.9Casino 118.6 48.6 75.6 29.0Unallocated (1.1) 0.1 ------ ------ ------ ------ 977.7 601.6 583.7 391.0 ------ ------ ------ ------Clean EBITDA margin 59.7% 65.0% Revenue was up 63% over the same period in 2004, driven by continued growth inthe Group's poker business but also by the strong growth in casino following thelaunch of blackjack during the fourth quarter of 2005. Clean EBITDA increased by49%, the impact of increased distribution and administration expenses resultingin a reduction in margin from 65.0% to 59.7%. Reconciliation of Operating Profit to Clean EBITDA Year ended 31 December 2005 2004 $m $mOperating profit 332.4 383.2Depreciation and amortisation 17.3 4.6 ------ ------EBITDA 349.7 387.8Share option charges 65.6 3.2IPO-related expenses 22.6 -Skin-related settlement costs 145.8 - ------ ------Clean EBITDA 583.7 391.0 ------ ------Basic earnings per share before share optioncharges, IPO expenses and skin-related settlementcosts (cents) 13.9 9.3Diluted earnings per share before share optioncharges, IPO expenses and skin-related settlementcosts (cents) 13.6 9.3Basic earnings per share (cents) 7.7 9.2Diluted earnings per share (cents) 7.5 9.2 Operating profit before share option charges, IPO expenses and skin-relatedsettlement costs was 47% ahead of 2004. The reduction in operating profit margin(before share option charges, IPO expenses and skin-related settlement costs) to57.9% (2004: 64.2%) primarily reflected increased marketing expenses within thepoker business as well as increased administration costs associated withbecoming a listed company. Share option charges, IPO expenses and skin-relatedsettlement costs totalled $234.0m in the period (2004: $3.2m). The share optioncharge of $65.6m reflects the granting of nil-cost share options to the Group'semployees during the year, the majority of which were granted ahead of theGroup's flotation which took place on 30 June 2005. The skin-related settlementcosts totalling $145.8m are amounts attributed to the settlement of disputesarising from the separation of PartyPoker players from EmpirePoker and all ofthe other third party skins in October 2005. Basic clean earnings per share were 13.9 cents (2004: 9.3 cents), an increase of49%. Basic earnings per share were 7.7 cents, a reduction of 16% over the prioryear (see note 5 of the financial information). Diluted clean earnings per sharewere 13.6 cents (2004: 9.3 cents), an increase of 46%. Diluted earnings pershare were 7.5 cents (2004: 9.2 cents). REVENUE Revenue was up 63%, driven by a further strong performance by the Group's pokerbusiness and also by a substantial improvement in performance by the casinobusiness which grew revenue by 144%. In terms of geographic spread, the Groupcontinued to reduce its dependence on the US where total revenue growth was 55%over 2004 whilst outside the US it was even higher at 125%. As a result, thepercentage of total revenue generated outside the US in 2005 was 16% comparedwith 11% in the previous year. A breakdown of the two business segments, pokerand casino is summarised below. POKER Year ended 31 December 2005 2004 % change $m $m Gross revenue 903.5 568.4 59%Bonuses and other fair value adjustments to (73.1) (29.5) 148%revenue ------ ------Net revenue from own sites 830.4 538.9 54%Income from skins 28.7 14.1 104% ------ ------Net poker revenue 859.1 553.0 55% ------ ------Clean EBITDA 509.2 361.9 41% PartyGaming operates a number of online poker rooms including PartyPoker, theworld's largest online poker room, MultiPoker, IntertopsPoker, PokerNOW andsubsequent to the year end, EmpirePoker. During 2005 the Group had 1.3 millionactive real money poker customers and revenue from customers playing on itspoker sites was up by 54% compared with the same period in 2004. During December 2005, it is estimated that PartyPoker (excluding skins) had anaverage market share, as measured by ring game gross revenue, of approximately38% which was more than three times larger than its nearest rival. PartyPoker'soperating margins in the period were lower than the previous year as a result ofincreased distribution costs reflecting continued competitive pressures as wellas wider brand promotion in a number of new territories such as the UK andScandinavia. Higher administration expenses, particularly in the second half,reflected the Group's transition to becoming a listed public company as well asone-off expenses associated with the conclusion of the Group's skin strategy. Poker continues to appeal to an expanding group of online players asdemonstrated by the strong growth in both real money sign-ups and the number ofactive players. A summary of the key performance indicators of the businessduring the period is shown in the table below: Key Performance IndicatorsYear ended 31 December 2005 2004Active player days 47,403,613 28,216,430Daily average players 129,815 77,094Yield per active player day $17.5 $19.1New real money sign-ups 839,317 596,565Unique active players during the 1,340,661 742,398periodUnique active players in December 559,189 323,943Average daily revenue $2,274,943 $1,472,398 The Group increased the total number of real money sign-ups during the year to839,317 (2004: 596,565), 24% of which were outside the US (2004: 10%). Thiscontributed to an 81% increase in unique active players and a 68% year-on-yearincrease in active player days to a record 47.4 million (2004: 28.2 million). Yield per active player day fell to $17.5 (2004: $19.1), reflecting anincreasing number of recreational players, the introduction of blackjack in thefourth quarter and an increase in the level of bonuses arising from competitivepressures in the marketplace. As anticipated, rates of attrition of real money sign-ups in 2005 continued toincrease with 29.2 % of the sign-ups in January 2005 remaining active after sixmonths and 26.7% after 12 months. While the rates of attrition have increasedover the previous year, the trend has improved in recent months reflecting thefact that a number of previously lapsed players have returned to PartyPoker. Asat 31 December 2005 and across all real money poker sign-ups to date, theaverage rate of attrition after six months was 32.9% and after 12 months it was29.5%. CASINO Year ended 31 December 2005 2004 % change $m $m Gross revenue 138.6 68.9 101%Bonuses and other fair value adjustments to (20.0) (20.3) (1%)revenue ------ ------Net casino revenue 118.6 48.6 144% ------ ------Clean EBITDA 75.6 29.0 161% The Group's casino business was transformed by the introduction of blackjack onto PartyPoker during the fourth quarter of 2005 with revenues up 144% on theprevious year. Excluding the first two weeks post-launch, which benefited from adegree of novelty factor, blackjack generated average daily gross win in thefourth quarter of $0.9m with a steady gross win margin of 2%. While bonus levelsin casino tend to be much higher than in poker, the large increase in revenuefrom blackjack meant that bonuses (and other fair value adjustments to revenue)fell to 14.4% of gross revenue (2004: 29.5%). Management expect that over timebonus activity will gradually increase and return to levels previously seen incasino. A summary of the key performance indicators of the business during theyear is shown in the table below: Key Performance Indicators Year ended 31 December 2005 2004Active player days 2,914,940 657,893Daily average players 7,986 1,798Yield per active player day $40.7 $73.9New real money sign-ups 66,741 54,000Unique active players during the 444,005 70,177periodUnique active players in December 207,391 12,745Average daily revenue $325,046 $132,754 Blackjack dominated all of the player metrics with total active player daysincreasing substantially from 0.7 million to 2.9 million, while the number ofunique active players increased more than five-fold to 444,005. Yield per activeplayer day fell to $40.7 (2004: $73.9) again driven by the impact of blackjackand this reduced the average yield over all casino games for the full year. Whilst additional distribution costs linked to the increase in volume wereincurred following the launch of blackjack, the fact that the majority ofblackjack players were already existing players on PartyPoker meant that therewere few customer acquisition costs associated with the blackjack revenuegenerated. As a result, Clean EBITDA margins for casino in 2005 increased to63.7% (2004: 59.7%). Distribution costs Year ended 31 December 2005 2004 % change $m $m Customer acquisition and retention (100.1) (37.6) 166%Affiliates (99.4) (53.7) 85%Other customer bonuses (not netted from revenue) (11.3) (10.0) 13%Customer bad debts (48.9) (36.7) 33%Web-hosting and technical services (11.4) (4.2) 171% ------ ------Total distribution costs (271.1) (142.2) 91% ------ ------Total distribution costs as % of revenue 27.7% 23.6% As reflected in the results for the first half of 2005, increased competitivepressures increased distribution expenses as a percentage of revenue comparedwith the previous year. Driven by a major increase in customer acquisition andretention costs, distribution expenses were 27.7% of revenue versus 23.6% in2004. Affiliate costs have also increased faster than revenue growth, reflectingtheir increasing importance as a central part of the Group's marketing strategy- affiliates were responsible for 34.3% of poker revenue in 2005 (2004: 28.3%).However, customer bad debts fell as a proportion of revenue reflectingimprovements in systems and processes to prevent fraudulent behaviour.Web-hosting and technical costs increased sharply reflecting the substantialincrease in customer traffic, investment in new equipment and further systemimprovements that were introduced during the year. Administration costs Year ended 31 December 2005 2004 % change $m $m Transaction fees (46.2) (29.3) 58%Depreciation and amortisation (17.3) (4.6) 276%Staff costs (38.4) (18.6) 106%Other overheads (37.2) (20.6) 81% ------ ------Administration costs before share optioncharges, (139.1) (73.1) 90%IPO expenses and skin-related settlement costs ------ ------Share option charges (see below) (65.6) (3.2) NMIPO-related expenses (22.6) - NMSkin-related settlement costs (145.8) - NM ------ ------Total administration costs (373.1) (76.3) 389% ------ ------Total administration costs as % of revenue 38.2% 12.7%Total administration costs as % revenue(excluding shareoption charges, IPO expenses and skin-relatedsettlement costs) 14.2% 12.2% Administration costs before share option charges, IPO expenses and skin-relatedsettlement costs increased by 90% to $139.1m, driven by increased activitylevels and the transformation to becoming a listed public company. Transactioncosts increased substantially reflecting increased volumes of customer depositsand withdrawals but reduced as a proportion of revenue reflecting an increase inthe proportion of transactions using e-wallets rather than more expensivepayment mechanisms. Depreciation and amortisation increased substantially to$17.3m reflecting further investment in bandwidth in Gibraltar, the fit-out of anumber of new offices in Gibraltar, Hyderabad and London to accommodate theincrease in staff levels and the amortisation of intangibles associated with theacquisition of PokerNOW, MultiPoker and IntertopsPoker during the year. Staffcosts more than doubled in the year reflecting the addition of new employees asthe business has expanded as well as the addition of a number of listedcompany-related appointments, including the Board of Directors. The growth inother overheads included various advisory fees associated with acquisitions andlegal claims. Share option charges Prior to flotation, the founding shareholders established a share option planfor the benefit of the current and future workforce. Under the terms of theplan, the existing workforce were granted a number of nil-cost options to besatisfied by existing shares which had been issued to a dedicated employeetrust. As such, the exercise of these options had no dilutive effect onshareholders who subscribed at the IPO and will have no cash impact on theCompany. International Financial Reporting Standards requires that the fairvalue of the options be amortised through the income statement over the life ofthe options. As a result there is a non-cash charge of $65.6m (2004: $3.2m)which has been included within the income statement in the period. This can beanalysed as follows: Year ended 31 December 2005 2004 $m $mCharge relating to- nil-cost options issued pre-IPO (63.4) (3.2)- nil-cost options issued post-IPO (2.2) - ------ ------Total (65.6) (3.2) ------ ------ IPO-related expenses Given that no new money was raised for the Company, the IPO-related expenseswere apportioned between the selling shareholders and the Company based oncontractual arrangements. The total IPO-related expenses were $88.0m of whichthe Company incurred $22.6m (2004: nil). Skin-related settlement costs The separation of PartyPoker from the skins platform in October 2005, thesubsequent departure of Coral Eurobet and the settlement of legal claims byEmpire Online Limited resulted in a non-recurring expense relating to settlementcosts totalling $145.8m. Associates Year ended 31 December 2005 2004 $m $m 35% interest in a company incorporated in England and 1.0 -Wales ------ ------ The Group acquired a 35% interest in the ordinary share capital of a companyincorporated in England and Wales during the period. The Group's share of lossesduring the year totalled $0.8m (2004: nil). Finance income and costs Year ended 31 December 2005 2004 $m $m Interest payable and other charges (10.2) (12.9)Interest receivable 3.5 1.4 ------ ------ (6.7) (11.5) ------ ------ Interest payable fell to $10.2m due to the repayment of all outstandingshareholder loans during the year. Interest receivable increased to $3.5m due toan increase in cash balances. Net cash1 As at 31 December 2005, the Group had net cash of $199.9m1 (2004: net debt of$350.7m), having repaid all outstanding shareholder loans as well as the balanceof a $200m revolving credit facility which was provided by Royal Bank ofScotland Plc and Barclays Capital at the time of the IPO. The margin on therevolving credit facility, which is currently undrawn, is 1% over LIBOR (orEURIBOR where relevant). 1 Net cash is defined as cash, cash equivalents and short term investments lessshareholder loans and bank debt Taxation The effective tax rate, before share option charges, IPO expenses andskin-related settlement costs is 5.7% (2004: 5.8%). Dividend The final dividend for the year to 31 December 2005 will be the Group's firstdividend since becoming a public company in June 2005. At the time of the IPOthe Board indicated that the final dividend was expected to be an aggregateamount of approximately $200m, representing two thirds of the total dividendthat would have been paid had the Company been listed since 1 January 2005.Accordingly, the Board is pleased to recommend a final dividend totalling $200min aggregate, equivalent to 5.25 cents per share. The final dividend of5.25 cents per share will be payable on 19 May 2006, subject to approval at theAnnual General Meeting to be held on 4 May 2006, to shareholders and depositaryinterest holders on the register of members or depositary interest registerrespectively at the close of business on 7 April 2006. The ex-dividend date willbe on 5 April 2006. Shareholders will receive their dividends in United StatesDollars, unless they elect for Sterling. These shareholders or depositaryinterest holders may make sterling elections by notifying Capita IRG by 20 April2006. The Sterling equivalent of dividends declared in United States Dollarswill be calculated by reference to a rate prevailing on 28 April 2006. Cashflow Year ended 31 December 2005 2004 $m $mCashflow from operations before movements in working 415.3 391.0capitalWorking capital movements associated with non-recurringskin-related settlement costs 142.2 -Other working capital movements 62.7 38.1 ------ ------Net cashflow from operating activities 620.2 429.1 ------ ------Capital expenditure (36.8) (11.9)Acquisitions of intangible assets (22.6) (5.8)Investment in associated undertaking (1.8) -Short term investments (6.8) -Purchase and cancellation of own shares - (1.1)Net finance costs (8.4) (9.6)Repayment of shareholder loans (482.8) (343.2) ------ ------Increase in cash and cash equivalents 61.0 57.5 ------ ------ Operating cashflow before movements in working capital included the chargerelating to non-recurring skin-related settlement costs of $142.2m and was 6%higher than 2004. Movements in working capital were again positive, generatingan additional $62.7m (2004: $38.1m) reflecting the continued management ofreceivables and lower payment processing reserves, resulting in net cashflowfrom operations of $620.2m, an increase of 45% over the previous year. During the period, $482.8m of outstanding shareholder loans were repaid. Capital expenditure Capital expenditure during the period was $36.8m (2004: $11.9m) and is analysedin the table below: Year ended 31 December 2005 2004 $m $m Poker 12.4 3.0Casino 0.3 1.4Corporate assets 24.1 7.5 ------ ------Total 36.8 11.9 ------ ------ The substantial increase in capital expenditure year on year reflected a numberof capital projects, including the implementation of a data warehousingsolution, the fit-out of offices in Gibraltar, Hyderabad and London andinvestment in a server centre in Gibraltar. Acquisitions of intangible assets During the year the Group completed a number of acquisitions, further details ofwhich are provided below. Year ended 31 December 2005 Consideration $mMultiPoker 14.5IntertopsPoker 4.2PokerNOW 2.8Other 5.4 ------Total 26.9 ------ On 11 November 2005 the Group announced the acquisition of the player databaseand intellectual property of MultiPoker for $14.5m in cash. Other acquisitionsincluded PokerNOW and control of the IntertopsPoker website as well as a numberof small affiliates for an aggregate sum of $12.4m. About PartyGaming Plc Founded in 1997, PartyGaming Plc is the world's leading online gaming companyand owns and operates PartyPoker, the world's largest online poker room as wellas EmpirePoker, MultiPoker, IntertopsPoker and PokerNOW. Other online gamingactivities include casino, principally through PartyCasino.com,StarluckCasino.com and also online bingo through PartyBingo.com. PartyGaming Plc is listed on The London Stock Exchange under the ticker: PRTY.In the year to 31 December 2005, the Group had revenues of $977.7m and generatedClean EBITDA of $583.7m and profit before tax of $324.9m. Regulated and licensed by the Government of Gibraltar, the Group has over 1,300employees located in the head office and operations centre in Gibraltar, abusiness process outsourcing operation in Hyderabad, India and a marketingservices subsidiary in London. The Group has customers in over 170 countries. PartyPoker.com hosted over one billion hands of poker in 2005 with a totalamount wagered of $45.8 billion and regularly supports up to 80,000 peopleplaying online at any one time. Financial Information Audited consolidated income statements Year ended 31 Dec 05 31 Dec 04 Notes $m $m Revenue - net gaming revenue 1 977.7 601.6 Other operating (expense)/income (1.1) 0.1 Administrative expenses * Other administrative expenses (139.1) (73.1) * Share option charges 2(a) (65.6) (3.2) * IPO-related expenses 2(b) (22.6) - * Skin-related settlement costs 2(c) (145.8) - ------ ------Total administrative expenses (373.1) (76.3) Distribution expenses (271.1) (142.2) ------ ------Profit from operating activities 332.4 383.2 Finance income 3 3.5 1.4Finance costs 3 (10.2) (12.9)Share of loss of associate (0.8) - ------ ------Profit before tax 324.9 371.7 Tax 4 (31.7) (21.6) ------ ------Profit after tax 293.2 350.1 ------ ------Attributable to:Equity holders of the parent 293.2 348.5Minority interest - 1.6 ------ ------ 293.2 350.1 ------ ------ Basic earnings per share (cents) 5 7.7 9.2Diluted earnings per share (cents) 5 7.5 9.2 All amounts relate to continuing operations Audited consolidated statement of changes in equity Year ended 31 Dec 05 31 Dec 04 Notes $m $mExchange differences on translation of - -foreignoperations ------ ------Net income/expense recognised directly to - -equity Profit after tax for the period 293.2 350.1 Total recognised income and expense ------ ------for the period 293.2 350.1 Issue of share capital 0.1 -Equity share options issued 65.6 3.2 ------ ------Total changes in equity 358.9 353.3 ------ ------Attributable to:Equity holders of the parent 5 358.9 351.7Minority interests - 1.6 ------ ------ 358.9 353.3 ------ ------ Audited consolidated balance sheets Year ended 31 Dec 05 31 Dec 04 Notes $m $m Non-current assetsIntangible assets 6 30.3 7.7Property, plant and equipment 7 37.1 13.3Investment in associates 9 1.0 - ------ ------ 68.4 21.0 ------ ------Current assetsTrade and other receivables 128.3 107.8Cash and cash equivalents 194.9 133.9Short term investments 10 6.8 - ------ ------ 330.0 241.7 ------ ------Total assets 398.4 262.7 ------ ------Current liabilitiesBank overdrafts (1.8) (1.8)Trade and other payables (201.5) (39.5)Shareholder loans 11 - (223.9)Income and other taxes payable (64.8) (28.0)Client liabilities and progressive prize (165.8) (104.6)poolsProvisions 12 (6.2) (4.7) ------ ------ (440.1) (402.5) ------ ------Non-current liabilitiesTrade and other payables (4.2) (6.1)Shareholder loans 11 - (258.9) ------ ------ (4.2) (265.0) ------ ------Total liabilities (444.3) (667.5) ------ ------Total net liabilities (45.9) (404.8) ------ ------EquityShare capital 13 0.1 0.0Share premium account 14 0.4 0.4Share option reserve 14 68.8 3.2Retained earnings 14 710.2 417.0Other reserve 14 (825.4) (825.4) ------ ------Equity attributable to equity holders of the (45.9) (404.8)parent ------ ------ Audited consolidated statement of cashflows Year ended 31 Dec 05 31 Dec 04 $m $m Profit before tax 324.9 371.7Adjustments for:Amortisation of intangibles 4.3 0.3Interest expense 10.2 12.9Interest income (3.5) (1.4)Depreciation of property, plant and equipment 13.0 4.3Increase in share option reserve 65.6 3.2Loss on investment in associate 0.8 - ------ ------Operating cashflows before movements inworking capital and provisions 415.3 391.0 ------ ------Increase in trade and other receivables (20.0) (54.6)Increase in trade and other payables 225.7 89.9Increase in provisions 1.5 2.8Income taxes paid (2.3) - ------ ------Cash generated by working capital 204.9 38.1 ------ ------Net cash inflow from operating activities 620.2 429.1 Investing activitiesPurchases of property, plant and equipment (36.8) (11.9)Purchases of intangible assets (22.6) -Purchase of minority interest in subsidiary - (5.8)Interest received 3.5 1.4Purchase and cancellation of own shares - (2.0)Investment in associated undertaking (1.8) -Increase in short-term investments (6.8) - ------ ------Net cash used in investing activities (64.5) (18.3) ------ ------Financing activitiesIssue of shares - 0.9Interest paid (9.6) (11.0)Cost of revolving credit facility (2.3) -Repayment of shareholder loans (482.8) (343.2) ------ ------Net cash used in financing activities (494.7) (353.3) ------ ------Net increase in cash and cash equivalents 61.0 57.5 Net cash and cash equivalents at beginning of period 132.1 74.6 ------ ------Net cash and cash equivalents at end of period 193.1 132.1 ------ ------Cash and cash equivalents 194.9 133.9Bank overdraft (1.8) (1.8) ------ ------ 193.1 132.1 ------ ------ Notes to the consolidated financial information Accounting policies Basis of preparation The financial information has been prepared in accordance with InternationalFinancial Reporting Standards including International Accounting Standards(IASs) and interpretations, (collectively IFRS), published by the InternationalAccounting Standards Board (IASB). The consolidated financial statements comply with the Gibraltar Companies(Consolidated Accounts) Ordinance 1999 and the Gibraltar Companies Ordinance1930, as amended. The financial information does not constitute the Group's statutory accounts forthe year ended 31 December 2005 or the year ended 31 December 2004, but isderived from those accounts. The financial information for the year ended 31 December 2004 is extracted fromthe Group's audited financial statements for the period ended 31 March 2005.Accounts for the period ended 31 March 2005, which were prepared under IFRS, areavailable at the Company's website (www.partygaming.com) and in hard copy fromits registered office. Accounts for the year ended 31 December 2005 will be madeavailable following the Company's Annual General Meeting. The auditors havereported on those accounts and their report was unqualified and did not containstatements under section 10(2) of the Gibraltar Companies (Accounts) Ordinanceor section 182(1) (a) of the Gibraltar Companies Ordinance 1930, as amended. Basis of accounting The financial information has been prepared in accordance with thoseInternational Financial Reporting Standards including International AccountingStandards (IASs) and interpretations, (collectively IFRS), published by theInternational Accounting Standards Board (IASB) which have been adopted by theEuropean Commission and endorsed for use in the EU for the purposes of theGroup's full year financial statements. The financial information has been prepared under the historical cost conventionother than for the valuation of certain financial instruments. The functional currency used in the preparation of this financial information isUnited States Dollars (USD) as is the presentation currency. The functionalcurrency is the currency in which the parent company operates and it reflectsthe economic substance of the underlying events and circumstances of the Group.A small minority of Group companies operate in Pounds Sterling and Indian Rupeesbut the amounts involved are not material. Assets, liabilities and expenses of the Group are translated from PoundsSterling and Indian Rupees into USD as follows: • assets and liabilities are translated at the closing rate existing at the balance sheet date; • income and expenses are translated at the exchange rates existing at the dates of the transactions or at a rate that approximates the actual exchange rates; • equity items other than the net profit or loss for the period that are included within retained earnings are translated at the closing rate existing at the balance sheet date; and • any exchange differences arising from the above translations are recognised in the income statement. Basis of consolidation Subsidiaries are those companies controlled, directly or indirectly byPartyGaming Plc. Control exists where the Company has the power to govern thefinancial and operating policies of an enterprise so as to obtain benefits fromits activities. Except as noted below, subsidiaries are consolidated from thedate of acquisition (i.e. the date on which control of the subsidiaryeffectively commences) to the date of disposal (i.e. the date on which controlover the subsidiary effectively ceases). Except as noted below, the financial information of subsidiaries is included inthe consolidated financial information using the acquisition method ofaccounting. On the date of acquisition the assets and liabilities of therelevant subsidiaries are measured at their fair values. The interest ofminority shareholders is stated at the minority's proportion of the fair valuesof the assets and liabilities recognised. Under Section 10(2) of the Gibraltar (Consolidated Accounts) Ordinance 1999, theCompany is exempt from the requirement to present its own income statement. All intra-Group transactions, balances, income and expenses are eliminated onconsolidation. Accounting for the Company's acquisition of the controlling interest inPartyGaming Holdings Limited The Company's controlling interest in its directly held, wholly owned,subsidiary PartyGaming Holdings Limited (formerly Headwall Ventures Limited) wasacquired through a transaction under common control, as defined in IFRS 3Business Combinations. The directors note that transactions under common controlare outside the scope of IFRS 3 and that there is no guidance elsewhere in IFRScovering such transactions. IFRS contain specific guidance to be followed where a transaction falls outsidethe scope of IFRS. This guidance is included at paragraphs 10 to 12 of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. This requires,inter alia, that where IFRS does not include guidance for a particular issue,the directors may also consider the most recent pronouncements of other standardsetting bodies that use a similar conceptual framework to develop accountingstandards. In this regard, it is noted that the United States FinancialAccounting Standards Board (FASB) has issued an accounting standard coveringbusiness combinations (FAS 141) that is similar in a number of respects to IFRS3. Further there is currently a major project being run jointly by the IASB andFASB to converge IFRS and US GAAP. In contrast to IFRS 3, FAS 141 does include, as an Appendix, limited accountingguidance for transactions under common control which, as with IFRS 3, areoutside the scope of that accounting standard. The guidance contained in FAS 141indicates that a form of accounting that is similar to pooling of interestsaccounting, which was previously set out in Accounting Principles Board (APB)Opinion 16, may be used when accounting for transactions under common control. Having considered the requirements of IAS 8, and the guidance included withinFAS 141, it is considered appropriate to use a form of accounting which issimilar to pooling of interests when dealing with the transaction in which theCompany acquired its controlling interest in PartyGaming Holdings Limited. In consequence, the Financial Information for PartyGaming Plc reports the resultof operations for the period as though the acquisition of its controllinginterest through a transaction under common control had occurred at 1 January2004. The effects of intercompany transactions have been eliminated indetermining the results of operations for the period prior to the acquisition ofthe controlling interest, meaning that those results are on substantially thesame basis as the results of operations for the period after the acquisition ofthe controlling interest. Similarly, the consolidated balance sheets and other financial information havebeen presented as though the assets and liabilities of the combining entitieshad been transferred at 1 January 2004. Associates Where the Group has the power to exercise significant influence over (but notcontrol) the financial and operating policy decisions of another entity, it isclassified as an associate. Associates are initially recognised in theconsolidated balance sheet at cost. The Group's share of post-acquisitionprofits and losses is recognised in the consolidated income statement, exceptthat losses in excess of the Group's investment in the associate are notrecognised unless there is an obligation to make good those losses. Profits and losses arising on transactions between the Group and its associatesare recognised only to the extent of unrelated investors' interests in theassociate. The investor's share in the associate's profits and losses resultingfrom these transactions is eliminated against the carrying value of theassociate. Any premium paid for an associate above the fair value of the Group's share ofthe identifiable assets, liabilities and contingent liabilities acquired iscapitalised and included in the carrying amount of the associate and subject toimpairment in the same way as goodwill arising on a business combinationdescribed below. Foreign currency Transactions entered into by Group entities in a currency other than thecurrency of the primary economic environment in which it operates (the"functional currency") are recorded at the rates ruling when the transactionsoccur. Foreign currency monetary assets and liabilities are translated at therates ruling at the balance sheet date. Exchange differences arising on theretranslation of unsettled monetary assets and liabilities are similarlyrecognised immediately in the income statement. Revenue Revenue from online gaming, comprising poker, casino and 'white label/skins'(third party entities that use the Group's platform and certain services), isrecognised in the accounting periods in which the gaming transactions occur. Poker revenue represents the commission ("rake") charged or tournament entryfees where the player has concluded his participation in the tournament. Casinorevenue represents net house win. Revenue in respect of 'white label/skin'arrangements is the net commission invoiced. Revenue is measured at the fairvalue of the consideration received or receivable and is net of certainpromotional bonuses. Interest income is recognised on an accruals basis. Segment information A segment is a distinguishable component of the Group that is engaged either inproviding products or services (business segment), or products or serviceswithin a particular economic environment (geographical segment) which aresubject to risks and rewards that are different to those of other segments. Taxation Income tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using rates that have beenenacted or substantively enacted by the balance sheet date. Deferred Tax Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the financial statements and the corresponding tax bases usedin the computation of taxable profit. It is accounted for using the balancesheet liability method. Deferred tax liabilities are generally recognised forall taxable temporary differences. Deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill or from theinitial recognition (other than in a business combination) of other assets andliabilities in a transaction that affects neither the taxable profit nor theaccounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference willreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset realised. Deferred tax ischarged or credited to profit or loss, except when it relates to items chargedor credited directly to equity, in which case the deferred tax is also dealtwith in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current assets against current tax liabilities andwhen they relate to income taxes levied by the same taxation authority and theGroup intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment All property, plant and equipment are stated at cost less accumulateddepreciation. Assets in the course of construction are carried at cost, less any recognisedimpairment loss. Cost includes directly attributable costs incurred in bringingthe asset to working condition for its intended use, including professionalfees. Depreciation commences when the assets are ready for their intended use. Depreciation is provided to write off the cost, less estimated residual values,of all property, plant and equipment, evenly over their expected useful lives.It is calculated at the following rates: Leasehold improvements - over length of leasePlant, machinery, computer equipment - 33% per annumFixtures, fittings, tools and equipment, - 20% per annumvehicles Where an item of property, plant or equipment comprises major components havingdifferent useful lives, they are accounted for as separate items of property,plant and equipment. Subsequent expenditure is capitalised where it is incurred to replace acomponent of an item of plant, property or equipment where that item isaccounted for separately including major inspection and overhaul. All othersubsequent expenditure is expensed as incurred, unless it increases the futureeconomic benefits to be derived from that item of plant, property and equipment. Goodwill Goodwill represents the excess of the cost of an acquisition over the Group'sshare of the fair value of the identifiable assets and liabilities of anacquired subsidiary, associate or jointly controlled entity. For acquisitions where the agreement date is on or after 31 March 2004, goodwillis not amortised and is reviewed for impairment at least annually. Anyimpairment is recognised immediately in the income statement and is notsubsequently reversed. Goodwill arising on earlier acquisitions was beingamortised over its estimated useful life of 20 years. In accordance with thetransitional provisions of IFRS 3 Business Combinations, the unamortised balanceof goodwill at 31 December 2004 was frozen and reviewed for impairment, and willbe reviewed for impairment at least annually. Intangible assets Identifiable assets, liabilities and contingent liabilities that meet theconditions for recognition under IFRS3 are recognised at their fair value at theacquisition date. The identified intangibles are amortised over the usefuleconomic life of the assets. For acquisitions during the period the usefuleconomic life of the intangible assets acquired is estimated to be betweeneighteen months and five years. Internally generated assets - research and development expenditure Expenditure incurred on development activities, including the Group's softwaredevelopment, is capitalised only where the expenditure will lead to new orsubstantially improved products or processes, the products or processes aretechnically and commercially feasible and the Group has sufficient resources tocomplete development. The expenditure capitalised includes the cost ofmaterials, labour and an appropriate proportion of overheads. All otherdevelopment expenditure is expensed as incurred. Subsequent expenditure on capitalised intangible assets is capitalised onlywhere it clearly increases the economic benefits to be derived from the asset towhich it relates. All other expenditure, including that incurred in order tomaintain the related intangible asset's current level of performance, isexpensed as incurred. Impairment of tangible and intangible assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cashflows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cashflows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately, unless the relevant asset is carried ata revalued amount, in which case the impairment loss is treated as a revaluationdecrease. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately, unless the relevant asset is carriedat a revalued amount, in which case the reversal of the impairment loss istreated as a revaluation increase. An impairment loss for goodwill is not reversed in a subsequent period unless: • The impairment loss was caused by a specific external event of an exceptional nature that was not expected to recur; and • Subsequent external events have occurred that reverse the effect of that event. Trade and other receivables Trade and other receivables are stated at amortised cost less provision forimpairment. Cash and cash equivalents Cash comprises cash in hand and balances with financial institutions. Cashequivalents are short term, highly liquid investments that are readilyconvertible to known amounts of cash. They include unrestricted short-term bankdeposits originally purchased with maturities of three months or less. Trade and other payables Trade and other payables are stated at amortised cost. Share option charge The Group has applied the requirements of IFRS 2 Share-based Payments. The Groupissues equity settled share based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight line basis over the vestingperiod based on the Group's estimate of the shares that will eventually vest.Fair value is measured by use of a suitable option pricing model. The expectedlife used in the model has been adjusted, based on management's best estimate,for the effects of non-transferability, exercise restrictions, and behaviouralconsiderations. For cash-settled share-based payment transactions, the goods or servicesreceived and the liability incurred are measured at the fair value of theliability. Up to the point at which the liability is settled, the fair value ofthe liability is re-measured at each reporting date and at the date ofsettlement, with changes being recorded in income statement. The Group recordsthe expense based on the fair value of the share-based payments on astraight-line basis over the vesting period. Provisions The Group recognises a provision in the balance sheet when it has a legal orconstructive obligation as a result of a past event and it is probable that anoutflow of economic benefits will be required to settle the obligation. Wheretime value is material, the amount of the related provision is calculated bydiscounting the cashflows at a pre-tax rate that reflects market assessments ofthe time value of money and any risks specific to the liability. Leased assets Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation. Leasepayments are apportioned between finance charges and reduction of the leaseobligation so as to achieve a constant rate of interest on the remaining balanceof the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the lease term. Financial instruments A substantial portion of the Group's revenue is received in its functionalcurrency. As such, currency exposure on revenues is minimal. Further, the Groupminimises foreign currency exposure by netting non-US$ deposits and payments ofwinnings in the respective currency. Additionally, other exposures include interest rate risk from borrowing and theinvestment of cash balances. The Group seeks to limit these risks by investingcash in short-term instruments and interest income is recognised on an accrualsbasis. Dividends Dividends are recognised when they become legally payable. In the case ofinterim dividends to equity shareholders, this is when declared by thedirectors. In the case of final dividends, this is when approved by theshareholders at the Annual General Meeting. Bank borrowings Interest bearing bank loans and overdrafts are recorded at the fair value of theproceeds received, net of direct issue costs. Finance charges, includingpremiums payable on settlement or redemption and direct issue costs, are chargedto the income statement using the effective interest method and are added to thecarrying amount of the instrument to the extent that they are not settled in theperiod in which they arise. 1. Business and geographical segment information For management purposes and transacting with customers, the Group is dividedinto the following two operating divisions: • Poker; and • Casino and Bingo. These divisions are the basis on which the Group reports its primary segmentinformation. Unallocated corporate expenses, assets and liabilities relate tothe entity as a whole and cannot be allocated to individual segments. Year ended Unallocated31 December 2005 Poker Casino Corporate Consolidated $m $m $m $m Revenue 859.1 118.6 - 977.7Clean EBITDA 509.2 75.6 (1.1) 583.7 Profit before tax 354.0 75.0 (104.1) 324.9 Other informationCapital additions 12.4 0.3 24.1 36.8Depreciation and amortisation 8.6 0.6 8.1 17.3 Balance sheetAssetsAssets - tangibles 12.2 1.0 23.9 37.1Assets - intangibles 30.3 - - 30.3Assets - associates 1.0 - - 1.0Segment assets - current 144.1 9.2 176.7 330.0Total assets 187.6 10.2 200.6 398.4 LiabilitiesSegment liabilities 329.2 10.1 105.0 444.3 Impairment losses 43.6 5.2 - 48.8Product development 1.1 0.4 0.7 2.2Cash flows from operating activities 558.6 78.6 (17.0) 620.2Cash flows from investing activities (36.8) (0.3) (27.4) (64.5)Cash flows from financing activities - - (494.7) (494.7) Year ended Poker Casino Unallocated Consolidated31 December 2004 Corporate $m $m $m $m Revenue 553.0 48.6 - 601.6 Clean EBITDA 361.9 29.0 0.1 391.0 Profit before tax 360.1 28.4 (16.8) 371.7 Other informationCapital additions 3.0 1.4 7.5 11.9Depreciation and amortisation 1.9 0.6 2.1 4.6 Balance sheetAssets - tangible 4.0 1.4 7.9 13.3Assets - intangible 7.7 - - 7.7Segment assets - current 96.5 8.7 136.5 241.7Total assets 108.2 10.1 144.4 262.7 LiabilitiesSegment liabilities (129.0) (6.6) (531.9) (667.5) Impairment losses 40.6 1.6 - 42.2Product development 2.6 1.1 - 3.7Cashflows from operating activities 392.5 28.8 7.8 429.1Cashflows from investing activities (10.7) (1.4) (6.2) (18.3)Cashflows from financing activities (0.2) - (353.1) (353.3) Revenue by Geographical Segment The following table provides an analysis of the Group's revenue by geographicalsegment. Year ended 31 Dec 05 31 Dec 04 $m $mUSA 824.5 533.5Europe 81.0 30.3Canada 54.1 25.7Rest of the world 18.1 12.1 ------ ------Total revenue 977.7 601.6 ------ ------ Carrying Value of Fixed Assets by Geographical Segment Year ended 31 Dec 05 31 Dec 04 $m $mEurope 26.0 7.4Canada 6.0 4.2Rest of the world 5.1 1.7 ------ ------Total fixed assets 37.1 13.3 ------ ------ Capital Expenditure by Geographical Segment Year ended 31 Dec 05 31 Dec 04 $m $mEurope 27.1 7.3Canada 4.7 3.3Rest of the world 5.0 1.3 ------ ------Total capital expenditure 36.8 11.9 ------ ------ 2(a) Share option charges Prior to flotation, the founding shareholders established a share option planfor the benefit of the current and future workforce. Under the terms of theplan, the existing workforce were granted a number of nil-cost options to besatisfied by existing shares which had been issued to a dedicated employeetrust. As such, the exercise of these options had no dilutive effect onshareholders who subscribed at the IPO and will have no cash impact on theCompany. International Financial Reporting Standards requires that the fairvalue of the options be amortised through the income statement over the life ofthe options. Nil-cost options issued pre-IPO were granted in order to attractand retain key employees and are considered to be significant. As a result thereis a non-cash charge of $65.6m (2004: $3.2m), which has been included within theincome statement in the period. This can be analysed as follows: Year ended 31 December 2005 2004 $m $mCharge relating to- nil-cost options issued pre-IPO (63.4) (3.2)- nil-cost options issued post-IPO (2.2) - ------ ------Total (65.6) (3.2) ------ ------ 2(b) IPO-related expenses The total IPO-related expenses were $88.0m of which the Company incurred $22.6m(2004: nil). Given that no new money was being raised for the Company, theIPO-related expenses were apportioned between the selling shareholders and theCompany based on contractual arrangements. 2(c) Skin-related settlement costs At the time of the IPO, the Group made it clear that it would seek to change thebasis of its relationships with its skins partners, the rationale for themhaving diminished following the Group's rapid expansion since 2003. In November 2005, the Group announced the acquisition of the player database andintellectual property of MultiPoker for US$14.5m in cash. MultiPoker is a leaderin online poker in Scandinavia with more than 255,000 registered players. TheGroup also announced the termination of its skin arrangement withIntertopsPoker.com which has since become an affiliate of PartyPoker, allowingPartyPoker to market its services to IntertopsPoker.com players. At the sametime the Group announced that it had agreed to terminate its skin arrangementwith Coral Eurobet. Also in November 2005, the Group announced that it was in discussions regardinga possible offer to acquire the business and assets of Empire Online Limited("EOL"). Those discussions were terminated on 21 November 2005 and EOL announcedthat it was proposing to commence legal proceedings against the Group for, interalia, breach of contract following the separation of PartyPoker from the rest ofthe Group's skins. On 14 February 2006, the Group announced that it had agreedto acquire the business and assets of EmpirePoker.com, its last remaining skin,from EOL as well as some other associated assets, for a total cash considerationof $250m. As part of the transaction, that is subject to the approval by EOLshareholders on 6 March 2006, EOL has agreed to withdraw all legal claimsagainst the Group. As required under International Financial Reporting Standards, a non-recurringcharge of $145.8m has been included in the 2005 financial year withinAdministration Expenses to reflect the settlement of disputes arising from theseparation of PartyPoker players from EmpirePoker and all of the other thirdparty skins. The agreement with EOL is conditional upon the approval of EOLShareholders and the Group has received irrevocable powers of attorney from EOLShareholders representing approximately 56 per cent of the issued share capitalof EOL to effect that their votes will be cast in favour of any necessaryresolution. 3. Finance income and costsYear ended 31 Dec 05 31 Dec 04 $m $mInterest payable (10.2) (12.9)Interest on bank deposits 3.5 1.4 ------ ------Net finance cost (6.7) (11.5) ------ ------ 4. Tax a) Analysis of tax charge for the yearYear ended 31 Dec 05 31 Dec 04 $m $m Current tax expense for the period 31.7 21.6Deferred tax - - ------ ------Income tax expense for the year 31.7 21.6 ------ ------ Domestic income tax is calculated at 35% (2004: 35%) of the estimated assessableprofit for the year. Taxation for other jurisdictions is calculated at the rateprevailing in the relevant jurisdiction. There are no material deferred tax balances arising in the year. b) Factors affecting the tax charge for the year The total charge for the year can be reconciled to accounting profit as follows: Year ended 31 Dec 05 31 Dec 04 $m $mProfit before tax from continuing operations 324.9 371.7 ------ ------Tax at the weighted average tax rate of the Group beingtax expense at the effective tax rate for the period 18.5 21.6Effect of IPO related expenses, IPO related optioncharges, and skin-related settlement costs 13.2 0.0 ------ ------Income tax expense 31.7 21.6 ------ ------ The Group's policy is to manage, control and operate group companies only in thecountries in which they are registered. However, the rules and practicegoverning the taxation of e-commerce activity are evolving in many countries. Itis possible that the amount of tax that will eventually become payable maydiffer from the amount provided in these financial statements. In calculatingthe tax provision, in addition to any amounts due in respect of jurisdictions inwhich Group companies are currently incorporated or domiciled, a provision hasbeen made to cover the Directors' best estimate of additional taxation exposureswhich may arise. The Group has received indemnities from the Principal Shareholders in connectionwith certain potential historic corporate taxation liabilities. The Directorsconsider the likelihood of any such liability arising to be remote. Accordingly,neither a provision for any such potential taxation has been made, nor an assetrecognised in respect of the indemnity. c) Factors that may affect future tax charges At the year end, there were PartyGaming Group companies and associatesregistered in Gibraltar, India and the UK. In Gibraltar, the Group benefits from the exempt company regime. The Gibraltarexempt company regime will be phased out between 1 July 2006 and 31 December2010; under current rules assessable income is taxed in Gibraltar at 35.0%. In India, the Group benefits from a tax holiday on income from qualifyingactivities until March 2009; under current rules assessable income is taxed inIndia at approximately 36.6%. 5. Earnings per share The calculation of basic and diluted earnings per share is based on thefollowing data: Year ended 31 Dec 05 31 Dec 04 $m $mEarningsEarnings for the purposes of basic and dilutedearnings per share being profit from ordinary activitiesattributable to equity holders of the parent 293.2 348.5 ------ ------ In accordance with IAS 33, the weighted average number of shares for basic anddiluted earnings per share takes into account the one to four ordinary sharesub-division that occurred on 5 May 2005 and the number of options which vestedfollowing flotation (see note 13). Year ended 31 Dec 05 31 Dec 04Number of shares for basic earnings per share Number Number m mNumber of shares in issue 4,000.0 3,776.0Number of shares issued to the Employee Trust (224.0) -Effect of shares which vested during the period 15.6 - ------ ------Weighted average number of ordinary shares for thepurposes of basic earnings per share 3,791.6 3,776.0 ------ ------- The shares held by the Employee Trust are accounted for as treasury shares. In accordance with IAS 33, the weighted average number of shares for dilutedearnings per share takes into account all potentially dilutive shares granted,which are not included in the number of shares for basic earnings per shareabove. Although the unvested potentially dilutive shares are contingentlyissuable, in accordance with IAS 33 the period end is treated as the end of theperformance period. Those option holders who were employees at that date aredeemed to have satisfied the performance requirements and their relatedpotentially dilutive shares have been included for the purpose of diluted EPS(see note 16). Year ended 31 Dec 05 31 Dec 04Number of shares for diluted earnings per share Number Number m mNumber of shares in issue 4,000.0 3,776.0Number of shares issued to the Employee Trust (224.0) -Effect of shares which vested during the period 15.6 -Effect of potential dilutive vested and unvested 92.6 -shares ------- ------Weighted average number of ordinary shares for thepurposes of diluted earnings per share 3,884.2 3,776.0 ------- ------- 6. Intangible assets Other Goodwill Total intangibles $m $m $mCostAs at 1 January 2004 - 2.1 2.1Additions - 8.0 8.0 ----- ----- -----As at 31 December 2004 - 10.1 10.1Additions 26.9 - 26.9 ----- ----- -----As at 31 December 2005 26.9 10.1 37.0 ----- ----- -----AmortisationAs at 1 January 2004 - 2.1 2.1Charge for the year - 0.3 0.3 ----- ----- -----As at 31 December 2004 - 2.4 2.4Charge for the year 4.3 - 4.3 ----- ----- -----As at 31 December 2005 4.3 2.4 6.7 ----- ----- -----Carrying amounts:As at 31 December 2005 22.6 7.7 30.3 ------ ------ ------As at 31 December 2004 - 7.7 7.7 ------ ------ ------ In accordance with IFRS3, the Group regularly monitors the carrying value of itsintangible assets. A review was undertaken at 31 December 2005 to assess whetherthe carrying value of assets was supported by the net present value of futurecash flows derived from assets using cash flow projections for each asset inrespect of the period to 31 March 2015. The other intangible assets primarily include the customer database andrelationships acquired from MultiPoker, PokerNOW and IntertopsPoker. The valueis based on cash flow projections from existing customers taking into accountthe expected impact of attrition. The discount rates for the review were based on company specific pre-taxweighted average cost of capital percentages and ranged from 9% to 12%. The results of the review undertaken at 31 December 2005 indicated that noimpairment was necessary in respect of intangible assets. 7. Property, plant and equipment Fixtures, Plant, fittings, Land and Machinery tools and buildings and vehicles equipment Total $m $m $m $mCost or valuationAs at 1 January 2004 0.1 0.6 7.2 7.9Additions 1.4 0.3 10.2 11.9 ------ ------ ------ ------As at 31 December 2004 1.5 0.9 17.4 19.8Additions 6.3 2.7 27.8 36.8Transfers (0.2) 0.2 - - ------ ------ ------ ------As at 31 December 2005 7.6 3.8 45.2 56.6 ------ ------ ------ ------Depreciation and impairment lossesAs at 1 January 2004 0.0 0.2 2.0 2.2Charge for the year 0.0 0.3 4.0 4.3 ------ ------ ------ ------As at 31 December 2004 0.0 0.5 6.0 6.5Charge for the year 0.7 0.8 11.5 13.0 ------ ------ ------ ------As at 31 December 2005 0.7 1.3 17.5 19.5 ------ ------ ------ ------Carrying amount As at 31 December 2005 6.9 2.5 27.7 37.1 ------ ------ ------ ------As at 31 December 2004 1.5 0.4 11.4 13.3 ------ ------ ------ ------ 8. Commitments for capital expenditure: Year ended 31 Dec 05 31 Dec 04 $m $m Contracted but not provided for 3.7 4.6 ------ ------ 9. Investment in associates The Group acquired a 35% interest in the ordinary share capital of a companyincorporated in England and Wales, in the period ended 31 December 2005, for acash consideration of $1.8m (this represents 35% of the voting rights). This isaccounted for under the equity method. The Group's share of losses for theperiod ended 31 December 2005 was $0.8m, resulting in a carrying value of $1.0m. 10. Short term investmentsYear ended 31 Dec 05 31 Dec 04 $m $m Cash on deposit for more than 3 months 6.8 - ------ ------ 11. Bank debt and shareholder loansYear ended 31 Dec 05 31 Dec 04 $m $m Current - 223.9Non-current - 258.9 ------ ------Total shareholder loans - 482.8 ------ ------Total bank debt and shareholder loans - 482.8 ------ ------ 12. ProvisionsYear ended 31 Dec 05 31 Dec 04 $m $m Provision at beginning of period 4.7 1.9Additional net provision in period 1.5 2.8 ------ ------Provision at end of period 6.2 4.7 ------ ------ Provisions are expected to be settled within the next year and relate tochargebacks which are recognised as the Directors' best estimate of theprovision based on past experience of such expenses applied to the level ofactivity. 13. Share capital Issued and fully paid Number $ mOrdinary sharesAs at 1 January and 31 December 2004 40,800 408.0Issued during the year ended 31 December 2005 59,652 3,592.0 ------ ------As at 31 December 2005 100,452 4,000.0 ------ ------ Shares issued are converted into US dollars at the exchange rate prevailing onthe date of transaction. The issued and fully paid share capital of the groupamounts to $100,452 and is split into 4,000,000,000 ordinary shares. The sharecapital in UK sterling is £60,000 and translates at an average exchange rate of$1.6742 USD to GBP. Authorised share capital and significant terms and conditions The total authorised number of shares comprises 5,000 million ordinary shareswith a par value of 0.0015p. All issued shares are fully paid. The holders ofordinary shares are entitled to receive dividends when declared and are entitledto one vote per share at meetings of the Company. The share capital is shown onthe basis that it has been in issue throughout the period. The following changesin share capital occurred during the period: 1. On 31 January 2005, the authorised share capital was increased from$50,000 to $100,000 divided into 1,000,000,000 ordinary shares of $0.0001 each. 2. On 7 February 2005, 536,000,000 ordinary shares of $0.0001 each wereissued to acquire the controlling interest in PartyGaming Holdings Limited asset out in the accounting policies. 3. On 5 May 2005, the authorised share capital of the Company of $100,000divided into 1,000,000,000 ordinary shares of $0.0001 each was redenominatedinto £60,000 divided into 1,000,000,000 ordinary shares of 0.006p each. Theauthorised share capital of £60,000 divided into 1,000,000,000 ordinary sharesof 0.006p each was then sub-divided into 4,000,000,000 ordinary shares of0.0015p each. 4. On 26 May 2005, the authorised share capital was increased from £60,000divided into 4,000,000,000 ordinary shares of 0.0015p each to £75,000 dividedinto 5,000,000,000 ordinary shares of 0.0015p each. 5. On 13 June 2005, 224,000,000 ordinary shares of 0.0015p each were issuedconditional on flotation to the Employee Trust. The Trustee has waived allvoting and dividend rights in respect of shares held by the Employee Trust. 6. A total of 159.0m ordinary shares of 0.0015p each were conditionallygranted under the share option scheme. 36.2m shares vested during the period ofwhich 31.3m shares were exercised by employees at 31 December 2005. 14. Reserves Share Share Retained Other option premium earnings reserves reserve $m $m $m $m As at 1 January 2005 0.4 417.0 (825.4) 3.2 Profit from ordinary activitiesattributable to equity holders of the parent - 293.2 - -Share option charges - - - 65.6Issue of treasury shares - - 0.0 - ------ ------ ------ ------As at 31 December 2005 0.4 710.2 (825.4) 68.8 ------ ------ ------ ------ The other reserve of $825.4m is the amount arising from the application ofaccounting which is similar to the pooling of interests method, as set out inthe accounting policies note. Under this method of accounting, the differencebetween the consideration for the controlling interest and the nominal value ofthe shares acquired is taken to other reserves on consolidation. As a result,the share capital reflects PartyGaming Plc's share capital and the retainedearnings for the period ended 31 December 2005 reflects the cumulative profitsas if the current group structure had always been in place. Treasury shares relate to 224,000,000 ordinary shares of 0.0015p issued to theEmployee Trust under the PartyGaming Plc Share Option Plan. 15. Related parties Relationships Transactions between the Company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. Anurag Dikshit, Ruth Parasol and Russell DeLeon are the ultimate controllingshareholders of the Group. During the period the controlling shareholders, andcorporate entities controlled by controlling shareholders received aggregateconsulting fees as follows: $m Year ended 31 December 2004 0.7Year ended 31 December 2005 0.5 As disclosed in the Company's listing particulars, under the terms of therelationship agreement between the Company and Ruth Parasol and Russell DeLeondated 14 June 2005, these principal shareholders have the right to nominate forappointment to the Board a suitable person whilst they together have an interestof 15 per cent or more of the Company's issued share capital. Ruth Parasol andRussell DeLeon have nominated Janos Libor and after considering the nominationthe Board and its Nomination Committee approved the appointment of Janos Libor.Since the date of appointment to the year end, Janos Libor was paid US$ 26,160by the company for services rendered as Non Executive Director. Remuneration of key management personnel Key management personnel are those individuals who the Directors believe havesignificant authority and responsibility for planning, directing and controllingthe activities of the Group. The aggregate short term and long term benefits andshare based payments of the Directors and key management personnel of the Groupare set out below: Short term Long term Share based Total $m $m $m $mYear ended 31 December 2004 5.2 - 3.2 8.4Year ended 31 December 2005 9.7 - 39.5 49.2 Transactions The following aggregate balances were due to/(from) key management at eachperiod end: As at 31 Dec 05 31 Dec 04 $m $m Due to 2.5 1.8 Due from (0.1) (0.0) The wife of a principal shareholder owns a property leased to the Group's Indiansubsidiary. Rentals paid were: $ Year ended 31 December 2004 28,230Year ended 31 December 2005 30,323 Additionally a security deposit in the sum of $13,800 has been paid. The total IPO-related expenses were $88.0m of which the Company incurred $22.6m(2004: nil). Given that no new money was raised for the Company, the IPO-relatedexpenses were apportioned between the selling shareholders and the Company basedon contractual arrangements. One of the Group subsidiaries has leased an unfurnished property to the GroupFinance Director at an annual lease rental of £36,000, which the directorsbelieve is a fair rental value of the property. Principal Shareholders have also given certain indemnities to the Group. On 29 April 2004, PartyGaming Holdings Limited acquired a 100% interest inElectraWorks Ltd for a total consideration of $826.0m in a transaction undercommon control. The shareholders of ElectraWorks Ltd also ultimately ownedPartyGaming Holdings Limited in similar proportions. The consideration was settled by way of cash of $118.0m and loans of $708.0m.The loans were repayable in quarterly instalments by 29 April 2007 and bearcompound interest at 3%. The loans were secured by way of a mortgage debentureover the assets of the Group. During the period to 31 December 2005, capitalrepayments to shareholders were made totalling $482.8m (year ended 31 December2004: $343.2m) and interest charged of $5.1m (year ended 31 December 2004:$12.6m), repaying these loans and any interest accrued in full. As at 29 April2004, PartyGaming Plc owned 43.2% of PartyGaming Holdings Limited. On 7 February2005 PartyGaming Plc acquired the remaining interest through a transaction undercommon control. Share option arrangements Directors and employees have conditional nil cost option arrangements underservice contracts, which were formally granted under the Group's share optionplan during the year ended 31 December 2005. 16. Share options The Group has designed a Share Option Plan ("the Plan") as a reward andretention incentive for employees and self-employed consultants of the Group,including the executive directors (the "Participants"). Certain individuals havenil-cost option arrangements under their service contracts, which were formallygranted under the Plan during the year. During the year, 159.0m options(including 40.0m options accounted for during the year 2004, in accordance withIFRS) over the share capital were granted to Participants, representing 2.67% ofthe total issued share capital following the changes in the share capital setout in note 13. Each option takes the form of a right, exercisable at nil-cost,to acquire shares in the Company. Options granted under the share option schemeduring the period generally vest in instalments over a four to five year period,commencing on 30 June 2005. Year ended 31 Dec 05 31 Dec 04 Number Number m m Outstanding at beginning of period 40.0 -Options granted during the period 119.0 40.0Options lapsed during the period (1.0) -Exercised during the period (31.3) - ----- -----Outstanding at end of period 126.7 40.0 ------ ------Exercisable at the end of period 4.9 - Weighted average exercise price £1.18 0.0Weighted average remaining contractual life of 756 days 923 daysoptions outstanding 17. Post balance sheet event On 14 February 2006, the Group announced that it had agreed to acquire thebusiness and assets of EmpirePoker.com, its last remaining skin, from EOL aswell as some other associated assets, for a total cash consideration of $250m.As part of the transaction, that is subject to the approval by EOL shareholderson 6 March 2006, EOL has agreed to withdraw all legal claims against the Group. As required under International Financial Reporting Standards, a non-recurringcharge of $145.8m has been included in the 2005 financial year withinAdministration Expenses to reflect the settlement of disputes arising from theseparation of PartyPoker players from EmpirePoker and all of the other thirdparty skins. See note 2(c) for further details. 18. Dividend The Board is pleased to recommend an inaugural final dividend of 5.25 cents pershare which will be considered at the Annual General Meeting to be held on 4 May2006. Year ended 31 Dec 05 31 Dec 04 $m $mFinal dividend (proposed) 200.0 - ------ ------ Dividends per ordinary share Year ended 31 Dec 05 31 Dec 04 $cents $centsFinal dividend (proposed) 5.25 - ------ ------ Glossary 'active player average active players multiplied by the number of days indays' the period 'affiliates' third party online or offline marketers who drive traffic to PartyGaming's gaming sites for a flat fee or on a revenue share basis 'attrition' The ratio of signups which are active during the period. The measure indicates retention profile of the players 'Clean EBITDA' EBITDA before IPO expenses and skin-related settlement costs as well as charges relating to share options which are to be satisfied by existing shares held by the Employee Trust 'Company' or PartyGaming Plc'PartyGaming' 'EBITDA' earnings before interest, tax, depreciation and amortisation 'Employee Trust' the PartyGaming Plc Shares Trust, a discretionary share ownership trust established by the Company 'Group' or the Company and its consolidated subsidiaries and subsidiary'PartyGaming Group' undertakings from time to time or, prior to 7 February 2005, PartyGaming Holdings Limited (formerly Headwall Ventures Limited) and its consolidated subsidiaries and subsidiary undertakings 'IAS' International Accounting Standards 'IFRS' International Financial Reporting Standards 'KPIs' Key Performance Indicators, such as active player days and yield per active player day 'PartyBingo' www.partybingo.com, the Group's bingo website 'PartyPoker' www.partypoker.com, the Group's principal poker website 'Principal Anurag Dikshit (holding through Crystal Ventures Limited),Shareholders' James Russell DeLeon (holding through Stinson Ridge Limited), Ruth Monicka Parasol (holding through Emerald Bay Limited) and Vikrant Bhargava (holding through Coral Ventures Limited), each of which was a promoter of the Company 'rake' the money charged by PartyGaming for each poker hand played on its websites: the rake is a flat fee, currently between $0.50 and $3.00, that is taken from each pot after each hand 'real money sign new players who have registered and transferred funds to theups' Group 'skins' arrangements where third parties use the software platform and services of another online gaming operator, typically on a revenue sharing basis, with the third party providing its own front end, branding and marketing arrangements 'Starluck Casino' www.starluckcasino.com, the Group's principal casino website 'unique active in relation to the Group's products is a player whoplayer' or 'unique generated revenue in the periodactive real moneyplayer' 'yield per active revenue in the period divided by the number of active playerplayer day' days This information is provided by RNS The company news service from the London Stock Exchange

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